-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NDksnbbb65RMKrL5tQdgWDnu/5Kt13u1qVrdbH0pOpLsQY4hG1cl/DJHFtm0BVCi X2c3am2ZEnvYIxeLcy7Nnw== 0000950130-96-001843.txt : 19960822 0000950130-96-001843.hdr.sgml : 19960822 ACCESSION NUMBER: 0000950130-96-001843 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19960517 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARBORSIDE HEALTHCARE CORP CENTRAL INDEX KEY: 0001011693 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 043307188 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-03096 FILM NUMBER: 96569604 BUSINESS ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 BUSINESS PHONE: 6175561515 MAIL ADDRESS: STREET 1: 470 ATLANTIC AVE CITY: BOSTON STATE: MA ZIP: 02210 S-1/A 1 PROSPECTUS AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1996 REGISTRATION NO. 333-3096 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- HARBORSIDE HEALTHCARE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8051 04-3307188 (STATE OR OTHER (PRIMARY STANDARD (IRS JURISDICTION OF INDUSTRIAL CLASSIFICATION EMPLOYERIDENTIFICATION INCORPORATION OR CODE NUMBER) NO.) ORGANIZATION) 470 ATLANTIC AVENUE BOSTON, MASSACHUSETTS 02210 (617) 556-1515 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) STEPHEN L. GUILLARD PRESIDENT AND CHIEF EXECUTIVE OFFICER HARBORSIDE HEALTHCARE CORPORATION 470 ATLANTIC AVENUE BOSTON, MASSACHUSETTS 02210 (617) 556-1515 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JAMES M. DUBIN, ESQ. JAMES R. TANENBAUM, ESQ. CARL L. REISNER, ESQ. STROOCK & STROOCK & LAVAN PAUL, WEISS, RIFKIND, WHARTON & SEVEN HANOVER SQUARE GARRISON NEW YORK, NEW YORK 10004 1285 AVENUE OF THE AMERICAS (212) 806-5400 NEW YORK, NEW YORK 10019 (212) 373-3000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ---------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [X] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- HARBORSIDE HEALTHCARE CORPORATION CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY THE ITEMS OF FORM S-1
ITEM NUMBER CAPTION LOCATION IN PROSPECTUS ------ ------- ---------------------- Item 1 Forepart of the Registration Statement and Outside Front Cover Page of Prospectus........................... Front Cover Page of Prospectus Item 2 Inside Front and Outside Back Cover Pages of Prospectus.................. Inside Front and Outside Back Cover Pages of Prospectus Item 3 Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors Item 4 Use of Proceeds....................... Prospectus Summary; Use of Proceeds Item 5 Determination of Offering Price....... Front Cover Page of Prospectus; Underwriting Item 6 Dilution.............................. Dilution Item 7 Selling Security Holders.............. Not Applicable Item 8 Plan of Distribution.................. Underwriting Item 9 Description of Securities to be Registered............................ Dividend Policy; Description of Capital Stock Item 10 Interests of Named Experts and Counsel............................... Legal Matters; Experts Item 11 Information with Respect to the Registrant............................ Prospectus Summary; The Company; Dividend Policy; Capitalization; Pro Forma Combined Financial Information; Selected Combined Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; The Reorganization; Certain Transactions; Stock Ownership of Directors, Executive Officers and Principal Holders; Shares Eligible For Future Sale; Financial Statements Item 12 Disclosure of Commission Position on Indemnification for Securities Act Liabilities.......................... Not Applicable
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED MAY 17, 1996 PROSPECTUS 3,600,000 SHARES [LOGO]HARBORSIDE HEALTHCARE CORPORATION COMMON STOCK ----------- All of the shares of Common Stock, par value $.01 per share (the "Common Stock"), offered hereby are being sold by Harborside Healthcare Corporation (the "Company"). Prior to this Offering (the "Offering"), there has been no public market for the Common Stock. It is currently estimated that the initial public offering price per share will be between $11.50 and $13.50. See "Underwriting" for a discussion of the factors that will be considered in determining the initial public offering price. It is anticipated that approximately 500,000 shares of Common Stock will be offered outside the United States to non-United States citizens or residents. At the request of the Company, up to 180,000 shares of Common Stock offered hereby have been reserved for sale to certain individuals, including directors and employees of the Company and members of their families, at the initial public offering price set forth above. The Common Stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange under the symbol "HBR." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share................... $ $ $ - -------------------------------------------------------------------------------- Total(3).................... $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of $850,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 540,000 shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If the option is exercised in full, the "Price to Public," "Underwriting Discounts and Commissions" and "Proceeds to Company" will be $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are offered by the Underwriters when, as and if delivered to and accepted by the Underwriters, and subject to various prior conditions, including the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of share certificates will be made in New York, New York, on or about , 1996. NATWEST SECURITIES LIMITED DEAN WITTER REYNOLDS INC. THE DATE OF THIS PROSPECTUS IS , 1996 [Map of Eastern United States showing location of the Company's facilities, regional offices and corporate office. Number of facilities licensed beds is subtotaled by region.] [MAP] FOR UNITED KINGDOM PURCHASERS: The shares of Common Stock offered hereby may not be offered or sold in the United Kingdom other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments, whether as principal or agent (except in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986) and this Prospectus may only be issued or passed on to any person in the United Kingdom if that person is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or a person to whom this Prospectus may otherwise lawfully be passed on. IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by reference to, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." Unless otherwise indicated, the information in this Prospectus assumes (i) the consummation of the transactions relating to the formation of the Company described herein under the heading "The Reorganization" (such transactions are hereinafter referred to as the "Reorganization") and (ii) that the Underwriters' over-allotment option is not exercised. References in this Prospectus to the "Company" or "Harborside Healthcare" refer to Harborside Healthcare Corporation, its combined affiliates and partnerships and their predecessors, or any of them, depending on the context. THE COMPANY Harborside Healthcare provides high quality long-term care, subacute care and other specialty medical services in four principal regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company operates 26 licensed long-term care facilities (9 owned and 17 leased) with a total of approximately 3,000 licensed beds. After giving effect to the pending acquisition of four facilities in Ohio (the "Ohio Facilities"), the Company will operate 30 long-term care facilities (13 owned and 17 leased) with a total of 3,700 licensed beds. The Company provides traditional skilled nursing care, a wide range of subacute care programs (such as orthopedic, cerebrovascular accident ("CVA")/stroke, cardiac, pulmonary and wound care), as well as distinct programs for the provision of care to Alzheimer's and hospice patients. In addition, the Company provides certain rehabilitation therapy and behavioral health services both at Company-operated and non-affiliated facilities. The Company seeks to position itself as the long-term care provider of choice to managed care and other private referral sources in its target markets by achieving a strong regional presence and by providing a full range of high quality, cost effective nursing and specialty medical services. Since commencing operations in 1988, the Company has experienced significant growth through strategic acquisitions in states it believes possess favorable demographic and regulatory environments, as well as through the expansion of subacute care and other specialty medical services provided at its long-term care facilities. Since 1993 and after giving effect to the recent and pending transactions, the Company increased its overall patient capacity by approximately 1,550 licensed beds, or 72.2%. During the same period, the Company also improved its overall quality mix (defined as net patient service revenues derived from Medicare, commercial insurance and other private payors) from 61.1% to 65.4% of net patient service revenues for the years ended December 31, 1993 and 1995, respectively, primarily as a result of the Company's rapid expansion of its subacute care and other specialty medical services. For the three months ended March 31, 1996, during which the Company began leasing six additional long-term care facilities in New Hampshire with approximately 540 beds (the "New Hampshire Facilities"), the Company's quality mix was 60.1% (31.8% private and other and 28.3% Medicare) and its average occupancy rate was 91.3%. The Company believes that its quality mix and its average occupancy rate have consistently been among the highest in the long- term care industry. The Company intends to continue to grow by (i) selectively acquiring additional long-term care facilities in its existing and in new geographic regions, (ii) expanding the range of subacute care provided, including the addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems) subacute care units, (iii) expanding its existing rehabilitation therapy and behavioral healthcare businesses, (iv) developing and acquiring new ancillary service operations, such as institutional pharmacy, home healthcare and infusion therapy and (v) expanding its Alzheimer's and hospice care programs. In keeping with its growth strategy, starting in January 1996, the Company began leasing the New Hampshire Facilities. Subsequently, the Company also entered into an agreement to acquire the four Ohio Facilities with approximately 700 licensed beds pursuant to a capital lease transaction (the "Ohio Transaction"), thereby further strengthening its existing Midwest regional presence. 3 Collectively, the New Hampshire and Ohio transactions represented approximately $54.3 million in combined total net revenues for the year ended December 31, 1995. Since 1994, the Company has also successfully implemented subacute care programs at 24 of its long-term care facilities, added approximately 170 distinct COMPASS beds and 132 distinct Alzheimer's and hospice care beds and expanded its rehabilitation therapy business to include 35 contracts with non- affiliated long-term care facilities. The Company believes that its strategy of concentrating its operations in selected geographic markets and complementing its long-term care platform with a wide range of specialty medical and other ancillary services will enable it to benefit from economies of scale and improve its ability to penetrate regional managed care markets. Although the Company is continuously discussing with third parties the possible acquisition of additional long-term care facilities, the Company does not at this time have any firm commitments to make any material acquisitions of long-term care facilities other than the Ohio Transaction, nor has it identified any material, specific ancillary business acquisitions. The Company believes that it is favorably positioned to benefit from trends impacting the healthcare industry, including favorable demographic shifts, advances in medical technology and continuing public and private pressures to contain growing healthcare costs. At the same time, government restrictions and high construction and start-up costs are expected to continue to constrain the supply of long-term care and subacute facilities. The Company further believes that an increasingly complex operating environment is motivating smaller, less efficient long-term care facility operators to combine with or sell to established operators. Harborside Healthcare expects that such recent trends toward industry consolidation will continue and will provide it with future acquisition opportunities. THE OFFERING Common Stock offered............... 3,600,000 shares Common Stock to be outstanding after the Offering(1)............. 8,000,000 shares Use of Proceeds.................... The Company will use the net proceeds from the Offering as follows: (i) approximately $26.7 million to repay mortgage indebtedness, including a related prepayment penalty (the "Debt Repayment"); (ii) $4.4 million to partially fund an option to purchase the Ohio Facilities at the end of the capital lease term; (iii) approximately $960,000 for payments to certain of the Company's key employees under existing plans and arrangements; and (iv) the remainder for general corporate purposes, including working capital and acquisitions. See "Use of Proceeds," and "Management--Employment Agreements and Change of Control Arrangements." New York Stock Exchange Symbol..... "HBR"
- -------- (1) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to the Company's stock and stock option plans, under which, upon consummation of the Offering, options to purchase 420,000 shares at an exercise price equal to the initial public offering price will be granted and options to purchase 80,000 shares at an exercise price of $8.15 per share will be granted in substitution for previously granted options to purchase interests in one of the Company's predecessors. See "Management--Stock Option Plans" and "Description of Capital Stock." 4 SUMMARY COMBINED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, --------------------------------------------------------- ----------------------------------------------- 1995 PRO FORMA AS ADJUSTED 1996 PRO FORMA AS ADJUSTED ----------------------------- ----------------------------- BEFORE OHIO INCLUDING OHIO BEFORE OHIO INCLUDING OHIO 1993 1994 1995 TRANSACTION(2) TRANSACTION(3) 1995 1996 TRANSACTION(4) TRANSACTION(5) ------- ------- -------- -------------- -------------- ------- ------- -------------- -------------- STATEMENT OF OPERATIONS DATA(1): Total net revenues(6)...... $75,101 $86,376 $109,425 $ 131,381 $ 163,698 $23,777 $34,931 $ 34,931 $ 43,203 ------- ------- -------- --------- --------- ------- ------- --------- --------- Expenses: Facility operating........ 57,412 68,951 89,378 106,584 131,244 19,734 28,120 28,120 34,463 General and administrative... 3,092 3,859 5,076 5,958 6,638 1,141 2,235 2,235 2,405 Service charges paid to affiliate........ 746 759 700 700 700 177 185 185 185 Depreciation and amortization..... 4,304 4,311 4,385 2,155 3,350 1,043 539 539 838 Facility rent.... 525 1,037 1,907 9,882 9,882 392 2,545 2,545 2,545 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total expenses.. 66,079 78,917 101,446 125,279 151,814 22,487 33,624 33,624 40,436 ------- ------- -------- --------- --------- ------- ------- --------- --------- Income from operations....... 9,022 7,459 7,979 6,102 11,884 1,290 1,307 1,307 2,767 Interest expense, net.............. (4,740) (4,609) (5,107) (1,343) (5,692) (1,264) (975) (295) (1,382) Loss on investment in limited partnership(7)... -- (448) (114) (114) (114) (81) (127) (127) (127) Other, net....... (2,297) (2,028) (1,524) -- -- (185) -- -- -- ------- ------- -------- --------- --------- ------- ------- --------- --------- Net income (loss)........... 1,985 374 1,234 4,645 6,078 (240) 205 885 1,258 Pro forma data: Pro forma income taxes(8)......... 774 146 481 1,812 2,371 (94) 80 345 491 ------- ------- -------- --------- --------- ------- ------- --------- --------- Pro forma net income (loss)(8)........ $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707 $ (146) $ 125 $ 540 $ 767 ======= ======= ======== ========= ========= ======= ======= ========= ========= Pro forma net income per share(8)......... $ 0.35 $ 0.46 $ 0.07 $ 0.10 Pro forma weighted average shares outstanding...... 8,052,160 8,052,160 8,052,160 8,052,160 OTHER DATA(1): Facilities (as of end of period): Owned(9)(10)..... 15 16 9 9 13 9 9 9 13 Leased(10)....... 2 3 11 17 17 10 17 17 17 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total............ 17 19 20 26 30 19 26 26 30 Licensed beds (as of end of period): Owned(9)(10)..... 1,860 1,976 1,028 1,028 1,720 1,022 1,028 1,028 1,720 Leased(10)....... 289 389 1,443 1,980 1,980 1,343 1,980 1,980 1,980 ------- ------- -------- --------- --------- ------- ------- --------- --------- Total............ 2,149 2,365 2,471 3,008 3,700 2,365 3,008 3,008 3,700 Average occupancy rate(11)......... 92.5% 91.5% 91.5% 91.9% 92.2% 90.9% 91.3% 91.3% 91.8% Sources of net patient service revenues(12): Private and other(13)........ 39.9% 37.1% 32.3% 33.0% 32.9% 34.2% 31.8% 31.8% 31.8% Medicare......... 21.2% 24.9% 33.1% 27.4% 27.0% 30.6% 28.3% 28.3% 27.3% Medicaid......... 38.9% 38.0% 34.6% 39.6% 40.1% 35.2% 39.9% 39.9% 40.9%
AS OF MARCH 31, --------------------------------------- 1996 PRO FORMA AS ADJUSTED ------------------------------- BEFORE OHIO INCLUDING OHIO 1996 TRANSACTION(14) TRANSACTION(15) ------- --------------- --------------- BALANCE SHEET DATA(1): Cash and cash equivalents............... $10,000 $23,340 $17,840 Working capital......................... 12,395 26,516 17,414 Total assets............................ 63,378 76,646 134,185 Total debt.............................. 43,422 18,422 75,961 Stockholders' equity.................... 5,001 43,269 43,269
- ------ (1) Harborside Healthcare has been created in anticipation of the Offering in order to combine under its control the operations of the long-term care facilities and ancillary businesses that are currently under the control of The Berkshire Companies Limited Partnership ("Berkshire") and its affiliates. See "The Reorganization." The Company's financial and operating data above combine the historical results of these business entities. 5 (2) Gives effect to the consummation of (i) the lease of the New Hampshire Facilities by the Company on January 1, 1996 (the "New Hampshire Transaction"); (ii) the sale by Krupp Yield Plus Limited Partnership ("KYP") of seven long-term care facilities (the "Seven Facilities") to Meditrust, a real estate investment trust ("Meditrust"), on December 31, 1995 and the subsequent distribution of $33,493,000 payable to the limited partners of KYP (the "KYP Unitholders") as of December 31, 1995 in connection with the liquidation of that partnership (the "Distribution"); (iii) the lease of the Seven Facilities by the Company on December 31, 1995 (the "1995 REIT Lease"); and (iv) the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if such transactions had occurred on January 1, 1995. (3) Gives effect to the transactions described in Note (2) above and the pending Ohio Transaction as if such transactions had occurred on January 1, 1995. The Ohio Transaction will be accounted for as a capital lease as a result of the bargain purchase option granted at the end of the lease term. This accounting treatment will result in an increase in depreciation and amortization expense of $1,195,000 and an increase in interest expense, net, of $4,349,000. The Company expects to complete the Ohio Transaction in the third quarter of 1996, subject to the satisfaction of certain customary conditions, including the satisfactory completion of the Company's due diligence review and receipt of regulatory and other approvals. (4) Gives effect to the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if the Offering had occurred on January 1, 1996. (5) Gives effect to (i) the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), and (ii) the pending Ohio Transaction, as if the transactions had occurred on January 1, 1996. The Ohio Transaction will result in an increase in depreciation and amortization expense for the period of $299,000 and an increase in interest expense, net, for the period of $1,087,000. (6) Total net revenues include net patient service revenues from the Company's facilities and revenues from ancillary services provided at non-affiliated long-term care facilities. Total net revenues exclude net patient service revenues from the Larkin Chase Nursing and Restorative Center (the "Larkin Chase Center"), but include management fees and rehabilitation therapy service revenues from such facility. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (7) Represents the Company's allocation of operating results for the Larkin Chase Center which the Company accounts for using the equity method. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (8) Prior to the Reorganization, the Company's predecessors operated under common control but were not subject to Federal or state income taxation and, accordingly, no provision for income taxes has been made in the Company's audited combined financial statements. Following the Reorganization, these predecessors will be subject to Federal and state income taxes. Pro forma net income (loss) and pro forma net income per share reflect the combined income tax expense that the Company's predecessors would have incurred had they been subject to such taxation during each of the periods indicated. (9) Includes the Larkin Chase Center commencing in 1994. (10) On December 31, 1995, the Seven Facilities were reclassified as "leased" following the sale and concurrent 1995 REIT Lease. See Note (2) above. The Ohio Facilities are classified as "owned" reflecting the treatment of the Ohio Transaction as a capital lease. (11) "Average occupancy rate" is computed by dividing the number of occupied licensed beds by the total number of available licensed beds during each of the periods indicated. (12) Net patient service revenues exclude all management fees and all rehabilitation therapy service revenues and the net patient service revenues of the Larkin Chase Center. See "Business--Properties." (13) Consists primarily of revenues derived from private pay individuals, managed care organizations, HMOs, hospice programs and commercial insurers. (14) Gives effect to the consummation of the transactions described in Note (4) above and a bonus payment in the form of Common Stock valued at $225,000 to Damian Dell'Anno, the Company's Executive Vice President of Operations, under an existing plan which will be incurred as a result of the Offering (the "Bonus Payment"), as if such transactions had occurred on March 31, 1996. (15) Gives effect to the transactions described in Note (14) above and the Ohio Transaction as if such transactions had occurred on March 31, 1996. The Ohio Transaction will be accounted for as a capital lease. See Note (3) above. This accounting treatment will result in an increase in total debt of $57,539,000. 6 RISK FACTORS An investment in the shares of Common Stock offered hereby involves various risks. Prior to investing in the Common Stock being offered hereby, prospective investors should carefully consider the risk factors set forth below, together with the other information set forth in this Prospectus. RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM The Company is subject to extensive governmental healthcare regulation. In addition, there are numerous legislative and executive initiatives at the Federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect such proposals would have on the Company's business. Aspects of certain of these proposals, such as reductions in funding or payment rates of the Medicare and Medicaid programs, potential changes in reimbursement regulations for rehabilitation therapy services, interim measures to contain healthcare costs such as a short-term freeze on prices charged by healthcare providers or changes in the administration of Medicaid at the state level, could materially adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have a material adverse effect on the Company. In particular, changes to the Medicare reimbursement program that have recently been proposed could materially adversely affect the Company's revenues derived from ancillary services. Concern about the potential effects of proposed and unanticipated future reform measures has contributed to the volatility of securities prices of companies in healthcare and related industries and may similarly affect the price of the Common Stock. See "Business--Sources of Revenues" and "-- Governmental Regulation." REIMBURSEMENT BY THIRD-PARTY PAYORS The Company received approximately 32.9%, 27.0% and 40.1% of its net patient revenues from private and other, Medicare and Medicaid patients, respectively, for the year ended December 31, 1995, on a pro forma basis after giving effect to the New Hampshire Transaction and the Ohio Transaction (31.8%, 27.3% and 40.9%, respectively, for the three months ended March 31, 1996, on a pro forma basis after giving effect to the Ohio Transaction). The Company typically receives higher payment rates for services to private pay and Medicare patients than for equivalent services provided to patients eligible for Medicaid. Any decline in the number of private or Medicare patients or increases in the number of Medicaid patients could materially adversely affect the Company. Both governmental and other third-party payors, such as commercial insurers, managed care organizations, HMOs and PPOs, have instituted cost containment measures designed to limit payments made to long-term care providers. These measures include the adoption of initial and continuing recipient eligibility criteria, the adoption of coverage criteria and the establishment of payment ceilings. Furthermore, governmental reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions. 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. In addition, there can be no assurance that the Company's facilities or the services provided by the Company will continue to meet the requirements for participation in such programs or that the states in which the Company operates will continue to meet their Medicaid reimbursement obligations on a timely basis, if at all. Any of the foregoing could materially adversely affect the Company. The Company is subject to periodic audits by the Medicare and Medicaid programs, and the paying agencies for these programs have various rights and remedies against the Company if they assert that the Company has overcharged the programs or failed to comply with program requirements. Such paying agencies could seek to require the Company to repay any overcharges or amounts billed in violation of program requirements, or could make deductions from future amounts due to the Company. Such agencies could also impose fines, criminal penalties or program exclusions. Any such action could materially adversely affect the Company. See "Business--Sources of Revenues" and "-- Government Regulation." 7 ACQUISITIONS AND DEVELOPMENTS; DIFFICULTIES OF MANAGING RAPID EXPANSION The Company has pursued an aggressive facility acquisition program and expects that a significant portion of any future growth will result from the acquisition of additional long-term care facilities. The Company's success will depend in large part on its ability to identify suitable acquisition opportunities and its ability to pursue and finance such opportunities, obtain governmental licenses and approvals, consummate such acquisitions, implement operating enhancements and effectively assimilate newly acquired facilities into its operations. The Company may also seek to acquire ancillary service businesses. There can be no assurance that the Company will be successful in making such acquisitions or that such facilities or businesses will be profitable following their acquisition. In addition, growth through acquisition entails certain risks because the acquired facilities or businesses could be subject to unanticipated business uncertainties or legal liabilities. The Company recently entered into an agreement to acquire the four Ohio Facilities pursuant to a capital lease. The Ohio Transaction is anticipated to close in the third quarter of 1996 and is subject to the satisfaction of customary closing conditions, including the receipt of regulatory and other approvals. However, there can be no assurance that such conditions will be met or that the Ohio Transaction will be successfully completed during the third quarter of 1996, if at all, or if completed, that the Ohio Facilities will be successfully integrated into the Company's operations. The consummation of the Offering is not conditioned on the closing of the Ohio Transaction. The Company also intends to grow through the expansion of existing facilities and the development of new facilities. Facility expansion and development projects are subject to a number of contingencies that are common to construction projects but over which the Company may have little control and which may adversely affect project cost and completion time. These may include shortages of supplies and materials, the inability of contractors and subcontractors to perform under their contracts and changes in building, zoning and other applicable laws and regulations or the interpretation of such laws and regulations. The Company may also experience start-up costs and delays during the period between the completion of a newly developed or expanded facility and the full utilization of the facility's capacity, all of which could adversely affect the Company's operating results. The Company's rapid growth has placed a significant burden on the Company's management and operating personnel. 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. If the Company is unable to manage its growth effectively, it could be materially adversely affected. See "Use of Proceeds," "Business--Growth Strategy," "--The Ohio Transaction," and "--Selected Expansion Projects." GEOGRAPHIC CONCENTRATION The Company's operations are located in Florida, Ohio, Indiana, New Hampshire, New Jersey and Maryland. A substantial portion of the Company's net revenues are derived from its operations in Florida, Ohio and New Hampshire. After giving effect to the New Hampshire Transaction, the Company derived 41.2%, 20.9% and 17.3%, respectively, of its net revenues from these three states, for the year ended December 31, 1995 (32.9%, 36.9% and 13.8%, respectively, after giving effect to the New Hampshire Transaction and the Ohio Transaction). Downturns in local and regional economies could have a material adverse effect on the Company. Any adverse changes in the regulatory environment or to the reimbursement rates paid in the states in which the Company operates, particularly in Florida, Ohio and New Hampshire, could also have a material adverse affect on the Company. The state of New Hampshire recently adopted legislation which froze Medicaid reimbursement rates and called for a redesign of its Medicaid program which has had, and may continue to have, an adverse effect on reimbursements paid under that state's Medicaid program. For the year ended December 31, 1995, 63.6% of the net revenues from the New Hampshire Facilities were derived from the New Hampshire Medicaid program. See "Business--Sources of Revenues." SIGNIFICANT DEBT AND LEASE OBLIGATIONS; ACCUMULATED DEFICIT After giving effect to the Offering, the Debt Repayment and the Ohio Transaction, which will be accounted for as a capital lease, the Company's total combined indebtedness (including total short-term and long-term debt) 8 as of March 31, 1996 would have been approximately $75.9 million, accounting for approximately 63.7% of its total capitalization. After giving effect to the Debt Repayment and the Ohio Transaction, the Company's total annual debt service obligations in 1995 would have been approximately $7.2 million. All nine of the facilities owned by the Company are currently subject to mortgages, seven of which are subject to mortgages in favor of Meditrust for a single loan. A default under this loan could therefore result in a loss to the Company of all of its facilities mortgaged to Meditrust. The Company is also the lessee under 17 long-term operating leases for long- term care facilities with aggregate minimum annual base rent payments of $9.1 million in 1996 and which generally provide for annual rent increases and payment by the Company of taxes, insurance and other obligations. Fourteen of the Company's facilities are leased from Meditrust. Because these leases contain cross-default and cross-collateralization provisions, a default by the Company under one of these leases could adversely affect all 14 of the facilities leased from Meditrust and result in a loss to the Company of such facilities. The degree to which the Company will be leveraged and subject to significant lease obligations could have important consequences to the Company, including limiting the Company's ability to obtain additional financing in the future for working capital, capital expenditures, facility acquisitions, expansions or developments or the refinancing of existing debt. In addition, a substantial portion of the Company's cash flows from operations may be dedicated to the payment of principal and interest on its indebtedness and rent expense, thereby reducing the funds available to the Company for its operations and to support its growth. Certain of the Company's current, and possibly future, debt agreements and leases contain cross-collateral and cross-default provisions and financial and other restrictive covenants, including restrictions on the incurrence of additional indebtedness, the creation of liens, the payment of dividends and the sale of assets. In addition, certain of the Company's leases do not contain non-disturbance provisions which could result in the loss of such facilities if the lessor defaults on its mortgage. There can be no assurance that the Company's operating results will be sufficient to support the payment of the Company's indebtedness and rent expense. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Business--Growth Strategy" and "--Properties." As of December 31, 1995, and as of March 31, 1996, the Company had an accumulated deficit of $6.2 million and $6.0 million, respectively, and a stockholders' equity of $4.1 million and $5.0 million, respectively. See the historical and pro forma combined financial statements and notes thereto appearing elsewhere in this Prospectus. GOVERNMENTAL REGULATION The Federal government and all the states in which the Company operates regulate various aspects of the Company's business. In addition to the regulation of Medicare and Medicaid reimbursement rates, the development and operation of long-term care facilities and the provision of long-term care services are subject to Federal, state and local licensure and certification laws that regulate, among other matters, the number of licensed beds, the provision of services, the distribution of pharmaceuticals, equipment, staffing (including professional licensing), operating policies and procedures, fire prevention measures, environmental matters and compliance with building and safety codes. The failure to maintain or renew any required regulatory approvals or licenses could materially adversely affect the Company's ability to provide its services and receive reimbursement of its expenses. There can be no assurance that Federal, state or local governments will not impose additional restrictions on the Company's activities which could materially adversely affect the Company. Long-term care facilities are subject to periodic inspection by governmental authorities to assure compliance with the standards established for continued licensing under state law and for certification under the Medicare or Medicaid programs, including a review of billing practices and policies. Failure to comply with these standards could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicare or Medicaid programs, restrictions on the ability to 9 acquire new facilities or expand existing facilities and, in extreme cases, the revocation of a facility's license or closure of a facility. There can be no assurance that the facilities currently owned or leased by the Company will continue to meet the requirements for participation in the Medicare or Medicaid programs nor can there be any assurance that the facilities acquired or developed by the Company in the future will initially meet or continue to meet these requirements. Many states, including each state in which the Company currently operates, control the supply of licensed long-term care beds through certificate of need ("CON") programs. Presently, state approval is required for the construction of new long-term care facilities, the addition to or reduction of the number of licensed beds and certain capital expenditures at such facilities. To the extent that a CON or other similar approval is required for the acquisition or construction of new facilities or the expansion of the number of licensed beds, services or existing facilities, the Company could be adversely affected by the failure or inability to obtain such approval, changes in the standards applicable for such approval and possible delays and expenses associated with obtaining such approval. In addition, in most states the reduction of the number of licensed beds or the closure of a facility requires the approval of the appropriate state regulatory agency and, if the Company were to seek to reduce the number of licensed beds at, or to close, a facility, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. Ohio has imposed a moratorium until June 30, 1997 on the issuance of CONs for the construction of new long-term care facilities and the addition of beds to existing facilities. Until recently, New Hampshire permitted long-term care facilities to add up to 10 licensed beds without obtaining a CON (referred to as "leeway beds") every two years as a matter of right. Recent legislation in New Hampshire has eliminated the right to leeway beds on existing CONs. These actions will restrict the Company's ability to expand its facilities in Ohio and New Hampshire. The Company is also subject to Federal and state laws that govern financial and other arrangements between healthcare providers. Federal laws, as well as the laws of certain states, prohibit direct or indirect payments or fee splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the Federal "anti-kickback 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. A wide array of relationships and arrangements, including ownership interests in a company by persons in a position to refer patients and personal service agreements have, under certain circumstances, been alleged to violate these provisions. A violation of the Federal anti-kickback law could result in the loss of eligibility to participate in Medicare or Medicaid, or in civil or criminal penalties for individuals or entities. Violation of state anti-kickback laws could lead to loss of licensure, significant fines and other penalties for individuals or entities. See "Business--Sources of Revenues" and "--Governmental Regulation." ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY MATTERS The Company is subject to a wide variety of Federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by healthcare providers such as the Company are: air and water quality control requirements, occupational health and safety requirements, waste management requirements, specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances, requirements for providing notice to employees and members of the public about hazardous materials and wastes and certain other requirements. In its role as owner and/or operator of properties or facilities, the Company may be subject to liability for investigating and remediating any hazardous substances that have come to be located on the property, or such substances that may have migrated off of, or been emitted, discharged, leaked, escaped or transported from, the property. The Company's operations may involve the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may harm individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. The cost of any required remediation or removal of hazardous or toxic substances could be substantial and the liability of an owner or operator for any property is generally not limited under applicable laws and could exceed the property's value. 10 Although the Company is not aware of any material liability under any environmental or occupational health and safety laws, there can be no assurance that the Company will not encounter such liabilities in the future, which could have a material adverse effect on the Company. See "Business-- Governmental Regulation." COMPETITION The long-term care industry is highly competitive. The Company competes with other providers of long-term care on the basis of the scope and quality of services offered, the rate of positive medical outcomes, cost-effectiveness and the reputation and appearance of its long-term care facilities. The Company also competes in recruiting qualified healthcare personnel, in acquiring and developing additional facilities and in obtaining CONs. The Company's current and potential competitors include national, regional and local long-term care providers, some of whom have substantially greater financial and other resources and may be more established in their communities than the Company. The Company also faces competition from assisted living facility operators as well as providers of home healthcare. In addition, certain competitors are operated by not-for-profit organizations and similar businesses which can finance capital expenditures and acquisitions on a tax- exempt basis or receive charitable contributions unavailable to the Company. The Company expects competition for the acquisition and development of long- term care facilities to increase in the future as the demand for long-term care increases. Construction of new (or the expansion of existing) long-term care facilities near the Company's facilities could adversely affect the Company's business. State regulations generally require a CON before a new long-term care facility can be constructed or additional licensed beds can be added to existing facilities. CON legislation is in place in all states in which the Company operates or expects to operate. The Company believes that these regulations reduce the possibility of overbuilding and promote higher utilization of existing facilities. However, a relaxation of CON requirements could lead to an increase in competition. In addition, as cost containment measures have reduced occupancy rates at acute care hospitals, a number of these hospitals have converted portions of their facilities into subacute units. Competition from acute care hospitals could adversely affect the Company. The New Jersey legislature is currently considering legislation that would permit acute care hospitals to offer subacute care services under existing CONs issued to those providers. Ohio has imposed a moratorium on the conversion of acute care hospital beds into long-term care beds. See "Business--Governmental Regulation." STAFFING AND LABOR COSTS Staffing and labor costs represent the Company's largest expense. Labor costs accounted for 59.9%, 56.4% and 52.0% of the Company's total facility operating expenses in 1993, 1994 and 1995, respectively. The Company competes with other healthcare providers in attracting and retaining qualified or skilled personnel. The long-term care industry has, at times, experienced shortages of qualified personnel. A shortage of nurses or other trained personnel or general economic inflationary pressures may require the Company to enhance its wage and benefits package in order to compete with other employers. There can be no assurance that the Company's labor costs will not increase or, if they do, that they can be matched by corresponding increases in private-payor revenues or governmental reimbursement. Failure by the Company to attract and retain qualified employees, to control its labor costs or to match increases in its labor expenses with corresponding increases in revenues could have a material adverse effect on the Company. Approximately 180 employees at two of the Company's facilities are covered by collective bargaining agreements. Although the Company believes that it maintains good working relationships with its employees and the unions that represent certain of its employees, it cannot predict the impact of continued or increased union representation or organizational activities on its future operations. See "Business--Employees." LIABILITY AND INSURANCE The Company's business entails an inherent risk of liability. In recent years, participants in the long-term care industry have been subject to lawsuits alleging malpractice or related legal theories, many of which involve large claims and significant legal costs. The Company expects that from time to time it will be subject to such suits as a result of the nature of its business. The Company currently maintains insurance policies in amounts and with coverage and deductibles as it deems appropriate, based on the nature and risks of its business, historical 11 experience and industry standards. There can be no assurance, however, that claims in excess of the Company's insurance coverage or claims not covered by insurance will not arise. A successful claim against the Company not covered by, or in excess of, its insurance coverage could have a material adverse effect on the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company's business and reputation, may lead to increased insurance premiums and may require the Company's management to devote time and attention to matters unrelated to the Company's business. The Company is self-insured (subject to contributions by covered employees) with respect to most of the healthcare benefits and for workers' compensation benefits made available to its employees. The Company believes that it has adequate resources to cover any self-insured claims and the Company maintains excess liability coverage to protect it against unusual claims in these areas. However, there can be no assurance that the Company will continue to have such resources available to it or that substantial claims will not be made against the Company. See "Business--Insurance." CONCENTRATION OF OWNERSHIP After giving effect to the Offering, Douglas Krupp, George Krupp and Laurence Gerber (collectively, the "Principal Stockholders") will have combined beneficial ownership of 50.9% (47.7% if the Underwriters' over- allotment option is exercised in full) of the outstanding Common Stock. These individuals, together with the Company's other Directors and Executive Officers, will have combined beneficial ownership of 55.0% (51.5% if the underwriters' over-allotment option is exercised in full) of the outstanding Common Stock after giving effect to the Offering. Consequently, the Principal Stockholders will be able to control the business, policies and affairs of the Company, including the election of directors and major corporate transactions. The concentration of beneficial ownership of the Company may have the effect of delaying, deterring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock or may otherwise adversely affect the market price of the Common Stock. See "Stock Ownership of Directors, Executive Officers and Principal Holders." CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Certificate of Incorporation and By-laws of the Company, as well as Delaware corporate law, contain provisions that may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder of the Company might consider in its best interest, including an attempt that might result in the receipt of a premium over the then current market price for the shares held by stockholders. Certain of these provisions allow the Company to issue, without stockholder approval, preferred stock having rights senior to those of the Common Stock. Other provisions impose various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions. In addition, the Company's Board of Directors is divided into three classes, each of which serves for a staggered three-year term, which may make it more difficult for a third party to gain control of the Board of Directors. In addition, the Company is subject to Section 203 of the Delaware General Corporation Law which under certain circumstances can make it more difficult for a third party to gain control of the Company without approval of the Board of Directors. See "Description of Capital Stock--Certain Provisions of the Company's Certificate of Incorporation and By-laws," "--Classification of Directors" and "--Section 203 of the Delaware Law." SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the Offering under Rule 144 ("Rule 144") of the Securities Act of 1933, as amended (the "Securities Act") or otherwise or the perception that such sales could occur may adversely affect prevailing market prices of the Common Stock. The Company and all persons who were stockholders of the Company prior to the Offering have agreed, for a period of 180 days after the date of this Prospectus, not to sell, offer to sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities which are convertible into, or exchangeable or exercisable for, shares of Common Stock, without the prior written consent of NatWest Securities Limited, except for grants by the Company of options to purchase shares of Common Stock described in this Prospectus, the exercise of such options and the issuance of shares in connection with the Reorganization. See "The Reorganization" and "Shares Eligible for Future Sale." 12 IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience immediate and substantial dilution of $7.51 per share in pro forma net tangible book value per share of Common Stock from the public offering price. See "Dilution." ABSENCE OF PRIOR PUBLIC MARKET Prior to the Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained following the Offering. There can be no assurance that market prices for the Common Stock after the Offering will equal or exceed the initial public offering price per share set forth on the cover page of this Prospectus. The initial public offering price per share will be determined by negotiation between the Company and the Underwriters based upon several factors and may not be indicative of the market price for the Common Stock following the Offering. The market price of the Common Stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for shares of Common Stock, changes in the Company's historical and anticipated operating results, new statutes or regulations or changes in interpretations of existing statutes and regulations affecting the healthcare industry in general and the long-term care industry in particular. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of the Common Stock. See "Underwriting." 13 THE COMPANY Harborside Healthcare provides high quality long-term care, subacute care and other specialty medical services in four principal regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company operates 26 licensed long-term care facilities (9 owned and 17 leased) with a total of approximately 3,000 licensed beds. After giving effect to the pending Ohio Transaction, the Company will operate 30 facilities (13 owned and 17 leased) with a total of 3,700 licensed beds. The Company provides traditional skilled nursing care, a wide range of subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as distinct programs for the provision of care to Alzheimer's and hospice patients. In addition, the Company provides certain rehabilitation therapy and behavioral health services both at Company-operated and non-affiliated facilities. The Company seeks to position itself as the long-term care provider of choice to managed care and other private referral sources in its target markets by achieving a strong regional presence and by providing a full range of high quality, cost effective nursing and specialty medical services. Harborside Healthcare was organized as a Delaware corporation in March 1996. The predecessors of the Company have operated long-term care facilities since 1988. The Company's principal executive offices are located at 470 Atlantic Avenue, Boston, Massachusetts 02210. Its telephone number is (617) 556-1515. THE REORGANIZATION The Company's operations have historically been conducted by various corporations and limited partnerships controlled by Berkshire, certain of its direct and indirect subsidiaries and affiliates, trusts for the benefit of the families of George and Douglas Krupp, and Messrs. Guillard, Dell'Anno and Gerber (collectively, the "Contributors"). The Company has entered into a reorganization agreement (the "Reorganization Agreement") with the Contributors, pursuant to which the Contributors will contribute their equity interests in such entities to the Company in exchange for an aggregate of 4,400,000 shares of Common Stock immediately prior to completion of the Offering (the "Reorganization"). Except as described herein under the caption "Certain Transactions," the equity interests transferred to the Company by the Contributors in connection with the Reorganization constitute all of the equity interests relating to the business of the Company that were previously owned directly or indirectly by the Contributors. Following the Reorganization, the Company will operate as a holding company and conduct all of its business through its wholly owned subsidiary corporations and limited partnerships. The representations and warranties made by the Contributors in the Reorganization Agreement are limited to their ownership of the equity interests being conveyed, their personal tax liabilities and their qualifications as accredited investors. In addition, upon consummation of the Reorganization, the Company will indemnify the Contributors against all obligations and liabilities of the Company's predecessors arising after such consummation. In connection with the Reorganization Agreement, the Company has agreed that if any of the Contributors pledge the shares of Common Stock received in connection with the Reorganization to a financial institution, the Company will enter into a registration rights agreement which provides, subject to certain limitations, the pledgee a demand registration right, at the Company's expense, in the event that it forecloses on the pledged shares. 14 USE OF PROCEEDS The net proceeds to the Company from the Offering, assuming an initial public offering price of $12.50 per share (the midpoint of the range set forth on the cover page of this Prospectus) and after deducting the estimated Offering expenses, including underwriting discounts and commissions, are estimated to be $41,000,000 ($47,277,500 if the Underwriters' over-allotment option is exercised in full). See "Underwriting." The Company will use the net proceeds of the Offering as follows: (i) approximately $26.7 million to repay mortgage indebtedness, including a related prepayment penalty of approximately $1.7 million, (ii) $4.4 million to partially fund an option to purchase the Ohio Facilities at the end of the capital lease term, (iii) approximately $960,000 for payments to certain of the Company's key employees under existing plans and arrangements and (iv) the remainder for general corporate purposes, including working capital and acquisitions. See "Management--Employment Agreements and Change of Control Arrangements." Although the Company is continuously discussing with third parties the possible acquisition of additional long-term care facilities, the Company does not at this time have any firm commitments to make any material acquisitions of long-term care facilities other than the Ohio Transaction, nor has it identified any material, specific ancillary business acquisitions. Pending their use, the net proceeds from the Offering will be invested principally in short-term, investment grade, interest-bearing securities. The repayment of indebtedness will reduce the principal amount outstanding under a mortgage loan in favor of Meditrust, of which $41.7 million aggregate principal amount was outstanding as of April 30, 1996. The loan matures on October 1, 2004 and bears interest at an annual rate of 10.65% plus additional interest equal to 0.3% of the difference between the annual operating revenues of the mortgaged facilities and actual revenues during the twelve-month base period commencing on October 1, 1995. Such additional interest begins to accrue on October 1, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY Since its formation in 1996, the Company has never declared or paid any dividends on its Common Stock. The Company does not anticipate paying cash dividends on its Common Stock for the foreseeable future and intends to retain all of its earnings for reinvestment in the operations and activities of the Company. Any future decision as to the payment of dividends will be at the discretion of the Company's Board of Directors. The Company's ability to pay dividends is also limited by the terms of current (and possibly future) lease and financing arrangements that restrict, among other things, the ability of the Company's combined affiliates to distribute funds to the Company. 15 DILUTION At March 31, 1996, the pro forma net tangible book value of the Company after giving effect to the Reorganization, but prior to the Offering would have been approximately $1.1 million, or $0.25 per share. Pro forma net tangible book value per share of Common Stock is determined by dividing the number of shares of Common Stock outstanding after giving effect to the Reorganization into the pro forma net tangible book value of the Company (total tangible assets less total liabilities) but without giving effect to the possible exercise of stock options which have been or will be granted by the Company prior to the consummation of the Offering under its stock option plans. After giving effect to the Offering at an assumed initial public offering price of $12.50 per share (the midpoint of the range set forth on the cover page of this Prospectus) the pro forma net tangible book value at such date would have been $39.9 million, or $4.99 per share, representing an immediate increase in pro forma net tangible book value of $4.74 per share to existing stockholders. Accordingly, purchasers of the Common Stock in the Offering would sustain an immediate and substantial dilution of $7.51 per share. The following table illustrates such per share dilution: Assumed initial public offering price............................. $12.50 Pro forma net tangible book value as of March 31, 1996.......... $0.25 Increase in pro forma net tangible book value attributable to the Offering(1)................................................ 4.74 ----- Pro forma net tangible book value after the Offering(2)........... 4.99 ------ Dilution to new investors in the Offering(2)(3)................... $ 7.51 ======
- -------- (1) After deduction of underwriting discounts and commissions and estimated Offering expenses. (2) If the Underwriters' over-allotment option were exercised in full, the pro forma net tangible book value per share after the Offering would be $5.41 and the dilution per share to new public investors would be $7.09. (3) Dilution is determined by subtracting the pro forma net tangible book value per share after completion of the Offering from the assumed initial public offering price per share of the Common Stock. The following table summarizes, on a pro forma basis as of March 31, 1996, after giving effect to the Reorganization and the Offering, the differences between the holders of Common Stock prior to the Offering, as a group, and the new investors in the Common Stock offered hereby, with respect to the number of shares purchased, the total consideration paid and the average price paid per share, based upon an assumed initial public offering price of $12.50 per share:
SHARES PURCHASED(1) TOTAL CONSIDERATION ---------------------------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- --------------------- ------- ------------- Existing stockhold- ers(2)................. 4,400,000 55.0% $11,263,000(/3/) 20.0% $ 2.56 New investors........... 3,600,000 45.0 45,000,000 80.0 $12.50 ----------- ------- ----------- ----- Total................. 8,000,000 100.0% $56,263,000 100.0% =========== ======= =========== =====
- -------- (1) If the Underwriters' over-allotment option is exercised in full, the number of shares of Common Stock held by existing stockholders would be reduced to 51.5% of the total number of shares to be outstanding after the Offering and the number of shares of Common Stock held by new investors would be increased to 4,140,000 or 48.5% of the total number of shares of Common Stock to be outstanding after the Offering. (2) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to the Company's stock and stock option plans, under which, upon consummation of the Offering, options to purchase 420,000 shares at an exercise price equal to the initial public offering price will be granted and options to purchase 80,000 shares at an exercise price of $8.15 per share will be granted in substitution for previously granted options to purchase interests in one of the Company's predecessors (See Note M to the Combined Financial Statements). See "Management--Stock Option Plans," "--Directors Retainer Fee Plan" and "Description of Capital Stock." (3) Total consideration paid by existing stockholders is equal to the sum of (i) cash paid for common stock of and partnership interests in the Company's predecessors , net of dividends and distributions paid back to these stockholders and (ii) the Bonus Payment of $225,000. 16 CAPITALIZATION The following table sets forth at March 31, 1996 (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company after giving effect to the Bonus Payment as adjusted to reflect the Offering at an assumed initial public offering price of $12.50 per share (the midpoint of the range set forth on the cover page of this Prospectus) and the application of the net proceeds therefrom and (iii) the pro forma capitalization of the Company as further adjusted after giving effect to the Ohio Transaction. This table should be read in conjunction with "Use of Proceeds" and the historical and pro forma combined financial statements and notes thereto appearing elsewhere in this Prospectus.
AT MARCH 31, 1996 ---------------------------------------- PRO FORMA AS ADJUSTED ------------------------------ BEFORE OHIO INCLUDING OHIO ACTUAL(1) TRANSACTION TRANSACTION(2) --------- ----------- -------------- (IN THOUSANDS) Long-term debt, less current por- tion............................. $42,974 $18,255 $ 72,192 ------- ------- -------- Stockholders' equity: Preferred Stock, par value $.01 per share: 1,000,000 shares authorized; no shares issued or outstanding ac- tual, pro forma as adjusted be- fore Ohio Transaction or pro forma as adjusted including Ohio Transaction..................... -- -- -- Common Stock, par value $.01 per share: 30,000,000 shares authorized; 4,400,000 shares issued and outstanding actual; 8,000,000 shares issued and outstanding pro forma as adjusted before Ohio Transaction and pro forma as adjusted including Ohio Transaction(3).................. 44 80 80 Additional paid-in capital........ 10,994 52,183 (/4/) 52,183 (/4/) Accumulated deficit............... (6,037) (8,994)(/5/) (8,994)(/5/) ------- ------- -------- Total stockholders' equity........ 5,001 43,269 43,269 ------- ------- -------- Total capitalization.............. $47,975 $61,524 $115,461 ======= ======= ========
- -------- (1) Gives effect to the Reorganization. (2) The Ohio Facilities will be acquired pursuant to a lease financing accounted for as a capital lease. The capitalization of the Company has increased by $53,937,000 to record this transaction. (3) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to the Company's stock and stock option plans, under which, upon consummation of the Offering, options to purchase 420,000 shares at an exercise price equal to the initial public offering price will be granted and options to purchase 80,000 shares at an exercise price of $8.15 per share will be granted in substitution for previously granted options to purchase interests in one of the Company's predecessors. See "Management--Stock Option Plans" and "Description of Capital Stock." (4) Gives effect to the Offering and the Bonus Payment. (5) Gives effect to payment of a $1.7 million debt prepayment penalty, $1,185,000 in bonus payments to certain key employees in connection with the Offering (of which $225,000 was paid in the form of Common Stock pursuant to the Bonus Payment), the write-off of $572,000 of deferred financing costs and the recognition of a deferred tax asset of $500,000. See "Management--Employment Agreements and Change of Control Arrangements" and "Certain Transactions." 17 PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited pro forma combined balance sheet of the Company at March 31, 1996 has been prepared to reflect (i) in the case of the "Pro Forma As Adjusted Before Ohio Transaction" column, the consummation of the Offering and the application of the net proceeds therefrom and (ii) in the case of the "Pro Forma As Adjusted Including Ohio Transaction" column, the consummation of the Offering and the application of the net proceeds therefrom and the consummation of the Ohio Transaction. The Ohio Transaction is anticipated to be completed in the third quarter of 1996, although there can be no assurance that the Ohio Transaction will be completed during such time, if at all. See "The Ohio Transaction." The unaudited pro forma combined balance sheet reflects the pro forma transactions as if they had occurred on March 31, 1996. The following unaudited pro forma combined statement of operations for the year ended December 31, 1995 has been prepared to reflect (i) in the case of the "Pro Forma Before Ohio Transaction" column, the consummation of the New Hampshire Transaction, the sale by KYP of the Seven Facilities on December 31, 1995, the Distribution and the 1995 REIT Lease, (ii) in the case of the "Pro Forma As Adjusted Before Ohio Transaction" column, the consummation of the New Hampshire Transaction, the sale by KYP of the Seven Facilities, the Distribution, the 1995 REIT Lease, and the Offering and the application of the net proceeds therefrom and (iii) in the case of the "Pro Forma As Adjusted Including Ohio Transaction" column, the consummation of the New Hampshire Transaction, the sale by KYP of the Seven Facilities, the Distribution, the 1995 REIT Lease, the Offering and the application of the net proceeds therefrom and the Ohio Transaction. Non-recurring charges that result directly from (i) the Offering, (ii) the subscription by Stephen Guillard, the Company's Chairman and Chief Executive Officer, on December 31, 1995, for the purchase of an equity interest in certain of the Company's predecessors for a purchase price of $438,000 (the "Executive Equity Purchase") and (iii) the purchase of equity interests in certain of the Company's predecessors by Laurence Gerber, one of the Company's Directors, on December 31, 1995, for an aggregate purchase price of $365,000 (the "Director Equity Purchase") are not included in the unaudited pro forma combined statement of operations. The unaudited pro forma combined statement of operations for the year ended December 31, 1995 reflects the pro forma transactions as if they had occurred on January 1, 1995. The following unaudited pro forma combined statement of operations for the three months ended March 31, 1996 has been prepared to reflect (i) in the case of the "Pro Forma As Adjusted Before Ohio Transaction" column, the consummation of the Offering and the application of the net proceeds therefrom and (ii) in the case of the "Pro Forma As Adjusted Including Ohio Transaction" column, the consummation of the Offering and the application of the net proceeds therefrom and the Ohio Transaction. The unaudited pro forma combined statement of operations for the three months ended March 31, 1996 reflects the pro forma transactions as if they had occurred on January 1, 1996. The following unaudited pro forma combined financial statements have been prepared by the Company based on the historical financial statements of the Company, the New Hampshire Facilities and the Ohio Facilities included elsewhere in this Prospectus, giving effect to these transactions and the assumptions and adjustments described in the accompanying notes. The following unaudited pro forma combined financial statements are not indicative of the actual results that would have been achieved if the pro forma transactions had actually been completed as of the dates indicated, or which may be realized in the future. The unaudited pro forma combined financial statements should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical combined financial statements of the Company, the prior owner of the New Hampshire Facilities and the owners of the Ohio Facilities and the related notes thereto included elsewhere in this Prospectus. 18 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 (IN THOUSANDS)
PRO FORMA PRO FORMA HARBORSIDE AS ADJUSTED AS ADJUSTED HEALTHCARE OFFERING BEFORE OHIO OHIO INCLUDING CORPORATION ADJUSTMENTS OHIO FACILITIES TRANSACTION OHIO (A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION ----------- ----------- ----------- ---------- ----------- ----------- ASSETS Current Assets: Cash and cash equivalents............ $10,000 $13,340 $23,340 $ 8,187 $ (8,187)(D) $ 17,840 (5,500)(E) Accounts receivable, net.................... 11,354 11,354 1,679 (1,679)(D) 11,354 Prepaid expenses and other.................. 1,935 1,935 190 (190)(D) 1,935 Demand note due from limited partnership.... 1,284 1,284 -- 1,284 Deferred income taxes... -- 500 500 -- 500 ------- ------- ------- -------- -------- --------- Total current assets... 24,573 13,840 38,413 10,056 (15,556) 32,913 Restricted cash......... 4,331 4,331 1,112 (1,112)(D) 4,331 Investment in limited partnership............ 395 395 -- 395 Property and equipment, net.................... 30,185 30,185 15,331 (15,331)(D) 93,224 63,039 (E) Intangible assets, net.. 3,894 (572) 3,322 554 (554)(D) 3,322 ------- ------- ------- -------- -------- --------- Total assets........... $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185 ======= ======= ======= ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt......... $ 448 $ (281) $ 167 $ 317 $ (317)(D) $ 3,769 3,602 (E) Accounts payable........ 3,762 3,762 1,556 (1,556)(D) 3,762 Employee compensation and benefits........... 6,640 6,640 1,277 (1,277)(D) 6,640 Other accrued liabilities............ 892 892 510 (510)(D) 892 Advances from affiliates............. -- -- 1,227 (1,227)(D) -- Accrued interest........ 67 67 131 (131)(D) 67 Current portion of deferred income........ 369 369 -- 369 ------- ------- ------- -------- -------- --------- Total current liabilities........... 12,178 (281) 11,897 5,018 (1,416) 15,499 Long-term portion of deferred income........ 3,225 3,225 3,225 Loan payable-- affiliate.............. -- -- 407 (407)(D) -- Long-term debt.......... 42,974 (24,719) 18,255 18,172 (18,172)(D) 72,192 53,937 (E) ------- ------- ------- -------- -------- --------- Total liabilities...... 58,377 (25,000) 33,377 23,597 33,942 90,916 ------- ------- ------- -------- -------- --------- Stockholders' equity: Common stock............ 44 36 80 -- 80 Additional paid-in capital................ 10,994 41,189 52,183 -- 52,183 Accumulated deficit..... (6,037) (2,957) (8,994) -- (8,994) Partners' equity........ -- -- 3,456 (3,456)(D) -- ------- ------- ------- -------- -------- --------- Total stockholders' equity................ 5,001 38,268 43,269 3,456 (3,456) 43,269 ------- ------- ------- -------- -------- --------- Total liabilities and stockholders' equity.............. $63,378 $13,268 $76,646 $ 27,053 $ 30,486 $ 134,185 ======= ======= ======= ======== ======== =========
See accompanying Notes to Unaudited Pro Forma Combined Balance Sheet as of March 31, 1996 19 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 A. Historical combined balance sheet of the Company as of March 31, 1996 after giving effect to the Reorganization. B. To record the effects of the sale of 3,600,000 shares of Common Stock sold by the Company hereby and the receipt of the estimated net proceeds of $41,000,000, based on an assumed initial public offering price of $12.50 per share and estimated underwriting discounts and commissions and Offering expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000 will be used to repay long-term debt and $1,700,000 will be used to pay a related prepayment penalty. The prepayment penalty, the write-off of $572,000 of deferred financing costs associated with the retired debt, the establishment of a deferred tax asset of $500,000 and bonus payments totaling approximately $1,185,000 (of which $225,000 was paid in the form of Common Stock pursuant to the Bonus Payment) to a group of key employees of the Company and incurred as a result of the Offering have been reflected as an aggregate adjustment of $2,957,000 to the Company's accumulated deficit. C. Historical combined balance sheet of the Ohio Facilities as of March 31, 1996. The Company anticipates that the Ohio Transaction will be consummated in the third quarter of 1996 and has categorized the completion of this acquisition as probable. D. Represents the elimination of all the historical combined balances of the Ohio Facilities as of March 31, 1996. The Company has recorded the lease of the Ohio Facilities as a capital lease as a result of the bargain purchase option at the end of the lease term. However, the Company will not purchase the eliminated assets or assume the eliminated liabilities in connection with such lease. E. Represents the recording of the Ohio Facilities as a capital lease with a capitalized asset value of $63,039,000, including closing costs of $2,100,000. The lease agreement requires an up-front payment of $5,000,000 for an option to purchase the Ohio Facilities at the end of the lease term. Of such $5,000,000, $600,000 was previously paid and $4,400,000 will be paid from the proceeds of the Offering. See "Use of Proceeds." The capital lease obligation has been apportioned between current liabilities of $3,602,000 and long-term debt of $53,937,000. The $5,000,000 purchase option price and closing costs of $500,000 have been recorded as a reduction of cash and cash equivalents. 20 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HARBORSIDE NEW NEW HAMPSHIRE PRO FORMA PRO FORMA AS HEALTHCARE HAMPSHIRE AND OTHER BEFORE OFFERING ADJUSTED OHIO OHIO CORPORATION FACILITIES PRO FORMA OHIO ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION (A) (B) ADJUSTMENTS TRANSACTION (C) TRANSACTION (D) ADJUSTMENTS ----------- ---------- ------------- ----------- ----------- ------------ ---------- ----------- Total net revenues........ $109,425 $21,956 $131,381 $ 131,381 $32,317 -------- ------- -------- --------- ------- Expenses: Facility operating...... 89,378 16,871 $ 311 (E) 106,584 106,584 24,660 277 (E) (253)(F) General and administrative.. 5,076 -- 882 (G) 5,958 5,958 -- $ 680 (O) Management fees........... -- 1,832 (1,832)(H) -- -- 2,664 (2,664)(P) Service charges paid to affiliate...... 700 -- 700 700 -- Depreciation and amortization... 4,385 273 (273)(H) 2,155 2,155 882 (882)(P) 106 (I) 1,195 (Q) (2,430)(F) 94 (J) Facility rent... 1,907 2,382 (2,382)(H) 9,882 9,882 -- 5,114 (J) 2,861 (K) -------- ------- ------ -------- --------- ------- ------- Total expenses... 101,446 21,358 2,475 125,279 125,279 28,206 (1,671) -------- ------- ------ -------- --------- ------- ------- Income from operations...... 7,979 598 (2,475) 6,102 6,102 4,111 1,671 Other: Interest expense, net... (5,107) (160) 998 (F) (4,070) $2,727 (1,343) (1,186) 1,626 (P) 199 (H) (4,349)(Q) (440)(R) Loss on investment in limited partnership.... (114) -- (114) (114) -- Gain on sale of facilities, net............ 4,869 -- (4,869)(L) -- -- -- Minority interest in net income of combined affiliates..... (6,393) -- 6,393 (L) -- -- -- -------- ------- ------ -------- ------ --------- ------- ------- Income before income taxes.... 1,234 438 246 1,918 2,727 4,645 2,925 (1,492) Income taxes..... -- 27 (27)(M) -- -- -- Pro forma income taxes........... 481 -- 267 (N) 748 1,064(N) 1,812 -- 559 (N) -------- ------- ------ -------- ------ --------- ------- ------- Pro forma net income.......... $ 753 $ 411 $ 6 $ 1,170 $1,663 $ 2,833 $ 2,925 $(2,051) ======== ======= ====== ======== ====== ========= ======= ======= Pro forma net income per common share.... $ 0.35 Pro forma weighted average number of shares outstanding..... 8,052,160 PRO FORMA AS ADJUSTED INCLUDING OHIO TRANSACTION -------------- Total net revenues........ $ 163,698 -------------- Expenses: Facility operating...... 131,244 General and administrative.. 6,638 Management fees........... -- Service charges paid to affiliate...... 700 Depreciation and amortization... 3,350 Facility rent... 9,882 -------------- Total expenses... 151,814 -------------- Income from operations...... 11,884 Other: Interest expense, net... (5,692) Loss on investment in limited partnership.... (114) Gain on sale of facilities, net............ -- Minority interest in net income of combined affiliates..... -- -------------- Income before income taxes.... 6,078 Income taxes..... -- Pro forma income taxes........... 2,371 -------------- Pro forma net income.......... $ 3,707 ============== Pro forma net income per common share.... $ 0.46 Pro forma weighted average number of shares outstanding..... 8,052,160
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operationsfor the year ended December 31, 1995 21 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 A. Historical audited combined statement of operations of the Company for the year ended December 31, 1995. B. Historical audited combined statement of operations of the New Hampshire Facilities for the year ended December 31, 1995. C. To record the effects of the sale of 3,600,000 shares of Common Stock sold by the Company hereby and the receipt of the estimated net proceeds of $41,000,000, based on an assumed initial public offering price of $12.50 per share and estimated underwriting discounts and commissions and Offering expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000 will be used to repay long-term debt and $1,700,000 will be used to pay a related prepayment penalty. If the proposed debt repayment had occurred on January 1, 1995, the Company's interest expense, including amortization of deferred financing costs, would have been reduced by $2,727,000. See "Use of Proceeds." The following are non-recurring charges resulting from the Offering and are therefore not reflected in the pro forma combined statement of operations: the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred financing costs associated with the retired debt, the establishment of a deferred tax asset of $500,000 and the making of bonus payments totaling approximately $1,185,000 (of which $225,000 was paid in the form of Common Stock pursuant to the Bonus Payment) to a group of key employees of the Company and incurred as a result of the Offering. The related tax effect of these non-recurring charges at an effective rate of 39% would have been a reduction of income tax expense of $1,348,000. D. Historical audited combined statement of operations of the Ohio Facilities for the year ended December 31, 1995. The Company anticipates that the Ohio Transaction will be consummated in the third quarter of 1996 and has categorized the completion of this acquisition as probable. E. Represents $311,000 in real estate taxes and $277,000 of purchased services relating to the New Hampshire Facilities which would have been recorded by the Company if the New Hampshire Transaction had occurred on January 1, 1995. F. Represents the elimination of historical amounts recorded with respect to the Seven Facilities for letter of credit fees of $253,000, depreciation and amortization expense of $2,430,000, and interest expense of $998,000 as if the sale of the Seven Facilities and the subsequent Distribution had occurred on January 1, 1995. G. Represents $882,000 of historical general and administrative expenses associated with the operation of the New Hampshire Facilities as if the New Hampshire Transaction had occurred on January 1, 1995. These costs are provided in lieu of management fees paid to the seller which included predecessor owner's compensation and profit. H. Represents the elimination of the historical combined amounts recorded by the New Hampshire Facilities for management fee expenses of $1,832,000, depreciation and amortization expenses of $273,000, rent expense of $2,382,000 and interest expense of $199,000. I. Represents the amortization of deferred financing costs in the amount of $106,000 relating to the New Hampshire Transaction. J. Represents the amortization of deferred financing costs in the amount of $94,000 and rent expense of $5,114,000 (recorded on a straight-line basis over the initial lease term of ten years) which the Company would have recorded if the sale of the Seven Facilities and the subsequent Distribution had occurred on January 1, 1995. K. Represents rent expense of $2,861,000 (recorded on a straight-line basis over the initial lease term of ten years), net of amortization of deferred income, that the Company would have incurred if the New Hampshire Transaction had occurred on January 1, 1995. 22 L. Represents the elimination of the "gain on sale of facilities, net" of $4,869,000, and "minority interest in net income of combined affiliates" of $6,393,000 as if the sale of the Seven Facilities and the subsequent Distribution had occurred on January 1, 1995. M. Represents the elimination of the historical combined amount recorded by the New Hampshire Facilities for state income taxes of $27,000. N. Represents adjustments to the Federal and state provision for income taxes which the Company would have recorded if the Company had historically been subject to taxation, based on an effective income tax rate of 39.0%. O. Represents $680,000 of historical general and administrative expenses associated with the operation of the Ohio Facilities as if the Ohio Transaction had occurred on January 1, 1995. These costs are provided in lieu of management fees paid to the seller which included predecessor owners' compensation, related costs and profit. P. Represents the elimination of the historical combined amounts recorded by the Ohio Facilities for management fee expenses of $2,664,000, depreciation and amortization of $882,000, and interest expense of $1,626,000. Q. Represents depreciation and amortization expense of $1,195,000 (recorded on a straight-line basis over the estimated useful life of 40 years) and interest expense of $4,349,000 (recorded at an interest rate of 8%) which the Company would have recorded if the Ohio Transaction had occurred on January 1, 1995. R. Represent the elimination of the historical combined amount recorded by the Ohio Facilities for interest income of $440,000. 23 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HARBORSIDE PRO FORMA AS PRO FORMA HEALTHCARE OFFERING ADJUSTED OHIO OHIO AS ADJUSTED CORPORATION ADJUSTMENTS BEFORE OHIO FACILITIES TRANSACTION INCLUDING OHIO (A) (B) TRANSACTION (C) ADJUSTMENTS TRANSACTION ----------- ----------- ------------ ---------- ----------- -------------- Total net revenues...... $34,931 $ 34,931 $8,272 $ 43,203 ------- --------- ------ --------- Expenses: Facility operating..... 28,120 28,120 6,343 34,463 General and administrative........ 2,235 2,235 -- $ 170 (E) 2,405 Management fees........ -- -- 742 (742)(F) -- Service charges paid to affiliate............. 185 185 -- 185 Depreciation and 539 539 203 (203)(F) 838 amortization.......... 299 (G) Facility rent.......... 2,545 2,545 -- 2,545 ------- --------- ------ ------- --------- Total expenses.......... 33,624 33,624 7,288 (476) 40,436 ------- --------- ------ ------- --------- Income from operations.. 1,307 1,307 984 476 2,767 Other: Interest expense, net.. (975) $680 (295) (289) 289 (F) (1,382) (1,087)(G) Loss on investment in limited partnership... (127) (127) -- (127) ------- ---- --------- ------ ------- --------- Income before income taxes.................. 205 680 885 695 (322) 1,258 Pro forma income taxes.. 80(D) 265(D) 345 -- 146 (D) 491 ------- ---- --------- ------ ------- --------- Pro forma net income.... $ 125 $415 $ 540 $ 695 $ (468) $ 767 ======= ==== ========= ====== ======= ========= Pro forma net income per common share........... $ 0.07 $ 0.10 Pro forma weighted average number of shares outstanding..... 8,052,160 8,052,160
See accompanying Notes to Unaudited Pro Forma Combined Statement of Operations for the three months ended March 31, 1996 24 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 A. Historical unaudited combined statement of operations of the Company for the three months ended March 31, 1996. B. To record the effects of the sale of 3,600,000 shares of Common Stock sold by the Company hereby and the receipt of the estimated net proceeds of $41,000,000, based on an assumed initial public offering price of $12.50 per share and estimated underwriting discounts and commissions and Offering expenses of $4,000,000. Proceeds from the sale in the amount of $25,000,000 will be used to repay long-term debt and $1,700,000 will be used to pay a related prepayment penalty. If the proposed debt repayment had occurred on January 1, 1996, the Company's interest expense, including amortization of deferred financing costs, would have been reduced by $680,000. See "Use of Proceeds." The following are non-recurring charges resulting from the Offering and are therefore not reflected in the pro forma combined statement of operations: the prepayment penalty of $1,700,000, the write-off of $572,000 of deferred financing costs associated with the retired debt, the establishment of a deferred tax asset of $500,000 and the making of bonus payments totaling approximately $1,185,000 (of which $225,000 was paid in the form of Common Stock pursuant to the Bonus Payment) to a group of key employees of the Company and incurred as a result of the Offering. The related tax effect of these non-recurring charges at an effective rate of 39% would have been a reduction of income tax expense of $1,348,000. C. Historical unaudited combined statement of operations of the Ohio Facilities for the three months ended March 31, 1996. The Company anticipates that the Ohio Transaction will be consummated in the third quarter of 1996 and has categorized the completion of this acquisition as probable. D. Represents adjustments to the Federal and state provision for income taxes which the Company would have recorded if the Company had historically been subject to taxation, based on an effective tax rate of 39.0%. E. Represents $170,000 of historical general and administrative expenses associated with the operation of the Ohio Facilities as if the Ohio Transaction had occurred on January 1, 1996. These costs are provided in lieu of management fees paid to the seller which included predecessor owners' compensation, related costs and profit. F. Represents the elimination of historical combined amounts recorded by the Ohio facilities for management fee expenses of $742,000, depreciation and amortization expense of $203,000, and interest expense, net, of $289,000. G. Represents depreciation and amortization expense of $299,000 (recorded on a straight-line basis over the estimated useful life of 40 years) and interest expense of $1,087,000 (recorded at an interest rate of 8%) which the Company would have recorded if the Ohio Transaction had occurred on January 1, 1996. 25 SELECTED COMBINED FINANCIAL AND OPERATING DATA The following table sets forth selected historical combined financial data and selected pro forma combined financial data for the Company. The selected historical combined financial data for each of the years in the five year period ended December 31, 1995 have been derived from the Company's combined financial statements, which have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected historical combined financial data as of March 31, 1996 and for the three-month periods ended March 31, 1995 and 1996 were derived from unaudited combined financial statements of the Company. In the opinion of management, the unaudited combined financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The results of operations for the interim periods are not necessarily indicative of results that may be expected for the full year. The pro forma data are derived from the Company's unaudited pro forma combined financial information and the notes thereto contained elsewhere in this Prospectus. The pro forma data are not necessarily indicative of the financial condition or results of operations that would have occurred or that will occur in the future had the transactions occurred on the dates indicated in the unaudited pro forma combined financial information. The financial data set forth below should be read in conjunction with the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Pro Forma Combined Financial Information" and the audited combined financial statements of the Company, the predecessor owner of the New Hampshire Facilities and the owners of the Ohio Facilities and the related notes thereto included elsewhere in this Prospectus. 26 (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OTHER DATA)
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1995 PRO FORMA AS ADJUSTED ----------------------------- BEFORE OHIO INCLUDING OHIO 1991 1992 1993 1994 1995 TRANSACTION(2) TRANSACTION(3) ------- ------- ------- ------- -------- -------------- -------------- STATEMENT OF OP- ERATIONS DA- TA(1): Total net reve- nues(6)......... $56,879 $62,623 $75,101 $86,376 $109,425 $ 131,381 $ 163,698 ------- ------- ------- ------- -------- --------- --------- Expenses: Facility operat- ing............. 43,299 48,413 57,412 68,951 89,378 106,584 131,244 General and ad- ministrative.... 3,019 3,079 3,092 3,859 5,076 5,958 6,638 Service charges paid to affili- ate............. 1,040 637 746 759 700 700 700 Depreciation and amortization.... 5,278 4,655 4,304 4,311 4,385 2,155 3,350 Facility rent.... -- -- 525 1,037 1,907 9,882 9,882 ------- ------- ------- ------- -------- --------- --------- Total expenses.. 52,636 56,784 66,079 78,917 101,446 125,279 151,814 ------- ------- ------- ------- -------- --------- --------- Income from oper- ations.......... 4,243 5,839 9,022 7,459 7,979 6,102 11,884 Other: Interest expense, net............. (4,527) (4,690) (4,740) (4,609) (5,107) (1,343) (5,692) Loss on investment in limited partnership(7).. -- -- -- (448) (114) (114) (114) Gain on sale of facilities, net............. -- -- -- -- 4,869 -- -- Loss on refinanc- ing of debt..... -- -- -- (453) -- -- -- Minority interest in net income of combined affiliates...... (1,709) (1,472) (2,297) (1,575) (6,393) -- -- ------- ------- ------- ------- -------- --------- --------- Net income....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078 ======= ======= ======= ======= ======== ========= ========= Pro forma data: Historical net income(8)....... $(1,993) $ (323) $ 1,985 $ 374 $ 1,234 $ 4,645 $ 6,078 Pro forma income taxes(8)........ -- -- 774 146 481 1,812 2,371 ------- ------- ------- ------- -------- --------- --------- Pro forma net in- come (loss)(8).. $(1,993) $ (323) $ 1,211 $ 228 $ 753 $ 2,833 $ 3,707 ======= ======= ======= ======= ======== ========= ========= Pro forma net in- come per share(8)........ $ 0.35 $ 0.46 Pro forma weighted average shares outstand- ing............. 8,052,160 8,052,160 OTHER DATA(1): Facilities (as of end of period) Owned(9)(10)..... 15 15 15 16 9 9 13 Leased(10)....... -- -- 2 3 11 17 17 ------- ------- ------- ------- -------- --------- --------- Total........... 15 15 17 19 20 26 30 Licensed beds (as of end of peri- od) Owned(9)(10)..... 1,860 1,860 1,860 1,976 1,028 1,028 1,720 Leased(10)....... -- -- 289 389 1,443 1,980 1,980 ------- ------- ------- ------- -------- --------- --------- Total........... 1,860 1,860 2,149 2,365 2,471 3,008 3,700 Average occupancy rate(11)........ 93.9% 93.5% 92.5% 91.5% 91.5% 91.9% 92.2% Sources of net patient service revenues(12): Private and oth- er(13).......... 43.9% 43.0% 39.9% 37.1% 32.3% 33.0% 32.9% Medicare......... 14.7% 16.2% 21.2% 24.9% 33.1% 27.4% 27.0% Medicaid......... 41.4% 40.8% 38.9% 38.0% 34.6% 39.6% 40.1% AS OF DECEMBER 31, -------------------------------------------- 1991 1992 1993 1994 1995 ------- ------- ------- ------- -------- BALANCE SHEET DA- TA(1): Cash and cash equivalents..... $ 7,290 $ 5,935 $10,214 $14,013 $ 40,157 Working capital.. 6,069 6,734 6,511 13,915 10,735 Total assets..... 87,923 84,865 85,472 93,876 92,632 Total debt....... 39,673 40,580 40,708 53,296 45,496 Stockholders' eq- uity............ 4,119 3,631 4,918 2,866 4,130 THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 1996 PRO FORMA AS ADJUSTED ------------------------------- BEFORE OHIO INCLUDING OHIO 1995 1996 TRANSACTION(4) TRANSACTION(5) -------- -------- --------------- --------------- STATEMENT OF OP- ERATIONS DA- TA(1): Total net reve- nues(6)......... $23,777 $34,931 $ 34,931 $43,203 -------- -------- --------------- --------------- Expenses: Facility operat- ing............. 19,734 28,120 28,120 34,463 General and ad- ministrative.... 1,141 2,235 2,235 2,405 Service charges paid to affili- ate............. 177 185 185 185 Depreciation and amortization.... 1,043 539 539 838 Facility rent.... 392 2,545 2,545 2,545 -------- -------- --------------- --------------- Total expenses.. 22,487 33,624 33,624 40,436 -------- -------- --------------- --------------- Income from oper- ations.......... 1,290 1,307 1,307 2,767 Other: Interest expense, net............. (1,264) (975) (295) (1,382) Loss on investment in limited partnership(7).. (81) (127) (127) (127) Gain on sale of facilities, net............. -- -- -- -- Loss on refinanc- ing of debt..... -- -- -- -- Minority interest in net income of combined affiliates...... (185) -- -- -- -------- -------- --------------- --------------- Net income....... $ (240) $ 205 $ 885 $ 1,258 ======== ======== =============== =============== Pro forma data: Historical net income(8)....... $ (240) $ 205 $ 885 $ 1,258 Pro forma income taxes(8)........ (94) 80 345 491 -------- -------- --------------- --------------- Pro forma net in- come (loss)(8).. $ (146) $ 125 $ 540 $ 767 ======== ======== =============== =============== Pro forma net in- come per share(8)........ $ 0.07 $ 0.10 Pro forma weighted average shares outstand- ing............. 8,052,160 8,052,160 OTHER DATA(1): Facilities (as of end of period) Owned(9)(10)..... 9 9 9 13 Leased(10)....... 10 17 17 17 -------- -------- --------------- --------------- Total........... 19 26 26 30 Licensed beds (as of end of peri- od) Owned(9)(10)..... 1,022 1,028 1,028 1,720 Leased(10)....... 1,343 1,980 1,980 1,980 -------- -------- --------------- --------------- Total........... 2,365 3,008 3,008 3,700 Average occupancy rate(11)........ 90.9% 91.3% 91.3% 91.8% Sources of net patient service revenues(12): Private and oth- er(13).......... 34.2% 31.8% 31.8% 31.8% Medicare......... 30.6% 28.3% 28.3% 27.3% Medicaid......... 35.2% 39.9% 39.9% 40.9% AS OF MARCH 31, ---------------------------------------- 1996 PRO FORMA AS ADJUSTED ------------------------------- BEFORE OHIO INCLUDING OHIO 1996 TRANSACTION(14) TRANSACTION(15) -------- --------------- --------------- BALANCE SHEET DA- TA(1): Cash and cash equivalents..... $10,000 $23,340 $ 17,840 Working capital.. 12,395 26,516 17,414 Total assets..... 63,378 76,646 134,185 Total debt....... 43,422 18,422 75,961 Stockholders' eq- uity............ 5,001 43,269 43,269
27 (1) Harborside Healthcare has been created in anticipation of the Offering in order to combine under its control the operations of the long-term care facilities and ancillary businesses that are currently under the control of Berkshire and its affiliates. See "The Reorganization." The Company's financial and operating data above combine the historical results of these business entities. (2) Gives effect to the consummation of the New Hampshire Transaction on January 1, 1996, the sale by KYP of the Seven Facilities on December 31, 1995 and the subsequent Distribution, the 1995 REIT Lease, the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if such transactions had occurred on January 1, 1995. (3) Gives effect to the transactions described in Note (2) above and the pending Ohio Transaction as if such transactions had occurred on January 1, 1995. The Ohio Transaction will be accounted for as a capital lease as a result of the bargain purchase option granted at the end of the lease term. This accounting treatment will result in an increase in depreciation and amortization expense of $1,195,000 and an increase in interest expense, net, of $4,349,000. The Company expects to complete the Ohio Transaction in the third quarter of 1996, subject to the satisfaction of certain customary conditions, including the satisfactory completion of the Company's due diligence review and receipt of regulatory and other approvals. (4) Gives effect to the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), as if the Offering had occurred on January 1, 1996. (5) Gives effect to (i) the consummation of the Offering and the application of the net proceeds therefrom (assuming an initial public offering price of $12.50 per share), and (ii) the pending Ohio Transaction, as if the transactions had occurred on January 1, 1996. The Ohio Transaction will result in an increase in depreciation and amortization expense for the period of $299,000 and an increase in interest expense, net, for the period of $1,087,000. (6) Total net revenues include net patient service revenues from the Company's facilities and revenues from ancillary services provided at non-affiliated long-term care facilities. Total net revenues exclude net patient service revenues from the Larkin Chase Center, but include management fees and rehabilitation therapy service revenues from such facility. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (7) Represents the Company's allocation of operating results for the Larkin Chase Center which the Company accounts for using the equity method. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (8) Prior to the Reorganization, the Company's predecessors operated under common control but were not subject to Federal or state income taxation and, accordingly, no provision for income taxes has been made in the Company's audited combined financial statements. Following the Reorganization, these predecessors will be subject to Federal and state income taxes. Pro forma net income (loss) and pro forma net income per share reflect the combined income tax expense that the Company's predecessors would have incurred had they been subject to taxation during each of the periods indicated. (9) Includes the Larkin Chase Center commencing in 1994. (10) On December 31, 1995, the Seven Facilities were reclassified as "leased" following the sale and concurrent 1995 REIT Lease. See Note (2) above. The Ohio Facilities are classified as "owned" reflecting the treatment of the Ohio Transaction as a capital lease. (11) "Average occupancy rate" is computed by dividing the number of occupied licensed beds by the total number of available licensed beds during each of the periods indicated. (12) Net patient service revenues exclude all management fees and all rehabilitation therapy service revenues and the net patient service revenues of the Larkin Chase Center. The Company accounts for its investment in this facility using the equity method because of certain control and purchase rights held by the minority investor in that facility. See "Business--Properties." (13) Consists primarily of revenues derived from private pay individuals, managed care organizations, HMOs, hospice programs and commercial insurers. (14) Gives effect to the consummation of the transactions described in Note (4) above and the Bonus Payment, as if such transactions had occurred on March 31, 1996. (15) Gives effect to the transactions described in Note (14) above and the Ohio Transaction as if such transactions had occurred on March 31, 1996. The Ohio Transaction will be accounted for as a capital lease. See Note (3) above. This accounting treatment will result in an increase in total debt of $57,539,000. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's predecessors commenced operations in 1988 with the acquisition of two long-term care facilities. The Company has experienced significant growth since that time, primarily through the acquisition of additional facilities. The Company operates 26 long-term care facilities and provides rehabilitation therapy services to patients at 36 non-affiliated long-term care facilities. The Company has been created in anticipation of the Offering in order to combine under its control the operations of long-term care facilities and ancillary businesses (the "Predecessors") that are currently under the control of Berkshire and its affiliates. Immediately prior to the completion of the Offering, the owners of the Predecessors will contribute their interests in such entities to the Company in exchange for 4,400,000 shares of Common Stock. See "The Reorganization." The Company's audited combined financial statements included elsewhere in this Prospectus have been prepared by combining the historical financial statements of the Predecessors, similar to a pooling of interests presentation. One of the Predecessors is the general partner of KYP, which owned the Seven Facilities throughout the period from January 1, 1991 to December 31, 1995. During this period, 95% of the net income of KYP was allocated to the Unitholders and 5% to the general partner. Effective December 31, 1995, KYP sold the Seven Facilities to Meditrust for a purchase price of $47,000,000. Simultaneously, the general partner leased the Seven Facilities from the purchaser pursuant to the 1995 REIT Lease. The accounts of KYP are included in the Company's audited combined financial statements and the interest of its limited partners is reflected as the minority interest. See "Business-- Properties" and Notes B and N to the Company's audited combined financial statements included elsewhere in this Prospectus. The Company's audited combined financial statements do not include a provision for Federal or state income taxes because the Predecessors were not subject to Federal or state income taxation. Accordingly, the Company's audited combined financial statements reflect a pro forma income tax expense for each year presented, as if the Predecessors had previously been tax-paying entities. The following discussion should be read in conjunction with "Selected Combined Financial and Operating Data" and the Company's audited combined financial statements and the notes thereto included elsewhere in this Prospectus. The following table sets forth the number of facilities owned and leased by the Company and the number of licensed beds operated by the Company:
AS OF DECEMBER 31, AS OF MARCH 31, ------------------------- ------------------------- 1996 PRO FORMA AS ADJUSTED INCLUDING OHIO 1993 1994 1995 1996 TRANSACTION ------ ------ ------ ----- -------------- Facilities: Owned.......... 15 16(/1/) 9(/1/)(/2/) 9(/1/) 13(/1/) Leased......... 2 3 11(/2/) 17 17 ------ ------ ------ ----- ----- Total........ 17 19 20 26 30 ====== ====== ====== ===== ===== Licensed beds: Owned.......... 1,860 1,976(/1/) 1,028(/1/)(/2/) 1,028(/1/) 1,720(/1/) Leased......... 289 389 1,443(/2/) 1,980 1,980 ------ ------ ------ ----- ----- Total........ 2,149 2,365 2,471 3,008 3,700 ====== ====== ====== ===== =====
- -------- (1) Includes the Larkin Chase Center, which is owned by Bowie Center Limited Partnership ("Bowie L.P."), a joint venture in which the Company has a 75% ownership interest and a non-affiliated investor has a 25% ownership interest. See "Business--Properties" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (2) On December 31, 1995, KYP sold the Seven Facilities which were concurrently leased by the Company pursuant to the 1995 REIT Lease. See "Business--Properties" and Note D to the Company's audited combined financial statements included elsewhere in this Prospectus. 29 The following table sets forth certain operating data for the periods indicated:
FOR THE THREE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------- ---------------------- 1995 PRO FORMA AS ADJUSTED INCLUDING OHIO 1993 1994 1995 TRANSACTION 1995 1996 ------- ------- ------- -------------- ---------- ---------- Patient days: Private and other..... 258,847 258,585 257,864 397,675 62,296 74,365 Medicare.............. 60,459 68,256 90,107 117,756 22,223 23,496 Medicaid.............. 366,105 404,372 432,392 684,331 100,887 142,226 ------- ------- ------- --------- ---------- ---------- Total............... 685,411 731,213 780,363 1,199,762 185,406 240,087 ======= ======= ======= ========= ========== ========== Average occupancy rate(1)................ 92.5% 91.5% 91.5% 92.2% 90.9% 91.3% Net patient service rev- enues (2): Private and other..... 39.9% 37.1% 32.3% 32.9% 34.2% 31.8% Medicare.............. 21.2 24.9 33.1 27.0 30.6 28.3 Medicaid.............. 38.9 38.0 34.6 40.1 35.2 39.9 ------- ------- ------- --------- ---------- ---------- Total............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ======= ======= ======= ========= ========== ==========
- -------- (1) "Average occupancy rate" is computed by dividing the number of occupied licensed beds by the total number of available licensed beds during each of the periods indicated. (2) Net patient service revenues exclude all management fees and all rehabilitation therapy service revenues and the net patient service revenues of the Larkin Chase Center. See "Business--Properties." RESULTS OF OPERATIONS The Company's total net revenues include net patient service revenues (excluding those recorded at the Larkin Chase Center), management fees from the Larkin Chase Center, and rehabilitation therapy service revenues from contracts with the Larkin Chase Center and, beginning in 1995, non-affiliated long-term care facilities. Private net patient service revenues are recorded at established per diem billing rates. Net patient service revenues to be reimbursed under contracts with third-party payors, primarily the Medicare and Medicaid programs, are recorded at amounts estimated to be realized under these contractual arrangements. Estimated Medicare and Medicaid revenues may be adjusted after the year of origination based on payor audits, improved revenue estimates or final settlements. Such adjustments are included in the net revenues for the period in which the adjustment occurs. The Company's facility operating expenses consist primarily of payroll and employee benefits related to nursing, housekeeping and dietary services provided to patients, as well as maintenance and administration of the facilities. Other significant facility operating expenses include the cost of rehabilitation therapy services provided by third parties, medical and pharmacy supplies, food, utilities, insurance and taxes. The Company's facility operating expenses also include the general and administrative costs associated with the operation of the Company's rehabilitation therapy business. The Company's general and administrative expenses include all costs associated with its regional and corporate operations. The "loss on investment in limited partnership" reflects the Company's 75% allocation of the net loss of the Larkin Chase Center. The Company accounts for its investment in this facility using the equity method because of certain purchase rights held by the minority investor in the facility and because the Company does not exercise control over the operations. As described in Note N to the Company's audited combined financial statements, KYP sold the Seven Facilities in December 1995 and recognized a net gain of $4,869,000, all of which was allocated to the KYP Unitholders and is reflected in "minority interest in net income of combined affiliates." 30 The following table presents certain combined financial data of the Company expressed as a percentage of total net revenues for the historical periods presented and for the year ended December 31, 1995 on a pro forma basis after giving effect to the consummation of the New Hampshire Transaction, the sale by KYP of the Seven Facilities and the subsequent Distribution, the 1995 REIT Lease, the Offering and the application of the net proceeds therefrom and the pending Ohio Transaction.
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------- FOR THE THREE 1995 MONTHS PRO FORMA ENDED MARCH AS ADJUSTED 31, INCLUDING OHIO ------------- 1993 1994 1995 TRANSACTION 1995 1996 ----- ----- ----- -------------- ----- ----- Total net revenues...... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- Expenses: Facility operating.... 76.5 79.8 81.7 80.2 83.0 80.5 General and adminis- trative.............. 4.1 4.5 4.6 4.1 4.8 6.4 Service charges paid to an affiliate...... 1.0 0.9 0.6 0.4 0.7 0.5 Depreciation and amor- tization............. 5.7 5.0 4.0 2.0 4.4 1.6 Facility rent......... 0.7 1.2 1.8 6.0 1.7 7.3 ----- ----- ----- ----- ----- ----- Total expenses...... 88.0 91.4 92.7 92.7 94.6 96.3 ----- ----- ----- ----- ----- ----- Income from operations.. 12.0 8.6 7.3 7.3 5.4 3.7 Other: Interest expense, net.................. (6.3) (5.4) (4.6) (3.5) (5.3) (2.7) Loss on investment in limited partnership.. -- (0.5) (0.1) (0.1) (0.3) (0.4) Gain on sale of facil- ities, net........... -- -- 4.4 -- -- -- Loss on refinancing... -- (0.5) -- -- -- -- Minority interest in net income of com- bined affiliates..... (3.1) (1.8) (5.9) -- (0.8) -- ----- ----- ----- ----- ----- ----- Net income (loss)....... 2.6 % 0.4 % 1.1 % 3.7 % (1.0)% 0.6 % Pro forma data: Pro forma income tax- es................... (1.0)% (0.2)% (0.4)% (1.4)% 0.4 % (0.2)% ----- ----- ----- ----- ----- ----- Pro forma net income (loss)............... 1.6 % 0.2 % 0.7 % 2.3 % (0.6)% 0.4 % ===== ===== ===== ===== ===== =====
The Company experienced an increase in average net patient service revenues per patient day as a result of an increase in the proportion of patients requiring higher levels of medical care, including subacute care. In 1993, the Company anticipated a decline in revenues from traditional custodial care private pay patients and sought to offset this potential loss through the expansion of subacute care and other specialty medical services. As a result, the percentage of net patient service revenues attributable to the Medicare program was 33.1% in 1995, a substantial increase from the 24.9% and 21.2% experienced in 1994 and 1993, respectively. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Total Net Revenues. Total net revenues increased by $23,049,000, or 26.7%, from $86,376,000 in 1994 to $109,425,000 in 1995. This increase resulted primarily from the operation of two additional facilities, the generation of revenues from rehabilitation therapy services provided to patients at the Larkin Chase Center and non-affiliated long-term care facilities and increased net patient service revenues per patient day at the Company's existing facilities. Of such increase, $6,279,000, or 27.2%, resulted from the operation of the Brevard facility, which the Company began leasing in October 1994, and the Swanton facility, which the Company began leasing in April 1995. In 1995, the Company began providing rehabilitation therapy services at non- affiliated long-term care facilities, which generated revenues of $3,045,000, or 13.2% of such increase. In addition, 31 rehabilitation therapy service revenues from the Larkin Chase Center increased by $687,000, or 3.0% of such increase, to $1,031,000 in 1995. The remaining $13,038,000, or 56.6% of such increase, is attributable to higher average net patient service revenues per patient day at the Company's existing facilities, resulting from increased care levels provided to patients with medically complex conditions. Average net patient service revenues per patient day increased by 14.4% from $117.54 in 1994 to $134.45 in 1995. The average occupancy rate at the Company's facilities remained unchanged in 1995 at 91.5%. Facility Operating Expenses. The increase in the number of facilities operated by the Company and the expansion of the Company's rehabilitation therapy services to include non-affiliated facilities, as well as the greater percentage of patients receiving higher levels of care, resulted in an increase in facility operating expenses of $20,427,000, or 29.6%, from $68,951,000 in 1994 to $89,378,000 in 1995. Facilities added during 1994 and 1995 accounted for $4,962,000, or 24.3%, of the increase in facility operating expenses. As described above, in 1995 the Company began providing rehabilitation therapy services to patients at non-affiliated facilities. During 1995, the Company entered into rehabilitation therapy service contracts with 16 non-affiliated facilities and expensed all related contract development costs as incurred, including marketing, recruiting and other related expenses. These expenses, together with the cost of providing rehabilitation therapy services at these facilities, increased the Company's facility operating expenses by $3,290,000, which approximated the revenues derived from such activities in 1995. The remainder of the increase in facility operating expenses, approximately $12,175,000, is due to significant increases in the costs of labor, medical supplies and rehabilitation therapy services purchased from third parties. The Company's efforts to enhance its clinical capabilities required it to significantly increase facility staffing levels in 1995 as compared to 1994. General and Administrative; Service Charges Paid to Affiliate. Expenses associated with the Company's regional and corporate offices increased by $1,217,000, or 31.5%, from $3,859,000 in 1994 to $5,076,000 in 1995. The majority of this increase resulted from the creation of new positions to support the development of subacute programs, as well as from the addition of administrative services needed to support facilities added during 1995 and late in 1994. The Company reimbursed Berkshire in 1995 for rent and other expenses related to its corporate headquarters, as well as for certain data processing and administrative services. See "Certain Transactions." In 1995, such reimbursements totaled $700,000, compared to $759,000 in 1994. The reduction in this expense is attributable to functions assumed by employees of the Company during 1995. Depreciation and Amortization. Depreciation and amortization remained relatively unchanged at $4,385,000 in 1995 as compared to $4,311,000 in 1994. Facility Rent. Facility rent expense increased by $870,000, or 83.9%, from $1,037,000 in 1994 to $1,907,000 in 1995. The increase in rent is attributable to the addition of two facilities financed pursuant to long-term leases. In April 1995, the Company began leasing its Swanton facility. In October 1994, the Company entered into a lease for its Brevard facility with an affiliate. See "Certain Transactions." Interest Expense, net. Interest expense, net, increased from $4,609,000 in 1994 to $5,107,000 in 1995. This increase of $498,000, or 10.8%, related to the incurrence of approximately $13,100,000 of additional debt in October 1994, and was offset in part by the refinancing of certain high cost debt at a lower interest rate. The increase in interest expense was partially offset by increased interest income resulting from a higher average cash balance held during 1995 following the incurrence of additional debt in October 1994 and prior to the use of these funds for facility acquisitions. Loss on Investment in Limited Partnership. The Company accounts for its investment in the Larkin Chase Center using the equity method. The Company's 75% allocation of the net loss from this facility was reduced from $448,000 in 1994 to $114,000 in 1995. Most of the improvement resulted from an increase in occupancy at this facility in 1995 and the recognition of start-up losses during 1994. The Larkin Chase Center opened on April 30, 1994 and achieved stabilized occupancy by the fourth quarter of 1995. 32 Gain on Sale of Facilities. The net gain on sale of facilities of approximately $4,869,000 in 1995 resulted from the sale on December 31, 1995 of the Seven Facilities. All of the net gain from this sale has been allocated to the Unitholders in accordance with the partnership agreement and is reflected in the increased minority interest charge in 1995. At the time of the sale, the Company entered into the 1995 REIT Lease. See "Business-- Properties" and Note N to the Company's audited combined financial statements included elsewhere in this Prospectus. Minority Interest in Net Income of Combined Affiliates. The minority interest charge increased from $1,575,000 in 1994 to $6,393,000 in 1995, an increase of $4,818,000. Substantially all of the increase is attributable to the allocation of the net gain on the sale of the Seven Facilities. Following the Distribution and subsequent dissolution of the partnership, the minority interest charge will be eliminated. Net Income. Net income was $374,000 in 1994 as compared to $1,234,000 in 1995. The increase of $860,000 was primarily the result of increased operating income in 1995 and a reduced loss from the Company's equity investment in the Larkin Chase Center in 1995. In addition, in 1994 the Company incurred a loss of $453,000 relating to the refinancing of certain indebtedness. Year Ended December 31, 1994 Compared to Year ended December 31, 1993 Total Net Revenues. Total net revenues increased by $11,275,000, or 15.0%, from $75,101,000 in 1993 to $86,376,000 in 1994. This increase resulted primarily from the operation of three additional facilities and increased net patient service revenues per patient day. Of such increase, $5,146,000, or 45.6%, resulted from the operation of these additional facilities. The remaining $6,129,000, or 54.4%, of such increase in revenues was the result of higher average net patient service revenues per patient day associated with increased levels of care to patients with medically complex conditions. Average net patient service revenues per patient day increased by 7.3% from $109.57 in 1993 to $117.54 in 1994, while the average occupancy rate decreased from 92.5% to 91.5% during the same period. Part of the reduction in average occupancy rate was the result of the opening of the newly constructed Larkin Chase Center in April 1994. Excluding the Larkin Chase Center, the average occupancy rate at the Company's facilities was 92.1% in 1994, only a slight reduction from 1993. Additionally, the Company closed certain Medicare and Medicaid cost reports in 1994 and 1993 which resulted in additional net patient service revenues of $1,000,000 and $2,000,000, respectively. Facility Operating Expenses. Facility operating expenses increased by $11,539,000, or 20.1%, from $57,412,000 in 1993 to $68,951,000 in 1994. Of this increase, $4,361,000, or 37.8%, resulted from increased expenses associated with the addition of three facilities in 1993 and 1994. The remaining $7,178,000, or 62.2%, of such increase resulted from increased expenses associated with higher skilled staffing levels and increased use of rehabilitation therapy and medical supplies. The incurrence of higher operating expenses is consistent with the Company's objective of providing care to patients requiring higher levels of medical care or specialized treatment. Beginning in 1993, the Company began providing its own rehabilitation therapy services to patients at certain of its facilities. The closing of certain Medicare and Medicaid cost reports in 1993 and 1994 had the effect of reducing facility operating expenses as a percentage of net revenues. General and Administrative; Service Charges Paid to Affiliate. General and administrative expenses increased by $767,000, or 24.8%, from $3,092,000 in 1993 to $3,859,000 in 1994. This increase resulted from higher expenses associated with expansion of regional and corporate support as well as increases in salaries. During 1994, the Company added corporate marketing and clinical positions as it expanded subacute care and other forms of specialty medical care. The Company reimbursed Berkshire in 1994 for rent and other expenses related to its corporate headquarters as well as for certain data processing and administrative services which were provided to the Company. In 1994, reimbursements to Berkshire totaled $759,000 as compared to $746,000 in 1993. Depreciation and Amortization. Depreciation and amortization remained relatively unchanged at $4,311,000 in 1994 as compared to $4,304,000 in 1993. 33 Facility Rent. Facility rent expense increased by $512,000, or 97.5%, from $525,000 in 1993 to $1,037,000 in 1994. This increase was primarily due to the addition of two facilities in June 1993 and one facility in October 1994, all of which were financed pursuant to long-term leases. Interest Expense, net. Interest expense, net, was $4,740,000 in 1993 as compared to $4,609,000 in 1994. The Company refinanced the majority of its long-term debt in October 1994. As a result, the Company incurred approximately $13,100,000 of additional debt at a reduced interest rate. The Company recorded a loss on refinancing of $453,000 in connection with this transaction. Loss on Investment in Limited Partnership. The Company recorded a loss of $448,000 in 1994 in connection with its 75% ownership interest in the Larkin Chase Center. The loss recognized in 1994 is primarily the result of the recognition of start-up costs incurred before the facility achieved stabilized occupancy. Minority Interest in Net Income of Combined Affiliates. Minority interest declined from $2,297,000 in 1993 to $1,575,000 in 1994, a decrease of $722,000. Minority interest in net income of combined affiliates reflects the allocation of 95% of the net income of KYP to the Unitholders. KYP generated less net income in 1994 than in 1993 and the minority interest was correspondingly reduced. Net Income. Net income was $1,985,000 in 1993 as compared to $374,000 in 1994. The decrease of $1,611,000 was primarily the result of reduced Medicare and Medicaid settlements in 1994, the loss related to the Company's equity investment in the Larkin Chase Center, and the loss on refinancing recorded by the Company in October 1994. A reduction in minority interest partially offset these factors. Year Ended December 31, 1995, Pro Forma As Adjusted Including the Ohio Transaction, Compared to Historical Year Ended December 31, 1995 Total Net Revenues. Total net revenues on a pro forma basis in 1995 increased by $54,273,000, or 49.6%, to $163,698,000 as compared to the Company's historical 1995 net revenues of $109,425,000. The addition of the six New Hampshire Facilities represented $21,956,000, or 40.5%, of such increase and the four Ohio Facilities represented $32,317,000, or 59.5%, of such increase. Facility Operating Expenses. Facility operating expenses on a pro forma basis increased 46.8%, or $41,866,000, to $131,244,000 in 1995 as compared to the Company's historical 1995 facility operating expenses of $89,378,000. The increase resulted from the addition of the New Hampshire and Ohio Facilities. Facility operating expenses as a percentage of total net revenues were 80.2% on a pro forma basis in 1995 and 81.7% on a historical basis. The operating expenses of these facilities are lower as a percentage of total net revenues than the Company's historical percentage due to differences in levels of medical care provided and start-up expenses incurred by the Company in connection with its rehabilitation therapy business. General and Administrative Expenses. General and administrative expenses on a pro forma basis in 1995 increased by $1,562,000, or 30.8%, to $6,638,000 as compared to the Company's historical 1995 general and administrative expenses of $5,076,000. This increase resulted from costs associated with the addition of the New Hampshire and Ohio Facilities. The New Hampshire Facilities operate as a new region of the Company and correspondingly require a higher level of general and administrative expenses than the Ohio Facilities, which are expected to be integrated into the Company's existing Midwest region. Depreciation and Amortization. Depreciation and amortization expense on a pro forma basis in 1995 decreased by $1,035,000, or 23.6%, to $3,350,000 as compared to the Company's historical 1995 depreciation and amortization expense of $4,385,000. The net reduction was largely the result of the elimination of $2,430,000 in depreciation and amortization expense recorded by the Seven Facilities owned by KYP after giving effect to the sale and subsequent lease of the Seven Facilities. This amount was partly offset by a $1,195,000 increase relating to the Ohio Transaction which has been recorded as a capital lease. 34 Facility Rent. Facility rent expense on a pro forma basis in 1995 increased by $7,975,000 to $9,882,000 as compared to the Company's historical 1995 expense of $1,907,000. The increase in rent expense was solely the result of the effect of the sale and subsequent lease of the Seven Facilities and the lease of the New Hampshire Facilities. Interest Expense, net. Interest expense, net, on a pro forma basis in 1995 increased by $585,000, or 11.5%, to $5,692,000 as compared to the Company's historical interest expense, net, of $5,107,000. Interest expense increased by $4,349,000 as the result of the Ohio Transaction, which has been recorded as a capital lease. This increase was partially offset by $2,727,000 as a result of the repayment of $25,000,000 of Meditrust debt with the proceeds of the Offering. All non-recurring items such as the prepayment penalty of $1,700,000 and the write-off of deferred financing costs of $572,000 have been excluded from the unaudited pro forma combined statement of operations. Net Income. Net income on a pro forma basis in 1995 increased by $2,954,000 to $3,707,000 as compared to the Company's historical net income of $753,000 (after reflecting a pro forma tax expense). Net income increased primarily as the result of reduced interest expense following the Debt Repayment as well as the addition of the New Hampshire Facilities and the Ohio Facilities. Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 Total Net Revenues. Total net revenues increased by $11,154,000, or 46.9%, from $23,777,000 in 1995 to $34,931,000 in 1996. This increase resulted primarily from the operation of seven additional facilities in 1996, and the generation of revenues from additional contracts to provide rehabilitation therapy services to patients at non-affiliated long-term care facilities. Of such increase, $6,345,000, or 56.9%, resulted from the operation of the Swanton facility, which the Company began leasing on April 1, 1995, and the six New Hampshire Facilities, which the Company began leasing on January 1, 1996. In 1995 the Company began providing rehabilitation therapy services to patients at non-affiliated long-term care facilities. As of March 31, 1995 the Company had one contract with a non-affiliated long-term care facility as compared to contracts with 35 facilities as of March 31, 1996. Revenues during the first quarter of 1995 from non-affiliated rehabilitation therapy services were $136,000 as compared to $2,141,000 for the first quarter of 1996, an increase of $2,005,000, or 18.0% of the overall increase in net revenues. The remaining $2,804,000, or 25.1% of such increase, is attributable to higher average net patient service revenues per patient day at the Company's previously existing facilities, resulting from increased care levels provided to patients with medically complex conditions. Facility Operating Expenses. The increase in the number of facilities operated by the Company and the expansion of the Company's rehabilitation therapy services at non-affiliated facilities, as well as the greater percentage of patients receiving higher levels of care, resulted in an increase in facility operating expenses of $8,386,000, or 42.5%, from $19,734,000 during the first quarter of 1995 to $28,120,000 during the first quarter of 1996. Facilities operated by the Company during the first quarter of 1996 but not during the prior year period accounted for $4,933,000, or 58.8%, of the increase in facility operating expenses. During 1995 the Company began providing rehabilitation services to patients at non-affiliated facilities. At the end of the first quarter of 1995 the Company had entered into only one contract with a non-affiliated facility but by the end of the first quarter of 1996, the Company had entered into 35 such contracts. The costs associated with the development of these contracts (including marketing and recruiting) together with the costs of providing rehabilitation therapy services at these facilities increased the Company's facility operating expenses by approximately $1,642,000, or 19.6%, of the total increase in these costs. The remainder of the increase in facility operating expenses, approximately $1,811,000, is primarily due to increases in the costs of labor, medical supplies and rehabilitation therapy services purchased from third parties. General and Administrative; Services Charges Paid to Affiliate. Expenses associated with the Company's regional and corporate offices increased by $1,094,000, or 95.9%, from $1,141,000 during the first quarter of 1995 to $2,235,000 during the first quarter of 1996. General and administrative expenses for the first quarter of 1996 included a compensation charge of $438,000 as a result of a special bonus paid to the President of the 35 Company. Most of the remaining increase, $656,000, resulted from the creation of new positions and additional administrative costs required to support the addition of the new facilities and the development of subacute programs. The Company reimbursed Berkshire during the first quarter of 1995 and 1996 for rent and other expenses related to its corporate headquarters, as well as for certain data processing and administrative services. See "Certain Transactions." During the first quarter of 1995, such reimbursements totalled $177,000, compared to $185,000 during the first quarter of 1996. The level of services provided by Berkshire on behalf of the Company was comparable in each period. Depreciation and Amortization. Depreciation and amortization expense decreased by $504,000, from $1,043,000 during the first quarter of 1995 to $539,000 during the first quarter of 1996. This decrease is the result of the sale of the Seven Facilities, which accounted for $601,000 of depreciation and amortization during the prior period, partially offset by additional expenses recorded at newly acquired facilities during the first quarter of 1996. Facility Rent. Facility rent expense increased by $2,153,000, from $392,000 during the first quarter of 1995 to $2,545,000 during the first quarter of 1996. The increase in rent is attributable to the addition of the Swanton facility on April 1, 1995, the Seven Facilities on December 31, 1995, and the New Hampshire Facilities effective January 1, 1996. Interest Expense, net. Interest expense, net, decreased by $289,000 from $1,264,000 during the first quarter of 1995 to $975,000 during the first quarter of 1996. This decrease was primarily the result of the retirement of the KYP Medium-Term Notes and the elimination of the related interest expense of $248,000 which was incurred during the first quarter of 1995. Loss on Investment in Limited Partnership. The Company accounts for its investment in the Larkin Chase Center using the equity method. The Company's 75% allocation of the net loss from this facility increased from $81,000 during the first quarter of 1995 to $127,000 during the first quarter of 1996. Net Income (Loss). The Company recorded a net loss of $240,000 during the first quarter of 1995 compared to net income of $205,000 during the first quarter of 1996, which is net of the $438,000 special bonus compensation charge included in general and administrative expenses. The improved performance was primarily the result of increased operating income during the first quarter of 1996 along with higher interest income. LIQUIDITY AND CAPITAL RESOURCES The Predecessors historically financed their operations and acquisitions growth primarily through a combination of mortgage financing, operating leases, and capital contributed by the KYP Unitholders. Although the Company had cash and cash equivalents totalling $40,157,000 as of December 31, 1995, approximately $33,493,000 of such amount was held pending the Distribution, which occurred in March 1996. As of March 31, 1996 the Company had cash and cash equivalents totaling $10,000,000. The Company had two mortgage loans outstanding as of March 31, 1996. The mortgage loan from Meditrust had an outstanding principal balance of $41,809,000 and bears interest at an annual rate of 10.65% plus additional interest equal to 0.3% of the difference between the annual operating revenues of the mortgaged facilities and actual revenues during the twelve-month base period commencing October 1, 1995. Such additional interest begins to accrue on October 1, 1996. The loan is secured by mortgages in favor of Meditrust on seven of the Company's facilities. The Company plans to use $25,000,000 of the net proceeds of the Offering to prepay a portion of this debt. In connection with this prepayment the Company expects to incur a cash prepayment penalty of approximately $1,700,000. See "Use of Proceeds." After giving effect to the Debt Repayment as of March 31, 1996, the outstanding principal as of such date would have been reduced to $16,809,000 and the outstanding principal due at maturity in 2004 would be $14,598,000. The Company's other mortgage loan, which encumbers a single facility, had an outstanding principal balance of $1,613,000 as of March 31, 1996 and bears interest at 14% per annum. This mortgage matures in the year 2010. 36 The Company's existing facility leases generally require it to make monthly lease payments, establish escrow funds to serve as debt service reserve accounts, and pay all property operating costs. The Company generally negotiates leases which provide for extensions beyond the initial lease term and an option to purchase the leased facility. See "Business--Properties." The Company expects that such leasing arrangements will continue to provide it with the most attractive form of financing to support its growth. The Company expects that cash on hand and the net proceeds of the Offering will be sufficient to meet its operating requirements and to finance anticipated growth over the next twelve months. The Company has been and will continue to be dependent on third-party financing to fund its acquisition strategy. The Company is currently involved in discussions with several financial institutions to establish a working capital line of credit secured by its receivables. The Company has recently received pre-approval from Meditrust, subject to customary due diligence and closing conditions, for up to $50 million in debt and/or lease financing for future acquisitions. There can be no assurances that such financing will be available to the Company on acceptable economic terms, or at all. From time to time, the Company expects to pursue certain expansion and new development opportunities associated with existing facilities. In connection with a Certificate of Need received by its Ocala facility in March 1996, the Company expects to commence construction of a sixty-bed addition and a rehabilitation therapy area within approximately six months. The costs of this project are estimated to be approximately $2,800,000. In addition, in connection with a Certificate of Need held by its Larkin Chase facility, the Company expects to commence construction of a sixty-bed addition during 1996. The costs associated with the Larkin Chase project are estimated to be approximately $2,500,000. The Company intends to seek separate financing for each of these projects. There can be no assurances that financing of either project will be available to the Company on acceptable terms. The Company's operating activities in 1995 generated net cash of $1,886,000 as compared to $4,939,000 in 1994, a decrease of $3,053,000. Most of the reduction in cash provided by operations was the result of an increase in accounts receivable of $7,573,000. This increase is the result of a substantial growth in revenues as well as a shift in payor mix toward slower- paying sources such as Medicare. Net cash provided by investing activities was $36,818,000 in 1995. After deducting the gross proceeds of $47,000,000 from the sale of the Seven Facilities and related transaction costs of $884,000, net cash used by investing activities was $9,298,000 in 1995 as compared to $6,078,000 used in 1994. In each year the primary use of invested cash related to additions to property and equipment ($2,585,000 in 1994 compared to $3,081,000 in 1995), the funding of escrow accounts in connection with debt or lease financing arrangements ($1,995,000 in 1994 compared to $760,000 in 1995), and additions to deferred financing costs associated with these financings ($1,410,000 in 1994 compared to $1,202,000 in 1995). In 1995, the Company loaned $1,255,000 to Bowie L.P. to finance its working capital requirements. The Company expects that this loan will be repaid during 1996. In 1995, the Company also paid acquisition deposits totalling $3,000,000 in connection with two groups of facilities for which it was negotiating leases. The Company began leasing the first group (the New Hampshire Facilities) on January 1, 1996 and received its $1,000,000 deposit back upon the closing of the transaction. The Company's offer to lease the second group of facilities was rescinded by the Company and it received its $2,000,000 deposit back in March 1996. The Company borrowed $2,000,000 from Berkshire to pay this acquisition deposit and repaid Berkshire in March 1996. See "Certain Transactions." Net cash used by financing activities was $12,560,000 in 1995. The repayment of debt and the incurrence of a related prepayment penalty upon the sale of the Seven Facilities and liquidation of KYP required the use of $10,954,000. In 1994 the Company refinanced existing debt by incurring approximately $13,100,000 in additional debt at a lower effective interest rate. A portion of the funds raised through this refinancing, $2,200,000, was distributed to shareholders of the Company's Predecessors. The Company's operating activities in the first three months of 1995 generated net cash of $2,000 as compared to $1,097,000 in the comparable period of 1996, an increase of $1,095,000. Most of the increase in cash provided by operations was the result of an increase in accrued employee compensation offset by an increase in prepaid expenses and a decrease in accounts payable. 37 Net cash used by investing activities was $275,000 in the three months ended March 31, 1995 as compared to $224,000 provided in the comparable period of 1996. In each period the primary use of invested cash related to additions to property and equipment ($486,000 in 1995 compared to $504,000 in 1996), changes in escrow account balances established in connection with debt or lease financing arrangements (a decrease of $247,000 in 1995 and an increase of $1,576,000 in 1996), and additions to deferred financing costs associated with these financings ($36,000 in 1995 compared to $696,000 in 1996). Additionally, in 1996 the Company received $3,000,000 in refunded acquisition deposits in connection with two groups of facilities which it was negotiating to acquire. Net cash used by financing activities was $1,068,000 in the three months ended March 31, 1995 as compared to $31,478,000 in 1996. Distributions to minority interest required the use of $909,000 in 1995 compared to $33,727,000 in 1996. The 1996 distribution consisted of the liquidating distribution to the KYP Unitholders. During the first three months of 1996 the Company also repaid a $2,000,000 note payable to an affiliate, but received a cash lease inducement from a landlord of $3,685,000 and received $803,000 in capital contributions through the Executive Equity Purchase and the Director Equity Purchase. The note payable was incurred when the Company borrowed funds from an affiliate to finance a deposit related to the acquisition of a group of facilities. The lease inducement was received as the result of the leasing of the New Hampshire Facilities. INFLATION The healthcare industry is labor intensive. Wages and other labor related costs are especially sensitive to inflation. Certain of the Company's other expense items, such as supplies and real estate costs are also sensitive to inflationary pressures. Shortages in the labor market or general inflationary pressure could have a significant effect on the Company. In addition, suppliers pass along rising costs to the Company in the form of higher prices. When faced with increases in operating costs, the Company has sought to increase its charges for services and its requests for reimbursement from government programs. The Company's private pay customers and third party reimbursement sources may be less able to absorb increased prices for the Company's services. The Company's operations could be adversely affected if it is unable to recover future cost increases or experiences significant delays in increasing rates of reimbursement of its labor or other costs from Medicare and Medicaid revenue sources. See "Business--Governmental Regulation." 38 BUSINESS THE COMPANY Harborside Healthcare provides high quality long-term care, subacute care and other specialty medical services in four principal regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (New Hampshire) and the Mid-Atlantic (New Jersey and Maryland). Within these regions, the Company operates 26 licensed long-term care facilities (9 owned and 17 leased) with a total of approximately 3,000 licensed beds. After giving effect to the pending acquisition of the four Ohio Facilities, the Company will operate 30 long-term care facilities (13 owned and 17 leased) with a total of 3,700 licensed beds. The Company provides traditional skilled nursing care, a wide range of subacute care programs (such as orthopedic, CVA/stroke, cardiac, pulmonary and wound care), as well as distinct programs for the provision of care to Alzheimer's and hospice patients. In addition, the Company provides certain rehabilitation therapy and behavioral health services both at Company-operated and non-affiliated facilities. The Company seeks to position itself as the long-term care provider of choice to managed care and other private referral sources in its target markets by achieving a strong regional presence and by providing a full range of high quality, cost effective nursing and specialty medical services. Since commencing operations in 1988, the Company has experienced significant growth through strategic acquisitions in states it believes possess favorable demographic and regulatory environments, as well as through the expansion of subacute care and other specialty medical services provided at its long-term care facilities. Since 1993 and after giving effect to the recent and pending transactions, the Company increased its overall patient capacity by approximately 1,550 licensed beds, or 72.2%. During the same period, the Company also improved its overall quality mix (defined as net patient service revenues derived from Medicare, commercial insurance and other private payors) from 61.1% to 65.4% of net patient service revenues for the years ended December 31, 1993 and 1995, respectively, primarily as a result of the Company's rapid expansion of its subacute care and other specialty medical services. For the three months ended March 31, 1996, during which the Company began leasing the New Hampshire Facilities, the Company's quality mix was 60.1% (31.8% private and other and 28.3% Medicare) and its average occupancy rate was 91.3%. The Company believes that its quality mix and its average occupancy rate have consistently been among the highest in the long-term care industry. The Company believes that it is favorably positioned to benefit from trends impacting the healthcare industry, including favorable demographic shifts, advances in medical technology and continuing public and private pressures to contain growing healthcare costs. At the same time, government restrictions and high construction and start-up costs are expected to continue to constrain the supply of long-term care and subacute facilities. The Company further believes that an increasingly complex operating environment is motivating smaller, less efficient long-term care facility operators to combine with or sell to established operators. Harborside Healthcare expects that such recent trends toward industry consolidation will continue and will provide it with future acquisition opportunities. GROWTH STRATEGY The Company intends to continue to grow by (i) selectively acquiring additional long-term care facilities in its existing and in new geographic regions, (ii) expanding the range of subacute care provided, including the addition of distinct COMPASS (COMprehensive Patient Active Subacute Systems) subacute care units, (iii) expanding its existing rehabilitation therapy and behavioral healthcare businesses, (iv) developing and acquiring new ancillary service operations, such as institutional pharmacy, home healthcare and infusion therapy and (v) expanding its Alzheimer's and hospice care programs. The Company believes that its strategy of concentrating its operations in selected geographic markets and complementing its long-term care platform with a wide range of specialty medical services and ancillary services will enable the Company to benefit from economies of scale and improve its ability to penetrate regional managed care markets. 39 Acquisition Strategy The Company generally seeks to acquire long-term care facilities in its existing regions as well as in new geographic markets it believes possess favorable demographic and regulatory environments. The Company believes that concentrating its long-term care facilities within selected geographic regions enables it to achieve certain operating efficiencies through economies of scale, reduced corporate overhead and more effective management supervision and financial controls. Geographic concentration also allows the Company to establish more effective working relationships with referral sources and regulatory authorities in the states in which it operates. The Company believes that this strategy complements its operating approach of building integrated networks of healthcare services targeted at managed care and other private insurance organizations. Harborside Healthcare generally seeks to acquire long-term care facilities that: (i) have a history of stable occupancy and operations, (ii) are in good physical condition, (iii) have been constructed or renovated in the past fifteen years, (iv) have an overall size generally ranging from 100 to 200 licensed beds, (v) have a good reputation in the community, (vi) operate in markets with favorable competitive climates and (vii) provide opportunities for additional growth through the expansion of the range and scope of services offered. All acquisition opportunities considered by the Company are subject to the availability of financing on acceptable terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." The Company employs a full-time acquisitions staff to locate, evaluate, negotiate and complete the acquisition of long-term care facilities. The Company believes that maintaining a dedicated acquisitions staff enables it to complete acquisitions without disruption of its operations. Prior to consummating an acquisition, the Company conducts a comprehensive due diligence review, including analyses of (i) financial and operating performance, (ii) survey results and compliance with Federal and state regulations, (iii) competition and market assessments, (iv) regulatory and reimbursement issues, (v) engineering and environmental matters and (vi) legal and ancillary risk issues. Upon completion of the due diligence process, the Company's acquisition staff, in conjunction with its operating and marketing personnel, develops a business plan for each facility or group of facilities to be acquired. The plan is subsequently reviewed by the Company's senior management and a decision whether to proceed is made. In keeping with its growth strategy, the Company leased six additional long- term care facilities with 537 beds in New Hampshire in January 1996. The Company believes that a significant opportunity exists to improve the quality mix revenues of its New Hampshire Facilities through the addition of Medicare, subacute care and other specialty medical services at these facilities. Subsequently, the Company also entered into an agreement to lease the Ohio Facilities pursuant to a capital lease. This transaction is expected to strengthen the Company's existing network of five long-term care facilities in Ohio and to provide the Company with an opportunity to achieve regional overhead cost efficiencies while further enhancing its ability to attract managed care payors in that state. Together, the New Hampshire Facilities and Ohio Facilities represented approximately $54.3 million in combined total net revenues for the year ended December 31, 1995. See "--The Ohio Transaction." Since 1993 and after giving effect to the New Hampshire Transaction and the Ohio Transaction, the Company increased its overall patient capacity by approximately 1,550 licensed beds, or approximately 72.2%. The Company is continuously discussing with third parties the possible acquisition of long-term care facilities. Although the Company regularly considers and evaluates opportunities for expansion and from time to time enters into letters of intent that provide the Company with an exclusivity period during which it considers possible acquisitions, the Company does not at this time have any firm commitments to make any material acquisitions of long-term care facilities other than the Ohio Transaction, nor has it identified any material, specific ancillary business. Expansion of Specialty Medical Services The Company also expects to continue to expand the range of subacute care and other specialty medical services provided at its long-term care facilities. Since its inception, the Company has developed strong 40 capabilities in the areas of subacute care and other specialty medical service design and delivery and has implemented subacute care services at each of its current long-term care facilities, other than the recently acquired New Hampshire Facilities. The Company is evaluating opportunities to introduce subacute care and other specialty medical services at its New Hampshire Facilities. Where demand for subacute care is particularly strong, the Company has developed distinct subacute care units. Where appropriate, the Company expects to continue to add distinct subacute care units within its existing facilities or within newly acquired long-term care facilities. Within these units, the Company has designed and implemented several clinical pathways designed to achieve specified, measurable treatment outcomes in an efficient and cost- effective manner. The Company believes that its subacute services and clinical pathways are attractive to managed care organizations and other private payors as a result of the Company's emphasis on quality and cost efficiency. The Company has also developed and expects to continue to develop specialized care units for patients with Alzheimer's disease and hospice units for patients with terminal illnesses. See "--Patient Services." Primarily as a result of the Company's expansion of specialty medical services, net revenues per patient day have increased from $109.57 in 1993 to $134.45 in 1995. Expansion of Ancillary Businesses The Company currently provides a range of ancillary services, including physical, occupational and speech rehabilitation therapy, at 15 Company- operated and 36 non-affiliated long-term care facilities. Where appropriate, the Company expects to add its rehabilitation therapy programs at newly acquired long-term care facilities and to selectively expand its ancillary business with non-affiliated long-term care facilities. The Company also recently began providing behavioral health services at selected Company- operated, as well as non-affiliated, long-term care facilities. The Company is currently evaluating opportunities to acquire or develop additional ancillary businesses, including home healthcare, institutional pharmacy and infusion therapy. The Company believes that providing home healthcare services will make it more attractive to managed care and other private payors, allow it to retain patients within a broader continuum of care and provide wider access to its current nursing capacity. The Company further believes that entry into institutional pharmacy and infusion therapy businesses will offer it opportunities to reduce operating costs and capture additional profits by bringing within its organization services typically purchased from third-party contractors. Although such activities are under consideration, the Company has not at this time identified any specific acquisitions or new business developments of these businesses. See "-- Ancillary Businesses." OPERATING STRATEGY The Company's operating strategy emphasizes (i) providing high quality healthcare on a cost-effective basis and expanding the range of medical services it provides, (ii) maintaining high occupancy rates and further improving its quality mix and (iii) achieving operating efficiencies and actively managing overhead costs. The Company will continue to focus its efforts to ensure the efficient and cost-effective delivery of high quality healthcare to its medically demanding patients. To achieve these goals, the Company will continue to recruit highly qualified administrators, nurses and medical directors. Performance improvement standards and committees at each facility (comprised of the facility administrator and the facility's senior medical professionals) continually monitor the quality of care provided. The Company uses interdisciplinary teams to provide high quality care and case managers to coordinate, monitor and evaluate the delivery of care. The Company believes that its commitment to providing high quality care has established its favorable reputation in the markets it serves. The Company also seeks to continually expand the range of medical services provided through its distinct units and otherwise. In addition, the Company employs corporate-level staff in the areas of specialty medical services, professional services and managed care who are responsible for evaluating and expanding the range of medical services provided at its facilities. 41 The Company also seeks to maintain high occupancy rates at its facilities while further improving its quality mix. The Company intends to achieve this goal by: (i) expanding the breadth and improving the quality of services offered, including the addition of speciality medical services in order to attract Medicare, managed care and other private pay patients; (ii) developing additional referral sources and marketing programs designed to increase occupancy; and (iii) closely monitoring census information and other patient data at the corporate, regional and facility levels. The Company believes that concentrating its long-term care facilities within selected geographic regions enables it to achieve operating efficiencies through economies of scale, reductions in corporate overhead and improvements in supervision and financial controls. Geographic concentration facilitates the centralization of purchasing, training, marketing and other management services and also allows the Company to establish more effective working relationships with referral sources and regulatory authorities. As a result, the Company believes it is better able to attract managed care and other private payors and thereby improve its quality mix. The Company actively monitors and manages operating costs in order to maintain and improve the profitability of its operations. The Company's management philosophy stresses close oversight of facility operations by all three levels of management (corporate headquarters, regional and facility). The Company's centralized, automated financial reporting system enables corporate financial personnel to monitor key operating and financial data and budget variances on a timely basis, as well as to respond quickly to unusual developments at its facilities. See "--Operations" and "--Sources of Revenues." PATIENT SERVICES Basic Patient Services Basic patient services are those traditionally provided to elderly patients in long-term care facilities to assist with the activities of daily living and to provide general medical care. The Company provides 24-hour skilled nursing care by registered nurses, licensed practical nurses and certified nursing aides in all of its facilities. Each facility is managed by an on-site licensed administrator who is responsible for the overall operation of the facility, including the quality of care provided. The medical needs of patients are supervised by a medical director, who is a licensed physician. Although treatment of patients is the responsibility of their own attending physicians, who are not employed by the Company, the medical director monitors all aspects of delivery of care. The Company also provides a broad range of support services, including dietary services, therapeutic recreational activities, social services, housekeeping and laundry services, pharmaceutical and medical supplies and routine rehabilitation therapy. Each facility offers a number of individualized therapeutic activities designed to enhance the quality of life of its patients. These activities include entertainment events, musical productions, trips, arts and crafts and volunteer and other programs that encourage community interaction. Specialty Medical Services Specialty medical services are those provided to patients with medically complex needs, who generally require more extensive treatment and a higher level of skilled nursing care. These services typically generate higher net patient service revenues per patient day than basic patient services as a result of increased levels of care and the provision of ancillary services. The Company intends to expand the scope and range of its specialty medical services and programs in order to further enhance revenues, profitability and the reputation of its facilities for providing quality care. Subacute Care. Subacute care is goal-oriented, comprehensive care designed for an individual who has had an acute illness, injury, or exacerbation of a disease process. Subacute care is typically rendered immediately after, or instead of, acute hospitalization in order to treat one or more specific, active, complex medical conditions or in order to administer one or more technically complex treatments. The Company provides subacute care services at all of its existing facilities (other than its recently acquired New Hampshire Facilities) in such areas 42 as complex medical, cardiac recovery, digestive, immuno-suppressed disease, post-surgical, wound, and CVA/stroke care, hemodialysis, infusion therapy, and diabetes and pain management. In facilities that have shown strong demand for subacute services, the Company has developed distinct subacute units marketed under the name "COMprehensive Patient Active Subacute System" or "COMPASS." Each COMPASS unit contains 20 to 60 beds and is specially staffed and equipped for the delivery of subacute care. Patients in COMPASS units typically range in age from late teens to the elderly, and typically require high levels of nursing care and the services of physicians, therapists, dietitians, clinical pharmacists or psycho/social counselors. Certain patients may also require life support or monitoring equipment. Because patient goals are generally rehabilitation- oriented, lengths of stay in COMPASS units are generally expected to be less than 30 days each. The Company recently opened its first five COMPASS units at its Gulf Coast, Larkin Chase, Tampa Bay, Sarasota and Troy facilities containing a total of approximately 170 licensed beds. Four additional COMPASS units are expected to open during 1996. The Company has designed clinical pathways for these COMPASS units in the areas of orthopedic rehabilitation, CVA/stroke recovery, cardiac recovery, pulmonary rehabilitation and wound care management. These clinical pathways are designed to achieve specified measurable outcomes in an efficient and cost-effective manner. The Company's COMPASS units and the clinical pathways used in these units are designed to attract commercial insurance and managed care organizations, such as HMOs and PPOs. The Company has personnel dedicated to actively marketing its COMPASS units to commercial insurers and managed care organizations. The Company is currently developing five additional clinical pathways in the areas of oncology, HIV/AIDS, post-surgical recovery, ventilator care and neuro-trauma rehabilitation, and expects to introduce these pathways in selected COMPASS units at various times during 1996. The Company is seeking to establish a Medical Services Organization network in conjunction with Humana Health Care Plans in the Pasco County, Florida area. The Company will develop a network of healthcare providers and manage a continuum of care ranging from subacute care to home healthcare services. The network is expected to include the Company's Gulf Coast and Palm Harbor facilities and is expected to commence operation in the third quarter of 1996. Alzheimer's and Hospice Care. The Company has also developed distinct units that provide care for patients with Alzheimer's disease and hospice units for patients with terminal illnesses. As of March 31, 1996, the Company operates three dedicated Alzheimer's units at its Pinebrook, Swanton and Northwood facilities, with a total of 88 licensed beds. The Company expects to open two additional Alzheimer's units at its Naples and Troy facilities during 1996. The Company also operates three distinct hospice units with a total of 46 licensed beds at its Tampa Bay, Clearwater and Sarasota facilities, where it provides care to terminally ill patients and counseling to their families. The Company expects to open an additional hospice unit with ten licensed beds during 1996 at its Pinebrook facility. ANCILLARY BUSINESSES The Company currently provides rehabilitation therapy services and behavioral health services, principally at its own long-term care facilities and, beginning in 1995, at selected non-affiliated long-term care facilities. The Company believes it can improve the operating performance of its long-term care facilities by further expanding the scope of ancillary services provided. In this regard, the Company intends to pursue selected opportunities to acquire or develop additional ancillary businesses, such as home healthcare, institutional pharmacy, and infusion therapy, in order to complement existing Company services. See "--Growth Strategy." Rehabilitation Therapy Services. Commencing in January 1994, the Company began to provide comprehensive physical, occupational and speech therapy programs. As of March 31, 1996, the Company provided rehabilitation therapy services at 13 of the Company's facilities and had therapy contracts with 35 non-affiliated long-term care providers. The Company currently employs approximately 430 therapists. 43 Behavioral Health Services. The Company recently commenced its behavioral health business, which offers services provided by teams of licensed professionals who assist patients with emotional and psychological issues relating to their loss of functioning and relocation to a long-term care setting. These teams of professionals also provide a range of therapy and emotional support services to assist patients and their families in improving the quality of their lives. The Company provides behavioral health services at five of the Company's facilities in Florida and at seven non-affiliated facilities in that region. PROPERTIES The Company operates 26 long-term care facilities, nine of which are owned and 17 of which are leased. All nine of the properties owned by the Company are subject to mortgages. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note E to the Company's audited combined financial statements included elsewhere in this Prospectus. Of the Company's leased facilities, fourteen are leased from subsidiaries of Meditrust. The Company's Northwestern Ohio and Defiance facilities are leased from a non-affiliated lessor and the Company's Brevard facility is leased from an affiliate. See "Certain Transactions." The Company has also entered into an agreement to acquire the Ohio Facilities from a non-affiliated lessor pursuant to a capital lease. See "--The Ohio Transaction." The Company's leases with Meditrust have initial terms which expire on various dates in the year 2005 and provide for up to two five-year renewals. The Company's annual rental expense under its leases with Meditrust for the year ended December 31, 1995, were $0.5 million and are expected to be $8.7 million for the year ended December 31, 1996 (without giving effect to any additional leases that might be entered into following the Offering). The Company's lease for its Northwestern Ohio and Defiance facilities has a ten- year term expiring in the year 2003 with no renewal options. The Company's lease for its Brevard facility has an initial term expiring in the year 2004 and provides for up to two five-year renewal terms. Each of the Company's leases provides for the payment of annual rent which in most cases increases by a formula or by a fixed percentage each year. The lease with Meditrust for the Company's Swanton facility also provides for additional rent based on increases in that facility's revenues as compared to a base year. The Company's leases also generally provide that the Company is responsible for expenses such as taxes, insurance and maintenance and repairs. Each of the Company's leases with Meditrust provides the Company with options to purchase the leased facilities which are exercisable on the eighth anniversary of the lease (the ninth anniversary in the case of the New Hampshire Facilities), at the end of the initial term and at the end of each renewal term at a price equal to the greater of (i) the fair market value of the facilities subject to the purchase option (90% of the fair market value in the case of the New Hampshire Facilities), excluding capital expenditures made by the Company or (ii) Meditrust's purchase price for the facilities subject to the purchase option. The lease with Meditrust for the Company's Swanton facility grants the Company a right of first refusal to purchase the facility which the Company may exercise if it exercises its first renewal option under the lease. Each of the Company's other leases with Meditrust grants the Company a right of first refusal to purchase the facility subject to the lease exercisable at any time during the term of the lease. The leases for the Company's Northwestern Ohio and Defiance facilities provides for a purchase option to acquire both of the facilities, which the Company may exercise during the final year of the lease term for an aggregate purchase price of $8,500,000. In the event the Company does not exercise its purchase option under the lease, the Company will be required to pay a one-time termination fee of $500,000 to the lessor. The lease also grants the Company a right of first refusal during the lease term. See Note D to the Company's audited combined financial statements included elsewhere in this Prospectus. The Company's lease for its Brevard facility also contains a purchase option. See "Certain Transactions." The Company's leases with Meditrust are secured by the facilities, the facilities' accounts receivable, cash collateral and a pledge of the ownership interests in the subsidiary lessees and the general partners of such lessees. The facilities subject to the Meditrust leases are also cross-collateralized and contain cross-default provisions, so that a default under one of the leases would trigger a default under each of the other Meditrust leases. As a result, the Company could lose all of the facilities subject to such leases in the event of a default 44 under one such lease. In addition, the leases permit Meditrust to require the Company to purchase the facilities at a specified purchase price upon the occurrence of a default. The Meditrust leases also subordinate all intercompany obligations and distributions of the subsidiary lessees to the obligations owing to Meditrust pursuant to the leases. Although many of the Company's leases provide for non-disturbance from mortgagees of the leased properties, the lease for the Company's Northwood facility is not so protected and is subject to termination in the event the mortgage is foreclosed following a default by the owner-lessor. However, the Company has the right to make mortgage payments on behalf of the owner-lessor in order to prevent such foreclosure. In the case of the Company's Brevard facility, the assets of the facility are subject to security interests in favor of a mortgagee of the property and intercompany payments from the subsidiary lessee are subordinate to payments under the mortgage. All of the Company's lease obligations and certain of the Company's debt obligations are guaranteed by Harborside Healthcare Limited Partnership ("HHLP"), the Company's principal operating subsidiary. In addition, HHLP has also agreed to indemnify Meditrust, as lessor under the Meditrust leases, and the senior mortgage holder on the Company's Brevard facility, for certain environmental liabilities. One of the Company's owned facilities, the Larkin Chase Center, is owned by Bowie L.P., a joint venture which is owned 75% by the Company and 25% by a non-affiliated investor. Bowie L.P. subleases the land on which the facility is located from an affiliate of the minority investor. The Company manages the facility for a fee equal to 6.0% of the facility's annual total net revenues. The minority investor has an option to purchase the Company's interest in Bowie L.P. at fair market value, which option is exercisable during a sixty- day period each year commencing in 2001. The Company accounts for the Larkin Chase Center using the equity method and its share of the facility's operating results is reflected in the Company's audited combined financial statements as a "loss on investment in limited partnership." See "Selected Combined Financial and Operating Data" and Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. The following table summarizes certain information regarding the Company's facilities and the facilities included in the Ohio Transaction: 45 SUMMARY OF FACILITIES
YEAR OWNED/ LICENSED AVERAGE FACILITY LOCATION ACQUIRED LEASED BEDS OCCUPANCY RATE(1) - ----------- -------- -------- ------ -------- ----------------- SOUTHEAST REGION FLORIDA Brevard Rockledge 1994 Leased(/2/) 100 91.6% Clearwater Clearwater 1990 Owned(/3/) 120 94.1% Gulf Coast New Port Richey 1990 Owned(/3/) 120 90.7% Naples Naples 1989 Leased(/4/) 120 93.3% Ocala Ocala 1990 Owned(/3/) 120 95.5% Palm Harbor Palm Harbor 1990 Owned(/3/) 120 90.8% Pinebrook Venice 1989 Leased(/4/) 120 93.6% Sarasota Sarasota 1990 Leased(/4/) 120 92.4% Tampa Bay Oldsmar 1990 Owned(/3/) 120 93.2% ----- 1,060 MIDWEST REGION OHIO Defiance Defiance 1993 Leased 100 87.9% Northwestern Ohio Bryan 1993 Leased 189 80.4% Swanton Swanton 1995 Leased(/4/) 100 97.2% Toledo Perrysburg 1990 Owned(/3/) 100 95.7% Troy Troy 1989 Leased(/4/) 195 95.2% The Ohio Facilities -- Pending Owned(/5/) 692 93.0% INDIANA Decatur Indianapolis 1988 Owned(/6/) 88 90.6% Indianapolis Indianapolis 1988 Leased(/4/) 103 91.5% New Haven New Haven 1990 Leased(/4/) 120 92.4% Terre Haute Terre Haute 1990 Owned(/3/) 120 91.9% ----- 1,807 NEW ENGLAND REGION NEW HAMPSHIRE Applewood Winchester 1996 Leased(/4/) 70 91.4% Crestwood Milford 1996 Leased(/4/) 82 96.6% Milford Milford 1996 Leased(/4/) 52 96.2% Northwood Bedford 1996 Leased(/7/) 147 95.9% Pheasant Wood Peterborough 1996 Leased(/4/) 99 96.7% Westwood Keene 1996 Leased(/4/) 87 86.7% ----- 537 MID-ATLANTIC REGION MARYLAND Larkin Chase Center Bowie 1994 Owned(/8/) 120 81.5%(9) NEW JERSEY Woods Edge Bridgewater 1988 Leased(/4/) 176 94.6% ----- 296 ----- TOTAL 3,700 =====
- ------------ (1) Average occupancy rate is computed by dividing the number of occupied licensed beds by the total number of available licensed beds during 1995. (2) Leased from Rockledge T. Limited Partnership ("RTLP"), an affiliate of the Company. See "Certain Transactions." (3) Subject to a mortgage in favor of Meditrust which secures a loan in the aggregate principal amount of $42.3 million. A portion of the proceeds of the Offering will be used to repay a portion of this loan pursuant to the Debt Repayment. See "Use of Proceeds." The loan bears interest at a 10.65% annual rate. Additional interest payments may also be required commencing on January 1, 1997 in an amount equal to 0.3% of the difference between the operating revenues of the borrowers after that date and the operating revenues during a 12 month base period which commenced October 1, 1995. Following the Debt Repayment the loan may be voluntarily prepaid, subject to a 1.5% prepayment penalty commencing in 1999. The prepayment penalty declines to zero in 2002. See Note E to the Company's combined financial statements included elsewhere in this Prospectus. (4) Leased from Meditrust. (5) To be acquired in connection with the pending Ohio Transaction. The capital lease for each of these facilities does not provide non- disturbance protection from, and is subject to, prior mortgages. See "-- The Ohio Transaction." 46 (6) This property is subject to a first mortgage loan which the Company assumed in connection with its purchase of the facility in 1988. The outstanding principal balance on the loan as of March 31, 1996 is $1,613,000. The loan bears interest at 14% and requires the annual retirement of $20,000 of principal each year. The final maturity of the loan is in 2010 and the loan may be prepaid commencing in 1999 without penalty. See Note E to the Company's combined financial statements included elsewhere in this Prospectus. (7) Leased from Meditrust. The lease for the Northwood facility does not provide non-disturbance protection from, and is subject to, a prior mortgage. (8) Owned by Bowie L.P. The Company's interest in Bowie L.P. is pledged to the facility's mortgage lender. HHLP has guaranteed the indebtedness of Bowie L.P. See Note F to the Company's audited combined financial statements included elsewhere in this Prospectus. (9) Average occupancy rate for the fourth quarter of 1995. The Larkin Chase Center was opened in April 1994 and did not reach stabilized occupancy until the fourth quarter of 1995. The Company's corporate offices in Boston are subleased from Berkshire. See "Certain Transactions." The Company also leases regional offices in Clearwater, Florida and Indianapolis, Indiana, maintains a regional office at its facility in Bridgewater, New Jersey, and owns a regional office in Peterborough, New Hampshire. An accounting and data processing office is leased by the Company in Fort Wayne, Indiana and the Company's ancillary services companies lease offices in Palm Harbor, Florida and Indianapolis, Indiana. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. See "--The Ohio Transaction" and "--Selected Expansion Projects" for a description of pending property acquisitions and expansions. THE OHIO TRANSACTION The Company has entered into an agreement to lease the four Ohio Facilities which will be accounted for as a capital lease, with a total of approximately 700 licensed beds. The Company expects to complete the Ohio Transaction in the third quarter of 1996, subject to the satisfaction of certain customary conditions, including the satisfactory completion of the Company's due diligence review and receipt of regulatory and other approvals. The Company has agreed to lease these facilities for an initial term ending in the year 2001. During the first six months of the final year of the initial term, the Company may exercise an option to purchase all four facilities (the "Ohio Purchase Option") for approximately $57.1 million (the "Ohio Purchase Price"). If the Company exercises the Ohio Purchase Option but is unable to finance the Ohio Purchase Price, the lease may be extended for up to two additional years pursuant to the terms of the lease, during which time the Company must finance, either directly or through lease financing, and complete the purchase of the Ohio Facilities. The annual aggregate base rent will be $5.0 million during the initial term and $5.5 million during the extension term. The Company will be responsible for expenses such as taxes, insurance and maintenance and repairs. The Company has agreed to pay a total of $8 million for the Ohio Purchase Option (the "Ohio Purchase Option Price"), which will be applied toward the Ohio Purchase Price of the facilities upon the closing of the purchase of the Ohio Facilities. The Company paid $600,000 (the "Initial Deposit") of the Ohio Purchase Option Price upon execution of the agreement to lease, which will be refunded if the Company terminates the Ohio Transaction after completing its due diligence investigation. An additional $600,000 of the Ohio Purchase Option Price (collectively with the Initial Deposit, the "Deposit") is payable upon the satisfactory completion of the Company's due diligence. The Deposit is non-refundable except under certain limited circumstances, including an inability to obtain necessary governmental approvals. An additional $3.8 million of the Ohio Purchase Option Price will become payable upon the commencement of the lease and will be funded with a portion of the net proceeds of the Offering. See "Use of Proceeds." The remaining $3.0 million of the Ohio Purchase Option Price will be paid by the Company at the end of the lease term whether or not the Company exercises the Ohio Purchase Option. If the Company exercises the Ohio Purchase Option, the balance of the Ohio Purchase Option Price will be paid upon the closing of the purchase or at the end of the two-year extension term. In connection with the Ohio Transaction, the Company has agreed to engage an executive and principal owner of the lessor as a consultant. As compensation for these services, the consultant will receive up to $120,000 per year during the term of the lease and the extension term, if any. The consultant will also receive $500,000 payable at the end of the initial lease term and an additional $500,000 payable upon termination of the lease. 47 HHLP will guarantee the performance of the obligations of the leasees and their affiliates under the Ohio Transaction and the Ohio Purchase Option. While the guarantee is in effect, payments by HHLP to its affiliates will be permitted subject to maintaining certain financial covenants. These covenants, and a requirement that the Company maintain a $5 million security deposit, will be waived upon delivery of an additional guaranty by the Company following the Offering. The leases under the Ohio Transaction are subordinate to certain mortgages insured by the U.S. Department of Housing and Urban Development ("HUD"). The lessors are responsible for debt service payments made in connection with such mortgages, but the Company may satisfy any lessor's debt service obligations should the lessor default in the payment of its debt service obligations under its respective mortgage. The leases provide for non-disturbance protection with respect to subsequent mortgages placed on the Ohio Facilities by the lessors but do not provide for non-disturbance protection against the HUD insured mortgages. The Ohio Transaction is subject to HUD approval, and no assurance can be given that such approval will be obtained. Certain portions of one of the Ohio Facilities are currently subleased to third parties. During the lease term, the Company will assume all of the lessor's rights under the subleases, and the lessor will remain responsible for obtaining the necessary HUD approval for such subleases or terminating the subleases if approval is not obtained. SELECTED EXPANSION PROJECTS From time to time, the Company expects to pursue select expansion and new development opportunities which (i) complement its existing operations, (ii) enable the Company to broaden the range of services offered at its facilities or (iii) enhance its ability to compete effectively in a particular market. The Company is currently in the initial phases of the following expansion projects: Ocala Expansion. In March 1996, the Company received a CON to construct an addition to its existing 120-bed facility in Ocala, Florida. The CON permits the addition of 60 licensed beds and a rehabilitation therapy area. The CON also provides for a 21-bed COMPASS unit and a 20-bed distinct Alzheimer's unit to be located within the addition. The CON permits project costs of up to approximately $2.8 million. The Company expects to commence construction within approximately six months. Larkin Chase Center Expansion. Bowie L.P. has received a CON permitting it to construct a 60-bed addition to its existing 120-bed facility, the Larkin Chase Center, located in Bowie, Maryland. The total permitted project cost is approximately $2.5 million including allowances for inflation. Bowie L.P. expects to commence construction during 1996. The Company expects to finance these expansion projects with debt or lease financings. There can be no assurance that sufficient financing will be available on favorable terms, that all required licenses and governmental approvals will be received or that the Company will be able to successfully complete these projects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." OPERATIONS Facilities. Each of the Company's facilities is supervised by a licensed facility administrator who is responsible for all aspects of the facility's operations. The facility administrator oversees (i) a director of nursing who supervises a staff of registered nurses, licensed practical nurses and certified nursing aides, (ii) a director of admissions who is responsible for developing local marketing strategies and programs and (iii) various other departmental supervisors. The Company also contracts with one or more licensed physicians at each facility to serve as medical directors for the purpose of supervising the medical management of patients. Facilities with subacute or specialty medical units or programs may also contract with physician specialists to serve as rehabilitation or specialty program medical directors in areas such as physiatry (physical medicine), neurology or gero-psychology. Facilities may also employ or contract for additional clinical staff such as case managers, respiratory therapists and program directors. Department supervisors at each of the Company's facilities oversee personnel who provide dietary, maintenance, laundry, housekeeping, therapy and social services. In addition, a 48 business office staff at each facility routinely performs administrative functions, including billing, payroll, accounts payable and data processing. The Company's corporate and regional staff provide support services such as quality assurance, management training, clinical consultation and support, management information systems, risk management, human resource policies and procedures, operational support, accounting and reimbursement expertise. Regions. The Company seeks to cluster its long-term care facilities and ancillary businesses in selected geographic regions to establish a strong competitive position as well as to position the Company as a healthcare provider of choice to managed care and private payors in these markets. The Company's facilities currently serve four principal geographic regions: the Southeast (Florida), the Midwest (Ohio and Indiana), New England (New Hampshire), and the Mid-Atlantic (New Jersey and Maryland). The Company maintains regional operating offices in Clearwater, Florida; Indianapolis, Indiana; Bridgewater, New Jersey; and Peterborough, New Hampshire. Geographic concentration enables the Company to take advantage of economies of scale in operations support, purchasing, training and other management services. Each region is supervised by a regional director of operations who directs the efforts of a team of professional support staff in the areas of clinical services, marketing, bookkeeping, human resources and engineering. Other Company staff, who are principally based in the regions, provide support and assistance to all of the Company's facilities in the areas of subacute services, managed care contracting, reimbursement services, risk management, data processing and training. Financial control is maintained through financial and accounting policies established at the corporate level for use at each facility. The Company has standardized operating policies and procedures and continually monitors operating performance to assure consistency and quality of operations. In addition to its principal executive office in Boston, an accounting and data processing office is maintained in Fort Wayne, Indiana. The Company's ancillary services businesses maintain offices in Palm Harbor, Florida, and Indianapolis, Indiana. Management and Financial Systems. The Company maintains a comprehensive system of management and financial controls which is designed to enable the Company to monitor operating costs closely and to quickly distribute financial and other operational information to appropriate levels of management. All of the Company's existing long-term care facilities, other than the recently acquired New Hampshire Facilities, together with its ancillary service companies, share common data processing systems for all financial applications, including the processing of billing, accounts payable, payroll and general ledger transactions. In addition, each of the Company's long-term care facilities processes clinical data through facility-based information systems. The Company expects that as new facilities are acquired, the Company will initially integrate their operations on the basis of their existing computer systems with a view toward ultimately converting all of its facilities to operate under a common management information system. In this regard, the Company expects to continue to use existing information systems to operate its six recently-acquired New Hampshire Facilities as well as those to be leased pursuant to the Ohio Transaction. Continuous Quality Improvement Program. The Company has developed a continuous quality improvement program which is designed to monitor, evaluate and improve the delivery of patient care. The program is supervised by the Company's Vice President of Professional Services and consists of the standardization of policies and procedures, routine site visits and assessments and a quality control system for patient care and physical plant compliance. Pursuant to its quality control system, the Company routinely collects information from patients, family members, referral sources, employees and state survey agencies which is then compiled, analyzed and distributed throughout the Company in order to monitor the quality of care and services provided. The Company's continuous quality improvement program is modeled after guidelines for long-term care and subacute facilities promulgated by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), a nationally recognized accreditation agency for hospitals and other healthcare organizations. The Company has received accreditation "with commendation" by JCAHO for its Pinebrook and Tampa Bay facilities. JCAHO recently completed an additional accreditation survey at the Company's Terre Haute facility 49 and the Company is awaiting formal notification of the results of such survey. Of the approximately 16,000 licensed long-term care facilities in the United States, approximately 1,200, or 7.5%, are accredited by JCAHO. Of those surveyed in 1995, approximately 16% were accredited "with commendation." The Company believes accreditation by JCAHO is considered an important criterion by both managed care and commercial insurance companies in awarding provider contracts and is therefore seeking accreditation of its remaining facilities. MARKETING The Company's marketing program is designed to attract patients who will have a favorable impact on the Company's profits and quality mix of revenues. The Company establishes monthly occupancy and revenue goals for each of its facilities and maintains marketing objectives to be met by each facility. The Company's Vice President of Marketing is principally responsible for the development and implementation of the Company's marketing program. Regional marketing directors provide routine support to the facility-based admissions directors through the development of facility-based marketing strategies, competitive assessments and routine visits. The Company uses a decentralized marketing approach in order to capitalize on each facility's strengths and reputation in the community it serves. Admissions staff at each facility are primarily responsible for marketing basic medical services and developing semi-annual marketing plans in consultation with the Company's regional marketing and operations staff. Basic medical services are marketed to area physicians, hospital discharge planning personnel, individual patients and their families and community referral sources. Facility personnel also market the Company's specialty medical services to these sources. Corporate and regional personnel who specialize in subacute care, managed care and reimbursement also assist in the marketing of specialty medical services. Since June 1994, the Company has maintained a dedicated managed care marketing group whose primary purpose is to solicit managed care and commercial insurance contracts. The Company's regional and corporate staff attend trade shows and events for managed care, commercial insurance companies and case managers in order to broaden the Company's overall presence and recognition with these groups. As of March 31, 1996, the Company had 35 contracts with these payors. INDUSTRY BACKGROUND The long-term care industry encompasses a broad range of healthcare services provided to the elderly and to other patients, with medical needs ranging from custodial to complex, who can be cared for outside of the acute care hospital environment. The Company believes that the demand for the services it provides will increase substantially during the foreseeable future primarily because of demographic trends, advances in medical technology and emphasis on healthcare cost containment. At the same time, government restrictions and high construction and start-up costs are expected to limit the supply of long-term care facilities. Furthermore, the Company believes that recent trends towards industry consolidation will continue and will provide it with future acquisition opportunities. Growth of Elderly Population. According to the U.S. Bureau of the Census, the number of people age 65 and over in the U.S. has grown from approximately 25.6 million in 1980, or 11.3% of the population, to approximately 31.1 million in 1990, or 12.5% of the population, and is projected to grow to 40.1 million, or 13.3% of the population, by the year 2010. In addition, people age 85 and older represent one of the fastest growing segments of the elderly population and are expected to approximately double in number between 1990 and 2010. This population segment comprises the largest number of consumers of long-term care services as 42% of nursing-home residents are aged 85 or older. The high growth rate of the elderly is due to general demographic changes as well as advances in medical technology that have increased life expectancies. Advances in Medical Technology. Sophisticated new forms of medical equipment and treatment have lengthened life expectancies, thereby increasing the number and medical needs of individuals requiring 50 specialized care and supervision. In addition, technological advances have made long-term care facilities a more attractive alternative to acute care or rehabilitation hospitals by enabling them to offer, on a more cost-effective basis, services traditionally provided by acute care hospitals. Cost Containment Pressures. In response to rapidly rising healthcare costs, governmental and private pay sources have adopted cost containment measures that have encouraged shorter stays in acute care hospitals. The Federal government has acted to curtail increases in Medicare costs by limiting to pre-established amounts acute care hospital reimbursement for specific services. As a result, average hospital stays have been shortened, with many patients being discharged despite a continuing need for long-term care. For many of these patients, home healthcare is not a viable alternative because of the complexity of the medical services, equipment or monitoring they require. Long-term care facilities, such as those operated by the Company, are able to provide many of these specialty services at significantly lower costs than acute care hospitals because of their lower capital costs, overhead and salary levels. The Company believes that managed care organizations, insurance companies, hospital discharge personnel and physicians view long-term care facilities as a cost-effective and appropriate environment for the delivery of the type of care offered by the Company and are increasingly referring patients to such facilities. Industry Consolidation. The long-term care industry is highly fragmented. There are approximately 16,000 long-term care facilities in the United States which contain a total of approximately 1.6 million licensed beds. The 32 largest long-term care providers operate approximately 3,000 facilities comprising approximately 360,000 licensed beds, or 22% of the industry total. Recently, the long-term care industry has been subject to competitive pressures and uncertainty with regard to future changes in governmental regulations, which have resulted in a trend toward consolidation, especially of smaller, local operators into larger, more established regional or national providers. The increasing complexity of medical services provided, growing regulatory and compliance requirements and increasingly complicated and potentially volatile reimbursement systems have resulted in the consolidation of operators who lack sophisticated management information systems, operating efficiencies and financial resources to compete effectively. The Company believes that this trend toward consolidation will continue and will provide the Company with opportunities for continued growth. There can be no assurance, however, that the Company will be successful in acquiring facilities on favorable terms, if at all, and in incorporating acquired facilities into its existing operations. See "--Growth Strategy." Limitations on the Supply of Long-Term Care Facilities. All of the states in which the Company operates have enacted CON programs or similar legislation, which act to artificially restrict the supply of long-term care services. These laws generally limit the construction of long-term care facilities and the addition of beds or services in existing facilities. High construction costs and limitations on government reimbursement of costs of construction and start-up expenses also act to constrain growth in the number of facilities. As a result, the Company believes that the supply of long-term care facilities may not be able to keep up with the demand for such facilities. However, the relaxation of CON programs could increase industry competition. See "-- Governmental Regulation" and "--Competition." SOURCES OF REVENUES The Company derives its revenues primarily from private pay sources, the Federal Medicare program for certain elderly and disabled patients and state Medicaid programs for indigent patients. The Company's revenues are influenced by a number of factors, including (i) the licensed bed capacity of its facilities, (ii) occupancy rates, (iii) the mix of patients and the rates of reimbursement among payor categories (private and other, Medicare and Medicaid) and (iv) the extent to which subacute and other specialty medical and ancillary services are utilized by the patients and paid for by the respective payment sources. The Company employs specialists to monitor reimbursement rules, policies and related developments in order to comply with all reporting requirements and to assist the Company in receiving reimbursements. 51 The following table identifies the Company's net patient service revenues attributable to each of its payor sources for the periods indicated: NET PATIENT SERVICE REVENUES(1)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------- ---------------------------- 1993 1994 1995 1995 1996 ------------- ------------- -------------- ------------- ------------- (DOLLAR AMOUNTS IN THOUSANDS) Private and other....... $29,967 39.9% $31,899 37.1% $ 33,912 32.3% $ 7,981 34.2% $10,313 31.8% Medicare................ 15,904 21.2 21,423 24.9 34,730 33.1 7,129 30.6 9,176 28.3 Medicaid................ 29,230 38.9 32,627 38.0 36,274 34.6 8,216 35.2 12,943 39.9 ------- ----- ------- ----- -------- ----- ------- ----- ------- ----- Total................. $75,101 100.0% $85,949 100.0% $104,916 100.0% $23,326 100.0% $32,432 100.0% ======= ===== ======= ===== ======== ===== ======= ===== ======= =====
- -------- (1) Net patient service revenues exclude all management fees and all rehabilitation therapy service revenues and the net patient service revenues of the Larkin Chase Center. See "--Properties." Private and Other. Private and other net patient service revenues include payments from individuals who pay directly for services without governmental assistance and payments from commercial insurers, HMOs, PPOs, Blue Cross organizations, workers' compensation programs, hospice programs and other similar payment sources. Private and other net patient service revenues as a percentage of total net revenues have declined over the past three years primarily due to the large increase in the portion of the Company's revenues derived from Medicare. The Company's rates for private pay patients are typically higher than rates for patients eligible for assistance under state Medicaid programs. The Company's private pay rates vary from facility to facility and are influenced primarily by the rates charged by other providers in the local market and by the Company's ability to distinguish its services from those provided by its competitors. Although private pay rates are generally established on a facility-specific fee schedule, rates charged for individual cases may vary widely because, in the case of managed care, they are either negotiated on a case-by-case basis with the payor or are fixed by contract. Rates charged to private pay patients are not subject to regulatory control in any of the states in which the Company operates. Medicare. All of the Company's facilities, except for two of the New Hampshire Facilities, are certified Medicare providers. In addition, one of the Ohio Facilities is not a certified Medicare provider. The Company does not expect to seek Medicare certification for this Ohio Facility because all of its current patients are private pay patients. The Company has applied for Medicare certification of the two New Hampshire Facilities that are not currently certified. Medicare is a Federally funded and administered health insurance program primarily designed for individuals who are age 65 or over and are entitled to receive Social Security benefits. The Medicare program consists of two parts. The first part, Part A, covers inpatient hospital services and certain services furnished by other institutional healthcare providers, such as long-term care facilities. The second part, Part B, covers the services of doctors, suppliers of medical items and services and various types of outpatient services. Part B services include physical, speech and occupational therapy, pharmaceuticals and medical supplies, certain intensive rehabilitation and psychiatric services and ancillary services of the type provided by long-term care or acute care facilities. Part A coverage, as applied to services delivered in a long-term care facility, is limited to skilled nursing and rehabilitative care related to a recent hospitalization and is limited to a specified term (generally 100 days per calendar year), requires beneficiaries to share some of the cost of covered services through the payment of a deductible and a co-insurance payment and requires beneficiaries to meet certain qualifying criteria. There are no limits on duration of coverage for Part B services, but there is a co-insurance requirement for most services covered by Part B. The method used in determining Medicare reimbursement for rehabilitation therapy services furnished in the Company's facilities depends on the type of therapy provided. Medicare applies salary equivalency guidelines to determine the reasonable cost of physical therapy services and respiratory therapy services provided on a contract basis, which is the cost that would be incurred if the therapist were employed at the facility, plus an 52 amount designed to compensate the provider for certain general and administrative overhead costs. Medicare pays for occupational therapy and speech language pathology 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 contract physical therapy services are less under the salary equivalency guidelines than for its services under the "prudent buyer" rule. The Health Care Financing Administration ("HCFA") has announced its intention to propose rules applying salary equivalency guidelines to speech and occupational therapy services provided on a contract basis. If these proposed rules are implemented, they could reduce the profitability of these services. See "--Governmental Regulation." Under the Medicare Part A program, the Company is reimbursed for its direct costs plus an allocation of indirect costs up to a regional limit. As the Company expands its subacute care and other specialty medical services, the costs of care for these patients have exceeded and are expected to continue to exceed the regional reimbursement routine cost limits. In order to recover these costs, the Company is required to submit routine cost limit exception requests to recover the excess costs from Medicare. There can be no assurance that the Company will be able to recover such excess costs under any pending or future requests. The failure to recover these excess costs in the future could materially adversely affect the Company. Under current regulations, new long-term care facilities are, in certain limited circumstances, able to apply for a three year exemption from routine cost limits. The Company has applied for, but has not received, such exemptions for its Indianapolis facility and the Larkin Chase Center. Unless and until such exemptions are granted, these facilities can recover excess costs only through routine cost limit exception requests. Medicaid. Medicaid includes the various state-administered reimbursement programs for indigent patients created by Federal law. Medicaid programs vary from state to state. Although reimbursement rates are determined by the state, the Federal government retains the right to approve or disapprove individual state plans. Providers must accept reimbursement from Medicaid as payment in full for the services rendered, because the provider may not bill the patient for more than the amount of the Medicaid payment received. Each of the facilities operated by the Company participates in the Medicaid program of the state in which it is located. One of the Ohio Facilities, which is currently occupied solely by private pay patients, does not participate in the Ohio Medicaid program. Under the Federal Medicaid statute and regulations, state Medicaid programs must provide reimbursement rates that are reasonable and adequate to cover the costs that would be incurred by efficiently and economically operated facilities in providing services in conformity with state and Federal laws, regulations and quality and safety standards. Furthermore, payments must be sufficient to enlist enough providers so that services under the state's Medicaid plan are available to recipients at least to the extent that those services are available to the general population. However, there can be no assurance that payments under Medicaid programs will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs. In several states, including New Jersey and Indiana, healthcare provider organizations have initiated litigation challenging the Medicaid reimbursement methodologies employed in such states, asserting that reimbursement payments are not adequate to reimburse an efficiently operated facility for the costs of providing Medicaid covered services. Although there can be no assurance that any of these proceedings will be determined in favor of the healthcare industry, the Company would benefit from any increases in reimbursement levels resulting from successful litigation in these states. The Medicaid programs in the states in which the Company operates pay a per diem rate for providing services to Medicaid patients based on the facility's reasonable allowable costs incurred in providing services, subject to cost ceilings applicable to both operating and capital costs. The Ohio, Florida, and Maryland Medicaid programs currently include incentive allowances for providers whose costs are less than certain ceilings and who meet other requirements. There are generally two types of Medicaid reimbursement rates: retrospective and prospective, although many states have adopted plans that have both retrospective and prospective features. A retrospective rate is determined after completion of a cost report by the service provider and is designed to reimburse costs after they are incurred. Typically, an interim rate based upon historical cost factors and inflation is paid by the state during 53 the cost reporting period and a cost settlement is made following an audit of the filed cost report. Such adjustments may result in additional payments being made to the Company or in recoupments from the Company, depending on actual performance and the limitations within an individual state plan. The more prevalent type of Medicaid reimbursement rate is the prospective rate. Under a prospective plan, the state sets its rate of payment for the period in advance of services rendered. Actual costs incurred by operators during a period are used by the state to establish the prospective rate for a subsequent period. The provider must accept the prospective rate as payment in full for all services rendered. Although there is usually no settlement based upon actual costs incurred subsequent to the cost report filing, subsequent audits may provide a basis for the state program to retroactively recoup monies. Maryland's, Florida's, Indiana's, New Hampshire's and New Jersey's Medicaid programs are, at present, substantially prospective plans. Ohio's reimbursement plan is a prospective plan with reimbursement rates adjusted on a facility-by-facility basis. The Ohio plan recalculates certain costs on a quarterly basis. In November 1995, the State of New Hampshire adopted legislation which eliminated incentive payments and froze reimbursement rates through June 30, 1996. The legislation also called for a redesign of the Medicaid payment system in New Hampshire, effective July 1, 1996. These rate and payment system changes have had and may continue to have an adverse effect on reimbursements paid under New Hampshire's Medicaid program. To date, adjustments from Medicaid audits have not had a material adverse effect on the Company. Although there can be no assurance that future adjustments will not have a material adverse effect on the Company, the Company believes that it has properly applied the various payment formulas and that it is not likely that audit adjustments would have a material adverse effect on the Company. Ancillary Services to Non-Affiliates. The Company generates revenues from services to non-affiliates from its rehabilitation therapy and behavioral healthcare businesses which provide services to patients at long-term care facilities not operated by the Company. In general, payments for these services are received directly from the non-affiliated long-term care facilities, which in turn are reimbursed by Medicare or other payors. The Company's revenues from non-affiliates, though not directly regulated, are effectively limited by competitive market factors and regulatory reimbursement policies imposed on the long-term care facilities that contract for these therapy services. In addition, the revenues that the Company derives for these services are subject to adjustment in the event the facility is denied reimbursement by Medicare or any other applicable payor on the basis that the services provided by the Company were not medically necessary. GOVERNMENTAL REGULATION The Federal government and all states in which the Company operates regulate various aspects of the Company's business. In addition to the regulation of rates by governmental payor sources, the development and operation of long- term care facilities and the provision of long-term care services are subject to Federal, state and local licensure and certification laws which regulate with respect to a facility, among other matters, the number of beds, the services provided, the distribution of pharmaceuticals, equipment, staffing requirements, patients' rights, operating policies and procedures, fire prevention measures, environmental matters and compliance with building and safety codes. There can be no assurance that Federal, state or local governmental regulations will not change or be subjected to new interpretations that impose additional restrictions which might adversely affect the Company's business. All of the facilities operated by the Company are licensed under applicable state laws, possess the required CONs from responsible state authorities and are certified or approved as providers under the Medicaid and Medicare programs, except that two of the New Hampshire Facilities are not certified for Medicare (although the Company has applied for such certification). One of the Ohio Facilities is also not certified for Medicare or Medicaid. Both the initial and continuing qualification of a long-term care facility to participate in such programs depend upon many factors, including accommodations, equipment, services, non-discrimination policies against indigent patients, patient care, quality of life, patients' rights, safety, personnel, physical environment and 54 adequacy of policies, procedures and controls. Licensing, certification and other applicable standards vary from jurisdiction to jurisdiction and are revised periodically. State agencies survey or inspect all long-term care facilities on a regular basis to determine whether such facilities are in compliance with the requirements for participation in government-sponsored third-party payor programs. In some cases or upon repeat violations, the reviewing agency has the authority to take various adverse actions against a facility, including the imposition of fines, temporary suspension of admission of new patients to the facility, suspension or decertification from participation in the state Medicaid or the Medicare program, offset of amounts due against future billings to the Medicare or Medicaid programs, denial of payments under Medicaid for new admissions, reduction of payments, restrictions on the ability to acquire new facilities and, in extreme circumstances, revocation of a facility's license or closure of a facility. The compliance history of a prior operator may be used by state or Federal regulators in determining possible action against a successor operator. The Company believes that its facilities are in substantial compliance with all statutes, regulations, standards and requirements applicable to its business, including applicable Medicaid and Medicare regulatory requirements. However, in the ordinary course of its business, the Company from time to time receives notices of deficiencies for failure to comply with various regulatory requirements. In most cases, the Company and the reviewing agency will agree upon corrective measures to be taken to bring the facility into compliance. Although the Company has been subject to fines and in one instance to a 30-day moratorium on admissions at one of the Company's Florida facilities in January 1995, statements of deficiency and other corrective actions have not had a material adverse effect on the Company. There can be no assurance that future agency inspections will not have a material adverse effect on the Company. Certificates of Need. All states in which the Company operates have adopted CON or similar laws which generally require that a state agency determine that a need exists prior to the construction of new facilities, the addition or reduction of licensed beds or services, the implementation of other changes, the incurrence of certain capital expenditures, the approval of certain acquisitions and changes in ownership or, in certain states, the closure of a facility. State CON approval is generally issued for a specific project or number of beds, specifies a maximum expenditure, is sometimes subject to an inflation adjustment, and requires implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability of the facility to provide the service, operate the facility or complete the acquisition, addition or other change and can also result in adverse reimbursement action or the imposition of sanctions or other adverse action on the facility's license. Ohio has imposed a moratorium on the issuance of CONs for the construction of new long-term care facilities and the addition of beds to existing facilities. The moratorium is scheduled to remain in effect until June 30, 1997. Recent legislation in New Hampshire has eliminated the right to "leeway beds" on existing CONs. New Hampshire previously permitted long-term care facilities to add up to 10 licensed beds every two years as a matter of right. Medicare and Medicaid. Effective October 1, 1990, the Omnibus Budget Reconciliation Act of 1987 ("OBRA") eliminated the different certification standards for "skilled" and "intermediate care" nursing facilities under the Medicaid program in favor of a single "nursing facility" standard. This standard requires, among other things, that the Company have at least one registered nurse on each day shift and one licensed nurse on each other shift and also increases training requirements for nurses aides by requiring a minimum number of training hours and a certification test before a nurses aide can commence work. In order to obtain Medicare reimbursement, states continue to be required to certify that nursing facilities provide "skilled care." The Omnibus Budget Reconciliation Act of 1993 ("OBRA 93") affects Medicare reimbursement for skilled nursing services in two ways, both of which have had a minimum effect on the Company. First, the current limits on the portion of the Medicare reimbursement known as "routine service costs" (excluding capital-related expenses) were frozen for two consecutive cost report years beginning October 1, 1993. Second, the return on equity component of Medicare reimbursement was eliminated beginning October 1, 1993. Although the Company believes that it is in substantial compliance with the current requirements of OBRA and OBRA 93, it is unable to predict how future interpretation and enforcement of regulations promulgated under OBRA and OBRA 93 by the state and Federal governments could affect the Company in the future. 55 Effective July 1, 1995, the HCFA promulgated new survey, certification and enforcement rules governing long-term care facilities participating in the Medicare and Medicaid programs, which impose significant new burdens on long- term care facilities and may require state survey agencies to take aggressive enforcement actions. Among other things, the new HCFA rules governing survey and certification requirements define or redefine a number of terms used in the survey and certification process. The rules require states to amend their state plans (as required by Federal law) to incorporate the provisions of the new rules. The regulations may require state survey agencies to take aggressive enforcement actions. The breadth of the new rules and their recent effective date create uncertainty over the manner in which the rules will be implemented, the ability of any long-term care facility to comply with them and the effect of the new rules on the Company. Under the new rules, unannounced standard surveys of facilities must be conducted at least once every 15 months with a state-wide average of 12 months. In addition to the standard survey, survey agencies have the authority to conduct surveys as frequently as necessary to determine whether facilities comply with participation requirements, to determine whether facilities have corrected past deficiencies and to monitor care if a change occurs in the ownership or management of a facility. Furthermore, the state survey agency must review all complaint allegations and conduct a standard or an abbreviated survey to investigate such complaints if a review of the complaint shows that a deficiency in one or more of the Federal requirements may have occurred and only a survey will determine whether a deficiency or deficiencies exist. If a facility has been found to furnish substandard care, it is subject to an extended survey. The extended survey is intended to identify the policies and procedures that caused a facility to furnish substandard care. HCFA's new rules substantially revise provisions regarding the enforcement of compliance requirements for long-term care facilities with deficiencies. The rules allow either HCFA or state agencies to impose one or more remedies provided under the rules for any particular deficiency. Facilities must provide a plan of correction for all deficiencies regardless of whether a remedy is imposed. At a minimum, the following remedies are available: termination of provider agreement; temporary management; denial of payment for new admissions; civil money penalties; closure of the facility in emergencies or transfer of patients or both; and on-site state monitoring. States may also adopt optional remedies. The new rules divide remedies into three categories. Category 1 remedies include directed plans of correction, state monitoring and directed in-service training. Category 2 remedies include denial of payments for new admissions, denial of payments for all individuals (imposed only by HCFA) and civil money penalties of $50 to $3,000 per day. Category 3 remedies include temporary management, immediate termination or civil money penalties of $3,050 to $10,000 per day. The rules define situations in which one or more of the penalties must be imposed. HCFA has announced its intention to propose rules applying salary equivalency guidelines to speech and occupational therapy services, while updating physical and respiratory therapy guidelines. In addition, on April 14, 1995, HCFA issued a memorandum in response to requests by intermediaries for information on reasonable costs for speech and occupational therapy. The cost data in the memorandum set forth rates for speech and occupational therapy services that are lower than the Medicare reimbursement rates currently received by the Company for such services. Although the memorandum states that the cost data are to be informative and not serve as a limit on reimbursement rates for speech and occupational therapy services, intermediaries and customers of the Company may apply the cost data guidelines as absolute limits on payments. The cost data figures contained in the memorandum have been subject to criticism by the industry and the Company is unable to determine what effect, if any, such criticism will have on future actions or policy decisions taken by HCFA in connection with Medicare reimbursement rates for speech and occupational therapy services. The Company cannot predict when, or if, any changes will be made to the current Medicare reimbursement methodologies for contract speech and occupational therapy services, or the extent to which the data in the HCFA memorandum will be used by intermediaries and customers in determining reimbursement. The imposition of salary equivalency guidelines on contract speech and occupational therapy services, or the widespread use by intermediaries of the data in the memorandum, could adversely affect the Company's revenues derived from ancillary services and thereby limit the Company's ability to recoup its investment in that part of its business. Similarly, any future regulations reducing the government payment rates for subacute or other specialty medical services could materially adversely affect the Company. 56 Fee Splitting and Referrals. The Company is also subject to Federal and state laws that govern financial and other arrangements between healthcare providers. Federal laws, as well as the laws of certain states, prohibit direct or indirect payments or fee splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. These laws include the Federal "anti-kickback 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. A wide array of relationships and arrangements, including ownership interests in a company by persons in a position to refer patients and personal service agreements have, under certain circumstances, been alleged to violate these provisions. Certain discount arrangements may also violate these laws. Because of the broad reach of these laws, the Federal government has published certain "safe harbors," which set forth the requirements under which certain relationships will not be considered to violate such laws. One of these safe harbors protects investment interests in certain large, publicly traded entities which meet certain requirements regarding the marketing of their securities and the payment of returns on the investment. A second safe harbor protects payments for management services which are set in advance at a fair market rate and which do not vary with the value or volume of services referred, so long as there is a written contract which meets certain requirements. A safe harbor for discounts, which focuses primarily on appropriate disclosure, is also available. A violation of the Federal anti- kickback law could result in the loss of eligibility to participate in Medicare or Medicaid, or in criminal penalties. Violation of state anti- kickback laws could lead to loss of licensure, significant fines and other penalties. Various Federal and state laws regulate the relationship between healthcare providers and physicians, including employment or service contracts and investment relationships. These laws include the broadly worded fraud and abuse provisions of the Medicaid and Medicare statutes, which prohibit various transactions involving Medicaid or Medicare covered patients or services. In particular, OBRA 93 contains provisions which greatly expand the Federal prohibition on physician referrals to entities with which they have a financial relationship. Effective January 1, 1995, OBRA 93 prohibits any physician with a financial relationship (defined as a direct or indirect ownership or investment interest or compensation arrangement) with an entity from making a referral for "designated health services" to that entity and prohibits that entity from billing for such services. "Designated health services" do not include skilled nursing services but do include many services which long-term care facilities provide to their patients, including infusion therapy and enteral and parenteral nutrition. Various exceptions to the application of this law exist, including one that protects physician ownership in publicly traded companies which in the past three years have had average shareholder equity exceeding $75 million and one which protects the payment of fair market compensation for the provision of personal services, so long as various requirements are met. Violations of these provisions may result in civil or criminal penalties for individuals or entities and/or exclusion from participation in the Medicaid and Medicare programs. Various state laws contain analogous provisions, exceptions and penalties. The Company believes that in the past it has been, and in the future it will be, able to arrange its business relationships so as to comply with these provisions. Each of the Company's long-term care facilities has at least one medical director that is a licensed physician. The medical directors may from time to time refer their patients to the Company's facilities in their independent professional judgment. The physician anti-referral restrictions and prohibitions could, among other things, require the Company to modify its contractual arrangements with its medical directors or prohibit its medical directors from referring patients to the Company. 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. Healthcare Reform. In addition to extensive existing governmental healthcare regulation, there are numerous legislative and executive initiatives at the Federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect such proposals would have on the Company's business. Aspects of certain of these proposals, such as reductions in funding of the Medicare and Medicaid programs, potential changes in reimbursement regulations for rehabilitation therapy services, interim measures to contain healthcare costs such 57 as a short-term freeze on prices charged by healthcare providers or changes in the administration of Medicaid at the state level, could materially adversely affect the Company. There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have an adverse effect on the Company. Environmental and Other. The Company is also subject to a wide variety of Federal, state and local environmental and occupational health and safety laws and regulations. Among the types of regulatory requirements faced by healthcare providers are: air and water quality control requirements, waste management requirements, specific regulatory requirements applicable to asbestos, polychlorinated biphenyls and radioactive substances, requirements for providing notice to employees and members of the public about hazardous materials and wastes and certain other requirements. In its role as owner and/or operator of properties or facilities, the Company may be subject to liability for investigating and remedying any hazardous substances that have come to be located on the property, including such substances that may have migrated off of, or emitted, discharged, leaked, escaped or been transported from, the property. The Company's operations may involve the handling, use, storage, transportation, disposal and/or discharge of hazardous, infectious, toxic, radioactive, flammable and other hazardous materials, wastes, pollutants or contaminants. Such activities may harm individuals, property or the environment; may interrupt operations and/or increase their costs; may result in legal liability, damages, injunctions or fines; may result in investigations, administrative proceedings, penalties or other governmental agency actions; and may not be covered by insurance. The cost of any required remediation or removal of hazardous or toxic substances could be substantial and the liability of an owner or operator for any property is generally not limited under applicable laws and could exceed the property's value. Although the Company is not aware of any material liability under any environmental or occupational health and safety laws, there can be no assurance that the Company will not encounter such liabilities in the future, which could have a material adverse effect on the Company. COMPETITION The long-term care industry is highly competitive. The Company competes with other providers of long-term care on the basis of the scope and quality of services offered, the rate of positive medical outcomes, cost-effectiveness and the reputation and appearance of its long-term care facilities. The Company also competes in recruiting qualified healthcare personnel, in acquiring and developing additional facilities and in obtaining CONs. The Company's current and potential competitors include national, regional and local long-term care providers, some of whom have substantially greater financial and other resources and may be more established in their communities than the Company. The Company also faces competition from assisted living facility operators as well as providers of home healthcare. In addition, certain competitors are operated by not-for-profit organizations and similar businesses which can finance capital expenditures and acquisitions on a tax- exempt basis or receive charitable contributions unavailable to the Company. The Company expects competition for the acquisition and development of long- term care facilities to increase in the future as the demand for long-term care increases. Construction of new (or the expansion of existing) long-term care facilities near the Company's facilities could adversely affect the Company's business. State regulations generally require a CON before a new long-term care facility can be constructed or additional licensed beds can be added to existing facilities. CON legislation is in place in all states in which the Company operates or expects to operate. The Company believes that these regulations reduce the possibility of overbuilding and promote higher utilization of existing facilities. However, a relaxation of CON requirements could lead to an increase in competition. In addition, as cost containment measures have reduced occupancy rates at acute care hospitals, a number of these hospitals have converted portions of their facilities into subacute units. Competition from acute care hospitals could adversely affect the Company. The New Jersey legislature is currently considering legislation that would permit acute care hospitals to offer subacute care services under existing CONs issued to those providers. Ohio has imposed a moratorium on the conversion of acute care hospital beds into long-term care beds. See "-- Governmental Regulation." 58 EMPLOYEES As of March 31, 1996, the Company employed approximately 3,420 facility- based personnel on a full- and part-time basis. The Company's corporate and regional staff consisted of 76 persons as of such date. In addition, the Company's ancillary businesses employed approximately 480 persons as of such date. Approximately 180 employees at two of the Company's facilities are covered by collective bargaining agreements. Although the Company believes that it maintains good relationships with its employees and the unions that represent certain of its employees, it cannot predict the impact of continued or increased union representation or organizational activities on its future operations. The Company believes that the attraction and retention of dedicated, skilled and experienced nursing and other professional staff has been and will continue to be a critical factor in the successful growth of the Company. The Company believes that its wage rates and benefit packages for nursing and other professional staff are commensurate with market rates and practices. The Company competes with other healthcare providers in attracting and retaining qualified or skilled personnel. The long-term care industry has, at times, experienced shortages of qualified personnel. A shortage of nurses or other trained personnel or general economic inflationary pressures may require the Company to enhance its wage and benefits package in order to compete with other employers. There can be no assurance that the Company's labor costs will not increase or, if they do, that they can be matched by corresponding increases in private-payor revenues or governmental reimbursement. Failure by the Company to attract and retain qualified employees, to control its labor costs or to match increases in its labor expenses with corresponding increases in revenues could have a material adverse effect on the Company. INSURANCE The Company carries general liability, professional liability, comprehensive property damage and other insurance coverages that management considers adequate for the protection of its assets and operations based on the nature and risks of its business, historical experience and industry standards. There can be no assurance, however, that the coverage limits of such policies will be adequate or that insurance will continue to be available to the Company on commercially reasonable terms in the future. A successful claim against the Company not covered by, or in excess of, its insurance coverage could have a material adverse effect on the Company. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company's business and reputation, may lead to increased insurance premiums and may require the Company's management to devote time and attention to matters unrelated to the Company's business. The Company is self-insured (subject to contributions by covered employees) with respect to most of the healthcare benefits and workers' compensation benefits available to its employees. The Company believes that it has adequate resources to cover any self-insured claims and the Company maintains excess liability coverage to protect it against unusual claims in these areas. See Note J to the Company's audited combined financial statements included elsewhere in this Prospectus. However, there can be no assurance that the Company will continue to have such resources available to it or that substantial claims will not be made against the Company. LEGAL PROCEEDINGS The Company is a party to claims and legal actions arising in the ordinary course of business. Management does not believe that unfavorable outcomes in any such matters, individually or in the aggregate, would have a material adverse effect on the Company. 59 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The following table sets forth certain information with respect to the executive officers, key employees, Directors and Director nominees of the Company:
NAME AGE POSITION ---- --- -------- Stephen L. Guillard.............. 46 Chairman, President, Chief Executive Officer and Director Damian N. Dell'Anno.............. 36 Executive Vice President of Operations William H. Stephan............... 39 Senior Vice President and Chief Financial Officer Bruce J. Beardsley............... 33 Senior Vice President of Acquisitions Robert L. Boelter, R.R.T......... 45 Senior Vice President of Subacute and Specialty Services Michael E. Gomez, R.P.T.......... 34 Senior Vice President of Rehabilitation Services Lisa Vachet-Miller............... 37 Vice President of Marketing Mary Anne Cherundolo, R.N........ 51 Vice President of Professional Services Jeffrey J. Leroy................. 43 Vice President of Managed Care and Commercial Insurance Laurence Gerber.................. 39 Director Douglas Krupp.................... 49 Director David F. Benson.................. 46 Director Nominee Robert M. Bretholtz.............. 51 Director Nominee Robert T. Barnum................. 50 Director Nominee Sally W. Crawford................ 42 Director Nominee
The Director Nominees will become Directors of the Company upon consummation of the Offering. The Company's Board of Directors is classified into three classes which consist of, as nearly as practicable, an equal number of directors. The members of each class will serve staggered three-year terms. Mr. Guillard is a Class I director, Mr. Gerber is a Class II director and Mr. Krupp is a Class III director. Nominees for Director will be divided among the three classes upon their election or appointment. The terms of Class I, Class II and Class III directors expire at the annual meeting of stockholders to be held in 1997, 1998 and 1999, respectively. See "Description of Capital Stock--Classification of Directors." Stephen L. Guillard has served as President and Chief Executive Officer since joining the Company in May 1988 and as a Director and Chairman of the Board since its incorporation. Mr. Guillard previously served as Chairman, President and Chief Executive Officer of Diversified Health Services ("DHS"), a long-term care company which Mr. Guillard co-founded in 1982. DHS operated approximately 7,500 long-term care and assisted living beds in five states. Mr. Guillard has a total of 24 years of experience in the long-term care industry and is a licensed Nursing Home Administrator. Damian N. Dell'Anno has served as Executive Vice President of Operations since 1994. From 1993 to 1994, he served as the head of the specialty services group for the Company and was instrumental in developing the Company's rehabilitation therapy business. From 1989 to 1993, Mr. Dell'Anno was Vice President of Reimbursement for the Company. From 1988 to 1989, Mr. Dell'Anno served as Director of Budget, Reimbursement and Cash Management for The Mediplex Group, Inc. ("Mediplex"), a long-term care company. Mr. Dell'Anno has a total of 14 years of experience in the long-term care industry. William H. Stephan has served as Senior Vice President and Chief Financial Officer since joining the Company in 1994. From 1986 to 1994, Mr. Stephan was a Manager in the health care practice of Coopers & Lybrand L.L.P. His clients there included long-term care facilities, continuing care retirement centers, physician 60 practices and acute care hospitals. Mr. Stephan is a Certified Public Accountant and a member of the Healthcare Financial Management Association. Bruce J. Beardsley has served as Senior Vice President of Acquisitions since 1994. From 1992 to 1994, he was Vice President of Planning and Development of the Company with responsibility for the development of specialized services, planning and engineering. From 1990 to 1992, he was an Assistant Vice President of the Company responsible for risk management and administrative services. From 1988 to 1990, Mr. Beardsley served as Special Projects Manager of the Company. Prior to joining the Company in 1988, Mr. Beardsley was a commercial and residential real estate appraiser. Robert L. Boelter, R.R.T. has served as Senior Vice President of Subacute and Specialty Services since 1995. From 1994 to 1995, he was Vice President of Subacute and Specialized Services for the Company. From 1992 through 1994, Mr. Boelter was the Manager and later, Corporate Director, of Subacute Programs for Arbor Health Care Company ("Arbor"), a publicly-held nursing and subacute care organization based in Lima, Ohio. While at Arbor, Mr. Boelter assisted with the development of that company's subacute model and directed the implementation of all distinct subacute programs. From 1984 to 1992, he was President of Pedi-Medical, a hospital-affiliated home medical equipment provider. Mr. Boelter is a licensed respiratory therapist. Michael E. Gomez, R.P.T. has served as the Company's Senior Vice President of Rehabilitation Services since 1994. From 1993 to 1994, Mr. Gomez served as Director of Therapy Services for the Company with responsibility for overseeing the coordination and direction of physical, occupational and speech therapy services. From 1991 to 1993, Mr. Gomez was Director of Rehabilitation Services at Mary Washington Hospital in Fredericksburg, Virginia. From 1988 to 1990, he was Physical Therapy State Manager for Pro-Rehab, a contract therapy company based in Boone, North Carolina. Mr. Gomez is a licensed physical therapist. Lisa Vachet-Miller has served as Vice President of Marketing since 1994. From 1990 to 1994, Mrs. Vachet-Miller was the Regional Marketing Director for the Southeast Region of the Company. Before joining the Company, Mrs. Vachet- Miller was Senior Director of Consumer Relations for Unicare Health Facilities ("Unicare"), a long-term care provider located in Evansville, Indiana and was Admissions/Marketing Director for Medco Center North, a Unicare facility, also in Evansville. Mary Anne Cherundolo, R.N. has served as Vice President of Professional Services since she joined the Company in 1994. From 1986 to 1993, Mrs. Cherundolo served as the Director of Quality Management for PersonaCare, a long-term care company which is now a subsidiary of Theratx, Inc. Mrs. Cherundolo is a licensed Registered Nurse in the states of Connecticut and Maryland and holds a gerontological nurse certification from the American Nursing Association. Jeffrey J. Leroy has served as Vice President of Managed Care and Commercial Insurance since 1995. Before his promotion to Vice President, from 1994 to 1995, Mr. Leroy served as a Director of Managed Care and Commercial Insurance of the Company in a similar capacity. From 1992 to 1994, Mr. Leroy served as Vice President of Strategic Planning and Marketing for Mediplex in Wellesley, Massachusetts and from 1989 to 1992, he served as the Regional Marketing Director for the Hillhaven Corporation, a long-term care provider. Douglas Krupp, a Director of the Company and Chairman of the Executive Committee since its incorporation, is Co-founder and Chairman of Berkshire, a holding company with approximately $3 billion under management for individual and institutional investors. Separately, Mr. Krupp is Chairman of The Board of Directors of Berkshire Realty Company, Inc. ("BRI"), a $500 million equity real estate investment trust that is publicly traded on the New York Stock Exchange and he serves as Chairman of the Board of Trustees for Krupp Government Income Trusts I and II. Since 1990, Douglas Krupp has been a trustee of Bryant College and he serves as a Corporate Overseer for Brigham and Women's Hospital. Laurence Gerber, a Director of the Company since its incorporation, is the President and Chief Executive Officer of Berkshire. Prior to becoming President and Chief Executive Officer in 1991, Mr. Gerber held various 61 positions within Berkshire, where his responsibilities included strategic planning and corporate finance. Mr. Gerber also serves as Chief Executive Officer and a Director of BRI and as President and Trustee of Krupp Government Income Trust and Krupp Government Income Trust II. David F. Benson, a Director Nominee, has been President of Meditrust since September 1991 and was Treasurer of Meditrust from June 1987 to May 1992. He was Treasurer of Mediplex from January 1986 through June 1987. He was previously associated with Coopers & Lybrand L.L.P., from 1979 to 1985. Mr. Benson is a trustee of Mid-Atlantic Realty Trust, a publicly-held shopping center real estate investment trust. Robert T. Barnum, Director Nominee, has been President, Chief Operating Officer and a Director of American Savings Bank ("American") since 1992. He joined American, the largest privately held thrift in the United States, in 1989 as Chief Financial Officer. Mr. Barnum is also a Director of National RE Holdings Corporation, a publicly held reinsurance holding company. Robert M. Bretholtz, a Director Nominee, was President and a Director of Madison Cable Corp., a privately held manufacturing company, from 1976 to 1995. Mr. Bretholtz is the Vice Chairman of the Board of Trustees of Brigham and Women's Hospital in Boston and a Corporator for Partners Healthcare System, Inc., the parent organization of the hospital. In addition, he is a Trustee of the Foundation for Neurological Diseases. Sally W. Crawford, a Director Nominee, has served since 1985 as Chief Operating Officer of Healthsource, Inc., a publicly held managed care organization headquartered in New Hampshire. Ms. Crawford's responsibilities at Healthsource, Inc. include leading that company's Northern Region operations and marketing efforts. DIRECTOR COMPENSATION AND COMMITTEES The Company established the Stock Option Plan for Non-Employee Directors which will become effective upon completion of the Offering. See "--Stock Option Plans." Commencing after the Offering, non-employee and non-affiliated Directors will receive a $15,000 annual fee plus $1,000 for each meeting of the Board of Directors or committee of the Board of Directors that they attend. The Board of Directors has established, effective upon the completion of the Offering, an Executive Committee, a Compensation Committee, an Audit Committee and a Stock Plan Committee. The Compensation Committee, which will be composed of three directors, will establish salaries, incentives and other forms of compensation for the Company's Directors and officers and will recommend policies relating to the Company's benefit plans. The Stock Plan Committee, which will be composed of three non-employee and non-affiliated Directors, will administer the Company's 1996 Long-Term Stock Incentive Plan. The Audit Committee, which will be composed of two non-employee and non-affiliated Directors, will oversee the engagement of the Company's independent auditors and, together with the Company's independent auditors, will review the Company's accounting practices, internal accounting controls and financial results. The Executive Committee will be composed of Douglas Krupp, Lawrence Gerber and Stephen Guillard. The By-laws of the Company provide the Executive Committee the authority to meet with members of the Company's senior management in between meetings of the Board of Directors for the purpose of advice and consultation only, but the Executive Committee has no power to exercise any of the powers of the Board of Directors. 62 EXECUTIVE COMPENSATION The following table sets forth information with respect to the compensation of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company (collectively, the "Named Executive Officers") for the fiscal year ended December 31, 1995. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION NAME AND -------------------- ALL OTHER PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) ------------------ ---------- --------- --------------- Stephen L. Guillard Chairman, President and Chief Executive Officer.................................. $267,800 $80,000 $4,063 Damian N. Dell'Anno Executive Vice President of Operations... 159,326 32,000 1,573 Bruce J. Beardsley Senior Vice President of Acquisitions.... 117,192 32,149 3,191 William H. Stephan Senior Vice President and Chief Financial Officer.................................. 120,000 24,000 5,954 Robert L. Boelter Senior Vice President of Subacute and Specialty Services....................... 102,193 17,500 2,037
- -------- (1) Includes matching contributions made by the Company under its Supplemental Executive Retirement Plan and 401(k) Plan. EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS Upon completion of the Offering, the Company will enter into employment agreements with Messrs. Guillard, Dell'Anno, Beardsley and Stephan, each of which will have an initial term of two years, subject to automatic renewal for successive one-year periods unless the Company or the employee gives notice of non-renewal 60 days prior to expiration. The employment agreements provide for an annual base salary of $310,000 for Mr. Guillard, $180,000 for Mr. Dell'Anno, $135,000 for Mr. Beardsley and $130,000 for Mr. Stephan. Such salaries may be increased, but not decreased, at the discretion of the Compensation Committee. Each employee will be entitled to participate in all benefits generally made available to senior executives of the Company and to receive annual bonus compensation in such amounts and upon such conditions as determined by the Compensation Committee, but not less than 15% of base salary in a given year. If any of the employment agreements is terminated by the Company other than for cause, the employee is entitled to receive all accrued but unpaid salary and bonus amounts plus termination payments equal to the employee's monthly base salary for each of the greater of (i) the number of months remaining under the term of the agreement or (ii) 12 months (24 months in the case of Mr. Guillard). In the event of an employee's termination due to disability or death, the employee (or his designated beneficiary) will receive monthly payments equal to the employee's monthly base salary for 12 months, reduced by payments made under any disability insurance policy or program maintained by the Company for the employee's benefit. If any of the employment agreements is not renewed by the Company at the end of its initial or subsequent term, the employee will be entitled to receive severance payments equal to the employee's monthly base salary for 12 months (24 months in the case of Mr. Guillard). Each employment agreement provides that neither the employee nor any business enterprise in which he has an interest may (i) until the later of the termination of the employee's employment with the Company and the expiration of two years from the commencement of such employment, engage in activities which compete with the Company's business, (ii) at any time during the employee's employment and one year following his termination (two years in the case of Mr. Guillard), manage or operate any long-term care facility managed or operated by the Company and (iii) for a period of one year following termination (two years in the case of Mr. Guillard), solicit or employ persons employed or retained as a consultant by the Company. Pursuant to prior employment agreements, Messrs. Guillard and Dell'Anno received limited partner capital (but not income) interests in HHLP as follows: Mr. Guillard received a 6.0% interest in HHLP; Mr. Dell'Anno 63 received a 2.0% interest in the excess value of HHLP above $7.0 million. As of December 31, 1995 Mr. Guillard also subscribed for equity interests in certain of the Predecessors pursuant to the Executive Equity Purchase. The aggregate subscription price of $438,000, equal to the fair market value of such interests as of December 31, 1995 was paid by Mr. Guillard in 1996 with the proceeds of a special bonus equal to such purchase price. To pay taxes due with respect to the Executive Equity Purchase and this bonus, Mr. Guillard is entitled to receive a loan from the Company, evidenced by a note maturing April 15, 2001, and bearing interest at 7.0% per annum. In connection with the Reorganization, the interests subject to the Executive Equity Purchase and Messrs. Guillard's and Dell'Anno's interests in HHLP will be exchanged for an aggregate of 307,723 shares of Common Stock. Under his prior employment agreement, Mr. Dell'Anno will also receive an additional 18,037 shares of Common Stock pursuant to the Bonus Payment in connection with the Offering. Mr. Dell'Anno will also receive a loan from the Company to pay income tax liabilities that result from the Bonus Payment. The loan will bear interest at 1% over the prime rate and will mature on the earlier of three years or when restrictions on sales of Common Stock under Rule 144 in respect of the Bonus Payment terminate. See "The Reorganization" and "Stock Ownership of Directors, Executive Officers and Principal Holders." The Company has adopted an Executive Long-Term Incentive Plan (the "Executive Plan") effective July 1, 1995. Eligible participants, consisting of the Company's department heads and regional directors, are entitled to receive a payment upon an initial public offering or sale of the Company above a baseline valuation of $23,000,000 within two years of the effective date of the plan. The total size of the pool available will depend upon the valuation implied by the initial public offering price. Allocations of the available pool among eligible participants were made by senior management. Assuming an initial public offering price of $12.50 (the midpoint of the range set forth on the cover page of this Prospectus), approximately $960,000 in the aggregate will be paid to eligible participants under the Executive Plan, of which Messrs. Beardsley and Stephan will receive $187,200 and $148,800, respectively, upon the completion of the Offering. The Executive Plan will terminate upon completion of the Offering. 401(k) PLAN All Company employees with at least one year of service (defined as 1,000 working hours within a consecutive twelve-month period) are eligible to participate in the Company's retirement savings program (the "401(k) Plan"), which is designed to be tax deferred in accordance with the provisions of Section 401(k) of the Internal Revenue Code of 1986 (the "Code"). The 401(k) Plan provides that each participant may defer up to 15% of his or her total compensation, subject to statutory limits, and the Company may also make a discretionary matching contribution to the 401(k) Plan in an amount to be determined by the Board of Directors at the end of each year. The Company may also make additional discretionary contributions, in the Board's discretion, to non-highly compensated participants. To be eligible for an allocation of Company matching or discretionary contributions, an employee must be employed by the Company on the last day of the year. Company matching or additional contributions vest 20% following the participant's second year of service and an additional 20% annually thereafter. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective September 15, 1995, the Company established a Supplemental Executive Retirement Plan ("SERP") to provide benefits for key employees of the Company. Participants may defer up to 25% of their salary and bonus compensation (100% for the period from September 16, 1995 to December 21, 1995) by making contributions to the SERP. Amounts deferred by the participant are credited to his or her account and are always fully vested. The Company matches 50% of amounts contributed (up to an amount equal to 10% of base salary) which become vested as of January 1 of the second year following the end of the plan year for which contributions were credited, provided the employee is still employed with the Company on that date. In addition, participants will be fully vested in such matching contribution amounts in the case of death or permanent disability or at the discretion of the Company. 64 Participants are eligible to receive benefits distributions upon retirement or in certain predesignated years. Participants may not receive distributions prior to a pre-designated year, except in the case of termination, death or disability or demonstrated financial hardship. Only amounts contributed by the employee may be distributed because of financial hardship. Although amounts deferred and Company matching contributions are deposited in a "rabbi trust," they are subject to risk of loss. If the Company becomes insolvent, the rights of participants in the SERP would be those of an unsecured general creditor of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During its fiscal year ended December 31, 1995, the Company had no compensation committee. Decisions concerning compensation for 1995 were made by a committee comprised of the Company's senior management. Future compensation decisions will be made by the Compensation Committee. See "-- Director Compensation and Committees." STOCK OPTION PLANS 1996 NON-EMPLOYEE DIRECTOR PLAN The Company has established its 1996 Stock Option Plan for Non-Employee Directors (the "Director Plan"). A maximum of 105,000 shares of Common Stock (subject to adjustment for stock splits and similar events) has been reserved by the Company for issuance pursuant to options under the Director Plan. Directors of the Company who are not employees or affiliates of the Company ("Outside Directors") are eligible to participate. The Director Plan is intended to allow the Outside Directors receiving grants to be "disinterested persons" as defined in Rule 16b-3 of the Securities Exchange Act of 1934 ("Rule 16b-3") with respect to other stock plans of the Company and, accordingly, is intended to be self-governing to the extent required by Rule 16b-3. Any administrative issues that nevertheless arise under the Director Plan will be resolved by the Board of Directors. As of the effective date of the Offering, each Outside Director will be granted an option to purchase 15,000 shares of Common Stock (60,000 in the aggregate). Thereafter, each person who is elected or appointed as an Outside Director will be granted an option to purchase 15,000 shares of Common Stock. Commencing in 1997, each person who is an Outside Director on January 1 of each year during the term of the Director Plan will receive an option to purchase 3,500 shares of Common Stock. All options granted under the Plan will be "nonqualified" stock options subject to the provisions of section 83 of the Code. Options issued under the Director Plan become exercisable on the first anniversary of the date of grant and terminate on the earliest of the following: (a) ten years from the date of grant; (b) one year from the termination of the optionee's service as an Outside Director by reason of death or Disability; (c) the termination of the optionee's service as an Outside Director for cause (as defined in the Plan); and (d) three months from the termination of the optionee's service as an Outside Director other than by reason of death, disability or cause. The exercise price of each option granted upon the effectiveness of the Offering will be the initial public offering price per share and the exercise price of all other options granted under the Director Plan will be the Fair Market Value (as defined in the Director Plan) of a share of Common Stock on the date the option is granted. Shares of Common Stock purchased upon the exercise of an option are to be paid for in cash, check or money order or by shares of Common Stock owned by the optionee for at least six months prior to exercise. Subject to certain limitations, the Company's Board of Directors may amend, suspend or discontinue the Director Plan at any time. 1996 LONG-TERM STOCK INCENTIVE PLAN The Company has adopted, and the Company's stockholders approved, the Harborside Healthcare Corporation 1996 Long-Term Stock Incentive Plan (the "Stock Plan"). 65 The Stock Plan is administered by the Stock Plan Committee, which is comprised of Directors who are intended to be "disinterested persons" (within the meaning of Rule 16b-3) and "outside directors" (within the meaning of section 162(m) of the Code). Any officer or other key employee or consultant to the Company or any of its subsidiaries who is not a member of the Stock Plan Committee may be designated as a participant under the Stock Plan. The Stock Plan Committee has the sole and complete authority to determine the participants to whom awards will be granted under the Stock Plan. The Stock Plan authorizes the grant of awards to participants with respect to a maximum of 680,000 shares of the Company's Common Stock ("Shares"), subject to adjustment for stock splits, stock dividends and similar events, which awards may be made in the form of (i) nonqualified stock options; (ii) stock options intended to qualify as incentive stock options under section 422 of the Code; (iii) stock appreciation rights; (iv) restricted stock and/or restricted stock units; (v) performance awards and (vi) other stock based awards; provided that the maximum number of shares with respect to which stock options and stock appreciation rights may be granted to any participant in the Stock Plan in any calendar year shall not exceed 150,000 and the maximum number of shares which may be paid to a participant in the Stock Plan in connection with the settlement of any awards designated as a "Performance Compensation Award" (as defined below) in respect of a single performance period may not exceed 150,000 or, in the event such Performance Compensation Award is paid in cash, the equivalent cash value thereof, after the effective date of the Stock Plan, any Shares covered by an award granted under the Stock Plan, or to which such an award relates, are forfeited, or if an award has expired, terminated or been canceled for any reason whatsoever (other than by reason of exercise or vesting), then the shares covered by such award will again be, or will become, Shares with respect to which awards may be granted under the Stock Plan. Awards may be made under the Stock Plan in assumption of, or in substitution for, outstanding awards previously granted by the Company or its affiliates or a company acquired by the Company or with which the Company combines. The number of shares underlying any such assumed or substitute awards will be counted against the aggregate number of Shares which are available for grant under awards made under the Stock Plan. Awards of options, stock appreciation rights, restricted stock units, performance awards and other stock based awards granted under the Stock Plan will be subject to such terms, including exercise price, circumstances of forfeiture and conditions and timing of exercise (if applicable), as may be determined by the Stock Plan Committee. Stock options that are intended to qualify as incentive stock options will be subject to terms and conditions that comply with such rules as may be prescribed by section 422 of the Code. Payment in respect of the exercise of an option granted under the Stock Plan may be made in cash, or its equivalent, or, to the extent permitted by the Stock Plan Committee, (i) by exchanging Shares owned by the optionee (which are not the subject of any pledge or other security interest and which have been owned by such optionee for at least 6 months) or (ii) through delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the aggregate exercise price, or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the fair market value of such Shares so tendered to the Company as of the date of such tender is at least equal to the aggregate exercise price of the option. Awards in the form of stock options and stock appreciation rights are intended to qualify as "performance-based compensation" and therefore be deductible under section 162(m) of the Code provided that the exercise or grant price, as the case may be, is the fair market value per Share on the date of the grant. In addition, the Stock Plan Committee may designate awards other than stock options or stock appreciation rights as a "Performance Compensation Award." Such awards meeting the criteria described below are also intended to be deductible under the section 162(m). Each Performance Compensation Award will be payable only upon achievement over a specified performance period (ranging from one to three years) of a pre-established objective performance goal established by the Stock Plan Committee for such period. The Stock Plan Committee may designate one or more performance criteria for purposes of establishing a performance goal with respect to Performance Compensation 66 Awards made under the Stock Plan. The performance criteria that will be used to establish such performance goals will be limited to the following: return on net assets, return on shareholders' equity, return on assets, return on capital, shareholder returns, profit margin, earnings per share, net earnings, operating earnings, price per share and sales or market share. With regard to a particular performance period, the Stock Plan Committee will have the discretion, subject to the Stock Plan's terms, to select the length of the performance period, the type(s) of Performance Compensation Award(s) to be issued, the performance goals that will be used to measure performance for the period and the performance formula that will be used to determine what portion, if any, of the Performance Compensation Award has been earned for the period. Such discretion shall be exercised by the Stock Plan Committee in writing no later than 90 days after the commencement of the performance period and performance for the period will be measured and certified by the Stock Plan Committee upon the period's close. In determining entitlement to payment in respect of a Performance Compensation Award, the Stock Plan Committee may through use of negative discretion reduce or eliminate such award, provided such discretion is permitted under section 162(m) of the Code. No award that constitutes a "derivative security," for purposes of section 16 of the Exchange Act, may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by a Participant otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order. The Board may amend, alter, suspend, discontinue, or terminate the Stock Plan or any portion thereof at any time; provided that no such amendment, alteration, suspension, discontinuation or termination shall be made without stockholder approval if such approval is necessary to comply with any tax or regulatory requirement, including for these purposes any approval requirement which is a prerequisite for exemptive relief from section 16(b) of the Exchange Act. Upon effectiveness of the Offering, the Company will grant options to purchase 360,000 shares of Common Stock at the initial public offering price to members of senior management and other employees. Of this total, Messrs. Guillard and Dell'Anno will receive options to purchase 80,000 and 48,000 shares of Common Stock, respectively, at the initial public offering price. Options to purchase interests in one of the Company's predecessors were granted to Messrs. Beardsley and Stephan in February 1996. The exercise price of these options reflected the fair market value of the predecessor at the time of grant. Upon completion of the Offering, Messrs. Beardsley and Stephan will both receive options to purchase 40,000 shares of Common Stock at $8.15 per share in pro rata substitution for these previously issued options. One- third of each option described above will become exercisable on the first, second and third anniversary of the date of grant. DIRECTORS RETAINER FEE PLAN The Company has adopted, and its shareholders have approved, the Harborside Healthcare Corporation Directors Retainer Fee Plan (the "Retainer Fee Plan"). The aggregate number of shares authorized for issuance under the Retainer Fee Plan is 15,000. Under the Retainer Fee Plan, a director who is not an employee of the Company or an affiliate (an "Eligible Director") may elect to receive payment of all or any portion of his annual cash retainer and meeting fees (including fees for committee meetings) either currently, in cash or shares of Common Stock, or may elect to defer receipt of such payment in stock. Following the consummation of the Offering, it is expected that four directors will be eligible to participate in the Retainer Fee Plan. Any deferral must be made pursuant to an irrevocable election made prior to the year of service with respect to which such fees relate and at least six months in advance of the deferral. Any election by an Eligible Director to receive all or a portion of such Eligible Director's retainer or meeting fees in shares of Common Stock must be made at least six months prior to the date when such fees are to be paid. 67 Deferrals are invested, at the election of the Eligible Director, in a Stock Unit Account (as defined in the Retainer Fee Plan). As elected by the Eligible Director, distributions are made on the first day of the month following (i) death, (ii) disability, (iii) termination of service or retirement, (iv) a fixed date in the future or (v) the earliest to occur of the foregoing. Distributions made from an Eligible Director's Stock Unit Account will be paid in a single payment in the form of shares of Common Stock (and cash representing any fractional share). The Retainer Fee Plan is administered by a committee of employee directors selected by the Board of Directors. No rights granted under the Retainer Fee Plan are transferable other than pursuant to the laws of descent or distribution. The Retainer Fee Plan may be amended or terminated by the Board of Directors, provided that no amendment or termination may adversely affect any rights accrued prior to the date of amendment or termination and provided that any amendment for which shareholder approval is required by law or in order to maintain continued qualification of the Plan under Rule 16b-3 promulgated under the Exchange Act shall not be effective until such approval has been obtained. CERTAIN TRANSACTIONS Berkshire, one of the Contributors, is beneficially owned by, among others, Douglas Krupp, a Director of the Company, his brother George Krupp and Laurence Gerber, a Director of the Company. Berkshire has historically had and expects to maintain certain relationships with the Company. All future transactions with George or Douglas Krupp or their affiliates, including Berkshire, will be approved by disinterested directors. Effective October 1, 1994, the Company entered into an agreement to lease its Brevard facility from RTLP, which is beneficially owned by Douglas Krupp, George Krupp. The Brevard lease agreement is for a period of ten years, plus up to two five-year renewals. Rent was $551,250 for the initial twelve-month period and increases by 2.0% each year thereafter. At the end of the initial lease term, the Company has the option to exercise two consecutive five-year lease renewals. The Company also has the right after the fifth anniversary of the commencement of the lease to purchase the facility at its fair market value. RTLP is required to make capital expenditures totaling $500,000 during the first three years of the lease. As of March 31, 1996, approximately $338,000 of such capital expenditures have been made. See "Business-- Properties." The Company's Boston headquarters occupy office space leased from Berkshire. The Company has historically been allocated certain expenses for office space and various services provided by Berkshire, including legal, tax, data processing and other administrative services. The allocations of expenses for the years ended December 31, 1993, 1994 and 1995 were $746,000, $759,000 and $700,000, respectively. As of March 31, 1996, no amounts were owed to Berkshire for these services. Berkshire also provided investor relations services to KYP, for which the Company paid a total of $118,000. The Company and Berkshire will enter into an administrative services agreement, which will both become effective upon consummation of the Offering, pursuant to which Berkshire will continue to provide the same services and office space to the Company as described above, as well as certain investor relation services. The administrative services agreement will have an initial term that ends on December 31, 1996, and will be automatically renewable annually thereafter. The Company or Berkshire may terminate the agreement upon 120 days' prior written notice. Management believes that the terms of the administrative services agreement will be as favorable to the Company as could be obtained from independent third parties. The administrative services agreement provides that the Company will indemnify Berkshire, including its officers and partners, to the fullest extent permitted by Delaware law, as if Berkshire were an agent of the Company in connection with the performance of its services under the agreement. Berkshire has agreed to indemnify the Company for losses arising from Berkshire's deliberate dishonesty or gross negligence or willful misconduct. The Company has entered into the Reorganization Agreement with the Contributors, pursuant to which the Contributors will receive 4,400,000 shares of Common Stock in exchange for their ownership interests in the Company's predecessors. The Reorganization will be completed immediately prior to completion of the Offering. See "The Reorganization." 68 In connection with the acquisition of the Company's Decatur facility, a subsidiary of the Company assumed a first mortgage note from the facility's prior owner. Douglas Krupp personally guaranteed the note which at the time had a remaining balance of $1,775,000. As of March 31, 1996, the remaining principal balance on the note is $1,613,000. The Company has agreed to indemnify Mr. Krupp for liability under such guaranty. On December 28, 1995, an affiliate of Berkshire advanced $2,000,000 to the Company at an interest rate of 9.0% per annum. The Company used these funds to make a purchase deposit on five long-term care facilities which the Company has since determined not to acquire. The advance and all accrued interest has since been repaid. In 1994, Bowie L.P. entered into an agreement with Krupp Construction Corporation ("Krupp Construction"), an affiliate of Douglas Krupp and George Krupp, to manage the construction of the Company's Larkin Chase Center. Krupp Construction received a total of $278,000 in management fees and reimbursements for certain costs incurred in connection with the agreement. Effective December 31, 1995, Mr. Gerber purchased equity interests in certain Predecessors pursuant to the Director Equity Purchase. Mr. Gerber purchased these equity interests for an aggregate price of $365,000, the fair market value of such interests on such date. In connection with the Reorganization, Mr. Gerber will exchange the interests for an aggregate of 69,892 shares of Common Stock. The Company has historically entered into a number of financings and lease arrangements with Meditrust. David F. Benson, the President of Meditrust, is a Director Nominee. Fourteen of the Company's facilities are leased from Meditrust. See "Business--Properties." The Seven Facilities were sold to Meditrust by KYP on December 31, 1995 for $47,000,000 and were subsequently leased to the Company. Total minimum rent payments under the Company's leases with Meditrust are expected to be approximately $7.6 million for 1996 and were $0.5 million in 1995. Seven of the Company's owned facilities are subject to mortgages in favor of Meditrust. See "Business--Properties" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." The Company will use a portion of the proceeds of the Offering to repay an aggregate of $25 million principal amount of these mortgages. Meditrust will also receive a prepayment penalty of $1.7 million. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company has recently received pre-approval from Meditrust, subject to customary due diligence and closing conditions, for up to $50 million in debt and/or lease financing for future acquisitions. 69 STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS The following table sets forth certain information with respect to the beneficial ownership of certain voting securities of the Company by all persons known by the Company to own beneficially more than 5% of the Common Stock, each of the Company's Directors, the Named Executive Officers and by all Directors and executive officers as a group.
SHARES OF COMMON STOCK SHARES OF COMMON STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO OFFERING AFTER OFFERING ------------------------- ------------------------- NUMBER OF PERCENTAGE NUMBER PERCENTAGE NAME AND ADDRESS(1) SHARES OF CLASS OF SHARES OF CLASS - ------------------- ------------- ----------- ------------- ----------- Douglas Krupp(2)......... 3,382,305 76.9% 3,382,305 42.3% George Krupp(2).......... 3,382,305 76.9% 3,382,305 42.3% Laurence Gerber(3)....... 2,830,156 64.3% 2,830,156 35.4% The Berkshire Companies L.P..................... 2,696,903 61.3% 2,696,903 33.7% The Douglas Krupp 1994 Family Trust(4)......... 622,042 14.1% 622,042 7.8% The George Krupp 1994 Family Trust(4)......... 622,042 14.1% 622,042 7.8% Stephen L. Guillard(5)... 260,160 5.9% 260,160 3.3% Damian N. Dell'Anno(6)... 65,600 1.5% 65,600 * Bruce J. Beardsley....... -- * -- * William H. Stephan....... -- * -- * Robert L. Boelter........ -- * -- * All Directors and Executive Officers as a group (11 persons)...... 3,777,958 85.9% 3,777,958 47.2%
- -------- * Less than one percent. (1) The address of each person named, unless otherwise noted, is c/o Harborside Healthcare Corporation, 470 Atlantic Avenue, Boston, Massachusetts 02210. (2) Includes 2,696,903 shares of Common Stock received by Berkshire and 63,360 shares of Common Stock received by Krupp Enterprises, L.P. ("Enterprises"), in each case in connection with the Reorganization. The general partners of Berkshire are KGP-1, Inc. ("KGP-1") and KGP-2, Inc. ("KGP-2") and the general partner of Enterprises is KGP-1. KGP-1 and KGP-2 are both 50% owned by each of George Krupp and Douglas Krupp. By virtue of their interests in the general partners of Berkshire and Enterprises, George Krupp and Douglas Krupp may each be deemed to beneficially own the 2,760,263 shares of Common Stock held by Berkshire and Enterprises. In addition, George Krupp and Douglas Krupp may each be deemed to beneficially own the 622,042 shares of Common Stock held by their respective family trusts. See Note 4, below. (3) Includes 69,893 shares of Common Stock received in connection with the Reorganization. Also includes an aggregate of the 2,760,263 shares of Common Stock held by Berkshire and Enterprises, which Mr. Gerber may be deemed to beneficially own because of his position as President of KGP-1 and KGP-2. (4) Includes 622,042 shares of Common Stock received in connection with the Reorganization by each of The George Krupp 1994 Family Trust ("GKFT") and The Douglas Krupp 1994 Family Trust ("DKFT"). Each of George Krupp and Douglas Krupp may be deemed to beneficially own the 622,042 shares of Common Stock held by GKFT and DKFT, respectively. The trustees of both GKFT and DKFT are Lawrence I. Silverstein, Paul Krupp and M. Gordon Ehrlich (the "Trustees"). The Trustees share control over the power to dispose of the assets of GKFT and DKFT and thus each may be deemed to beneficially own the 622,042 shares of Common Stock held by GKFT and DKFT; however, each of the Trustees disclaims beneficial ownership of all of such shares which are or may be deemed to be beneficially owned by George Krupp or Douglas Krupp. (5) Includes 260,160 shares of Common Stock received in connection with the Reorganization. (6) Includes 65,600 shares of Common Stock received in connection with the Reorganization, of which 18,037 shares of Common Stock received consist of the Bonus Payment. 70 DESCRIPTION OF CAPITAL STOCK The following summary information is qualified in its entirety by the provisions of the Company's Certificate of Incorporation and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. See "Additional Information." The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), of which 4,400,000 shares of Common Stock are outstanding upon completion of the Reorganization but prior to completion of the Offering. Upon completion of the Offering, 8,000,000 shares of Common Stock will be outstanding (8,540,000 shares if the Underwriters' over-allotment is exercised in full) and no shares of preferred stock will be issued or outstanding. Prior to the Offering, there has been no public market for the Common Stock. See "Underwriting." COMMON STOCK Voting Rights. The Company's Certificate of Incorporation provides that holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of stockholders. The stockholders are not entitled to vote cumulatively for the election of directors. Dividends. Each share of Common Stock is entitled to receive dividends if, as and when declared by the Board of Directors. Under Delaware law, a corporation may declare and pay dividends out of surplus, or if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding year. No dividends may be declared, however, if the capital of the corporation has been diminished by depreciation in the value of its property, losses or otherwise to an amount less than the aggregate amount of capital represented by any issued and outstanding stock having a preference on the distribution of assets. See "Dividend Policy." Other Rights. Stockholders of the Company have no preemptive or other rights to subscribe for additional shares. Subject to any rights of the holders of any preferred stock that may be issued subsequent to the Offering, all holders of Common Stock are entitled to share equally on a share-for-share basis in any assets available for distribution to stockholders on liquidation, dissolution or winding up of the Company. No shares of Common Stock are subject to redemption or a sinking fund. All outstanding shares of Common Stock are, and the Common Stock to be outstanding upon completion of the Offering will be, fully paid and nonassessable. Transfer Agent and Registrar. The Transfer Agent and Registrar for the Common Stock is American Stock Transfer and Trust Company. PREFERRED STOCK The Company's Board of Directors is authorized to issue, without further authorization from stockholders, up to 1,000,000 shares of Preferred Stock in one or more series and to determine, at the time of creating each series, the distinctive designation of, and the number of shares in, the series, its dividend rate, the number of votes, if any, for each share of such series, the price and terms on which such shares may be redeemed, the terms of any applicable sinking fund, the amount payable upon liquidation, dissolution or winding up, the conversion rights, if any, and such other rights, preferences and priorities of such series as the Board of Directors may be permitted to fix under the laws of the State of Delaware as in effect at the time such series is created. The issuance of Preferred Stock could adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Certificate of Incorporation and By-laws of the Company summarized below may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including an attempt that might result in the receipt of a premium over the market price for the shares held by stockholders. 71 The Company's Certificate of Incorporation or By-laws provide (i) that no director may be removed from office during his term except for cause, (ii) that vacancies on the Board of Directors may be filled only by the remaining directors and not by the stockholders, (iii) that any action required or permitted to be taken by the stockholders of the Company may be effected only at an annual or special meeting of stockholders and stockholder action by written consent in lieu of a meeting is prohibited, (iv) that special meetings of stockholders may be called only by a majority of the Board of Directors, or by the Chairman of the Board of Directors or the President of the Company, (v) that stockholders are not permitted to call a special meeting or require that the Board of Directors call a special meeting of stockholders and (vi) for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise business at such meetings must be received by the Company not less than 60 or more than 90 days prior to the anniversary of the previous year's annual meeting and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. CLASSIFICATION OF DIRECTORS The Company's Board of Directors is classified into three classes. It is anticipated that each class will, as nearly as practicable, contain an equal number of Directors. The members of each class will serve staggered three-year terms. At each annual meeting of stockholders, Directors will be elected for a full three-year term to succeed those Directors whose terms are expiring. The Company's classified Board of Directors could have the effect of increasing the length of time necessary to change the composition of a majority of the Board of Directors. In general, at least two annual meetings of stockholders will be necessary for stockholders to effect a change in a majority of the members of the Board of Directors. LIMITATION ON DIRECTORS' LIABILITY The Company has included in its Certificate of Incorporation provisions to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages from a director resulting from breaches of fiduciary duty (including breaches resulting from grossly negligent behavior). This provision does not eliminate liability for breaches of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, violations under Section 174 of the Delaware General Corporation Law ("Delaware Law") concerning the unlawful payment of dividends or stock redemptions or repurchases or for any transaction from which the director derived an improper personal benefit. However, these provisions will not limit the liability of the Company's Directors under Federal securities laws. The Company believes that these provisions are necessary to attract and retain qualified persons as directors and officers. SECTION 203 OF THE DELAWARE LAW Section 203 of the Delaware Law prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years following the date of the transaction in which the person or entity became an interested stockholder, unless (i) prior to such date, either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder is approved by the Board of Directors of the corporation, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the outstanding voting stock of the corporation (excluding for this purpose certain shares owned by persons who are directors and also officers of the corporation and by certain employee benefit plans) or (iii) on or after such date the business combination is approved by the Board of Directors of the corporation and by the affirmative vote (and not by written consent) of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. For the purposes of Section 203, a "business combination" is broadly defined to include mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within the immediately preceding three years did own) 15% or more of the corporation's voting stock. 72 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 8,000,000 shares of Common Stock (8,540,000 shares if the Underwriters' overallotment option is exercised in full). An additional 500,000 shares of Common Stock will be issuable upon the exercise in full of all outstanding options to purchase Common Stock. Of the maximum 8,540,000 shares of Common Stock outstanding, 4,140,000 shares will have been sold pursuant to the Offering and all of such shares will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased or acquired by an "affiliate" of the Company (as that term is defined under the rules and regulations of the Securities Act). The remaining outstanding shares of Common Stock were issued to the Contributors in connection with the Reorganization and are "restricted securities" that may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained under Rule 144. In connection with the Reorganization, the Company has agreed to grant a demand registration right, subject to certain limitations and at the Company's expense, to financial institutions to whom the Contributors may pledge the Common Stock received by them in the Reorganization. See "The Reorganization." The Company has agreed that it will not, directly or indirectly, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Prospectus, except for specific grants of options to purchase shares of Common Stock described in this Prospectus and for the issuance of shares in connection with the Reorganization. The Contributors have agreed that they will not, directly or indirectly, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Prospectus. An aggregate of 800,000 shares of Common Stock have been reserved for issuance to employees, officers and Directors upon exercise of options, of which options for 500,000 shares of Common Stock will be granted upon the effectiveness of the Offering. The Company anticipates filing a registration statement on Form S-8 under the Securities Act to register all of the shares of Common Stock currently issuable or reserved for future issuance under the Stock Plan, the Director Plan and the Retainer Fee Plan. Shares purchased upon exercise of options granted pursuant to the Stock Plan, the Director Plan and the Retainee Fee Plan generally will be available for resale in the public market (in the case of the Stock Plan, to the extent the stock transfer restriction agreements with NatWest Securities Limited have expired), except that any such shares issued to affiliates are subject to the volume limitations and certain other restrictions of Rule 144. See "Management--Stock Option Plans" and "Management--Directors Retainer Fee Plan." In general, under Rule 144 as currently in effect, beginning 90 days after the Offering, a person (or persons whose shares are aggregated) who has beneficially owned "restricted" shares for at least two years, including a person who may be deemed to be an affiliate of the Company, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock of the Company (80,000 shares after giving effect to the Offering) or (ii) the average weekly trading volume of Common Stock during the four calendar weeks preceding the date on which a notice of sale is filed with the Commission. A person (or persons whose shares are aggregated) who is not at any time during the 90 days preceding a sale an "affiliate" is entitled to sell such shares under Rule 144, commencing three years after the date such shares were acquired from the Company or an affiliate of the Company, without regard to the volume limitations described above. As defined in Rule 144, an "affiliate" of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Sales under Rule 144 are subject to certain other restrictions relating to the manner of sale, notice and the availability of current public information about the Company. The Company is unable to estimate the number of shares that may be resold from time to time under Rule 144, because such number will depend on the market price and trading volume for the Common Stock, the personal circumstances of the sellers and other factors. Prior to the Offering, there has been no public market for Common Stock and no prediction can be made as to the effect, if any, that the sale or availability for sale of additional shares of Common Stock will have on the market price of the Common Stock. Nevertheless, sales of significant amounts of such shares in the public market or the availability of large amounts of shares for sale could adversely affect the market price of Common Stock and could impair the Company's future ability to raise capital through an offering of its equity securities. 73 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below (the "Underwriters"), for whom NatWest Securities Limited and Dean Witter Reynolds Inc. are acting as representatives (the "Representatives"), and each such Underwriter has severally agreed to purchase from the Company, the number of shares of Common Stock set forth opposite its name:
NUMBER OF UNDERWRITER SHARES ----------- --------- NatWest Securities Limited........................................... Dean Witter Reynolds Inc. ........................................... --------- Total.............................................................. 3,600,000 =========
The Company is obligated to sell, and the Underwriters are severally obligated to purchase, all of the shares of Common Stock offered hereby if any such shares are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public initially at the public Offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price, less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such selected dealers may reallow, a concession not in excess of $ per share of Common Stock to certain other brokers and dealers. The public Offering price, concession and discount to dealers may be changed by the Underwriters after the shares of Common Stock are released for sale to the public. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. The Company has granted the Underwriters an option, exercisable within 30 days after the date of this Prospectus, to purchase up to 540,000 additional shares of Common Stock at the initial public offering price, less the underwriting discount set forth on the cover page of this Prospectus. If the Underwriters exercise their option to purchase any of the additional shares of Common Stock, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by each of them as shown in the above table bears to the Underwriters' initial commitment. The Underwriters may exercise the option only to cover over-allotments in the sale of the shares of Common Stock offered hereby. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments which the Underwriters may be required to make in respect thereof. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Representatives. The factors considered in determining the initial public offering price will include an assessment of the history and the prospects for the industry in which the Company operates, the ability of the Company's management, the past and present operations of the Company, the historical results of operations of the Company, the Company's earnings prospects, the general conditions of the securities markets at the time of the Offering and the prices of similar securities of comparable companies. There can be no assurance, however, that the price at which the Common Stock will sell in the public market after this Offering will not be lower than the price at which it is sold by the Underwriters. 74 The Company has agreed that it will not, directly or indirectly, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Prospectus, except for specific grants of options to purchase shares of Common Stock described in this Prospectus and for the issuance of shares in connection with the Reorganization. The Contributors have agreed that they will not, directly or indirectly, without the prior written consent of NatWest Securities Limited, sell, offer to sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date of this Prospectus. NatWest Securities Limited, a United Kingdom broker-dealer and a member of the Securities and Futures Authority Limited, has agreed that, as part of the distribution of the Common Stock offered hereby and subject to certain exceptions, it will not offer or sell any Common Stock within the United States, its territories or possessions or to persons who are citizens thereof or residents therein. The Underwriting Agreement does not limit the sale of the Common Stock offered hereby outside of the United States. NatWest Securities Limited has represented and agreed that (i) it has not offered or sold and will not offer to sell any shares of Common Stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the "Act"), (ii) it has complied and will comply with all applicable provisions of the Act with respect to anything done by it in relation to the shares of Common Stock in, from or otherwise involving the United Kingdom and (iii) it has only issued or passed on, and will only issue or pass on, in the United Kingdom, any document which consists of or any part of listing particulars, supplementary listing particulars, or any other document required or permitted to be published by listing rules under Part IV of the Act, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on. An affiliate of NatWest Securities Limited has in the past provided investment banking services to an affiliate of the Company. At the request of the Company, up to 180,000 shares of Common Stock offered hereby have been reserved for sale to certain individuals, including directors and employees of the Company and members of their families. The price of such shares to such persons will be the initial public offering price set forth on the cover of this Prospectus. The number of shares available to the general public will be reduced to the extent those persons purchase reserved shares. Any shares not so purchased will be offered hereby at the public Offering price set forth on the cover of this Prospectus. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York. Certain legal matters will be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York, New York. EXPERTS The combined balance sheets as of December 31, 1994 and 1995 and the combined statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, of the Company included in this Prospectus and elsewhere in the Registration Statement of which this Prospectus is a part, have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their report with respect thereto, and are included herein and in the Registration Statement, of which this Prospectus is a part, given on the authority of said firm as experts in accounting and auditing. 75 The combined balance sheets as of December 31, 1993, 1994 and 1995 and the combined statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995, of Sowerby Enterprises, the former owner of the New Hampshire Facilities, included in this Prospectus and elsewhere in the Registration Statement of which this Prospectus is a part, have been audited by Leverone & Company, independent accountants, as indicated in their report with respect thereto, and are included herein and in the Registration Statement of which this Prospectus is a part, given on the authority of said firm as experts in accounting and auditing. The combined balance sheets as of December 31, 1994 and 1995 and the combined statements of income, partners' equity and cash flows for the years ended December 31, 1993, 1994 and 1995 of the owners of the Ohio Facilities included in this Prospectus and elsewhere in this Registration Statement of which this Prospectus is a part have been audited by Howard, Wershbale & Co., independent accountants, as indicated in their report with respect thereto, and are included herein and in the Registration Statement of which this Prospectus is a part, given on the authority of said firm as experts in accounting and auditing. The balance sheets as of December 31, 1994 and 1995 and the statements of operations and partners' equity and cash flows for the period from April 7, 1993 (date of inception) through December 31, 1993 and for the years ended December 31, 1994 and 1995, of Bowie Center Limited Partnership included in this Prospectus and elsewhere in the Registration Statement of which this Prospectus is a part, have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their report with respect thereto, and are included herein and in the Registration Statement, of which this Prospectus is a part, given on the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a registration statement on Form S-1 (together with all amendments and exhibits, the "Registration Statement") under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement and to the schedules and exhibits thereto. The Registration Statement, including the exhibits and schedules thereto, may be inspected, without charge, and copies may be obtained, at prescribed rates, at the public reference facilities of the Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of the Registration Statement may also be inspected, without charge, at the Commission's regional offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, copies of the Registration Statement may be obtained by mail at prescribed rates, from the Commission's Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549. Statements contained in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. As a result of this Offering, the Company will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference facilities and regional offices referred to above. The Company intends to furnish to its stockholders annual reports containing audited financial statements and an opinion thereon expressed by independent certified public accountants and quarterly reports containing unaudited interim summary financial information for the first three fiscal quarters of each fiscal year of the Company. 76 INDEX TO FINANCIAL STATEMENTS
PAGE ---- HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES Report of Independent Accountants....................................... F-2 Combined Balance Sheets as of December 31, 1994, December 31, 1995 and (unaudited) March 31, 1996............................................. F-3 Combined Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1995 and 1996............................................................... F-4 Combined Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1995 and 1996................................... F-5 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1995 and 1996............................................................... F-6 Notes to Combined Financial Statements.................................. F-7
SOWERBY ENTERPRISES: Independent Auditors' Report............................................ F-21 Combined Balance Sheets at December 31, 1993, 1994 and 1995............. F-22 Combined Statements of Income for the years ended December 31, 1993, 1994 and 1995.......................................................... F-24 Combined Statements of Retained Earnings (Deficit) for the years ended December 31, 1993, 1994 and 1995....................................... F-25 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995.......................................................... F-26 Notes to Combined Financial Statements.................................. F-27 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY: Independent Auditors' Report............................................ F-31 Combined Balance Sheets at December 31, 1994, December 31, 1995 and (unaudited) March 31, 1996............................................. F-32 Combined Statements of Income for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1996................................................................... F-33 Combined Statements of Partners' Equity for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1996............................................................... F-34 Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and (unaudited) for the three months ended March 31, 1996................................................................... F-35 Notes to Combined Financial Statements.................................. F-36 BOWIE CENTER LIMITED PARTNERSHIP: Report of Independent Accountants....................................... F-42 Balance Sheets as of December 31, 1994 and 1995......................... F-43 Statements of Operations and Partners' Equity for the period from April 7, 1993 (date of inception) through December 31, 1993 and the years ended December 31, 1994 and 1995....................................... F-44 Statements of Cash Flows for the period from April 7, 1993 (date of inception) through December 31, 1993 and the years ended December 31, 1994 and 1995.......................................................... F-45 Notes to Financial Statements........................................... F-46
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Harborside Healthcare Corporation: We have audited the accompanying combined balance sheets of Harborside Healthcare Corporation and its combined affiliates (the "Company") as of December 31, 1994 and 1995 and the related combined statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company as of December 31, 1994 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts March 19, 1996 F-2 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------------
DECEMBER 31, ---------------- PRO FORMA MARCH 31, MARCH 31, 1994 1995 1996 1996 (NOTE B) ------- ------- ----------- ------------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........ $14,013 $40,157 $10,000 $10,000 Accounts receivable, net of allowances for doubtful accounts of $801, $1,526 and $1,618, respectively.................... 5,351 9,967 11,354 11,354 Prepaid expenses and other....... 1,334 1,790 1,935 1,935 Demand note due from limited partnership (Note F)........................ -- 1,255 1,284 1,284 Facility acquisition deposits (Notes O and P)................. -- 3,000 -- -- Restricted cash (Note C)......... 586 -- -- -- ------- ------- ------- ------- Total current assets........... 21,284 56,169 24,573 24,573 Restricted cash (Note C)........... 1,409 2,755 4,331 4,331 Investment in limited partnership (Note F).......................... 633 519 395 395 Property and equipment, net (Note G)................................ 66,938 30,139 30,185 30,185 Intangible assets, net (Note H).... 3,612 3,050 3,894 3,894 ------- ------- ------- ------- Total assets................... $93,876 $92,632 $63,378 $63,378 ======= ======= ======= ======= LIABILITIES Current liabilities: Current maturities of long-term debt (Note E)................... $ 391 $ 428 $ 448 $ 448 Accounts payable................. 2,689 4,034 3,762 3,762 Employee compensation and bene- fits............................ 3,110 4,495 6,640 6,640 Other accrued liabilities........ 664 959 892 892 Note payable to affiliate (Note P).............................. -- 2,000 -- -- Accrued interest................. 515 25 67 67 Current portion of deferred in- come............................ -- -- 369 369 Distribution payable to minority interest (Note N)........................ -- 33,493 -- -- ------- ------- ------- ------- Total current liabilities...... 7,369 45,434 12,178 12,178 Long-term portion of deferred in- come.............................. -- -- 3,225 3,225 Long-term debt (Note E)............ 52,905 43,068 42,974 42,974 ------- ------- ------- ------- Total liabilities.............. 60,274 88,502 58,377 58,377 ------- ------- ------- ------- Minority interest (Notes B and N).. 30,736 -- -- -- ------- ------- ------- ------- Commitments and contingencies (Notes C, D, F and J).............. STOCKHOLDERS' EQUITY (NOTE M) Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding; pro forma 30,000,000 shares authorized, 4,400,000 shares issued and outstanding..... -- -- -- 44 Additional paid-in capital......... 10,342 10,372 11,038 10,994 Accumulated deficit................ (7,476) (6,242) (6,037) (6,037) ------- ------- ------- ------- Total stockholders' equity..... 2,866 4,130 5,001 5,001 ------- ------- ------- ------- Total liabilities and stock- holders' equity............... $93,876 $92,632 $63,378 $63,378 ======= ======= ======= =======
The accompanying notes are an integral part of the combined financial statements. F-3 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FOR THE THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------- ---------------------- 1993 1994 1995 1995 1996 --------- --------- --------- ---------- ---------- (UNAUDITED) Total net revenues...... $ 75,101 $ 86,376 $ 109,425 $ 23,777 $ 34,931 --------- --------- --------- ---------- ---------- Expenses: Facility operating.... 57,412 68,951 89,378 19,734 28,120 General and administrative....... 3,092 3,859 5,076 1,141 2,235 Service charges paid to affiliate (Note P)................... 746 759 700 177 185 Depreciation and amortization......... 4,304 4,311 4,385 1,043 539 Facility rent......... 525 1,037 1,907 392 2,545 --------- --------- --------- ---------- ---------- Total expenses...... 66,079 78,917 101,446 22,487 33,624 --------- --------- --------- ---------- ---------- Income from operations.. 9,022 7,459 7,979 1,290 1,307 Other: Interest expense, net.................. (4,740) (4,609) (5,107) (1,264) (975) Loss on investment in limited partnership (Note F)............. -- (448) (114) (81) (127) Gain on sale of facilities, net (Note N)................... -- -- 4,869 -- -- Loss on refinancing of debt (Note E)........ -- (453) -- -- -- Minority interest in net income of combined affiliates (Notes B and N)...... (2,297) (1,575) (6,393) (185) -- --------- --------- --------- ---------- ---------- Net income (loss)....... $ 1,985 $ 374 $ 1,234 $ (240) $ 205 ========= ========= ========= ========== ========== Pro forma data (unaudited--Notes C and L): Historical net income (loss)............... $ 1,985 $ 374 $ 1,234 $ (240) $ 205 Pro forma income taxes................ (774) (146) (481) 94 (80) --------- --------- --------- ---------- ---------- Pro forma net income (loss)............... $ 1,211 $ 228 $ 753 $ (146) $ 125 ========= ========= ========= ========== ========== Pro forma net income (loss) per share (Note C)............. $ 0.27 $ 0.05 $ 0.17 $ (0.03) $ 0.03 ========= ========= ========= ========== ========== Weighted average number of common and common equivalent shares used in pro forma net income (loss) per share (Note B)............... 4,452,160 4,452,160 4,452,160 4,452,160 4,452,160 ========= ========= ========= ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-4 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS) ----------------
ADDITIONAL PAID- IN ACCUMULATED CAPITAL DEFICIT TOTAL ---------- ----------- ------- Stockholders' equity, December 31, 1992....... $11,266 $(7,635) $ 3,631 Net income for the year ended December 31, 1993......................................... -- 1,985 1,985 Distributions................................. (698) -- (698) ------- ------- ------- Stockholders' equity, December 31, 1993....... 10,568 (5,650) 4,918 Net income for the year ended December 31, 1994......................................... -- 374 374 Distributions................................. (226) (2,200) (2,426) ------- ------- ------- Stockholders' equity, December 31, 1994....... 10,342 (7,476) 2,866 Net income for the year ended December 31, 1995......................................... -- 1,234 1,234 Contributions................................. 30 -- 30 ------- ------- ------- Stockholders' equity, December 31, 1995....... 10,372 (6,242) 4,130 Net income for the three months ended March 31, 1996 (unaudited)......................... -- 205 205 Purchase of equity interests (unaudited)...... 803 -- 803 Distributions (unaudited)..................... (137) -- (137) ------- ------- ------- Stockholders' equity, March 31, 1996 (unau- dited)....................................... $11,038 $(6,037) $ 5,001 ======= ======= =======
The accompanying notes are an integral part of the combined financial statements. F-5 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) ----------------
FOR THE YEARS ENDED FOR THE THREE MONTHS DECEMBER 31, ENDED MARCH 31, ------------------------- ---------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ---------- ---------- (UNAUDITED) Operating activities: Net income (loss).......... $ 1,985 $ 374 $ 1,234 $ (240) $ 205 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Minority interest.......... 2,297 1,575 6,393 185 234 Gain on sale of facilities, net....................... -- -- (4,869) -- -- Loss on refinancing of debt...................... -- 453 -- -- -- Depreciation of property and equipment............. 3,734 3,744 3,924 924 459 Amortization of intangible assets.................... 570 567 461 119 80 Amortization of deferred income.................... -- -- -- -- (91) Loss from investment in limited partnership....... -- 448 114 81 127 Amortization of loan costs and fees.................. 355 172 109 27 33 Deferred interest.......... 472 -- -- -- -- Other...................... 108 8 14 -- (5) ------- ------- ------- ---------- ---------- 9,521 7,341 7,380 1,096 1,042 Changes in operating assets and liabilities: (Increase) in accounts receivable................ (534) (2,888) (7,573) (1,630) (1,387) (Increase) decrease in prepaid expenses and other..................... (95) (521) (456) 372 (406) Increase (decrease) in accounts payable.......... 147 656 1,345 148 (272) Increase in employee compensation and benefits.................. 713 635 1,385 302 2,145 Increase (decrease) in accrued interest.......... 9 367 (490) (248) 42 Increase (decrease) in other accrued liabilities............... 169 (60) 295 (38) (67) Increase (decrease) in due to affiliates............. 591 (591) -- -- -- ------- ------- ------- ---------- ---------- Net cash provided by operating activities..... 10,521 4,939 1,886 2 1,097 ------- ------- ------- ---------- ---------- Investing activities: Additions to property and equipment................. (1,205) (2,585) (3,081) (486) (504) Facility acquisition deposits.................. -- -- (3,000) -- 3,000 Additions to intangibles... (1,365) (1,410) (1,202) (36) (696) Transfers to (from) restricted cash, net...... -- (1,995) (760) 247 (1,576) Purchase of commercial paper..................... (2,677) -- -- -- -- Maturity of commercial paper..................... 6,100 -- -- -- -- Demand note from limited partnership............... -- -- (1,255) -- -- Contributions to investment in limited partnership.... (995) (88) -- -- -- Payment of costs related to sale of facilities........ -- -- (884) -- -- Proceeds from sale of facilities................ -- -- 47,000 -- -- ------- ------- ------- ---------- ---------- Net cash provided (used) by investing activities.. (142) (6,078) 36,818 (275) 224 ------- ------- ------- ---------- ---------- Financing activities: Payment of long-term debt.. (663) (29,842) (9,800) (93) (102) Debt prepayment penalty.... -- -- (1,154) -- -- Payment of termination fee on interest protection agreement................. -- (384) -- -- -- Payment of demand note payable................... -- (225) -- -- -- Issuance of long-term debt...................... 11 42,300 -- -- -- Note payable to an affiliate................. -- -- 2,000 -- (2,000) Receipt of lease inducement................ -- -- -- -- 3,685 Dividend distribution...... (698) (2,426) -- (66) (137) Distributions to minority interest.................. (4,750) (4,485) (3,636) (909) (33,727) Purchase of equity interests and other contributions............. -- -- 30 -- 803 ------- ------- ------- ---------- ---------- Net cash provided (used) by financing activities.. (6,100) 4,938 (12,560) (1,068) (31,478) ------- ------- ------- ---------- ---------- Net increase (decrease) in cash and cash equivalents.. 4,279 3,799 26,144 (1,341) (30,157) Cash and cash equivalents, beginning of period........ 5,935 10,214 14,013 14,013 40,157 ------- ------- ------- ---------- ---------- Cash and cash equivalents, end of period.............. $10,214 $14,013 $40,157 $12,672 $10,000 ======= ======= ======= ========== ========== Supplemental Disclosure: Interest paid............... $ 4,197 $ 4,505 $ 6,208 $ 1,705 $ 1,227 ======= ======= ======= ========== ==========
The accompanying notes are an integral part of the combined financial statements. F-6 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED) ---------------- A. NATURE OF BUSINESS Harborside Healthcare Corporation and its combined affiliates (the "Company") operate long-term care facilities and provide rehabilitation therapy services (see Note B). As of December 31, 1995, the Company owned eight facilities, operated eleven additional facilities under various leases and owned a rehabilitation therapy services company. The Company also maintained a majority equity investment in Bowie Center Limited Partnership ("Bowie L.P.") which owns an additional long-term care facility (see Note F). The Company's long-term care facilities are located in Florida, Ohio, Indiana, Maryland and New Jersey. In January 1996, the Company entered into a leasing arrangement for six additional facilities located in New Hampshire (see Note Q). B. BASIS OF PRESENTATION Harborside Healthcare Corporation is a Delaware corporation and was incorporated on March 19, 1996. The Company was formed as a holding company, in anticipation of an initial public offering, to combine under the control of a single corporation the operations of various business entities (the "Predecessor Entities") which are all under the majority control of several related stockholders. These stockholders expect to enter into an agreement (the "Reorganization Agreement") whereby they will transfer their ownership of the Predecessor Entities to the Company in exchange for shares of Common Stock of the Company. The accompanying financial statements have been prepared to reflect the combination of the Predecessor Entities in a manner which is similar to a pooling-of-interests. This presentation results in a combination of the Predecessor Entities (which will become subsidiaries of the Company under the terms of the Reorganization Agreement) at each entity's respective historical accounting basis. A Pro Forma unaudited balance sheet as of March 31, 1996 has been presented to reflect the exchange of the ownership interests of the Predecessor Entities for 4,400,000 shares of common stock of the Company, which will occur upon implementation of the Reorganization Agreement, and which will result in a transfer of $44,000 from additional paid-in capital to common stock. The Predecessor Entities include one C corporation, KHI Corporation ("KHI"), two limited partnerships, HH Advisors Limited Partnership ("HH Advisors") and Riverside Retirement Limited Partnership ("Riverside") and seven Subchapter S corporations (the "S Corporations") and their direct and indirect wholly-owned subsidiaries. The common stock of KHI Corporation has not been presented on the balance sheet as it is immaterial. The partnership equity of HH Advisors and Riverside has been presented as additional paid-in capital and accumulated deficit. A subsidiary of HH Advisors, HHCI Limited Partnership ("HHCI"), is the general partner of Krupp Yield Plus Limited Partnership ("KYP"), a partnership which was formed in June 1987 to purchase and operate long-term care facilities. KYP raised proceeds through the sale of limited partnership interests ("Units") in KYP to the public, and by March 6, 1990, KYP had purchased seven long-term care facilities. For financial reporting purposes, the interests of the holders of the Units ("Unitholders"), including distributions of capital, have been reflected in the accompanying financial statements as a minority interest. The net income of KYP was allocated 95% to the Unitholders and 5% to HHCI. In December 1995, a majority of the Unitholders approved the sale, effective December 31, 1995, of the real estate owned by the seven KYP facilities to Meditrust, a real estate investment trust ("Meditrust"). Simultaneously, Meditrust leased the real estate of these facilities to HHCI (see Notes D and N). In addition to the seven leased facilities described above, KHI and HH Advisors together control subsidiaries, which as of December 31, 1995, leased four long-term care facilities and owned a rehabilitation therapy services company. F-7 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Additionally, Riverside owns one long-term care facility, and the S Corporations in total own seven long-term care facilities. C. SIGNIFICANT ACCOUNTING POLICIES The Company uses the following accounting policies for financial reporting purposes: Principles of Combination The combined financial statements include the accounts of the Company and its combined affiliates. All significant intercompany transactions and balances have been eliminated in combination. Unaudited Interim Financial Data The interim financial data at March 31, 1996 and for the three months ended March 31, 1995 and 1996 included herein are unaudited and, in the opinion of management, reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of financial position and the results of operations and cash flows for such interim periods. Total Net Revenues Total net revenues include net patient service revenues, rehabilitation therapy service revenues from contracts to provide services to non-affiliated long-term care facilities and management fees from the facility owned by Bowie L.P. (see Note F). Net patient service revenues payable by patients at the Company's facilities are recorded at established billing rates. Net patient service revenues to be reimbursed by contracts with third-party payors, primarily the Medicare and Medicaid programs, are recorded at the amount estimated to be realized under these contractual arrangements. Revenues from Medicare and Medicaid are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants or 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 audited and generally retroactively adjusted 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, which could materially and adversely affect the Company, are reflected in operations at the time of the adjustment or settlement. In addition, direct and allocated 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. Beginning in 1995, total net revenues includes revenues recorded by the Company's rehabilitation therapy combined affiliate (which does business under the name "Theracor") for therapy services provided to non-affiliated long-term care facilities. These revenues approximated $3,045,000, $136,000 and $2,141,000 for the year ended December 31, 1995 and the three months ended March 31, 1995 and 1996, respectively and were derived from contracts negotiated with each facility. Additionally, Theracor recorded approximately $345,000, $1,031,000, $265,000 and $240,000 in rehabilitation therapy service revenues in connection with services F-8 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- provided to the facility owned by Bowie L.P. for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively. Concentrations A significant portion of the Company's revenues are derived from the Medicare and Medicaid programs. There have been, and the Company expects that there will continue to be, a number of proposals to limit reimbursement allowable to long-term care facilities under these programs. 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. Approximately 60%, 63%, 68%, 66% and 68% of the Company's net patient service revenues in the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively, are from the Company's participation in the Medicare and Medicaid programs. As of December 31, 1994, December 31, 1995 and March 31, 1996, $4,637,000, $7,780,000 and $8,405,000, respectively, of net accounts receivable were due from the Medicare and Medicaid programs. Facility Operating Expenses Facility operating expenses include expenses associated with the normal operations of a long-term care facility. The majority of these costs consist of payroll and employee benefits related to nursing, housekeeping and dietary services provided to patients, as well as maintenance and administration of the facilities. Other significant facility operating expenses include: the cost of rehabilitation therapies, medical and pharmacy supplies, food and utilities. Beginning in 1995, facility operating expenses include expenses of $3,311,000 associated with services rendered by Theracor to non-affiliated facilities. For the three months ended March 31, 1995 and 1996, these expenses totaled $96,000 and $1,738,000, respectively. Provision for Doubtful Accounts Provisions for uncollectible accounts receivable of $285,000, $538,000, $1,240,000, $235,000 and $131,000 are included in facility operating expenses for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively. Individual patient accounts deemed to be uncollectible are written off against the allowance for doubtful accounts. Use of Estimates The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for the collectibility of receivables, depreciation and amortization, employee benefit plans, taxes and contingencies. Stock-Based Compensation In 1996, the Company will adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This standard will require the Company to report the fair value for stock-based compensation plans either through recognition or disclosure. The Company intends to adopt this standard by disclosing the pro forma net income and pro forma net income per share amounts assuming the fair value method was adopted on January 1, 1996. The adoption of this standard will not impact the Company's results of operations, financial position or cash flows. Income Taxes Prior to the implementation of the Reorganization Agreement, the Predecessor Entities were operated under common control but, other than KHI (which is a C corporation), were not subject to federal or state income F-9 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- taxation and, accordingly, no provision for income taxes has been made in the combined financial statements. No provision for income taxes and deferred assets and liabilities of KHI has been reflected in the combined financial statements, as it has never reported material taxable income. However, since the Company will be a taxable entity upon implementation of the Reorganization Agreement, a pro forma income tax expense has been reflected for each year presented, as if the Company had always been a C corporation (see Note L). Pro Forma Net Income Per Share (Unaudited) Pro forma net income per share is computed using the estimated weighted average number of common and dilutive common equivalent shares (stock options) anticipated to be outstanding upon the implementation of the Reorganization Agreement during each year presented. Pursuant to Securities and Exchange Commission staff requirements, stock options issued within one year of an initial public offering, calculated using the treasury stock method and an assumed initial public offering price of $12.50 per share, have been included in the calculation of pro forma net income (loss) per common share as if they were outstanding for all periods presented. Property and Equipment Property and equipment are stated at cost. Expenditures that extend the lives of affected assets are capitalized, while maintenance and repairs are charged to expense as incurred. Upon the retirement or sale of an asset, the cost of the asset and any related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is included in net income. Depreciation expense is estimated using the straight-line method. These estimates are calculated using the following estimated useful lives: Buildings and improvements........................ 31.5 to 40 years Furniture and equipment........................... 5 to 10 years Leasehold improvements............................ over the life of the lease Land improvements................................. 8 to 40 years
Intangible Assets Intangible assets consist of amounts identified in connection with certain facility acquisitions accounted for under the purchase method and certain deferred costs which were incurred in connection with various financings (see Note H). In connection with each of its acquisitions, the Company reviewed the assets of the acquired facility and assessed its relative fair value in comparison to the purchase price. Certain acquisitions resulted in the allocation of a portion of the purchase price to the value associated with the existence of a workforce in place, residents in place at the date of acquisition and covenants with sellers which limit their ability to engage in future competition with the Company's facilities. The assets recognized from an assembled workforce and residents in place are amortized using the straight- line method over the estimated periods (from three to seven years) during which the respective benefits would be in place. Covenants not-to-compete are being amortized using the straight-line method over the period during which competition is restricted. Goodwill resulted from the acquisition of certain facilities for which the negotiated purchase prices exceeded 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 was being amortized using the straight-line method over a 31.5 to 40 year period. The Company's remaining goodwill was written-off in connection with the sale of seven facilities in 1995 (see Note N). F-10 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Costs incurred in obtaining financing (including loans, letters of credit and facility leases) are amortized as interest expense using the straight-line method (which approximates the interest method) over the term of the related financial obligation. Assessment of Long-Lived Assets Effective for the year ended December 31, 1995, the Company has adopted the provisions of Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Accordingly, the Company periodically reviews the carrying value of its long- lived assets (primarily property and equipment and intangible assets) to assess the recoverability of these assets; any impairments would be recognized in operating results if a diminution in value considered to be other than temporary were to occur. The adoption of this Statement had no impact on the Company's combined financial position, results of operations or liquidity. As part of this assessment, the Company reviews the expected future net operating cash flows from its facilities, as well as the values included in appraisals of its facilities, which have periodically been obtained in connection with various refinancings. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of their acquisition by the Company. Restricted Cash Restricted cash consists of cash set aside in escrow accounts as required by several of the Company's leases and other financing arrangements. The current portion of restricted cash related to the required deposits for the semiannual interest payments on the KYP medium-term notes. These notes were repaid at the end of 1995 (see Note N). D. OPERATING LEASES In March 1993, a combined affiliate of the Company entered into an agreement with a non-affiliated entity to lease two long-term care facilities in Ohio with 289 beds for a period of ten years. The lease agreement, which became effective in June 1993, provides for fixed annual rental payments of $900,000. At the end of the ten- year period, the Company has the option to acquire the facilities for $8,500,000, or to pay a $500,000 termination fee and relinquish the operation of the facilities to the lessor. On the effective date of the lease, the subsidiary paid $1,200,000 to the lessor for a covenant not-to- compete which remains in force through June 2003. Effective October 1, 1994, a combined affiliate of the Company entered into an agreement with a related party to lease a 100 bed long-term care facility in Florida for a period of ten years. The lease agreement provides for annual rental payments of $551,250 in the initial twelve-month period and annual increases of 2% thereafter. The Company has the option to exercise two consecutive five-year lease renewals. The Company also has the right to purchase the facility at fair market value at any time after the fifth anniversary of the commencement of the lease. The lease agreement also required the Company to escrow funds equal to three months' base rent ($165,000). The lessor is required to make certain capital expenditures, totalling $500,000, to the facility during the first three years of the lease. Effective April 1, 1995, a combined affiliate of the Company entered into an agreement with Meditrust to lease a 100-bed long-term care facility in Ohio for a period of ten years. The lease agreement provides for annual rental payments of $698,400 in the initial twelve-month period. The Company may also be required to make additional rental payments beginning April 1, 1996 in an amount equal to 5.0% of the difference between the facility's operating revenues in each applicable year and the operating revenues in a twelve-month base period which commenced on April 1, 1995. The annual additional rent payment will not exceed $14,650. At the end of F-11 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- the initial lease period, the Company has the option to exercise two consecutive five-year lease renewals. The lease agreement also required the Company to escrow funds equal to three months' base rent ($152,000). The Company's obligations under the lease are collateralized by, among other things, an interest in any property improvements made by the Company and by the facility's accounts receivable. The Company also has the right to purchase the facility at its fair market value on the eighth and tenth anniversary dates of the commencement of the lease and at the conclusion of each lease renewal. The Company is required to make certain capital expenditures, totalling $150,000, to the facility. Effective January 1, 1996, a combined affiliate of the Company entered into an agreement with Meditrust to lease the seven facilities formerly owned by KYP (see Note N). The lease agreement provides for annual rental payments of $4,582,500 in the initial twelve-month period and annual rental increases of $117,500 for the remainder of the lease term. The lease has an initial term of ten years with two consecutive five-year renewal terms exercisable at the Company's option. The lease agreement also required the Company to escrow funds in an amount equal to three months' base rent ($1,146,000). The Company's obligations under the lease are collateralized by, among other things, an interest in any property improvements made by the Company and by the related facilities' accounts receivable. In conjunction with the lease, the Company was granted a right of first refusal and an option to purchase the facilities as a group, which option is exercisable at the end of the eighth year of the initial term and at the conclusion of each renewal term. The purchase option is exercisable at the greater of the fair market value of the facilities at the time of exercise or Meditrust's original investment. The Meditrust leases contain cross-default and cross-collateralization provisions. A default by the Company under one of these leases could adversely affect a significant number of the Company's properties and result in a loss to the Company of such properties. In addition, the leases permit Meditrust to require the Company to purchase the facilities upon the occurrence of a default. Under the terms of each of the facility leases described above, the Company is responsible for the payment of all real estate and personal property taxes, as well as other reasonable costs required to operate, maintain, insure and repair the facilities. Future minimum rent commitments under the Company's non-cancelable operating leases as of December 31, 1995 are as follows: 1996.............................. $ 6,746,000 1997.............................. 6,875,000 1998.............................. 7,004,000 1999.............................. 7,133,000 2000.............................. 7,262,000 Thereafter........................ 34,647,000 ------------ $ 69,667,000 ============
E. LONG-TERM DEBT In October 1994, the Predecessor Entities (which are S corporations) refinanced $29,189,000 of then outstanding bank debt, and as a result, recorded a loss of $453,000. This loss included a payment of $384,000 upon the termination of a related interest rate protection agreement, which was required pursuant to the terms of the bank debt in order to effectively fix the interest rate on such debt. The retirement of this debt was financed by the concurrent borrowing of $42,300,000 from Meditrust. The Meditrust debt requires monthly principal and interest payments of $404,000 through October 1, 2004, at which F-12 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- time the remaining unpaid principal balance of $36,318,000 is due. The Meditrust debt bears interest at the annual rate of 10.65%. Additional interest payments may also be required commencing on January 1, 1997 in an amount equal to 0.3% of the difference between the operating revenues of the S Corporations in each applicable year and the actual operating revenues of the S Corporations during a twelve-month base period which commenced October 1, 1995. The Meditrust debt is cross-collateralized by the assets of the S Corporations. The loan agreement with Meditrust places certain restrictions on the S Corporations; among them, the agreement restricts their ability to incur additional debt or to make significant dispositions of assets. The S Corporations are also required to maintain a debt service coverage ratio of at least 1.2 to 1.0 (as defined in the loan agreement) and a current ratio of at least 1.0 to 1.0. Management believes the S Corporations are in compliance with these covenants. The loan agreement required the Company to establish a debt service reserve fund equal to three months' debt service and a renovation escrow account in the amount of $197,000 to fund facility renovations identified in the agreement. All of the renovation escrow funds will be released upon completion of the required renovations. As of December 31, 1995, substantially all of the required renovations have been completed and the Company is in the process of obtaining the release of the escrowed renovation funds. Accordingly, the funds have been classified as unrestricted in the accompanying December 31, 1995 balance sheet. The Meditrust loan agreement contains a prepayment penalty, which decreases from 2.5% of the outstanding balance in the fourth year to none in the ninth year (see Note M). Harborside Healthcare Limited Partnership ("HHLP"), a combined affiliate of the Company, has entered into two guaranty agreements with Meditrust on behalf of the S Corporations. Under the first agreement (the "Guaranty"), HHLP has guaranteed a maximum of $2,780,000 of the Meditrust debt if Meditrust demands payment under the Guaranty. The second agreement (the "Environmental Indemnification Agreement") requires HHLP to make payments to Meditrust upon the demand of the lender in order to fund the costs associated with the clean-up of hazardous substances on the collateralized properties. HHLP's maximum liability under the Environmental Indemnification Agreement is limited to $4,500,000; however, certain matters identified in the Environmental Indemnification Agreement are excluded from this limitation. Payments made in excess of $1,720,000 under the Environmental Indemnification Agreement would reduce the potential obligation of HHLP under the Guaranty. As of December 31, 1995, the full amount of these guarantees remains in effect, and management is not aware of any payments which are likely to be required in the foreseeable future in connection with these agreements. Riverside assumed a first mortgage note (the "Note") with a remaining balance of $1,775,000 as part of the acquisition of a long-term care facility. The Note requires the annual retirement of principal in the amount of $20,000. The Company pays interest monthly at the rate of 14% per annum on the outstanding principal amount until maturity in October 2010, when the remaining unpaid principal balance of $1,325,000 is due. The Note is collateralized by the property and equipment of Riverside's facility. Interest expense charged to operations for the years ended December 31, 1993, 1994, and 1995 and the three months ended March 31, 1995 and 1996 was $5,049,000, $5,048,000, $5,830,000, $1,457,000 and $1,246,000, respectively. F-13 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- As of December 31, 1995, future long-term debt maturities associated with the Company's debt are as follows: 1996............................. $ 428,000 1997............................. 472,000 1998............................. 523,000 1999............................. 579,000 2000............................. 642,000 Thereafter....................... 40,852,000 ----------- $43,496,000 ===========
Approximately $54 million of the Company's assets are subject to liens under long-term debt or operating lease agreements. F. INVESTMENT IN LIMITED PARTNERSHIP In April 1993, an affiliate of the Company acquired a 75% partnership interest in Bowie L.P., which developed a 120-bed long-term care facility in Maryland that commenced operations on May 1, 1994. The remaining 25% interest in Bowie L.P. is owned by a non-affiliated party. The Company records its investment in Bowie L.P. on the equity method. Although the Company owns a majority interest in Bowie L.P., the Company only maintains a 50% voting interest and accordingly does not exercise control over the operations of Bowie L.P In addition, the non-affiliated party has the option to purchase the Company's partnership interest during the sixty-day period prior to the seventh anniversary of the facility's opening and each subsequent anniversary thereafter. If the option is exercised, the purchase price would be equal to the fair market value of the Company's interest at the date on which the option is exercised. The Company is entitled to 75% of the facility's net income and manages this facility in return for a fee equal to 5.5% of the facility's net revenues (effective September 1995). Prior to this date, the management fee approximated $10,000 per month. The Company recorded $96,000, $234,000, $35,000 and $111,000 in management fees from this management contract for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively. Bowie L.P. obtained a $4,377,000 construction loan from a bank to finance the construction of the facility. Bowie L.P. also obtained a $1,000,000 line of credit from the bank to finance pre-opening costs and working capital requirements. On July 31, 1995, the line of credit converted to a term loan. As of December 31, 1994 and 1995, Bowie L.P. owed the bank a principal amount of $5,100,000 and $5,200,000, respectively, on these loans. Interest on the loans is payable monthly at the bank's prime rate (8.5% at December 31, 1995) plus 1%. These loans also limit Bowie L.P.'s ability to borrow additional funds and to make acquisitions, dispositions and distributions. Additionally, the loans contain covenants with respect to maintenance of specified levels of net worth, working capital, occupancy and debt service coverage. Bowie L.P.'s above loans are collateralized by each partner's partnership interest as well as all of the assets of Bowie L.P. These loans are guaranteed by an affiliate of the Company and additional collateral pledged by the non- affiliated partner. The Bowie L.P. partnership agreement states that each partner will contribute an amount in respect of any liability incurred by a partner in connection with a guarantee of the partnership's debt so that the partners each bear their proportionate share of the liability based on their percentage ownership of the partnership. F-14 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- The results of operations of Bowie L.P. are summarized below:
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED DECEMBER 31, MARCH 31, ---------------------- ---------------------------- 1994 1995 1995 1996 ---------- ---------- ------------- ------------- Net operating revenues.. $2,523,000 $7,595,000 $ 1,643,000 $ 1,976,000 Net operating expenses.. 2,840,000 7,238,000 1,628,000 1,982,000 Net loss................ (598,000) (152,000) (109,000) (170,000)
The financial position of Bowie L.P. was as follows:
AS OF DECEMBER 31, --------------------- AS OF MARCH 31, 1994 1995 1996 ---------- ---------- --------------- Current assets......................... $1,019,000 $2,785,000 $2,910,000 Non-current assets..................... 5,507,000 5,045,000 4,946,000 Current liabilities.................... 1,491,000 2,227,000 2,485,000 Non-current liabilities................ 4,190,000 4,910,000 4,848,000 Partners' equity....................... 845,000 693,000 523,000
On December 28, 1995, the Company advanced $1,255,000 to Bowie L.P. to support additional facility working capital requirements by means of a demand note bearing interest at 9.0% per annum. G. PROPERTY AND EQUIPMENT The Company's property and equipment are stated at cost and consist of the following as of December 31:
1994 1995 ----------- ----------- Land................................................ $ 5,714,000 $ 2,994,000 Land improvements................................... 2,796,000 2,874,000 Leasehold improvements.............................. 54,000 450,000 Buildings and improvements.......................... 67,735,000 28,257,000 Equipment, furnishings and fixtures................. 10,898,000 5,872,000 ----------- ----------- 87,197,000 40,447,000 Less accumulated depreciation....................... 20,259,000 10,308,000 ----------- ----------- $66,938,000 $30,139,000 =========== =========== H. INTANGIBLE ASSETS Intangible assets are stated at cost and consist of the following as of December 31: 1994 1995 ----------- ----------- Patient lists....................................... $ 1,805,000 $ 1,459,000 Assembled workforce................................. 1,328,000 930,000 Covenant not to compete............................. 2,617,000 1,838,000 Goodwill............................................ 1,123,000 -- Organization costs.................................. 150,000 256,000 Deferred financing costs............................ 1,719,000 2,157,000 ----------- ----------- 8,742,000 6,640,000 Less accumulated amortization....................... 5,130,000 3,590,000 ----------- ----------- $ 3,612,000 $ 3,050,000 =========== ===========
F-15 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- I. RETIREMENT PLANS The Company maintains an employee 401(k) defined contribution plan. All employees who have worked at least one thousand hours and completed one year of continuous service are eligible to participate in the plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Employee contributions to this plan may be matched at the discretion of the Company. The Company contributed $40,000, $86,000 and $120,000 to the plan in 1993, 1994 and 1995, respectively. During September 1995, the Company established a Supplemental Executive Retirement Plan (the "SERP") to provide benefits to key employees. Participants may defer up to 25% of their compensation which is matched by the Company at a rate of 50% (up to 10% of base salary). Vesting in the matching portion occurs in January of the second year following the plan year in which contributions were made. J. CONTINGENCIES The Company is involved in legal actions and claims in the ordinary course of its business. It is the opinion of management, based on the advice of legal counsel, that such litigation and claims will be resolved without material effect on the Company's combined financial position, results of operations or liquidity. Beginning in 1994, the Company self-insures for health benefits provided to a majority of its employees. The Company maintains stop-loss insurance such that the Company's liability for losses is limited. The Company recognizes an expense for estimated health benefit claims incurred but not reported at the end of each accounting period. Beginning in 1995, the Company self-insures for workers' compensation claims. The Company maintains stop-loss insurance such that the Company's liability for losses is limited. The Company accrues for estimated workers' compensation claims incurred but not reported at the end of each accounting period. K. 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, 1994 and 1995. L. PRO FORMA INCOME TAXES (UNAUDITED) For financial reporting purposes, a pro forma provision for income taxes has been reflected in each period included in the accompanying combined statements of operations. The purpose of these pro forma provisions is to reflect the state and federal income tax provisions that would have been recorded in the years presented if the non-taxpaying Predecessor Entities included in the combined financial statements had been operating as a consolidated taxpaying entity. The pro forma income tax expense was computed utilizing an estimated effective tax rate of 39%. The rate was derived by using the statutory federal income tax rate of 34% plus an average of the various state statutory income tax rates (net of federal benefits) where the Company operates. F-16 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Upon the implementation of the Reorganization Agreement, the Company will adopt Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." The adoption of SFAS 109 will require the Company to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of the Company's assets and liabilities. SFAS 109 requires that deferred tax assets be reduced by the creation of a valuation allowance if management believes that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Adoption of SFAS 109 will occur contemporaneous with the anticipated public offering and will result in the recognition of an estimated net deferred tax asset of approximately $500,000. M. CAPITAL STOCK Immediately prior to the completion of the Company's initial public offering of Common Stock ("Offering"), the Reorganization Agreement will be implemented. The Company intends to use approximately $25,000,000 of the net proceeds of the Offering to retire an equal amount of its long-term debt and approximately $1,700,000 to pay associated prepayment penalties. Had the early retirement of debt occurred on January 1, 1995, the pro forma net income per share, using 4,452,160 common and common equivalent shares, would have been $0.31 for the year ended December 31, 1995. The pro forma amount assumes a reduction in interest and amortization expense of $1,663,000 (net of related tax expense) for the year ended December 31, 1995. The Company intends to adopt a Long-Term Stock Incentive Plan ("Stock Plan") prior to the initial public offering. The Stock Plan will authorize the Company's Board of Directors or a committee appointed by the Board of Directors to administer the Stock Plan and to grant certain employees of the Company incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, performance awards and other stock based awards. The Company also intends to adopt a non-employee directors stock option plan ("Directors Plan") prior to the initial public offering. The Directors Plan will grant nonqualified stock options to purchase shares of the Company's Common Stock as of the effective date of the Offering and thereafter at the beginning of each calendar year. The exercise price of each option granted will be the fair market value per share of the Company's Common Stock at the date of grant. Options become exercisable on the first anniversary of the date of grant and each option expires no later than ten years from the date of grant. The Company has an executive long-term incentive plan ("Executive Plan") which grants an economic interest in the appreciation of the business above a baseline valuation of $23,000,000 to certain senior level management personnel upon the successful completion of an initial public offering at a minimum retained equity valuation above $43,000,000. A pool of three percent of the retained equity above $23,000,000 is to be reserved and allocated to the eligible recipients. Assuming an equity valuation of $43,000,000 is achieved, the minimum pool would be $600,000. In the event the retained equity is valued at an amount greater than $43,000,000, the award amount would be increased proportionately. The Executive Plan is effective for the two-year period ending June 30, 1997. On December 31, 1995, the S Corporations issued a 6% equity interest in the S Corporations to the President of the Company amounting to $438,000 and a 5% equity interest in the S Corporations to the president of an affiliate amounting to $365,000. The issuance amounts represented the fair market value of these interests at the date of issuance based on an independent appraisal obtained by the Company. The payment for the issuance of these shares is due within 90 days. Accordingly, the amounts receivable from these individuals have been reflected as a contra-equity subscription receivable with no net increase to stockholders' equity at December 31, 1995. Subsequent to year-end and in connection with the execution of the President of the Company's 1996 employment agreement, the Company granted a special bonus to the President equal to the cost of the shares issued. The bonus will be recorded as a 1996 compensation charge. F-17 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- In February 1996, HHLP granted an option to purchase a 1.36% limited partnership interest in HHLP to each of two members of senior management. The exercise price per percentage limited partnership interest under each such option is $239,525 per percentage interest, which represented the fair market value of a 1% limited partnership interest in HHLP at the date of grant based on an independent appraisal obtained by the Company. The options vest in equal one-third portions on each anniversary of the date of grant over a three-year period and expire ten years from the date of grant. The option grant contains provisions for the pro rata conversion of these shares upon the completion of an initial public offering. N. GAIN ON SALE OF FACILITIES, NET As discussed in Note B, in December 1995, a majority of the Unitholders approved the sale (the "Transaction") of the seven long-term care facilities owned by KYP to Meditrust for $47,000,000. The Transaction was effective December 31, 1995 and a net gain of $4,869,000 was recorded. A portion of the proceeds of the Transaction was used by KYP to repay the outstanding balance of its Medium-Term Notes ($9,409,000), a related prepayment penalty ($1,154,000) and transaction costs ($884,000). The original principal amount of the Medium-Term Notes was $6,000,000 and interest on this obligation accrued at 10.55% per annum through June 30, 1993. Commencing December 31, 1993, KYP began making semiannual interest payments on the original principal and the accrued interest. The principal and all deferred interest were scheduled to be repaid in June 1998. As a result of the early retirement of this debt, the Company recorded a loss of $1,502,000, which was netted against the gain on the sale of the KYP facilities. The terms of the KYP partnership agreement specified that HHCI would not share in the gain associated with the sale of the facilities; as such, the entire amount of the net gain has been allocated to the Unitholders, which is included in the minority interest reflected in the Company's combined statement of operations for the year ended December 31, 1995. The determination of the net gain included the recognition of an estimated liability of approximately $3,000,000 to Medicare and certain states' Medicaid programs. This amount has been included with other estimated settlements due to/from third-party payors as a component of accounts receivable. Under existing regulations, KYP is required to repay these programs for certain depreciation expense recorded by the KYP facilities and for which they received reimbursement prior to the sale. Any payments assessed by these programs to settle these obligations in excess of the funds withheld from the proceeds of the sale of the facilities will be the responsibility of HHCI without any recourse to the Unitholders. However, if the ultimate settlement of these obligations results in a net amount due to KYP, this amount would be distributed to the Unitholders. The Transaction provides for the dissolution of KYP and the distribution of the net proceeds of the Transaction to the Unitholders, which occurred in March 1996. The Company's balance sheet as of December 31, 1995 includes the cash to be distributed to the Unitholders as well the related distribution payable of $33,493,000. Concurrent with the closing of the Transaction, HHCI entered into an agreement with Meditrust to lease the former KYP facilities (see Note D). Unaudited pro forma results of operations of the Company for the years ended December 31, 1994 and 1995 are presented below, assuming that the KYP Facilities had been acquired by the Company as of January 1, 1994. The pro forma results include the historical accounts of the Company and the minority interest adjusted to reflect: (1) the elimination of the historical depreciation and amortization amounts recorded by the KYP facilities, (2) the elimination of historical interest expense on the Medium-Term Notes, (3) the elimination of the historical income allocated to the minority interest and (4) the recognition of the rental expense and amortization of closing costs which would have been incurred by the Company. The pro F-18 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- forma financial results are not necessarily indicative of the actual results of operations which might have occurred or of the results of operations which may occur in the future.
FOR THE THREE FOR THE YEARS ENDED DECEMBER 31, MONTHS ENDED -------------------------------- MARCH 31, 1994 1995 1995 -------------------------------- ------------- (UNAUDITED) (UNAUDITED) Total net revenues........... $ 86,376,000 $ 109,425,000 $23,777,000 Income (loss) before income taxes....................... 835,000 1,231,000 (456,000) Pro forma net income (loss).. 509,000 751,000 (278,000) Pro forma net income (loss) per common share using 4,452,160 common and common equivalent shares........... $ 0.11 $ 0.17 $ (0.06)
O. PENDING ACQUISITIONS At December 31, 1995, Company funds in the amount of $3,000,000 were held in escrow in connection with the acquisition of long-term care facilities. Of this amount, $1,000,000 was refunded in January 1996 in conjunction with the acquisition of six facilities as further described in Note Q. The remaining $2,000,000 pertains to the purchase of a separate group of facilities, for which negotiations have terminated and the deposit was returned in March 1996 (see Note P). In November, 1995, the Company signed a letter of intent to purchase four long-term care facilities in Ohio. The specific terms of the transaction are still under negotiation (see Note R). P. RELATED PARTY TRANSACTIONS An affiliate which is a principal stockholder of the Company provides office space, legal, tax, data processing and other administrative services to the Company in return for a monthly fee. Total service charges under this arrangement were $746,000, $759,000, $700,000, $177,000 and $185,000 for the years ended December 31, 1993, 1994, and 1995 and the three months ended March 31, 1995 and 1996, respectively. As of December 31, 1995 and March 31, 1996, the Company owed the stockholder $178,000 and $0, respectively for these and other related services. Also, on December 28, 1995, the stockholder advanced $2,000,000 to the Company to make an acquisition deposit on five long-term care facilities. The advance was repaid in March 1996 (see Note O). Q. SUBSEQUENT EVENTS Effective January 1, 1996, a combined affiliate of the Company entered into an agreement with Meditrust to lease six long-term care facilities with a total of 537 licensed beds in New Hampshire. The lease agreement, which will be treated as an operating lease, provides for annual rental payments of $2,324,000 in the initial twelve-month period and annual rental increases of $64,000 for the remainder of the lease term. The lease has an initial term of ten years with two consecutive five-year renewal terms exercisable at the Company's option. The lease agreement also required the Company to escrow funds in an amount equal to three months' base rent ($581,000). In addition, the lease agreement required the Company to establish a renovation escrow account in the amount of $560,000 to fund facility renovations identified in the agreement. All of the renovation escrow funds will be released upon completion of the required renovations. The Company's obligations under the lease are collateralized by, among other things, an interest in any property improvements made by the Company and by the related facilities' accounts receivable. In conjunction with the lease, the Company was granted a right of first refusal and an option to purchase the facilities as a group, which is exercisable at the end of the eighth year F-19 HARBORSIDE HEALTHCARE CORPORATION AND COMBINED AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) ---------------- of the initial term and at the conclusion of each renewal term. The purchase option is exercisable at the greater of 90% of the fair market value of the facilities at the time of exercise or Meditrust's original investment. In connection with this lease, the Company received a cash payment of $3,685,000 from Meditrust representing a lease inducement which will be recorded as deferred income and amortized over the ten-year initial lease term as a reduction of rental expense. The Company incurred total transaction costs of approximately $1,035,000 of which $206,000 had been incurred and capitalized as of December 31, 1995. Unaudited pro forma results of the Company for the three months ended March 31, 1995 are presented below assuming that the New Hampshire Facilities had been acquired by the Company as of January 1, 1995. The pro forma results include the historical accounts of the Company adjusted to include the historical results of the New Hampshire Facilities and to reflect the following adjustments: (1) the elimination of historical rent expense, management fees, depreciation and amortization expense and interest expense recorded by the New Hampshire Facilities, (2) the recognition of rent expense, amortization of deferred financing costs, general and administrative expenses and real estate taxes which would have been incurred by the Company if the New Hampshire Facilities had been leased beginning on January 1, 1995. The pro forma financial results are not necessarily indicative of the actual results of operations which might have occurred or of the results of operations which may occur in the future.
FOR THE THREE MONTHS ENDED MARCH 31, 1995 ------------- (UNAUDITED) Total net revenues.......................................... $29,193,000 Loss before income taxes.................................... (196,000) Pro forma net loss.......................................... (120,000) Pro forma net loss per common share using 4,452,160 common and common equivalent shares................................... (0.03)
R. OHIO TRANSACTION (UNAUDITED) During May 1996, the Company entered into an agreement to lease four long- term care facilities in Ohio for an initial term of five years which is expected to commence in the third quarter of 1996. The Ohio Transaction will be accounted for as a capital lease as a result of the bargain purchase option granted at the end of the lease term. The annual aggregate base rent will be $5,000,000. The Company has agreed to make an $8,000,000 non-refundable deposit for the option to purchase the four facilities at the end of the lease term at a fixed cost of $57,125,000. If the Company chooses to exercise this option, the $8,000,000 deposit will be applied towards the purchase price. Of the $8,000,000, $5,000,000 will be paid at or prior to the closing of the lease agreement and the remainder will be paid upon the closing of the purchase or termination of the lease. F-20 INDEPENDENT AUDITORS' REPORT To the Stockholder Sowerby Enterprises R.R. 2, Box 312C, Spring Hill Road Peterborough, NH 03458 We have audited the accompanying combined balance sheets of Sowerby Enterprises (see Note 1) for the years ended December 31, 1993, 1994 and 1995 and the related combined statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Sowerby Enterprises for the years ended December 31, 1993, 1994 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Leverone & Company Billerica, Massachusetts February 9, 1996 F-21 SOWERBY ENTERPRISES COMBINED BALANCE SHEETS AT DECEMBER 31, ----------------
1993 1994 1995 ----------- ----------- ----------- ASSETS Current Assets Cash................................... $ 1,259,991 $ 1,172,962 $ 1,474,885 Patient Related Receivables (Note 1)... 684,281 830,653 925,892 Prepaid Expenses and Other............. 41,020 27,792 60,477 Due from Affiliate (Note 2)............ 727,514 687,533 455,000 ----------- ----------- ----------- Total Current Assets................. 2,712,806 2,718,940 2,916,254 ----------- ----------- ----------- Property and Equipment (Note 1) Land................................... 125,000 125,000 125,000 Building............................... 1,850,000 1,850,000 1,850,000 Building Improvements.................. 606,631 847,836 829,528 Furniture, Fixtures and Equipment...... 1,483,995 1,556,676 1,499,036 Motor Vehicles......................... 84,111 140,633 140,171 ----------- ----------- ----------- 4,149,737 4,520,145 4,443,735 Less: Accumulated Depreciation....... (1,716,586) (1,955,685) (2,009,266) ----------- ----------- ----------- Net Property and Equipment........... 2,433,151 2,564,460 2,434,469 ----------- ----------- ----------- Other Assets Intangible Assets (Note 1)............. 48,667 38,363 28,059 ----------- ----------- ----------- Total Assets......................... $ 5,194,624 $ 5,321,763 $ 5,378,782 =========== =========== ===========
See Accompanying Notes to Combined Financial Statements. F-22 EXHIBIT A SOWERBY ENTERPRISES COMBINED BALANCE SHEETS AT DECEMBER 31, ----------------
1993 1994 1995 ---------- ---------- ---------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Note Payable--Current Portion (Note 3)... $ 33,980 $ 33,954 $ 26,600 Mortgage Payable--Current Portion (Note 3)...................................... 86,400 80,000 80,000 Obligations Under Capital Leases--Current Portion (Note 4)................................ 56,400 58,464 15,223 Accounts Payable......................... 282,496 221,124 234,317 Accrued Rent (Note 2).................... 565,000 250,000 -- Accrued Compensation and Benefits........ 839,719 812,974 903,367 ---------- ---------- ---------- Total Current Liabilities.............. 1,863,995 1,456,516 1,259,507 ---------- ---------- ---------- Long-Term Debt Notes Payable--Net of Current Portion (Note 3)................................ 139,526 105,128 77,092 Mortgage Payable (Note 3)................ 1,996,431 1,922,810 1,843,423 Obligations under Capital Leases--Net of Current Portion (Note 4)................ 73,388 15,223 -- Loans From Stockholder (Note 2).......... 705,000 730,000 655,000 Loan Payable--Affiliate (Note 2)......... 345,000 370,000 411,000 ---------- ---------- ---------- Total Long-Term Debt................... 3,259,345 3,143,161 2,986,515 ---------- ---------- ---------- Total Liabilities...................... 5,123,340 4,599,677 4,246,022 ---------- ---------- ---------- Stockholder's Equity Common Stock--No Par Value Authorized--300 Shares Issued and Outstanding--100 Shares...... 92,000 92,000 92,000 Additional Paid-in-Capital............... 49,831 49,831 49,831 Retained Earnings (Deficit) (Exhibit C).. (10,547) 640,255 1,050,929 ---------- ---------- ---------- 131,284 782,086 1,192,760 Less: Treasury Stock at Cost 49 Shares............................. (60,000) (60,000) (60,000) ---------- ---------- ---------- Total Stockholder's Equity............. 71,284 722,086 1,132,760 ---------- ---------- ---------- Total Liabilities and Stockholders' Equity................................ $5,194,624 $5,321,763 $5,378,782 ========== ========== ==========
See Accompanying Notes to Combined Financial Statements F-23 EXHIBIT B SOWERBY ENTERPRISES COMBINED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 ----------- ----------- ----------- Net Patient Service Revenue............. $19,342,515 $21,271,939 $21,956,010 ----------- ----------- ----------- OPERATING EXPENSES Facility Operating Expenses........... 14,621,845 15,942,680 16,837,294 Rent (Notes 2 & 5).................... 2,734,000 2,526,000 2,382,000 Depreciation.......................... 210,346 240,299 262,889 Management Fee (Note 2)............... 1,460,400 1,726,500 1,832,000 Loss on Disposal of Fixed Assets...... -- -- 33,539 Amortization.......................... 10,305 10,305 10,305 ----------- ----------- ----------- Total Operating Expenses............ 19,036,896 20,445,784 21,358,027 ----------- ----------- ----------- Operating Income.................... 305,619 826,155 597,983 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest Expense...................... (189,395) (193,204) (199,313) Interest Income....................... 25,961 38,912 38,609 Other................................. 2,429 2,006 -- ----------- ----------- ----------- Total Other Income (Expense)........ (161,005) (152,286) (160,704) ----------- ----------- ----------- Net Income Before Provision for Income Tax.................................. 144,614 673,869 437,279 Provision for State Income Taxes (Note 1)................................... (15,946) (23,067) (26,605) ----------- ----------- ----------- Net Income.............................. $ 128,668 $ 650,802 $ 410,674 =========== =========== ===========
See Accompanying Notes to Combined Financial Statements F-24 EXHIBIT C SOWERBY ENTERPRISES COMBINED STATEMENTS OF RETAINED EARNINGS (DEFICIT) FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 --------- --------- ---------- Accumulated Adjustments Account Balance Beginning.......................... $(638,489) $(404,132) $ (94,010) Taxable Income............................. 223,254 274,519 96,271 Interest Income............................ 25,961 38,912 38,609 Non-Deductible Expenses.................... (14,858) (3,309) (2,124) --------- --------- ---------- Balance Ending............................. (404,132) (94,010) 38,746 --------- --------- ---------- Accumulated Earnings and Profits Subchapter C Corporation Income............ (96,082) (96,082) (96,082) --------- --------- ---------- Tax Timing Adjustments Balance Beginning.......................... 595,465 489,776 830,456 Tax Deferred Income........................ (105,689) 340,680 277,918 --------- --------- ---------- Balance Ending............................. 489,776 830,456 1,108,374 --------- --------- ---------- Other Retained Earnings Balance Ending............................. (109) (109) (109) --------- --------- ---------- Total Retained Earnings (Deficit)............ $ (10,547) $ 640,255 $1,050,929 ========= ========= ==========
See Accompanying Notes to Combined Financial Statements F-25 EXHIBIT D SOWERBY ENTERPRISES COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 ---------- ---------- ---------- Cash Flows From Operating Activities Net Income............................... $ 128,668 $ 650,802 $ 410,674 Non-Cash Items Included in Net Income: Depreciation and Amortization.......... 220,651 250,604 273,194 Loss on Retirement of Assets........... -- -- 33,539 Changes In: Patient Related Receivables............ (34,112) (146,373) (95,239) Prepaid Expenses....................... 164 13,228 (32,685) Due from Affiliate..................... (1,974) 39,981 232,533 Accounts Payable....................... 31,750 (61,372) 13,193 Accrued Rent........................... 115,000 (315,000) (250,000) Accrued Expenses....................... 246,016 (26,745) 90,393 ---------- ---------- ---------- Net Cash Flows Provided By Operating Ac- tivities................................ 706,163 405,125 675,602 ---------- ---------- ---------- Cash Flows From Investing Activities Additions to Property and Equipment...... (337,663) (371,608) (174,388) Proceeds From Disposal of Property and Equipment............................... -- -- 7,950 ---------- ---------- ---------- Net Cash Flows Used In Investing Activi- ties.................................... (337,663) (371,608) (166,438) ---------- ---------- ---------- Cash Flows From Financing Activities Payments on Bank Debt.................... (111,856) (114,445) (114,777) Payments of Capital Lease Obligations.... (43,490) (56,101) (58,464) Payments to Stockholder.................. (185,000) 25,000 (75,000) Loans From Affiliate..................... 75,000 25,000 41,000 Additions to Capital Lease Obligations... 73,854 -- -- ---------- ---------- ---------- Net Cash Flows Used In Financing Activi- ties.................................... (191,492) (120,546) (207,241) ---------- ---------- ---------- Net Increase (Decrease) in Cash............ 177,008 (87,029) 301,923 Cash--Beginning of Year.................... 1,082,983 1,259,991 1,172,962 ---------- ---------- ---------- CASH--END OF YEAR.......................... $1,259,991 $1,172,962 $1,474,885 ========== ========== ========== Supplemental Disclosure Of Cash Flow Infor- mation.................................... Cash Payment for Interest................ $ 189,395 $ 193,204 $ 199,313 ========== ========== ========== Cash Payment for Taxes................... $ 1,132 $ 37,850 $ 26,400 ========== ========== ==========
See Accompanying Notes to Combined Financial Statements F-26 SOWERBY ENTERPRISES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Sowerby Enterprises operates a group of six nursing homes with a total of 537 beds throughout New Hampshire. The combined financial statements include the accounts of Westwood Healthcare Center, Inc., Crestwood Healthcare Center, Inc., Milford Nursing Home, Inc., Northwood Healthcare Center, Inc., Applewood Healthcare Center, Inc. and Pheasant Wood Nursing Home, Inc. A summary of the Company's significant accounting policies follows. Nature of the Business The combined Companies are licensed proprietary health care providers, organized under corporate charter in the State of New Hampshire. Their services are available to qualified in-state and out-of-state private and welfare recipients in accordance with the State of New Hampshire Department of Human Services Principles of Reimbursement. Patient Revenues and Accounts Receivable Patient service revenue is reported at the estimated net realizable amounts from residents, third-party payors and others for services rendered. Revenue under third-party payor agreements is subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered. Differences between the estimated amounts accrued and interim and final settlements are reported in operations in the year of settlement. Accounts Receivable and Revenue Recognition The combined Companies are on the specific charge off method of accounting for bad debts, charging bad accounts to expense as management deems them worthless. Collection of accounts written off in prior periods is treated as income in the period of collection. Cash and Cash Equivalents Cash and cash equivalents include investments in highly liquid debt instruments with a maturity of three months or less. Property and Equipment Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Assets lives range from 4 to 20 years. Depreciation expense for the years ended December 31, 1993, 1994 and 1995 was $210,346, $240,299 and $262,889, respectively. Income Taxes The Companies, with the consent of their stockholder, have elected under the Internal Revenue Code to be taxed as an "S' corporation. In lieu of Federal corporate income taxes, the stockholder of the "S' corporation is taxed on the taxable income of the Company. Therefore, no provision for Federal income taxes has been included in these financial statements. The provision for State income taxes consists of the current income taxes due to the State of New Hampshire since New Hampshire does not recognize "S' Corporation status. Intangible Assets Amortization of intangibles is calculated by the straight-line method. Start-up costs are amortized over sixty (60) months. Closing costs incurred in securing the mortgages are amortized over 22 years, the term of the mortgage. F-27 SOWERBY ENTERPRISES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 Amortization expense for the years ended December 31, 1993, 1994 and 1995 was $10,305.
1993 1994 1995 ------- ------- ------- Unamortized Start-up Costs.......................... $33,039 $23,819 $14,599 Unamortized Closing Costs........................... 15,628 14,544 13,460 ------- ------- ------- Total Intangible Assets........................... $48,667 $38,363 $28,059 ======= ======= =======
Concentration of Credit Risk The Companies invest excess cash in debt instruments of a financial institution with strong credit ratings that maintain safety and liquidity. The Companies have not experienced any losses on cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. There was no change in profit arising from these changes. NOTE 2--RELATED PARTY TRANSACTIONS The sole stockholder and principal officer of the combined Companies personally owns the real estate used by several of the facilities. Rent accrued at December 31, 1993 and 1994 amounted to $565,000 and $250,000, respectively. No rent was payable to the sole stockholder at December 31, 1995. Rent expense for the years ended December 31, 1993, 1994 and 1995 amounted to $2,734,000, $2,526,000 and $2,382,000, respectively. Management fees are paid to a related management corporation and amounted to $1,460,000, $1,726,500 and $1,832,000 for the years ended December 31, 1993, 1994 and 1995, respectively. The combined Companies and the related management company are under the common ownership of Dwight D. Sowerby. Amounts due from affiliate represent over-funding of the self-insured health insurance program controlled through a related management company and loans to the related management company. No terms for interest have been made. For the years ended December 31, 1993, 1994 and 1995 the amount due from affiliate amounted to $727,514, $687,533 and $455,000, respectively. Loans to affiliate made by Pheasant Wood Nursing Home amounted to $675,000, $675,000 and $455,000 for the years ended December 31, 1993, 1994 and 1995, respectively. Loan Payable--Affiliate, represents monies advanced to the Company from a related management organization. For the years ended December 31, 1993, 1994 and 1995 the loan payable to affiliate amounted to $345,000, $370,000 and $411,000, respectively. Amounts advanced to the combined Companies by its sole stockholder for the years ended December 31, 1993, 1994 and 1995 amounted to $705,000, $730,000 and $655,000, respectively. F-28 SOWERBY ENTERPRISES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 NOTE 3--LONG-TERM DEBT Long-term debt at December 31, 1993, 1994 and 1995 consisted of the following:
1993 1994 1995 ---------- ---------- ---------- Note payable to a Bank, in monthly installments of $834 including interest at 9%. Final payment due November 1995, collateralized by a motor vehicle............ $ 17,514 $ 8,754 $ -- First Mortgage, Peterborough Savings Bank, due December 2008, secured by building and equipment. Interest is adjusted yearly each June, rates at December 31, 1995, 1994 and 1993 were 9.42%, 8.73% and 6.90%, respectively................................. 2,082,831 $2,002,810 1,923,423 Note Payable, Peterborough Savings Bank, due in monthly installments of $3,045 including interest at 1% above prime (9.75%, 9.5% and 7% at December 31, 1995, 1994 and 1993, respectively), refinanced on January 10, 1992, final payment due January 1999. This note is secured by all furniture and fixtures..................................... 155,992 130,328 103,692 ---------- ---------- ---------- Total Long-Term Debt........................ 2,256,337 2,141,892 2,027,115 Less: Current Portion ...................... 120,380 113,954 106,600 ---------- ---------- ---------- Total Long-Term Debt--Net of Current Portion.................................... $2,135,957 $2,027,938 $1,920,515 ========== ========== ==========
On January 1, 1996 all long-term debt was repaid in full in a transaction related to the sale of the company's assets, see Note 7. NOTE 4--CAPITAL LEASE COMMITMENTS The combined Companies lease computer equipment under long-term capital leases. During the year ended December 31, 1995, rentals under long-term lease obligations were $66,285 of which $58,464 was recorded as principal and $7,821 as interest. Future obligations over the terms of the Corporation's long-term leases as of December 31, 1995 are:
YEAR AMOUNT ---- ------- 1996................................................................ $16,000 Less: Amounts Representing Interest............................... (777) ------- 15,223 Less: Current Maturities of Capitalized Lease Obligations......... (15,223) ------- Capitalized Lease Obligations, Less Current Maturities.............. $ -- =======
The computer equipment is recorded at a cost of $195,301 with related accumulated depreciation of $117,498. NOTE 5--OPERATING LEASE ARRANGEMENTS The Northwood Healthcare Center, Inc. facility leases its real estate under a ten year lease which began in June of 1992. The lease calls for minimum annual lease payments amounting to $1,080,000 due on the first day F-29 SOWERBY ENTERPRISES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1995 of each month with additional lease payments sufficient to pay all mortgage payments including payments to reserves for betterments, insurance, taxes and necessary repairs. Per a regulatory agreement signed with the United States Department of Housing and Urban Development, the agreement is subject and subordinate to the mortgage security note with Reilly Mortgage Group, Inc. The mortgage note is for 40 years commencing in September 1991 in the amount of $7,469,800 as amended on August 19, 1993 and again on April 29, 1994. Principal and interest in the amount of $51,336 are due and payable monthly. The interest rate at December 31, 1995 was 7.875%. On January 1, 1996, this note was assumed by Medi Trust of Bedford, Inc., in a transaction related to the sale of the company. NOTE 6--401(K) PROFIT SHARING PLAN The combined Companies maintain a 401(K) Profit Sharing Plan. Under the plan, employees eligible to participate are permitted to make salary reduction contributions equal to a percentage of annual salary up to 15%. The Plan allows for a discretionary company matching contribution in an amount equal to 50% of contributions made by the employee, up to a maximum of 5% of the employee's salary. For the year ended December 31, 1995 the Company did not make a contribution to the plan and for the years ended December 31, 1993 and 1994 the company contributed $28,628 and $87,756, respectively. NOTE 7--SUBSEQUENT EVENT--SALE OF BUSINESS During July of 1995, the combined Companies entered into an agreement with KHI Corporation to sell substantially all of the assets of the Corporations. The sale was completed on January 1, 1996. NOTE 8--CONTINGENCIES The combined Companies are a guarantor of certain debt of its sole stockholder totalling $1,385,130. This debt is secured by various business assets of the Company and a second mortgage on the certain real estate owned by Pheasant Wood Nursing Home, Inc. This debt was repaid on January 1, 1996 in a transaction related to the sale of the Company's assets. F-30 INDEPENDENT AUDITORS' REPORT Partners Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor Company, and Royalview Manor Development Company (all Ohio Partnerships) Cleveland, Ohio We have audited the combined balance sheets of Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor Company, and Royalview Manor Development Company (all Ohio partnerships), as of December 31, 1995 and 1994 and the related combined statements of income, partners' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. These combined financial statements are the responsibility of the Partnerships' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor Company, and Royalview Manor Development Company as of December 31, 1995 and 1994, and the results of its combined operations, changes in partners' equity and cash flows for the years ended December 31, 1995, 1994 and 1993, in conformity with generally accepted accounting principles. Howard, Wershbale & Co. Beachwood, Ohio March 15, 1996 F-31 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY COMBINED BALANCE SHEETS ----------------
DECEMBER 31, ----------------------- MARCH 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............ $ 6,741,168 $ 6,879,695 $ 8,186,746 Receivables: Residents.......................... 1,874,206 2,214,225 1,829,377 Estimated settlements from government programs............... 42,300 66,400 146,200 Note receivable, related party....... 50,000 -- -- Prepaid expenses and other current assets.............................. 123,194 209,184 190,470 ----------- ----------- ----------- Total current assets............. 8,830,868 9,369,504 10,352,793 Restricted investments................. 1,389,382 1,268,721 1,112,168 Property and equipment, net............ 16,283,603 15,522,011 15,331,275 Deferred costs, net.................... 598,584 560,239 554,177 ----------- ----------- ----------- Total assets..................... $27,102,437 $26,720,475 $27,350,413 =========== =========== =========== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Current maturities: Mortgage notes payable............. $ 277,328 $ 297,877 $ 317,073 Note payable, bank................. 300,000 -- -- Accounts payable..................... 1,329,158 1,929,787 1,556,390 Accrued employee compensation and benefits............................ 1,268,061 1,282,970 1,276,931 Accrued interest..................... 134,067 131,345 130,886 Other accrued liabilities............ 595,782 560,004 509,996 Estimated settlements due government programs............................ 792,500 395,700 296,100 Due to affiliated management compa- nies................................ 1,335,384 691,220 1,227,666 ----------- ----------- ----------- Total current liabilities........ 6,032,280 5,288,903 5,315,042 ----------- ----------- ----------- Long-term debt: Mortgage notes payable, net of cur- rent portion........................ 18,700,446 18,267,603 18,172,626 Note payable, bank, net of current portion............................. 75,000 -- -- Loans and interest payable, related parties............................. 695,552 401,984 406,957 ----------- ----------- ----------- 19,470,998 18,669,587 18,579,583 ----------- ----------- ----------- Total liabilities................ 25,503,278 23,958,490 23,894,625 Partners' equity....................... 1,599,159 2,761,985 3,455,788 ----------- ----------- ----------- $27,102,437 $26,720,475 $27,350,413 =========== =========== ===========
See notes to financial statements. F-32 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY COMBINED STATEMENTS OF INCOME ----------------
THREE YEAR ENDED DECEMBER 31, MONTHS ENDED ----------------------------------- MARCH 31, 1993 1994 1995 1996 ----------- ----------- ----------- ------------ (UNAUDITED) Operating revenue: Net resident service reve- nue........................ $28,724,617 $29,103,836 $32,165,648 $8,242,306 Other....................... 179,746 180,129 151,040 29,317 ----------- ----------- ----------- ---------- Total operating revenue... 28,904,363 29,283,965 32,316,688 8,271,623 ----------- ----------- ----------- ---------- Expenses: Operating expenses.......... 21,664,216 23,005,764 24,660,055 6,342,664 Management fees to affili- ates....................... 2,373,530 2,320,226 2,663,818 742,390 Depreciation and amortiza- tion....................... 851,849 875,071 881,749 203,478 Interest.................... 1,977,252 1,863,098 1,626,695 398,091 ----------- ----------- ----------- ---------- Total expenses............ 26,866,847 28,064,159 29,832,317 7,686,623 ----------- ----------- ----------- ---------- Income from operations........ 2,037,516 1,219,806 2,484,371 585,000 Investment earnings........... 275,445 285,778 440,395 108,803 ----------- ----------- ----------- ---------- Net income.................... $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803 =========== =========== =========== ==========
See notes to financial statements. F-33 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY COMBINED STATEMENTS OF PARTNERS' EQUITY ----------------
GENERAL LIMITED PARTNERS PARTNERS TOTAL ---------- ----------- ----------- Balance, December 31, 1992................ $1,215,908 $ 1,365,918 $ 2,581,826 Net income................................ 448,238 1,864,723 2,312,961 Distributions............................. (424,708) (1,275,292) (1,700,000) ---------- ----------- ----------- Balance, December 31, 1993................ 1,239,438 1,955,349 3,194,787 ---------- ----------- ----------- Net income................................ 486,425 1,019,159 1,505,584 Distributions............................. (448,710) (2,652,502) (3,101,212) ---------- ----------- ----------- Balance, December 31, 1994................ 1,277,153 322,006 1,599,159 ---------- ----------- ----------- Net income................................ 627,169 2,297,597 2,924,766 Distributions............................. (622,439) (1,288,301) (1,910,740) Contributions............................. -- 148,800 148,800 ---------- ----------- ----------- Balance, December 31, 1995................ 1,281,883 1,480,102 2,761,985 ---------- ----------- ----------- Net income (unaudited).................... 273,741 420,062 693,803 ---------- ----------- ----------- Balance, March 31, 1996 (unaudited)....... $1,555,624 $ 1,900,164 $ 3,455,788 ========== =========== ===========
See notes to financial statements. F-34 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY COMBINED STATEMENTS OF CASH FLOWS ----------------
THREE YEAR ENDED DECEMBER 31, MONTHS ENDED ------------------------------------- MARCH 31, 1993 1994 1995 1996 ----------- ----------- ----------- ------------ (UNAUDITED) Cash flows from operat- ing activities: Net income............. $ 2,312,961 $ 1,505,584 $ 2,924,766 $ 693,803 Adjustments to recon- cile net income to net cash provided by oper- ating activities: Depreciation and amor- tization.............. 851,849 875,071 881,749 203,478 ----------- ----------- ----------- ---------- 3,164,810 2,380,655 3,806,515 897,281 Change in receivables and estimated settle- ments from/due govern- ment programs......... 2,604,649 (467,324) (436,168) 205,448 (Increase) decrease in prepaid expenses and other current assets.. 52,337 (44,584) (85,990) 18,714 Increase (decrease) in accounts payable...... (148,926) (203,896) 275,878 (373,397) Increase in accrued em- ployee compensation and benefits.......... 298,465 100,941 14,909 (6,039) Decrease in accrued in- terest................ (1,449) (23,719) (2,722) (459) Increase (decrease) in other accruedliabilities.... 117,965 (2,829) (35,778) (50,008) Increase (decrease) due to affiliated manage- ment companies........ 57,262 (53,982) (644,164) 536,446 ----------- ----------- ----------- ---------- Net cash provided by operating activities.. 6,145,113 1,685,262 2,892,480 1,227,986 ----------- ----------- ----------- ---------- Investing activities: Additions to property and equipment......... (30,615) (296,475) (81,812) (6,680) (Increase) decrease in note receivable....... -- (50,000) 50,000 -- ----------- ----------- ----------- ---------- Net cash used for fi- nancing activities.... (30,615) (346,475) (31,812) (6,680) ----------- ----------- ----------- ---------- Financing activities: Payments of note pay- able.................. (225,000) (300,000) (375,000) -- Payments of mortgage notes payable......... (177,775) (212,064) (412,294) (75,000) Distributions to part- ners.................. (1,700,000) (3,101,212) (1,910,740) -- Net decrease (increase) in restricted cash.... (228,588) 381,718 120,661 156,553 Contribution from part- ner................... -- -- 148,800 -- Decrease in loans and interest, related par- ties.................. 14,304 (175,021) (293,568) 4,192 Increase in deferred costs................. -- (20,348) -- -- ----------- ----------- ----------- ---------- Net cash used for fi- nancing activities.... (2,317,059) (3,426,927) (2,722,141) 85,745 ----------- ----------- ----------- ---------- Net increase (decrease) in cash and cash equiv- alents................. 3,797,439 (2,088,140) 138,527 1,307,051 Cash and cash equiva- lents, beginning....... 5,031,869 8,829,308 6,741,168 6,879,695 ----------- ----------- ----------- ---------- Cash and cash equiva- lents, ending.......... $ 8,829,308 $ 6,741,168 $ 6,879,695 $8,186,746 =========== =========== =========== ==========
See notes to financial statements. F-35 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 (INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED) ---------------- 1. DESCRIPTION OF PARTNERSHIPS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of Partnerships: Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company (all limited partnerships) and Royalview Manor Company (a general partnership) are organized as Ohio partnerships for the purpose of operating nursing facilities under Section 232 of the National Housing Act. The Partnerships located in Cleveland, Ohio, operate four nursing facilities consisting of 692 beds. Royalview Manor Development Company, organized as an Ohio limited partnership, leases its nursing facility to Royalview Manor Company. The entities are collectively referred to as the "Partnerships" in these combined financial statements. Principles of combination: The Partnerships were combined based on common ownership. All material intercompany transactions and balances have been eliminated. Unaudited Interim Financial Data: The interim financial data at March 31, 1996 and for the three months then ended included herein are unaudited and, in the opinion of management, reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of financial position and the results of operations and cash flows for such interim periods. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the combined financial statements, and the reported amounts of revenue and expenses during the reporting period. Revisions in estimates are recorded in the period in which the facts which require the revisions become known. Cash and cash equivalents: Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of their acquisition by the Partnerships. Included in cash and cash equivalents are interest bearing advances to an affiliate's joint investment account, which is primarily invested in overnight repurchase agreements. Cash held and invested by the affiliate, amounted to $6,705,524 at December 31, 1994, $6,793,307 at December 31, 1995 and $7,881,625 at March 31, 1996. For purposes of the statements of cash flows, the Partnerships consider cash held by the affiliate to be cash equivalents. Resident service revenue/accounts receivable: Resident service revenue is recorded at established billing rates as services are rendered. Reductions are currently provided for as contractual adjustments representing the difference between established billing rates and amounts advanced under the Medicaid and Medicare programs. Estimated amounts management believes will result from audits and settlements by the appropriate governmental authority in the determination of final reimbursement rates are included in these statements. Revisions in estimates are reflected in the period in which the facts which require the revisions become known. Net resident service revenue increased as a result of such adjustments by $116,000 in 1993, decreased by $251,700 in 1994, increased by $439,000 in 1995 and $176,000 in the three months ended March 31, 1996. F-36 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Two of the Partnerships have filed Medicare routine cost limit exceptions for the years ended 1991 through 1993 with the Medicare Intermediary. If granted, these exceptions would retroactively increase the Partnerships' Medicare reimbursement rates. The exception requests require approval by both the Intermediary and the Health Care Financing Administration (HCFA). The Partnerships' will record these amounts to income when approval is obtained. In the opinion of management, amounts received, if any, could be material to the financial statements. In addition, based on the Medicare routine cost limit exceptions filed for 1991 through 1993 by the two Partnerships and an interim Medicare routine cost limit exception filed by another Partnership for the year ended December 31, 1994, the Partnerships' 1994 and 1995 Medicare reimbursement rates were adjusted by the Intermediary during 1995 to include an estimated amount for 1994 and 1995 exception limitations. The Partnerships have recorded these amounts in revenue in the 1995 financial statements less an estimate of amounts considered overadvanced using the guidance under Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies". Revisions in these estimates which could be material to the financial statements, will be reflected in the period the rates are final settled by the Intermediary. Accounts receivable, residents are due both from residents and governmental agencies. Accounts receivable from governmental agencies are recorded net of credit balances due to those agencies since legal right of setoff exists. The Partnerships provide an allowance for billing adjustments and bad debts relating to accounts receivable balances. The allowance amounted to $20,000 at December 31, 1994 and 1995 and March 31, 1996. Restricted investments: Included in restricted investments are certificates of deposit and marketable debt securities consisting of government securities. These securities are classified as held-to-maturity and are carried at amortized cost, which approximates market value at December 31, 1994 and 1995 and March 31, 1996. Property and equipment: The assets are recorded at cost and depreciated using the straight-line and accelerated methods over the following estimated useful lives:
YEARS ----- Land improvements...................................................... 20 Building and improvements.............................................. 30-32 Furniture, fixtures and equipment...................................... 5-10
Deferred costs: Deferred costs include financing and organization costs. Deferred financing costs resulted from charges incurred in obtaining the mortgage notes payable and are being amortized using the straight-line method over the terms of the mortgages. Organization costs are being amortized using the straight-line method over five years. F-37 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Income taxes: The Partnerships are not subject to federal and state income taxes. Instead, the partners are taxed on their share of the Partnerships' taxable income, whether or not distributed. Therefore, no provision for income taxes has been made in these combined financial statements. 2. MEDICARE AND MEDICAID REIMBURSEMENT: Three of the Partnerships received a portion of their net resident service revenue from the Medicare and Ohio Medicaid programs. Combined Medicare and Medicaid revenue was approximately 66% in 1993 and 1994, 67% in 1995, and 68% in the three months ended March 31, 1996 of total combined net resident service revenue. Collection of accounts receivable in the normal course of business is dependent on payment by the Medicare and Medicaid programs. Net combined amounts included in accounts receivable and estimated settlements due from/to third party payors amounted to approximately $827,400, $905,400 and $1,042,700 at December 31, 1994, 1995, and March 31, 1996, respectively. 3. RESTRICTED INVESTMENTS: Restricted investments consisted of the following at December 31, 1994 and 1995:
DECEMBER 31, --------------------- 1994 1995 ---------- ---------- Mortgage escrow deposits.............................. $ 276,611 $ 211,450 Replacement reserve................................... 985,312 1,057,271 Other................................................. 127,459 -- ---------- ---------- $1,389,382 $1,268,721 ========== ==========
Included in restricted investments are amounts invested in certificates of deposit totalling $362,255, and $443,974, and government securities totalling $473,540 and $522,645 at December 31, 1994 and 1995, respectively. At December 31, 1995 government securities mature within one year. 4. DEFERRED COSTS: Deferred costs consisted of the following at December 31, 1994 and 1995.
DECEMBER 31, -------------------- 1994 1995 --------- --------- Deferred financing costs............................... $ 842,139 $ 842,139 Organization costs..................................... 109,410 109,410 --------- --------- 951,549 951,549 Less accumulated amortization.......................... (352,965) (391,310) --------- --------- $ 598,584 $ 560,239 ========= =========
F-38 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ---------------- 5. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following at December 31, 1994 and 1995:
DECEMBER 31, ----------------------- 1994 1995 ----------- ----------- Land and improvements............................. $ 2,507,813 $ 2,515,513 Buildings and improvements........................ 17,987,730 17,912,730 Furniture, fixtures and equipment................. 2,606,978 2,640,534 ----------- ----------- 23,102,521 23,068,777 Less accumulated depreciation and amortization.... 6,818,918 7,546,766 ----------- ----------- $16,283,603 $15,522,011 =========== ===========
6. NOTE PAYABLE, BANK: A Partnership had a revolving line of credit amounting to $1,000,000 with interest at the bank's prime plus 1% which was converted to a note payable effective April, 1993. The note required monthly installments of $25,000 plus interest through April, 1996. The interest rate at December 31, 1994 was 9.5%. The loan was collateralized by the accounts receivable of the Partnership and guaranteed by certain partners of the Partnership. The note payable amounted to $375,000 at December 31, 1994 which was repaid during 1995. 7. MORTGAGE NOTES PAYABLE: Property and equipment are pledged as collateral on mortgage notes payable, which are insured by the FHA and have the following terms: Original amount.............................................. $20,335,500 Monthly payments............................................. $156,453 Interest rates............................................... 6.45% to 9.7%
The mortgage notes payable mature at various dates as follows:
BALANCE, PARTNERSHIP MATURITY DATE DECEMBER 31, 1995 ----------- ---------------- ----------------- Beachwood Care Center.................... December 1, 2030 $10,909,165 Westbay Manor Company.................... October 1, 2010 2,346,298 Westbay Manor II Development Company..... July 1, 2013 2,155,206 Royalview Manor Development Company...... June 1, 2013 3,154,811 ----------- $18,565,480 ===========
During 1994, certain Partnerships entered into mortgage modification agreements reducing the interest rates and principal and interest payments. F-39 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ---------------- Future principal payment requirements of the mortgages at December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ------------------------ 1996......................................................... $ 297,877 1997......................................................... 319,981 1998......................................................... 343,768 1999......................................................... 369,350 2000......................................................... 396,887 Later Years.................................................. 16,837,617 ----------- $18,565,480 ===========
Beachwood Care Center's mortgage note payable is held by an affiliated company. Under agreements with the mortgage lenders and FHA, the Partnerships are required to make monthly escrow deposits for taxes, insurance and replacement of Partnership assets, and are subject to restrictions for their release and as to operating policies and distributions to partners. These deposits are included in restricted cash in the accompanying combined financial statements. Certain of the Partnerships' mortgages contain prepayment penalties decreasing annually at various dates through September, 1998. The liability of the Partnerships under the mortgage notes payable is limited to the underlying value of the real estate collateral, plus other amounts deposited with the lenders. Based on borrowing rates currently available to the Partnerships for FHA insured loans with similar terms and maturities, the approximate fair value of the mortgages is $20,930,800 at December 31, 1995. 8. RELATED PARTY TRANSACTIONS: During the years ended December 31, 1993, 1994, 1995, affiliated companies performed admitting, administrative and other services in their capacity as managing agents of the facilities. The management companies earn a 7% base management fee and, if applicable, an incentive management fee. The management companies earned fees of $2,373,530 in 1993, $2,320,226 in 1994, $2,663,818 in 1995, and $742,390 in the three months ended March 31, 1996. Amounts due to the affiliated management companies totalled $1,335,384, $691,220 and $1,227,666, at December 31, 1994 and 1995, and March 31, 1996, respectively. The Partnerships were advanced funds from partners of the Partnerships. At December 31, 1994 and 1995 and March 31, 1996, amounts due to the related parties totalled $695,552, $401,984, and $406,957, respectively, which included accrued interest totalling $428,236, $211,497, and $216,470, respectively. During 1994, a partner was advanced $50,000. The advance was non-interest bearing and was received during 1995. A Partnership leases corporate and medical office facilities to an affiliated company under a five-year operating lease expiring January 1, 1997. The lease requires monthly payments of $11,000. Total rental income received from the affiliated company amounted to $132,000 in 1993, 1994 and 1995 and $33,000 in the three months ended March 31, 1996. Future minimum lease receipts under the noncancelable operating lease are $132,000 to be received in the year ending December 31, 1996. F-40 BEACHWOOD CARE CENTER, WESTBAY MANOR COMPANY, WESTBAY MANOR II DEVELOPMENT COMPANY, ROYALVIEW MANOR COMPANY, AND ROYALVIEW MANOR DEVELOPMENT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) ---------------- 9. SUBSEQUENT EVENT: During May of 1996, the Partnerships entered into an agreement to lease their four nursing facilities to an affiliate of Harborside Healthcare Corporation ("Harborside") for an initial term of five years which is expected to commence on July 1, 1996. During the first six months of the final year of the initial term, Harborside may exercise an option to purchase the four facilities for $57,125,000. Under certain conditions the lease may be extended for up to two additional years, during which time Harborside must obtain financing and complete the acquisition. The annual aggregate base rent will be $5,000,000 during the initial term and $5,500,000 during the extension term, if any. Harborside has agreed to pay $8,000,000 for its option to purchase the facilities, which will be applied toward the purchase price. Of this amount, $5,000,000 will be paid at or prior to the closing of the lease agreement and the remainder will be paid upon the closing of the purchase or termination of the lease. F-41 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Bowie Center Limited Partnership: We have audited the accompanying balance sheets of Bowie Center Limited Partnership (the "Partnership") as of December 31, 1994 and 1995, and the related statements of operations and partners' equity and cash flows for the period from April 7, 1993 (date of inception) through December 31, 1993 and the years ended December 31, 1994 and 1995. These financial statements are the responsibility of the General Partners of the Partnership. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the General Partners of the Partnership, 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 financial position of Bowie Center Limited Partnership as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the period from April 7, 1993 (date of inception) through December 31, 1993 and the years ended December 31, 1994 and 1995 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Boston, Massachusetts March 19, 1996 F-42 BOWIE CENTER LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1994 AND 1995 (IN THOUSANDS OF DOLLARS) ----------------
1994 1995 ------ ------ ASSETS Current assets: Cash and cash equivalents...................................... $ 87 $ 286 Accounts receivable, net of allowance for doubtful accounts of $89 in 1994 and $389 in 1995.................................. 818 2,322 Prepaid expenses and other..................................... 95 93 ------ ------ Total current assets......................................... 1,000 2,701 Property and equipment, net...................................... 4,917 4,678 Intangible assets, net........................................... 590 367 ------ ------ Total assets................................................. $6,507 $7,746 ====== ====== LIABILITIES Current liabilities: Current maturities of long-term debt........................... $ 123 $ 249 Accounts payable............................................... 265 233 Employee compensation and benefits............................. 173 276 Other accrued liabilities...................................... 19 67 Payable to related party....................................... 80 -- Demand note payable to affiliate............................... -- 1,255 ------ ------ Total current liabilities.................................... 660 2,080 Long-term debt................................................... 5,002 4,973 ------ ------ Total liabilities............................................ 5,662 7,053 Commitments and contingencies (Note H) PARTNERS' EQUITY Partners' equity................................................. 845 693 ------ ------ Total liabilities and partners' equity....................... $6,507 $7,746 ====== ======
The accompanying notes are an integral part of the financial statements. F-43 BOWIE CENTER LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993 AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (IN THOUSANDS OF DOLLARS) ----------------
1993 1994 1995 ------ ------ ------ Revenues: Net patient service revenues........................... $ -- $2,515 $7,574 Other patient related services......................... -- 8 21 ------ ------ ------ Total revenues....................................... -- 2,523 7,595 ------ ------ ------ Expenses: Facility operating..................................... -- 2,407 6,485 Depreciation and amortization.......................... -- 353 537 Interest............................................... -- 286 518 Management fees to an affiliate........................ -- 80 214 ------ ------ ------ Total expenses....................................... -- 3,126 7,754 ------ ------ ------ Loss from operations..................................... -- (603) (159) Investment income........................................ -- 5 7 ------ ------ ------ Net loss............................................. -- (598) (152) Contributions............................................ 1,327 116 -- Partners' equity, beginning of period.................... -- 1,327 845 ------ ------ ------ Partners' equity, end of period.......................... $1,327 $ 845 $ 693 ====== ====== ======
The accompanying notes are an integral part of the financial statements. F-44 BOWIE CENTER LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM APRIL 7, 1993 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995 (IN THOUSANDS OF DOLLARS) ----------------
1993 1994 1995 ------- ------- ------- Operating activities: Net loss.......................................... $ -- $ (598) $ (152) Adjustments to reconcile net loss to net cash provided by (used by) operating activities: Depreciation and amortization..................... -- 353 537 ------- ------- ------- -- (245) 385 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable...... -- (818) (1,504) (Increase) decrease in prepaid expenses and other.......................................... (2) (93) 2 Increase (decrease) in accounts payable......... 439 (174) (32) Increase in employee compensation and benefits.. 2 171 103 Increase (decrease) in payable to related party.......................................... 3 77 (80) Increase (decrease) in other accrued liabilities.................................... 170 (151) 48 ------- ------- ------- Net cash provided by (used by) operating activities................................. 612 (1,233) (1,078) ------- ------- ------- Investing activities: Additions to property and equipment............... (3,192) (1,916) (75) Transfers (to) from restricted funds.............. (291) 291 -- Additions to intangible assets.................... (15) (722) -- ------- ------- ------- Net cash used by investing activities....... (3,498) (2,347) (75) ------- ------- ------- Financing activities: Contributions..................................... 1,327 116 -- Proceeds from construction loan................... 1,569 2,800 -- Principal payments on long-term debt.............. -- (13) (149) Demand note payable to affiliate.................. -- -- 1,255 Borrowings on line of credit...................... -- 754 246 ------- ------- ------- Net cash provided by financing activities... 2,896 3,657 1,352 ------- ------- ------- Net increase in cash and cash equivalents........... 10 77 199 Cash and cash equivalents, beginning of period...... -- 10 87 ------- ------- ------- Cash and cash equivalents, end of period............ $ 10 $ 87 $ 286 ======= ======= ======= Supplemental disclosure: Interest paid..................................... $ -- $ 286 $ 474 ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-45 BOWIE CENTER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS ---------------- A.ORGANIZATION Bowie Center Limited Partnership (the "Partnership") was formed on April 7, 1993 (date of inception) to develop and operate a 120 bed nursing facility (the "facility") in Bowie, Maryland. The facility commenced operations on April 30, 1994. Harborside Healthcare Limited Partnership ("HHLP") was formed to acquire and operate healthcare facilities and to provide related healthcare management services for affiliates of The Berkshire Group Limited Partnership and its subsidiaries. HHLP holds a 74.25% limited partnership interest in the Partnership, while an affiliate of HHLP holds a 0.75% general partnership interest in the Partnership. The remaining 24.75% limited partner interest and 0.25% general partner interest are held by Madison Manor, Inc., an affiliate of Dimensions Health Corporation, a non-profit corporation which owns and operates two acute care hospitals and related enterprises. Profits and losses of the Partnership are allocated to the partners in accordance with their percentage of ownership. Certain items of income, gain, loss, deduction, and credit are allocated to the partners in accordance with Section 4.3.2 of the partnership agreement. The Partnership is required to make quarterly cash distributions to the partners in amounts equal to the partners' tax liabilities arising from their respective shares of the Partnership's net income. The partnership agreement also calls for distributions to the partners based on the Partnership's achievement of certain quarterly cash flow objectives as defined in the partnership agreement. B.SIGNIFICANT ACCOUNTING POLICIES The Partnership uses the following accounting policies for financial reporting purposes: Cash Equivalents The Partnership includes all liquid investments with maturities of three months or less from the date of acquisition in cash and cash equivalents. Net Patient Service Revenues Net patient service revenues payable by patients at the facility are recorded at established billing rates. Net patient service revenues to be reimbursed by contracts with third-party payors, primarily the Medicare and Medicaid programs, are recorded at the amount estimated to be realized under these contractual arrangements. Revenues from Medicare and Medicaid are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants or a prospective payment system. The Partnership 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 audited and generally retroactively adjusted 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 Partnership subsequent to the year of origination and prior to final settlement based on improved estimates. Such adjustments and final settlements with third party payors, which could materially and adversely affect the Partnership, are reflected in operations at the time of the adjustment or settlement. F-46 BOWIE CENTER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ---------------- B.SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Concentrations A significant portion of the Partnership's revenues are derived from the Medicare and Medicaid programs. There have been, and the Partnership expects that there will continue to be, a number of proposals to limit reimbursement allowable to long-term care facilities under these programs. The Partnership 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 Partnership. Approximately 81% and 77% of the Partnership's net patient service revenues in 1994 and 1995, respectively, are from the Partnership's participation in the Medicare and Medicaid programs. As of December 31, 1994 and 1995, $760,743 and $2,261,295 respectively, of net accounts receivable were due from the Medicare and Medicaid programs. Provision for Doubtful Accounts Bad debt expense of $89,000 and $300,000 is included in facility operating expenses for the year ended December 31, 1994 and 1995, respectively. Individual patient accounts deemed to be uncollectible are written off against the allowance for doubtful accounts. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partners to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for the collectibility of receivables, depreciation and amortization, employee benefit plans and contingencies. Income Taxes The Partnership is not liable for federal or state income taxes because the Partnership's income or loss is allocated to the partners for income tax purposes. If the Partnership's tax returns are examined by the Internal Revenue Service or a state taxing authority and such an examination results in a change in Partnership taxable income or loss, such change will be reported to the partners. Property and Equipment Property and equipment are stated at cost. Expenditures that extend the lives of affected assets are capitalized, while maintenance and repairs are charged to expense as incurred. Upon retirement or sale of an asset the cost of the asset and any related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is included in net income. Depreciation expense is estimated using the straight-line method. These estimates are calculated using the following estimated useful lives: Land improvements.............................................. 8-40 years Buildings and improvements..................................... 5-40 years Equipment, furnishings and fixtures............................ 5-15 years
F-47 BOWIE CENTER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ---------------- Intangible Assets Costs incurred in obtaining the Partnership's long-term debt are being amortized over the life of the loan. Pre-opening costs for the facility are being amortized on a straight-line basis over a two-year period beginning with the facility's commencement of operations. Assessment of Long-Lived Assets Effective for the year ended December 31, 1995 the Partnership has adopted the provisions of Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Accordingly, the Partnership periodically reviews the carrying value of its long-lived assets (primarily property and equipment and intangible assets) to assess the recoverability of these assets; any impairments would be recognized in operating results if a diminution in value considered to be other than temporary were to occur. The adoption of this Statement had no impact on the Partnership's results of operations for the year ended December 31, 1995. As part of this assessment, the Partnership reviews the expected future net operating cash flows from its facility. C.LONG-TERM DEBT The Partnership obtained a $4,377,000 construction loan from a bank to fund the construction of the facility. Monthly principal payments of approximately $5,000 began in September 1994 with the balance of $4,061,000 due in September 1999. As of December 31, 1994, the full amount of the construction loan had been used. In connection with this loan, the Partnership capitalized interest of $30,000 and $91,000 during the period from April 7, 1993 (date of inception) through December 31, 1993 and year ended December 31, 1994, respectively. In addition to the construction loan, the Partnership also obtained a $700,000 line of credit from the bank to finance certain pre- opening costs and initial working capital requirements. During 1994, the Partnership increased the maximum amount of the line of credit to $1,000,000. The Partnership borrowed $246,000 under this line of credit in 1995, bringing the total amount owed under this facility to the $1,000,000 maximum. In July, 1995, the line of credit converted to a term loan. Monthly principal payments of approximately $16,000 plus interest began in August 1995; a balance of $262,000 will be due in July 1999. Interest on each of these loans is at the bank's prime rate (8.50% at December 31, 1995) plus 1%. Among other requirements, these loans limit the Partnership's borrowings, acquisitions, dispositions and distributions. Additionally, the maintenance of specified levels of net worth, working capital, occupancy at the nursing facility and debt service coverage are also requirements of the loans. Management believes the Partnership is in compliance with the loan covenants. The loans are collateralized by each partner's partnership interest as well as by all of the assets of the Partnership. Additionally, the loans described above are supported by the guarantee of HHLP as well as collateral pledged by the unaffiliated partner. The Partnership agreement states that any liability incurred by a partner in connection with a guarantee of the Partnership's debt is limited to that partner's proportionate share of the liability based on its percentage ownership of the Partnership. Long-term debt consists of the following at December 31, 1994 and 1995 (in thousands of dollars):
1994 1995 ------ ------ Construction loan.......................................... $4,359 $4,305 Line of Credit............................................. 754 906 Capital lease obligation................................... 12 11 ------ ------ Total.................................................... $5,125 $5,222 ====== ======
F-48 BOWIE CENTER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ---------------- The scheduled repayment of long-term debt is as follows (in thousands of dollars): 1996............................................................... $ 249 1997............................................................... 255 1998............................................................... 261 1999............................................................... 4,457 ------ Total............................................................ $5,222 ======
D.MANAGEMENT FEES AND EXPENSE REIMBURSEMENTS DUE TO AFFILIATES Under the terms of a management agreement, HHLP manages the facility in return for a monthly fee of $10,000, which commenced in May, 1994. When the facility reached a normal occupancy level in September 1995, the fee was changed to an amount equal to 5.5% of the facility's net revenues. The management agreement also defines certain expense reimbursements which the Partnership pays to affiliated entities for accounting, computer, travel, legal and payroll expenses incurred on its behalf. These charges amounted to $29,000 and $51,000 in 1994 and 1995, respectively. These costs have been charged to operating expenses. E.PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following (in thousands):
1994 1995 ------ ------ Land improvements......................................... $ 694 $ 694 Buildings and improvements................................ 3,932 3,940 Equipment, furnishings and fixtures....................... 497 564 ------ ------ 5,123 5,198 Less: accumulated depreciation and amortization........... 206 520 ------ ------ $4,917 $4,678 ====== ====== F.INTANGIBLE ASSETS Intangible assets are stated at cost and consist of the following (in thousands): 1994 1995 ------ ------ Loan costs................................................ $ 433 $ 433 Pre-opening costs......................................... 304 304 ------ ------ 737 737 Less: accumulated amortization............................ 147 370 ------ ------ $ 590 $ 367 ====== ======
G.RETIREMENT PLAN Employees of the Partnership may participate in an employee 401(k) defined contribution plan along with employees of other entities affiliated with HHLP. All employees of the facility who have worked at least one thousand hours and completed one year of continuous service are eligible to participate in the plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. The Partnership did not make any contributions to the plan in 1993, 1994 or 1995. F-49 BOWIE CENTER LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ---------------- H.CONTINGENCIES The Partnership is involved in legal actions and claims in the ordinary course of its business. It is the opinion of the General Partners, based on the advice of legal counsel, that such litigation and claims will be resolved without material effect on the Partnership's financial position, results of operations or liquidity. I.DISCLOSURE 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 Partnership's long-term debt is estimated based on the current rates offered to the Partnership for similar debt. The carrying value of the Partnership's long-term debt approximates its fair value as of December 31, 1994 and 1995. J.DEMAND NOTE PAYABLE TO AFFILIATE On December 28, 1995, HHLP advanced $1,255,000 to fund working capital requirements of the Partnership by means of a demand note bearing interest at 9.0% per annum. F-50 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRIT- ER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RE- LATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI- TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN- DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON- TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 The Company.............................................................. 13 The Reorganization....................................................... 13 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Dilution................................................................. 16 Capitalization........................................................... 17 Pro Forma Combined Financial Information................................. 18 Selected Combined Financial and Operating Data........................... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 29 Business................................................................. 39 Management............................................................... 60 Certain Transactions..................................................... 67 Stock Ownership of Directors, Executive Officers and Principal Holders... 69 Description of Capital Stock............................................. 70 Shares Eligible for Future Sale.......................................... 72 Underwriting............................................................. 74 Legal Matters............................................................ 75 Experts.................................................................. 76 Additional Information................................................... 76 Index to Financial Statements............................................ F-1
---------------- UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDI- TION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UN- DERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,600,000 SHARES [LOGO] HARBORSIDE HEALTHCARE CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- NATWEST SECURITIES LIMITED DEAN WITTER REYNOLDS INC. , 1996 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses payable in connection with the Offering of the shares being registered hereby, other than underwriting discounts and commissions. All the amounts shown are estimates, except the Securities and Exchange Commission registration fee and the NASD filing fee. All of such expenses are being borne by the Company. SEC registration fee............................................... $ 19,273 NASD filing fee.................................................... 6,089 New York Stock Exchange Listing Fee................................ 102,100 Blue Sky fees and expenses......................................... 20,000 Accounting fees and expenses....................................... * Legal fees and expense............................................. * Printing and engraving expenses.................................... * Registrar and transfer agent's fees................................ * Miscellaneous fees and expenses.................................... * -------- Total............................................................ * ========
- -------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 102(b)(7) of the Delaware General Corporation Law ("Delaware Law") permits a provision in the certificate of incorporation of each corporation organized thereunder, eliminating or limiting, with certain exceptions, the personal liability of a director to the corporation or its stockholders for monetary damages for certain breaches of fiduciary duty as a director. The Certificate of Incorporation of the Company eliminates the personal liability of directors to the fullest extent permitted by Delaware Law. Section 145 of Delaware Law ("Section 145"), in summary, empowers a Delaware corporation, within certain limitations, to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred by them in connection with any suit or proceeding other than by or on behalf of the corporation, if they acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. With respect to actions by or on behalf of the corporation, Section 145 permits a corporation to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such action or suit, provided such person meets the standard of conduct described in the preceding paragraph, except that no indemnification is permitted in respect of any claim where such person has been found liable to the corporation, unless the Court of Chancery or the court in which such action or suit was brought approves such indemnification and determines that such person is fairly and reasonably entitled to be indemnified. Section 8 of the Certificate of Incorporation of the Company provides for the indemnification of officers and directors and certain other parties (the "Indemnitees") of the Company to the fullest extent permitted under Delaware law. The Underwriting Agreement provides for indemnification by the Underwriters of the Company, its directors and officers, and persons who control the Company within the meaning of Section 15 of the Securities Act for certain liabilities, including liabilities arising thereunder. II-1 Each of the employment agreements described in the Prospectus under the captions "Executive Compensation--Employment Agreements and Change of Control Arrangements" and "Executive Compensation--Directors' Compensation" contains provisions entitling the executive to indemnification for losses incurred in the course of service to the Company or its subsidiaries, under certain circumstances. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In connection with the Reorganization, the Contributors will receive an aggregate of 4,400,000 shares of Common Stock in consideration for the transfer of their ownership interests in the Company's predecessors. Of these shares, 1,000 shares were issued to Berkshire upon the formation of the Company in March 1996. The remaining shares to be issued in connection with the Reorganization will be issued immediately prior to the completion of the Offering. These securities will be issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 1.1** Form of Underwriting Agreement. 2.1** Reorganization Agreement. 3.1* Amended and Restated Certificate of Incorporation of the Company. 3.2* Amended and Restated By-laws of the Company. 4.1* Specimen Common Stock certificate. 5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1(a) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven Facility). 10.1(b) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust Tri-States, Inc. and HHCI Limited Partnership (Indianapolis Facility). 10.1(c) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility). 10.1(d) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota Facility). 10.1(e) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook Facility). 10.1(f) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples Facility). 10.1(g) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods Edge Facility). 10.2(a) Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Harborside Healthcare Limited Partnership, dated October 13, 1994. 10.2(b) Guaranty, dated October 14, 1994, to Meditrust Mortgage Investments, Inc. from Harborside Healthcare Limited Partnership. 10.2(c) Environmental Indemnity Agreement, dated October 13, 1994, by and among Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation, Harborside Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc.
II-2 10.2(d) Consolidated and Renewal Promissory Note, dated October 13, 1994, from Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation to Meditrust Mortgage Investments, Inc. 10.2(e) Negative Pledge Agreement, dated October 13, 1994, by and among Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Meditrust Mortgage Investments, Inc. 10.2(f) Affiliated Party Subordination Agreement, dated October 13, 1994, by and among Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation, Harborside Healthcare Limited Partnership, Harborside Rehabilitation Limited Partnership and Meditrust Mortgage Investments, Inc. 10.2(g)* First Amendment to Loan Agreement, dated May , 1996, by and among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Harborside Healthcare Limited Partnership. 10.3(a) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Westwood Facility). 10.3(b) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Pheasant Woods Facility). 10.3(c) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Crestwood Facility). 10.3(d) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Milford Facility). 10.3(e) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Applewood Facility). 10.3(f) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Bedford, Inc. and Harborside New Hampshire Limited Partnership (Northwood Facility). 10.4(a) Facility Lease Agreement, dated as of March 31, 1995 between Meditrust of Ohio, Inc. and Harborside Toledo Limited Partnership (Swanton Facility). 10.4(b) First Amendment of Facility Lease Agreement, dated as of December 31, 1995, by and between Harborside Toledo Limited Partnership and Meditrust of Ohio Inc. (Swanton Facility). 10.5 Amended and Restated Agreement of Limited Partnership of Bowie Center Limited Partnership, dated April 7, 1993. 10.6 Agreement of Lease, dated March 16, 1993, between Bryan Nursing Home, Inc. and Harborside of Ohio Limited Partnership (Defiance and Northwestern Ohio Facilities). 10.7 First Amendment to Agreement of Lease, dated June 1, 1993, by and between Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership. 10.8 Option to Purchase Agreement, dated March 16, 1993, by and between Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership. 10.9(a) Lease, dated September 30, 1994, between Rockledge T. Limited Partnership and Harborside of Florida Limited Partnership (Brevard Facility). 10.9(b) Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited Partnership from Harborside Healthcare Limited Partnership. 10.9(c) Indemnity Agreement, dated September 30, 1994, between Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama.
II-3 10.9(d) Assignment and Security Agreement, dated September 30, 1994, between Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, and Southtrust Bank of Alabama. 10.9(e) Subordination Agreement (Lease), dated September 30, 1994, by and among Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama. 10.9(f) Subordination Agreement (Management), dated September 30, 1994, by and among Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama. 10.10(a)* Form of Employment Agreement between the Company and Stephen L. Guillard. 10.10(b)* Form of Employment Agreement between the Company and Damian Dell'Anno. 10.10(c)* Form of Employment Agreement between the Company and Bruce Beardsley. 10.10(d)* Form of Employment Agreement between the Company and William Stephan. 10.11 * 1996 Stock Option Plan for Non-Employee Directors. 10.12 * 1996 Long-Term Stock Incentive Plan. 10.13 * Retirement Savings Plan of the Company. 10.14 ** Supplemental Executive Retirement Plan of the Company. 10.15 ** Form of Administrative Services Agreement between the Company and Berkshire. 10.16 ** Agreement to Lease, dated as of May 3, 1996 among Westbay Manor Company, Westbay Manor II Development Company, Royal View Manor Development Company, Beachwood Care Center Limited Partnership, Royalview Manor Company, Harborside Health I Corporation, and Harborside Healthcare Limited Partnership. 21.1 * Subsidiaries of the Company. 23.1 ** Consent of Coopers & Lybrand L.L.P. 23.2 ** Consent of Leverone & Company 23.3 ** Consent of Howard, Wershbale & Co. 23.4 * Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1). 24.1 Power of Attorney. 27.1 ** Financial Data Schedule 99.1 Consent of David F. Benson 99 2 ** Consent of Robert T. Barnum 99.3 ** Consent of Robert M. Bretholtz 99.4 ** Consent of Sally W. Crawford
- -------- * To be filed by amendment. ** Filed herewith. ITEM 17. UNDERTAKINGS The Company hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Company pursuant to its Certificate of Incorporation, By-Laws, the Underwriting Agreement or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: II-4 (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide Offering thereof. II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOSTON, COMMONWEALTH OF MASSACHUSETTS, ON THE 17TH DAY OF MAY, 1996. HARBORSIDE HEALTHCARE CORPORATION /s/ Stephen L. Guillard By: _________________________________ STEPHEN L. GUILLARD President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. NAME TITLE DATE ---- ----- ---- President, Chief * Executive Officer May 17, 1996 - ------------------------------------- and Director STEPHEN L. GUILLARD (Principal Executive Officer) /s/ William H. Stephan Chief Financial - ------------------------------------- Officer (Principal May 17, 1996 WILLIAM H. STEPHAN Financial and Accounting Officer) Director * May 17, 1996 - ------------------------------------- LAURENCE GERBER Director * May 17, 1996 - ------------------------------------- DOUGLAS KRUPP /s/ William H. Stephan By: _________________________________ NAME: WILLIAM H. STEPHAN Attorney- in-Fact II-6
EXHIBIT NUMBER DESCRIPTION PAGE NO. ------- ----------- -------- 1.1** Form of Underwriting Agreement. 2.1** Reorganization Agreement. 3.1* Amended and Restated Certificate of Incorporation of the Company. 3.2* Amended and Restated By-laws of the Company. 4.1* Specimen Common Stock certificate. 5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison. 10.1(a) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust Tri-States, Inc. and HHCI Limited Partnership (New Haven Facility). 10.1(b) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust Tri-States, Inc. and HHCI Limited Partnership (Indianapolis Facility). 10.1(c) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Ohio, Inc. and HHCI Limited Partnership (Troy Facility). 10.1(d) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Sarasota Facility). 10.1(e) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Pinebrook Facility). 10.1(f) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Florida, Inc. and HHCI Limited Partnership (Naples Facility). 10.1(g) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of New Jersey, Inc. and HHCI Limited Partnership (Woods Edge Facility). 10.2(a) Loan Agreement among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Harborside Healthcare Limited Partnership, dated October 13, 1994. 10.2(b) Guaranty, dated October 14, 1994, to Meditrust Mortgage Investments, Inc. from Harborside Healthcare Limited Partnership. 10.2(c) Environmental Indemnity Agreement, dated October 13, 1994, by and among Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation, Harborside Healthcare Limited Partnership and Meditrust Mortgage Investments, Inc. 10.2(d) Consolidated and Renewal Promissory Note, dated October 13, 1994, from Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation to Meditrust Mortgage Investments, Inc. 10.2(e) Negative Pledge Agreement, dated October 13, 1994, by and among Douglas Krupp, George Krupp, Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Meditrust Mortgage Investments, Inc. 10.2(f) Affiliated Party Subordination Agreement, dated October 13, 1994, by and among Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation, Harborside Healthcare Limited Partnership, Harborside Rehabilitation Limited Partnership and Meditrust Mortgage Investments, Inc.
EXHIBIT NUMBER DESCRIPTION PAGE NO. ------- ----------- -------- 10.2(g)* First Amendment to Loan Agreement, dated May , 1996, by and among Meditrust Mortgage Investments, Inc. and Bay Tree Nursing Center Corporation, Belmont Nursing Center Corporation, Countryside Care Center Corporation, Oakhurst Manor Nursing Center Corporation, Orchard Ridge Nursing Center Corporation, Sunset Point Nursing Center Corporation, West Bay Nursing Center Corporation and Harborside Healthcare Limited Partnership. 10.3(a) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Westwood Facility). 10.3(b) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Pheasant Woods Facility). 10.3(c) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Crestwood Facility). 10.3(d) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Milford Facility). 10.3(e) Facility Lease Agreement, dated as of January 1, 1996 between Meditrust of New Hampshire, Inc. and Harborside New Hampshire Limited Partnership (Applewood Facility). 10.3(f) Facility Lease Agreement, dated as of December 31, 1995 between Meditrust of Bedford, Inc. and Harborside New Hampshire Limited Partnership (Northwood Facility). 10.4(a) Facility Lease Agreement, dated as of March 31, 1995 between Meditrust of Ohio, Inc. and Harborside Toledo Limited Partnership (Swanton Facility). 10.4(b) First Amendment of Facility Lease Agreement, dated as of December 31, 1995, by and between Harborside Toledo Limited Partnership and Meditrust of Ohio Inc. (Swanton Facility). 10.5 Amended and Restated Agreement of Limited Partnership of Bowie Center Limited Partnership, dated April 7, 1993. 10.6 Agreement of Lease, dated March 16, 1993, between Bryan Nursing Home, Inc. and Harborside of Ohio Limited Partnership (Defiance and Northwestern Ohio Facilities). 10.7 First Amendment to Agreement of Lease, dated June 1, 1993, by and between Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership. 10.8 Option to Purchase Agreement, dated March 16, 1993, by and between Bryan Nursing Home, Inc. and Harborside Ohio Limited Partnership. 10.9(a) Lease, dated September 30, 1994, between Rockledge T. Limited Partnership and Harborside of Florida Limited Partnership (Brevard Facility). 10.9(b) Lease Guaranty, dated September 30, 1994, to Rockledge T. Limited Partnership from Harborside Healthcare Limited Partnership. 10.9(c) Indemnity Agreement, dated September 30, 1994, between Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama. 10.9(d) Assignment and Security Agreement, dated September 30, 1994, between Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, and Southtrust Bank of Alabama. 10.9(e) Subordination Agreement (Lease), dated September 30, 1994, by and among Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama.
EXHIBIT NUMBER DESCRIPTION PAGE NO. ------- ----------- -------- 10.9(f) Subordination Agreement (Management), dated September 30, 1994, by and among Rockledge T. Limited Partnership, Harborside of Florida Limited Partnership, Harborside Healthcare Limited Partnership and Southtrust Bank of Alabama. 10.10(a)* Form of Employment Agreement between the Company and Stephen L. Guillard. 10.10(b)* Form of Employment Agreement between the Company and Damian Dell'Anno. 10.10(c)* Form of Employment Agreement between the Company and Bruce Beardsley. 10.10(d)* Form of Employment Agreement between the Company and William Stephan. 10.11 * 1996 Stock Option Plan for Non-Employee Directors. 10.12 * 1996 Long-Term Stock Incentive Plan. 10.13 * Retirement Savings Plan of the Company. 10.14 * Supplemental Executive Retirement Plan of the Company. 10.15 * Form of Administrative Services Agreement between the Company and Berkshire. 10.16 ** Agreement to Lease, dated as of May 3, 1996 among Westbay Manor Company, Westbay Manor II Development Company, Royal View Manor Development Company, Beachwood Care Center Limited Partnership, Royalview Manor Company, Harborside Health I Corporation, and Harborside Healthcare Limited Partnership. 21.1 * Subsidiaries of the Company. 23.1 ** Consent of Coopers & Lybrand L.L.P. 23.2 ** Consent of Leverone & Company 23.3 ** Consent of Howard, Wershbale & Co. 23.4 * Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1). 24.1 Power of Attorney. 27.1 ** Financial Data Schedule 99.1 Consent of David F. Benson 99 2 ** Consent of Robert T. Barnum 99.3 ** Consent of Robert M. Bretholtz 99.4 ** Consent of Sally W. Crawford
- -------- * To be filed by amendment. ** Filed herewith. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 [DRAFT- 05/17/96] 3,600,000 Shares HARBORSIDE HEALTHCARE CORPORATION Common Stock UNDERWRITING AGREEMENT ---------------------- __________ __, 1996 NATWEST SECURITIES LIMITED DEAN WITTER REYNOLDS INC. As Representatives of the several Underwriters c/o NatWest Securities Limited 135 Bishopsgate London EC2M 3XT England Ladies and Gentlemen: HARBORSIDE HEALTHCARE CORPORATION, a Delaware corporation (the "Company"), proposes to issue and sell an aggregate of 3,600,000 shares (the "Firm Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), to you and the other underwriters named in Schedule I hereto (collectively, the ---------- "Underwriters"), for whom you are acting as representatives (the "Representatives"). The Company has also agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 540,000 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b) hereto. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The Company hereby confirms as follows its agreements with the Representatives and the several other Underwriters. 1. Agreement to Sell and Purchase. ------------------------------ (a) On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, (i) the Company agrees to sell to the several Underwriters and (ii) each of the Underwriters, severally and not jointly, agrees to purchase from the Company at a purchase price of $_____ per share, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto, plus such additional number of Firm Shares which such Underwriter may become obligated to purchase pursuant to Section 10 hereof. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, the Option Shares at the same price per share as the Underwriters shall pay for the Firm Shares. This option may be exercised only to cover over- allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time and from time to time on or before the 30th day after the date of this Agreement (or on the next business day if the 30th day is not a business day), upon notice (the "Option Shares Notice") in writing or by telephone (confirmed in writing) by the Representatives to the Company no later than 5:00 p.m., New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased and the time and date for such purchase. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representatives in such manner as they deem advisable to avoid fractional shares. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the -------------------- Representatives for the accounts of the Underwriters against payment of the purchase price by certified or official bank checks payable in New York Clearing House (next-day) funds to the order of the Company (the "Closing") at the office of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Company, 1285 Avenue of the Americas, New York, New York 10019. Such payment shall be made at 10:00 a.m., New York City time, on the third full business day following the date of this Agreement, or at such other time on such other date, not later than seven business days after the date of this Agreement, as may be agreed upon by the Company and the Representatives (such date is hereinafter referred to as the "Closing Date"). To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in -2- such denominations as the Representatives shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be. The cost of original issue tax stamps, if any, in connection with the issuance, sale and delivery of the Firm Shares and Option Shares by the Company to the respective Underwriters shall be borne by the Company. The Company will pay and save each Underwriter and any subsequent holder of the Shares harmless from any and all liabilities, interest and penalties with respect to or resulting from any failure or delay in paying Federal or state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance, sale or delivery to such Underwriter of the Firm Shares and Option Shares. 3. Representations, Warranties and Covenants of the Company. The Company -------------------------------------------------------- represents, warrants and covenants to each Underwriter that: (a) A registration statement on Form S-1 (Registration No. 333-3096) relating to the Shares, including a preliminary prospectus relating to the Shares and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Commission has not issued any order preventing or suspending the use of the Prospectus (as defined below) or any Preliminary Prospectus (as defined below). The term "Preliminary Prospectus" as used herein means a preliminary prospectus relating to the Shares included at any time as part of the foregoing registration statement or any amendment thereto before it became effective under the Act and any prospectus filed with the Commission by the Company pursuant to Rule 424(a) of the Rules and Regulations. Copies of such registration statement and amendments and of each related Preliminary Prospectus have been delivered to the Representatives. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus relating to the Shares containing information permitted to be -3- omitted at the time of effectiveness by Rule 430A will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations promptly after execution and delivery of this Agreement. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including all financial statements and schedules and all exhibits, and all information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a term sheet described in Rule 434 of the Rules and Regulations in accordance with Section 5 hereof and deemed to be included therein as of the Effective Date by Rule 430A of the Rules and Regulations. The term "Prospectus" means the prospectus relating to the Shares as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus relating to the Shares included in the Registration Statement at the Effective Date. (b) On the date that any Preliminary Prospectus was filed with the Commission, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement, each Preliminary Prospectus and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply in all material respects with all applicable provisions of the Act and the Rules and Regulations and did or will contain all material statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any -4- amendment or supplement thereto. The Company has not distributed, and, prior to the later to occur of (i) the Closing Date or, if later, the Option Closing Date and (ii) completion of the distribution of the Shares, will not distribute, any offering material in connection with the offering or sale of the Shares other than the Registration Statement, the Preliminary Prospectus, the Prospectus or any other materials, if any, permitted by the Act. (c) At or prior to the Closing Date, the Company will complete a series of transactions (collectively, the "Reorganization Transactions") contemplated under that certain Reorganization Agreement dated as of May 15, 1996 (the "Reorganization Agreement") among the Company, The Berkshire Companies Limited Partnership, Krupp Enterprises Limited Partnership, The Douglas Krupp 1994 Family Trust, The George Krupp 1994 Family Trust, Laurence Gerber, Stephen Guillard and Damian Dell'Anno, a copy of which has been filed as Exhibit 2.1 to the registration statement described in Section 3(a) hereof (the "Reorganization Agreement") pursuant to which, among other things: (A) KHI Corp., a Delaware corporation ("KHI"), will become a wholly owned subsidiary of the Company, (B) the Company will become the owner, directly or indirectly, of all of the outstanding limited partnership interests of (I) Harborside Healthcare Advisors Limited Partnership, a Massachusetts limited partnership ("HH Advisors"), of which KHI is the sole general partner and (II) Riverside Retirement Limited Partnership, a Massachusetts limited partnership ("Riverside"), of which a wholly-owned subsidiary of HH Advisors is the sole general partner and (C) each of Bay Tree Nursing Center Corp., a Massachusetts corporation, Oakhurst Manor Nursing Center Corp., a Massachusetts corporation, Belmont Nursing Center Corp., a Massachusetts corporation, Sunset Point Nursing Center Corp., a Massachusetts corporation, Countryside Care Center Corp., a Massachusetts corporation, West Bay Nursing Center Corp., a Massachusetts corporation, and Orchard Ridge Nursing Center Corp., a Massachusetts corporation (collectively, the "Krupp Subsidiaries"), will become wholly owned subsidiaries of the Company. Prior to the date that the first amendment to the registration statement described in Section 3(a) hereof was filed with the Commission, the Reorganization Agreement was executed and delivered by all of the parties thereto. The Reorganization Transactions shall have closed, been fully consummated and be effective for all purposes prior to or simultaneous with the Closing in accordance with the terms of the Reorganization Agreement. (d) The Company has no subsidiaries on the date hereof and will, at the Closing Date and, if later, the Option Closing Date, have the subsidiaries listed in Exhibit 21.1 to the Registration Statement (collectively, the "Subsidiaries" and individually, a "Subsidiary"). Each of the Subsidiaries will be -5- a direct or indirect wholly owned subsidiary of the Company, except for Bowie Center Limited Partnership, a Maryland limited partnership, of which Madison Manor Inc., a Maryland corporation, will own a 0.25% general partnership interest and a 24.75% limited partnership interest (the "Madison Manor Interest"). The Company is, and at the Closing Date and the Option Closing Date will be, duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of the Subsidiaries is, and at the Closing Date and the Option Closing Date will be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each of the Company and the Subsidiaries has, and at the Closing Date and the Option Closing Date, will have, full corporate or partnership power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), assuming and giving effect to, in each case, the consummation of the Reorganization Transactions. Each of the Company and the Subsidiaries is, and at the Closing Date and the Option Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign organization in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so qualified does not and, upon consummation of the Reorganization Transactions will not, have a material adverse effect, singly or in the aggregate, on the business, properties, condition (financial or otherwise), or results of operations of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). Upon completion of the Reorganization Transactions on the Closing Date, the Company will beneficially own, directly or indirectly, all of the outstanding equity interests in each of the Subsidiaries, free and clear of all liens, security interests, pledges, encumbrances, charges or equities (collectively, "Encumbrances"), except (i) for the Madison Manor Interest, (ii) as disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and (iii) Encumbrances which are immaterial both individually and in the aggregate. Except with respect to the Subsidiaries upon completion of the Reorganization Transactions on the Closing Date, the Company does not own, and at the Closing Date and Option Closing Date will not own, directly or indirectly, any shares of stock or any other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity of a nature required to be disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) that has not been so disclosed. Complete and correct copies of the charter and -6- bylaws or partnership certificates and agreements or other governing documents of the Company and each Subsidiary and all amendments thereto have been delivered or made available to the Representatives, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date, except as contemplated by the Reorganization Transactions or as are not material, either individually or in the aggregate, to the Company. (e) The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable and are not subject to any preemptive rights under the Company's Certificate of Incorporation and By-Laws, the General Corporation Law of the State of Delaware (the "GCL") or any agreement, contract or other instrument to which the Company or any Subsidiary is bound. The Shares to be issued and sold by the Company will be, upon such issuance and payment therefor, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar rights. The Company has, and, upon completion of the sale of the Shares and the Reorganization Transactions, will have, an authorized, issued and outstanding capitalization as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). The description of the securities of the Company in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), is complete and accurate in all material respects, and except as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company does not have outstanding, and at the Closing Date and, if later, the Option Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell, any shares of its capital stock or any such warrants, convertible securities or obligations. (f) The combined financial statements and the related notes of the Company and the Subsidiaries set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) present fairly, in all material respects, the combined financial position of the Company and the Subsidiaries as of the dates indicated and the combined results of operations, changes in stockholders' equity and cash flows of the Company and the Subsidiaries for the periods covered thereby, all in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the entire period involved. The combined financial statements and the related notes of Sowerby Enterprises ("Sowerby") set forth in the Registration -7- Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) present fairly, in all material respects, the combined financial position of Sowerby as of the dates indicated and the combined results of operations, retained earnings (deficit) and cash flows of Sowerby for the periods covered thereby, all in conformity with GAAP applied on a consistent basis throughout the entire period involved. The combined financial statements and related notes of Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor Company and Royalview Manor Development Company (collectively, the "Ohio Sellers") set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) present fairly, in all material respects, the combined financial position of the Ohio Sellers as of the dates indicated and the combined results of operations, partners' equity and cash flows of the Ohio Sellers for the periods covered thereby, all in conformity with GAAP applied on a consistent basis throughout the entire period involved. The selected historical combined financial data for the Company and the Subsidiaries set forth under the captions "Prospectus Summary--Summary Combined Financial and Operating Data" and "Selected Combined Financial and Operating Data" in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been prepared on a basis consistent with the combined financial statements of the Company and the Subsidiaries. The pro forma combined financial statements of the Company and the Subsidiaries and the related notes included in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) comply in all material respects with the applicable requirements of Rule 11-02 of Regulation S-X of the Commission and present fairly the information shown therein, and all of the correct pro forma adjustments have been properly applied to the historical amounts in the compilation of such statements. No other financial statements or schedules of or pro forma information relating to the Company, any Subsidiary or any other entity are required by the Act or the Rules and Regulations to be included in the Registration Statement or Prospectus (or, if the Prospectus is not in -8- existence, the most recent Preliminary Prospectus). The pro forma financial data set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), under the captions "Prospectus Summary--Summary Combined Financial and Operating Data" and "Selected Combined Financial and Operating Data" have been prepared on a basis consistent with the pro forma combined financial statements of the Company and the Subsidiaries included therein. Coopers & Lybrand L.L.P. (the "Accountants"), who have reported on the combined financial statements of the Company and the Subsidiaries included in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent accountants with respect to the Company, as required by the Act and the Rules and Regulations. Leverone & Company, who have reported on the combined financial statements of Sowerby included in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent accountants with respect to Sowerby, as required by the Act and the Rules and Regulations. Howard, Wershbale & Co. (the "Ohio Sellers Accountants"), who have reported on the combined financial statements of the Ohio Sellers included in the Registration Statement and Prospectus (or, of the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent accountants with respect to the Ohio Sellers, as required by the Act and the Rules and Regulations. (g) The Company and each of the Subsidiaries maintains a system of internal accounting control sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (h) Except as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date and, if later, the Option Closing Date, (i) there has not been, and will not have been (after giving effect to the consummation of the Reorganization Transactions), any change in the capitalization of the Company (other than (x) the exercise of outstanding stock options described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and (y) as otherwise contemplated by this Agreement or the Reorganization Agreement) or any Material Adverse Effect, (ii) neither the Company nor any of the Subsidiaries has incurred, nor will it have incurred (after giving effect to the consummation of the Reorganization Transactions), any material liabilities or obligations, direct or contingent, (iii) neither the Company nor any of the Subsidiaries has entered into, nor will it have entered into (after giving effect to the consummation of the Reorganization Transactions), any material transactions other than pursuant to this Agreement or the Reorganization Agreement, and (iv) neither the Company nor any of the Subsidiaries has, -9- nor will it have (after giving effect to the consummation of the Reorganization Transactions), paid or declared any dividends or other distributions of any kind on any class of its capital stock, partnership interests or other equity securities except for amounts paid or payable to the Company or another Subsidiary. (i) Each Subsidiary has good and marketable title to those facilities owned by it as described in the Registration Statements and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) (all such facilities owned by the Subsidiaries are hereinafter referred to collectively as the "Owned Facilities"), in each case free and clear of all Encumbrances or leases and without title company exceptions, disclaimers of liability or objections (other than standard exceptions or disclaimers of liability contained in the standard form of title insurance policy of the issuer of the title policies with respect to such Owned Facilities), except (i) as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and (ii) for those which could not reasonably be expected to affect the Company's (or such Subsidiary's) intended use of such Owned Facilities in a manner that would have a Material Adverse Effect. Each of the Subsidiaries has valid, subsisting and enforceable leases for the facilities leased by it as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) (all such facilities leased by the Subsidiaries are hereinafter referred to collectively as the "Leased Facilities"), in each case free and clear of all Encumbrances, except (i) as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and (ii) for those which could not reasonably be expected to affect the Company's (or such Subsidiary's) intended use of such Leased Facilities in a manner that would have a Material Adverse Effect. (j) Each of Harborside Healthcare Limited Partnership, a Massachusetts limited partnership ("HH Partners"), and Harborside Health I Corp., a Delaware corporation ("HH Corp."), has entered into that certain Agreement to Lease dated as of May 3, 1996 among the Ohio Sellers, HH Partners and HH Corp. (the "Ohio Acquisition Agreement"). Each of HH Advisors and HH Corp. has full right, power and authority to enter into the Ohio Acquisition Agreement and to consummate the transactions contemplated therein. The Ohio Acquisition Agreement has been duly authorized, executed and delivered by each of HH Advisors and HH Corp. and constitutes the valid and binding agreement of HH Advisors and HH Corp., enforceable against each of such parties in accordance with the terms thereof, except as limited by applicable -10- bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies. The description of the Ohio Acquisition Agreement in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) set forth under the caption "Business-The Ohio Transaction" contains a fair and accurate description of the Ohio Acquisition Agreement in all material respects. None of the execution or delivery of the Ohio Acquisition Agreement by HH Partners or HH Corp., the performance by HH Partners or HH Corp. of its obligations thereunder, or the consummation by HH Partners or HH Corp. of the transactions contemplated therein, conflicts with or results in any breach or violation of any of the terms or provisions of, or constitutes a default under, or results in the creation or imposition of any Encumbrance upon, any property or assets of the Company or any of the Subsidiaries pursuant to (A) the charter or bylaws or the certificate or agreement of limited partnership, as applicable, of the Company or any Subsidiary; (B) (subject to obtaining any required approvals) the terms of any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note or other evidence of indebtedness, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which the Company or any of the Subsidiaries is (or, upon consummation of the Reorganization Transactions and the transactions contemplated by the Ohio Acquisition Agreement, will be) a party or by which it or any of the Subsidiaries is (or, upon consummation of the Reorganization Transactions and the transactions contemplated by the Ohio Acquisition Agreement, will be) bound or to which any of their respective assets or properties is (or, upon consummation of the Reorganization Transactions and the transactions contemplated by the Ohio Acquisition Agreement, will be) subject, the conflict, breach or violation of which would have a Material Adverse Effect; (C) (subject to the issuance of any required regulatory approvals or consents) any statute, rule or regulation of any Governmental Body having (or that, upon consummation of the Reorganization Transactions and the transactions contemplated by the Ohio Acquisition Agreement, will have) jurisdiction over the Company or any of its Subsidiaries or any of their respective activities or properties, the conflict, breach or violation of which would have a Material Adverse Effect; or (D) the terms of any judgment, decree or order of any arbitrator or Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign (collectively, a "Governmental Body") having (or that, upon consummation of the Reorganization Transactions and the transactions contemplated by the Ohio Acquisition Agreement, will have) such jurisdiction, the conflict, breach or violation of which would have a Material Adverse Effect; -11- (k) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). (l) Except as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened, against or affecting the Company, any Subsidiary or any directors or officers of any of the foregoing in their capacity as such, before or by any Governmental Body, wherein an unfavorable ruling, decision or finding could reasonably be expected to have a Material Adverse Effect. (m) Except as otherwise described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), each of the Company and the Subsidiaries has, and at the Closing Date, the Option Closing Date (if any) and upon consummation of the Reorganization Transactions will have, all governmental licenses, permits, consents, orders, approvals and other authorizations (collectively, the "Licenses"), including, but not limited to, (i) valid and subsisting Certificates of Need for each Facility and (ii) valid and subsisting authorizations for each Facility to participate in all applicable Federal and State Medicare and Medicaid programs, which are necessary to carry on its business and own or lease its properties, including the Facilities, as contemplated in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), except where the failure to have such Licenses would not have a Material Adverse Effect. Except as otherwise described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), to the best knowledge of the Company, each of the Ohio Sellers has, and at the Closing Date and the Option Closing Date (if any) will have, all Licenses which are necessary to carry on its business at the Ohio Facilities as contemplated in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), except where the failure to have such Licenses would not have a Material Adverse Effect. Each of the Company and the Subsidiaries has, and at the Closing Date and the Option Closing Date (if any) and upon consummation of the Reorganization Transactions will have, complied in all material respects with all laws, regulations, Licenses and orders (including, but not limited to, those pertaining to Medicare and Medicaid programs) applicable to it or its business and properties, including the Facilities, except for such noncompliance as would not have a Material Adverse Effect. None of the Company or any Subsidiary is, and, at the Closing Date, -12- the Option Closing Date (if any) and upon consummation of the Reorganization Transactions, will be, in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) under any contract or other agreement to which it is a party or by which any of its property is, or, upon consummation of the Reorganization Transactions, will be, bound or affected, the violation of which would have a Material Adverse Effect. To the best knowledge of the Company, no other party under any such contract or other agreement is, or, at the Closing Date, the Option Closing Date (if any) and upon consummation of the Reorganization Transactions, will be, in default in any material respect thereunder, except for such defaults as would not have a Material Adverse Effect. With respect to two of the Facilities located in New Hampshire which have not been certified for participation in the Medicare program, the Company has applied for participation of such facilities in such program. There are no governmental proceedings or actions pending or, to the knowledge of the Company, threatened for the purpose of suspending or revoking any License held, or, upon consummation of the Reorganization Transactions, to be held, by the Company or any Subsidiary or Facility, or, to the knowledge of the Company, any of the Ohio Sellers or the Ohio Facilities (including, without limitation, any proceeding or action to decertify any of the Facilities or Ohio Facilities from participation in any Medicare or Medicaid program). None of the Company or any Subsidiary is in violation of any provision of its charter or bylaws or certificate or agreement of limited partnership, as applicable. (n) No consent, approval, authorization or order of, or any filing or declaration with, any Governmental Body is required for the consummation of the transactions contemplated by this Agreement or the Reorganization Agreement or in connection with the issuance and sale of the Shares by the Company or the issuance of shares of Common Stock by the Company in the Reorganization Transactions, except such as have been obtained from, or such filings as have been made (i) with Governmental Bodies as of the date hereof or (ii) under the Act or the Rules and Regulations, and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares to be sold by the Company. All consents of the partners or shareholders of the Company and all Subsidiaries required for the consummation of the Reorganization Transactions have been duly and validly obtained, have not been revoked and remain in full force and effect; (o) The Company has full corporate power and authority to enter into this Agreement and the Reorganization Agreement and to carry out all the terms and provisions hereof and thereof to be carried out by it. This Agreement has been -13- duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and is enforceable against the Company in accordance with the terms hereof, except as limited by applicable bankruptcy, insolvency, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity or contribution may be limited by Federal or state securities laws and the public policy underlying such laws or any order of the Commission. The Reorganization Agreement has been duly authorized, executed and delivered and constitutes the valid and binding agreement of the Company and, to the Company's knowledge, the other parties thereto, and is enforceable against the Company and, to the Company's knowledge, the other parties' thereto, in accordance with the terms thereof, except as limited by applicable bankruptcy, insolvency, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies. Except as disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the execution, delivery and performance of this Agreement and the Reorganization Agreement and the consummation of the transactions contemplated hereby and thereby by the Company will not result in the creation or imposition of any Encumbrance upon any property or assets of the Company or any Subsidiary pursuant to the terms or provisions of, or result in a breach or violation of, or conflict with, any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, (i) the charter or bylaws or the certificate or agreement of limited partnership of the Company or any Subsidiary, as applicable, (ii) any contract or other agreement to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary, or any of their assets or properties are, or, upon consummation of the Reorganization Transactions, will be, bound, which Encumbrance, breach, violation, conflict, default, termination or acceleration would have a Material Adverse Effect, or (iii) any judgment, ruling, decree, order, law, statute, rule or regulation of any Governmental Body applicable to the Company, the Subsidiaries, or the business or properties of the Company or any Subsidiary which Encumbrance, breach, violation, conflict, default, termination or acceleration would have a Material Adverse Effect. The Company has full corporate power and authority to authorize, issue, offer and sell the Shares, as contemplated by this Agreement, free of any preemptive rights under the Company's Certificate of Incorporation and By-Laws, the GCL or any agreement, contract or other instrument to which the Company or any Subsidiary is bound. The offer, issuance and sale by the Company of any shares of Common Stock and all -14- options or rights to purchase Common Stock prior to the date hereof was and is, or in the Reorganization Transactions will be, exempt from the registration requirements of the Act and applicable state securities, real estate syndication and blue sky laws and are or will be in full compliance with all requirements of such laws. (p) There is no document or contract of a character required to be described in the Registration Statement or Prospectus (if the Prospectus is not in existence, the most recent Preliminary Prospectus) or to be filed as an exhibit to the Registration Statement which is not described or filed as required. (q) Neither the Company nor any of its directors, officers or affiliates (within the meaning of the Rules and Regulations) has taken, nor will he, she or it take, directly or indirectly, any action designed, or which might reasonably be expected in the future, to cause or result in, under the Act or otherwise, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or otherwise. (r) No holder of securities of the Company or any Subsidiary has rights to register any such securities with the Shares pursuant to the Registration Statement. (s) The Shares have been approved for listing on the New York Stock Exchange (the "NYSE"), subject only to notice of issuance. (t) Neither the Company nor any Subsidiary is involved in any labor dispute that would have a Material Adverse Effect. The Company has no knowledge of union organization activities affecting any of its employees except for those covered by collective bargaining agreements described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (u) To the Company's knowledge, no claims have been asserted by any person to the use of any material trademarks or trade names used in or necessary for the conduct of the Company's business or challenging or questioning the validity or effectiveness of any such trademark or trade name. The use, in connection with the business and operations of the Company and the Subsidiaries, of such trademarks and trade names does not, to the Company's knowledge, infringe on the rights of any person. (v) None of the Company, any Subsidiary or, to the Company's knowledge, any employee or agent of the Company or -15- any Subsidiary has made any payment of funds of the Company or any Subsidiary or received or retained any funds of the Company or any Subsidiary in violation of any law, rule or regulation or of a character required to be disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (w) The descriptions of the Company's insurance coverages as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are true and complete in all material respects and the Company has not received any notice to the effect that it will not be able to renew its and its Subsidiaries' existing insurance coverage (or such coverage as will be in effect upon consummation of the Reorganization Transactions) as and when such coverage expires. (x) Except as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the business, operations and Facilities of the Company and each Subsidiary comply with all applicable laws, ordinances, rules, regulations, Licenses and permits relating to occupational safety and health, or environmental matters, and none of the Company or any Subsidiary has received any written notice from any Governmental Body or third party alleging any violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances), except for such noncompliances, violations or liabilities that would not have a Material Adverse Effect. The intended use and occupancy of each of the Facilities complies with all material applicable codes and zoning laws and regulations and there is no pending or, to the knowledge of the Company, threatened condemnation, zoning change, environmental or other proceeding or action that would, if determined adversely to the Company, have a Material Adverse Effect. (y) Upon the lease by ________ of the Ohio Facilities, ___________ will receive a valid leasehold estate to the Ohio Facilities, in each case, free and clear of all Encumbrances, other than those described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and those that will not interfere with the use made or proposed to be made of such properties by the Company as contemplated by the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) in a manner that would have a Material Adverse Effect. (z) Each of the Company and the Subsidiaries has (i) filed all material foreign, Federal, state and local tax -16- returns that are required to be filed or has requested extensions thereof and (ii) paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for taxes, fines and penalties which would not have a Material Adverse Effect. 4. Representations and Warranties of the Underwriters. Upon your -------------------------------------------------- authorization of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. NatWest Securities Limited represents and agrees that (i) it has not offered or sold and will not offer or sell any Shares to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (whether as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 or the Financial Services Act 1986 (the "UK Act"); (ii) it has complied and will comply with all applicable provisions of the UK Act with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue or pass on, in the United Kingdom any document which consists of or any part of listing particulars, supplementary listing particulars, supplementary listing particulars, or any other document required or permitted to be published by listing rules under Part IV of the UK Act, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom the document may otherwise lawfully be issued or passed on. 5. Agreements of the Company. The Company covenants and agrees with each ------------------------- of the several Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representatives within a reasonable period of time prior to the filing thereof and the Representatives shall not have objected thereto in good faith. (b) If the Registration Statement is not yet effective, the Company will use its best efforts to cause the Registration Statement to become effective not later than the time indicated in Section 7(a) hereof. The Company will notify the Representatives promptly, and will confirm such advice in -17- writing, (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (iv) of the happening of any event during the period mentioned in the second sentence of Section 5(f) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue in any material respect or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading in any material respect and (v) of receipt by the Company or any representative or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any Preliminary Prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will use its best efforts to obtain the withdrawal of such order at the earliest possible moment. The Company will prepare the Prospectus in a form approved timely and in good faith by the Representatives and will file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A, the Company will use its best efforts to comply with the provisions of, and make all requisite filings with, the Commission pursuant to Rule 430A and to notify the Representatives promptly of all such filings. (c) (i) If, at any time when a Prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which, in the good faith opinion of the Representatives, the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or the Registration Statement, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or (ii) if for any other reason it is necessary at any time to amend or supplement the Prospectus or the Registration Statement to comply with the Act or the Rules and Regulations, the Company will promptly notify the Representatives thereof. Subject to Section 5(b) hereof, the -18- Company, in either such case, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance, and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representatives may reasonably request. (d) The Company will furnish to the Representatives, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representatives, without charge, for transmittal to each of the other Underwriters, copies of the registration statement referred to in Section 3(a) and each pre-and post-effective amendment thereto, including financial statements and schedules but without exhibits. (e) The Company will comply with all the provisions of all undertakings contained in the Registration Statement. (f) On the Effective Date, and thereafter from time to time for such period as the Prospectus is required by the Act to be delivered, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. (g) Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representatives and counsel to the Underwriters in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (h) During the period of three years commencing on the Effective Date, the Company will furnish to each of the Representatives and each other Underwriter who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any publicly traded class of its -19- capital stock, and will furnish to each of the Representatives and each other Underwriter who may so request a copy of each annual or other report it shall be required to file with the Commission. (i) The Company will make generally available to holders of its securities, as soon as may be practicable, but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, a consolidated earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (j) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (k) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds" and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 of the Rules and Regulations. (l) The Company will not, directly or indirectly, for a period of 180 days after the date hereof, without the prior written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock, except for specific grants of options to purchase shares of Common Stock described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and for the issuance of shares of Common Stock in connection with the Reorganization Transactions, and except for option grants under the Company's stock option plans as described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) provided that no such option shall vest or become exercisable during the 180 day period from the date hereof. -20- 6. Expenses. -------- (a) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representatives, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the Registration Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus, (2) the preparation and delivery of certificates representing the Shares and the shares of Common Stock to be issued in the Reorganization Transactions, (3) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any Preliminary Prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (4) the listing of the Shares on the NYSE, (5) any filings required to be made by the Underwriters with the NASD, (6) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(g), including the reasonable fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (7) counsel and accountants to the Company and (8) the transfer agent for the Shares. (b) If this Agreement shall be terminated by the Company pursuant to any of the provisions hereof (otherwise than pursuant to Section 10) or if for any reason the Company shall be unable to perform its obligations hereunder, the Company will reimburse the several Underwriters for all out-of-pocket expenses (including the fees, disbursements and other charges of counsel to the Underwriters) incurred by them in connection herewith. 7. Conditions of the Obligations of the Underwriters. The obligations of ------------------------------------------------- each Underwriter hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Representatives not later than 12:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representatives and all filings required by Rule 424 of the Rules and Regulations and Rule 430A shall have been made. -21- (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representatives and the Representatives did not object thereto in good faith, and the Representatives shall have received certificates, dated the Closing Date and the Option Closing Date and signed by the Chief Executive Officer of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of the foregoing clauses (i), (ii) and (iii). (c) Since the respective dates of the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the business, properties, condition (financial or otherwise) or results of operations of the Company and the Subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, (ii) none of the Company or any Subsidiary shall have sustained any loss or interference with its business or properties from fire, explosion, flood or other casualty, or from any labor dispute or any court or legislative or other governmental action, order or decree which would have a Material Adverse Effect and (iii) there shall have been no litigation or other proceeding instituted against the Company, any Subsidiary, or any of their respective officers or directors in their capacities as such, before or by any Governmental Body which would have a Material Adverse Effect, in each case which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall have been no litigation or other proceeding instituted against any of the Ohio Sellers before or by any Governmental Body which would materially and adversely affect the business, properties, condition (financial or -22- otherwise), or results of operations of the Company and the Subsidiaries, taken as a whole, assuming, for this purpose, that the transactions contemplated by the Ohio Acquisition Agreement had been consummated, and (ii) none of the Ohio Facilities shall have sustained any material loss or interference with its business, assets or properties from fire, explosion, flood or other casualty, or from any labor dispute or any court or legislative or other governmental action, order or decree, which loss or interference arising from any such causes also constitutes a material loss or interference with the business or properties of the Company and the Subsidiaries, taken as a whole, assuming, for this purpose, that the transactions contemplated by the Ohio Acquisition Agreement had been consummated, in each case which is not set forth in the Registration Statement and Prospectus, if in the judgment of the Representatives any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (e) Each of the representations and warranties of the Company contained herein shall be true and correct at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made on such date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been fully performed, fulfilled or complied with. (f) The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the Company, to the following effect: (i) Each of the Company and the Subsidiaries (A) has been duly incorporated (or, in the case of partnerships, organized) and is a validly existing corporation or partnership in good standing under the laws of its jurisdiction of incorporation or organized with full corporate or partnership power and authority to own or lease its properties and to conduct its business as described in the Prospectus (in the case of the Company, as to be owned, leased or conducted upon consummation of the Reorganization Transactions) and (B) is duly qualified to do business as a foreign corporation or partnership and is in good standing in each jurisdiction in which it owns or leases property as set forth in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or as set forth in an officer's certificate satisfactory to the Representatives; -23- (ii) To such counsel's knowledge, the Company owns no capital stock or other beneficial interest in any corporation, partnership, joint venture or other business entity except for its interest in its Subsidiaries; (iii) The Company has authorized capital stock as set forth in the Prospectus; the securities of the Company conform in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued by the Company, are fully paid and nonassessable and are free of any preemptive or other rights to subscribe for any of the Shares under the Company's Certificate of Incorporation and By-Laws, the GCL or any agreement, contract or instrument to which the Company or any Subsidiary is bound which is listed as an Exhibit to the Registration Statement or Prospectus (or, if the Prospectus is not then in existence, the most recent Preliminary Prospectus) or as set forth in an officer's certificate satisfactory to the Representatives; the Company has duly authorized the issuance and sale of the Shares to be sold by it hereunder; such Shares, when issued by the Company and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained in the Prospectus and will not be subject to any preemptive, subscription or other similar rights under the Company's Certificate of Incorporation and By-Laws, the GCL or any agreement, contract or instrument to which the Company or any Subsidiary is bound which is listed as an Exhibit to the Registration Statement or Prospectus (or, if the Prospectus is not then in existence, the most recent Preliminary Prospectus) or as set forth in an officer's certificate satisfactory to the Representatives; and the Shares have been duly authorized for listing, subject to official notice of issuance, on the NYSE; (iv) Based solely on telephonic advice of a staff attorney of the Commission, the Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b) and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and to such counsel's knowledge, no proceedings for that purpose have been instituted or are pending or, are threatened under the Act the registration statement originally filed with respect to the Shares and each amendment thereto and the Prospectus and, if any, each amendment and supplement thereto (except for the financial statements, schedules and other financial data included therein, as to which such counsel need not express any -24- opinion), complied as to form in all material respects with the requirements of the Act and the Rules and Regulations (except matters that were corrected by supplement or amendment); the descriptions contained and summarized in the Registration Statement and the Prospectus of material contracts and other material documents are accurate and fair in all material respects; to the knowledge of such counsel based on an officer's certificate satisfactory to the Representatives, there is not pending or threatened against the Company or any Subsidiary, Facility or Ohio Facility any action, suit, proceeding or investigation before or by any Governmental Body of a character required to be disclosed in the Registration Statement or the Prospectus which is not so disclosed therein; and the statements set forth under the heading "Description of Capital Stock" in the Prospectus, insofar as such statements constitute a summary or the legal matters, documents or proceedings therein, provide an accurate summary of such legal matters, documents and proceedings; (v) The Company has full corporate power, and authority to enter into this Agreement and to consummate the transactions provided for herein; this Agreement has been duly authorized, executed and delivered by the Company; this Agreement, assuming due authorization, execution and delivery by each other party hereto, is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws or any order of the Commission; none of the Company's execution or delivery of this Agreement, its performance hereof, its consummation of the transactions contemplated herein or its application of the net proceeds of the offering in the manner set forth in the Prospectus under the caption "Use of Proceeds" (other than the application of proceeds for the Company's working capital), conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Encumbrance upon, any property or assets of the Company or any of the Subsidiaries pursuant to (A) the terms of the charter or bylaws or certificate or agreement of limited partnership, as applicable, of the Company or any Subsidiary; (B) the terms of any contract or other agreement filed as an exhibit to the Registration Statement; (C) any statute, rule or regulation of any -25- Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) jurisdiction over the Company or any Subsidiary or any of their respective activities or properties pursuant to Applicable Law; or (D) the terms of any judgment, decree or order, known to such counsel (such knowledge to be based on a certificate of an appropriate officer of the Company), of any arbitrator or Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) such jurisdiction; and no consent, approval, authorization or order of any Governmental Body under Applicable Law has been or is required for the Company's performance of this Agreement or the consummation of the transactions contemplated hereby, except such as have been obtained under the Act or may be required under state securities or blue sky laws in connection with the purchase and distribution by the Underwriters of the Shares. As used herein, "Applicable Law" shall mean the Federal laws of the United States of America, the laws of the State of New York, the Commonwealth of Massachusetts and the GCL and shall expressly exclude Medicare, Medicaid and State healthcare laws; (vi) The Company is not (after giving effect to the Reorganization Transactions and the sale of the Shares) an "investment company," as such term is defined in the Investment Company Act. (vii) The Company has the corporate power and authority to enter into the Reorganization Agreement and to consummate the transactions provided for therein; the Reorganization Agreement has been duly authorized, executed and delivered by the Company; the Reorganization Agreement is a valid and binding agreement of the Company, enforceable against the Company in accordance with the terms thereof, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies; none of the execution or delivery of the Reorganization Agreement by the Company, the performance by it of its obligations thereunder, or the consummation by it of the transactions contemplated therein, conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes a default under, or results in the creation or imposition of any Encumbrance upon, any property or assets of the Company or any of the Subsidiaries pursuant to (A) the terms of the charter or bylaws or certificate or agreement of limited partnership, as applicable, of the Company or any Subsidiary; (B) the terms of any contract or other agreement filed as an -26- exhibit to the Registration Statement; (C) any statute, rule or regulation of any Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) jurisdiction over any of them or any of their respective activities or properties pursuant to Applicable Law; or (D) the terms of any judgment, decree or order, known to such counsel (such knowledge to be based on a certificate of an appropriate officer of the Company), of any arbitrator or Governmental Body under Applicable Law having (or that, upon consummation of the Reorganization Transactions, will have) such jurisdiction; and no consent, approval, authorization or order of any Governmental Body has been or is required for the performance of the Reorganization Agreement or the consummation of the transactions contemplated thereby or the consummation of any of the Reorganization Transactions, in each case by the Company or any Subsidiary, except such as have been obtained under the Act or may be required under state securities or blue sky laws in connection with the purchase and distribution by the Underwriters of the Shares; and (viii) Each of HH Partners and HH Corp. has full legal right, power, and authority to enter into the Ohio Acquisition Agreement and to consummate the transactions provided for therein; the Ohio Acquisition Agreement has been duly authorized, executed and delivered by each of HH Partners and HH Advisors; the Ohio Acquisition Agreement is a valid and binding agreement of each of HH Partners and HH Advisors, enforceable against them in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies; none of the execution or delivery of the Ohio Acquisition Agreement by each of HH Partners or HH Corp., the performance by them of their obligations thereunder, or their consummation of the transactions contemplated therein, conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes a default under, or results in the creation or imposition of any Encumbrance upon, any property or assets of the Company or any of the Subsidiaries pursuant to (A) the terms of the charter or bylaws or certificate or agreement of limited partnership, as applicable, of the Company or any Subsidiary; (B) the terms of any contract or other agreement known to such counsel after reasonable investigation to which any of them is (or, upon consummation of the Reorganization -27- Transactions, will be) a party or by which any of them is or may be (or, upon consummation of the Reorganization Transactions, will or may be) bound or to which any of their assets or properties is or may be (or, upon consummation of the Reorganization Transactions, will or may be) subject; (C) any statute, rule or regulation of any Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) jurisdiction over any of them or any of their respective activities or properties; or (D) the terms of any judgment, decree or order, known to such counsel after reasonable investigation, of any arbitrator or Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) such jurisdiction; (ix) The offer, issuance and sale by the Company of shares of Common Stock (other than the Shares) on or prior to the date hereof is exempt from the registration requirements of the Act; Provided that, to the extent that any of the foregoing opinions are dependant upon matters of law other than Federal, New York or Delaware law, then the opinion of other counsel that is nationally recognized or satisfactory to the Representatives, may be provided in lieu (as to such matters only) of the opinion of Paul, Weiss, Rifkind, Wharton & Garrison. In addition, such counsel shall state that in the course of the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company and with the Company's independent public accountants, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Registration Statement and the Prospectus and (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus other than the Sections relating to Applicable Healthcare Law (as such term is defined and such Sections are identified in Section 5(g)(i) below), relying to a significant degree on such officers, representatives and accountants as to materiality and without assuming responsibility for the accuracy, completeness or fairness of such statements), nothing has come to such counsel's attention that causes such counsel to believe that the Registration Statement as of the date it was declared effective and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of the date thereof and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it -28- being understood that such counsel need not express any opinion with respect to the financial statements, statistical information, schedules and other financial data included in the Registration Statement or the Prospectus. In rendering any such opinion, such counsel need not opine on Medicare, Medicaid or State healthcare licensing or regulatory matters. Such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any State other than one in which such counsel does not maintain an office (to the extent satisfactory in form and scope to counsel for the Underwriters) such counsel may rely upon the opinion of local counsel to the Company. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion of local counsel, and copies of such opinion shall be delivered to the Representatives and counsel for the Underwriters. Such opinion shall contain such other limitations, assumptions, qualifications and restrictions as shall be acceptable to the Representatives and their counsel. References to the Registration Statement and the Prospectus in this paragraph (f) shall include any amendment or supplement thereto at the date of such opinion, but shall be deemed to exclude any matter amended, modified or supplemented in a later amendment or supplement filed after the date of such opinion. (g) The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, from each of (i) Sheehan, Phinney, Bass & Green, special healthcare counsel for the State of New Hampshire, (ii) Hahn, Loeser & Parks, special healthcare counsel for the States of Indiana and Ohio, (iii) McDermott, Will & Emery, special healthcare counsel for the States of Maryland and Florida and the Federal laws of the United States of America relating to Medicare, and (iv) Norris, McLaughlin & Marcus, special healthcare counsel for the State of New Jersey. (i) The statements set forth under the headings "Risk Factors- Risk of Adverse Effect of Healthcare Reform," "Risk Factors-Reimbursement by Third-Party Payors," "Risk Factors-Government Regulation," "Business- Sources of Revenues" and "Business-Government Regulation" in the Prospectus, insofar as such statements constitute a summary of matters relating to Applicable Healthcare Law, therein, provide an accurate summary of such legal matters, documents and proceedings; As used herein, "Applicable Healthcare Law" shall mean the Medicaid -29- and healthcare laws, rules and regulations of the State for which such counsel serves as special healthcare counsel and, in the case of McDermott, Will & Emery, the Federal laws of the United States of America relating to Medicare; (ii) None of the Company's execution or delivery of this Agreement or the Reorganization Agreement, its performance hereof or thereof, its consummation of the transactions contemplated herein or therein or its application of the net proceeds of the offering in the manner set forth in the Prospectus under the caption "Use of Proceeds" (other than the application of proceeds for the Company's working capital) conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Encumbrance upon, any property or assets of the Company or any Subsidiary pursuant to (A) any Applicable Healthcare Law, of any Governmental Body having (or that, upon consummation of the Reorganization Transactions, will have) jurisdiction over any of them or any of their respective activities or properties; or (B) the terms of any judgment, decree or order, known to such counsel (such knowledge to be based on a certificate of an appropriate officer of the Company), of any arbitrator or Governmental Body under Applicable Healthcare Law having (or that, upon consummation of the Reorganization Transactions, will have) such jurisdiction; and no consent, approval, authorization or order of any Governmental Body under Applicable Healthcare Law has been or is required for the Company's performance of this Agreement or the consummation of the transactions contemplated hereby, except such as have been obtained prior to the date hereof; (iii) To such counsel's knowledge, based solely on a review of applicable state agency records, the conduct of the business of each of the Company and the Subsidiaries is not, and upon consummation of the Reorganization Transactions, will not be, in violation of any Applicable Healthcare Law, which violation is likely to have a Material Adverse Effect on the Company and the Subsidiaries, taken as a whole; and each of the Company and the Subsidiaries has obtained all Licenses as are necessary or required under Applicable Healthcare Law for the ownership, leasing and operation of its properties and the conduct of its business as presently conducted and, in the case of the Company, as contemplated in the Prospectus upon consummation of the Reorganization Transactions; (iv) Each of the Company, the Subsidiaries and the Facilities, as applicable, is, and upon consummation of the -30- Reorganization Transactions will be, organized, licensed and operated in conformity with the requirements for qualification as a long-term healthcare facility under Applicable Healthcare Law, and each of the Company, the Subsidiaries and the Facilities, as applicable, is, and upon consummation of the Reorganization Transactions will be, certified or approved as a provider under the Federal Medicare and State Medicaid programs in which such Facilities are located. In addition, such counsel shall state that in the course of the preparation of the portions of the Registration Statement and the Prospectus set forth in clause (i) above, such counsel has reviewed such portions of the Registration Statement and the Prospectus and made inquiries of such officers and representatives of the Company and the Subsidiaries and discussed the contents of the above-referenced portions of the Registration Statement and the Prospectus and (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) nothing has come to such counsel's attention that causes such counsel to believe that either the statements contained in the Registration Statement under the headings set forth in clause (i) above as of the date it was declared effective and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the statements contained in the Prospectus under the headings set forth in clause (i) above as of the date thereof and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (g) shall include any amendment or supplement thereto at the date of such opinion. (h) The Representatives shall have received an opinion, dated the Closing Date and the Option Closing Date, -31- from Stroock & Stroock & Lavan, counsel to the Underwriters, which opinion shall be satisfactory in all respects to the Representatives. In rendering such opinion, such counsel may rely as to all matters of Massachusetts and ______________ law upon the opinion of _____________. (i) Concurrently with the execution and delivery of this Agreement, or, if the Company elects to rely on Rule 430A, on the date of the Prospectus, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery (the "Original Letter"), addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that (i) they are independent public accountants with respect to the Company and its Subsidiaries within the meaning of the Act and the Rules and Regulations; (ii) in their opinion, the financial statements included in the Registration Statement and examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (iii) on the basis of procedures, not constituting an examination in accordance with generally accepted auditing standards, set forth in detail in the Original Letter (which procedures shall include a "SAS 71" review), including a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its Subsidiaries, inspections of the minute books and partnership records of the Company and its Subsidiaries since the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and the Subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in the Original Letter to a date not more than five days prior to the date of the Original Letter, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements and schedules of the Company and its Subsidiaries included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations, or are not fairly presented in conformity with GAAP applied on a basis substantially consistent with the basis for the audited financial statements included in the Prospectus; (B) any other unaudited income statement -32- data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited financial statements of the Company and its Subsidiaries from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements of the Company and its Subsidiaries included in the Prospectus; (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited financial statements referred to in Clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included in the Prospectus; (D) the unaudited pro forma financial statements of the Company and its Subsidiaries included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations, or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; (E) as of a specified date not more than five days prior to the date of the Original Letter, there have been any changes in the capital stock or partnership interests of the Company or the Subsidiaries, or any increase in the long-term debt of the Company or the Subsidiaries, or any decreases in net current assets or net assets or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in the Original Letter; and (F) for the period from the date of the latest financial statements of the Company and its Subsidiaries included in the Prospectus to the specified date referred to in Clause (E), there were any decreases in revenues or operating profit or the total or per share amounts of net income or other items specified by the Representatives, or any increases in any items specified by the Representatives, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representatives, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in the Original Letter; and (iv) in addition to the examination referred to in their reports included in the Prospectus and the procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representatives, which are derived from the general accounting, financial or other records of the Company or the Subsidiaries, as the case may be, which appear in the Prospectus or in Part II of, or in exhibits or schedules to, the Registration Statement, and have compared such amounts, percentages and financial information with such accounting, financial and other records and have found them to be in agreement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the Original Letter, that nothing has come to their attention during the period from the date of -33- the Original Letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in the Original Letter if it were required to be dated and delivered at the Closing Date or the Option Closing Date, as the case may be. (j) Concurrently with the execution and delivery of this Agreement, or, if the Company elects to rely on Rule 430A, on the date of the Prospectus, the Ohio Sellers Accountants shall have furnished to the Representatives a letter, dated the date of its delivery (the "Original Ohio Letter"), addressed to the Representatives and in form and substance satisfactory to the Representatives, confirming that (i) they are independent public accountants with respect to the Ohio Sellers within the meaning of the Act and the Rules and Regulations; (ii) in their opinion, the financial statements and any supplementary financial information and schedules included in the Registration Statement and examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; and (iii) they have conducted a "SAS 71" review of the unaudited financial statements of the Ohio Sellers included in the Registration Statement. At the Closing Date and, as to the Option Shares, the Option Closing Date, the Ohio Sellers Accountants shall have furnished to the Representatives a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the Original Ohio Letter, that nothing has come to their attention during the period from the date of the Original Ohio Letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in the Original Ohio Letter if it were required to be dated and delivered at the Closing Date or the Option Closing Date, as the case may be. (k) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to the Representatives an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer or a Senior Vice President and the Chief Financial Officer of the Company, in form and substance satisfactory to the Representatives, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, (x) the Registration Statement does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not -34- misleading and (y) the Prospectus does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (B) since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect; (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered and as if made on the date of such certificate, true and correct in all material respects; and (iii) Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with. (l) The Shares shall be qualified for sale in such states as the Representatives may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date. (m) Prior to the Closing Date, the Shares shall have been approved for listing on the NYSE, subject only to notice of issuance. (n) All of the Reorganization Transactions shall have been fully consummated or shall be fully consummated simultaneously with the closing of the purchase and sale of the Shares hereunder in accordance with the terms of the Reorganization Agreement and the Company shall have delivered to the Representatives copies of all of the documents relating to the closing of the Reorganization Transactions. (o) Each officer, director and person named in the table set forth in the section of the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) captioned "Stock Ownership of Directors, Executive Officers and Principal Holders" has delivered to NatWest Securities Limited an agreement in the form set forth as Exhibit A hereto (a "Lockup --------- Agreement") to the effect that he or she will not, directly or indirectly, for a period of one hundred eighty (180) days after the date hereof, without the prior -35- written consent of NatWest Securities Limited, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer to sell, sale, contract to sell, grant of any option to purchase or other disposition) of any shares of Common Stock or securities convertible into, or exchangeable or exercisable for, shares of Common Stock. (p) The Company shall have furnished to the Representatives such certificates, letters and other documents, in addition to those specifically mentioned herein, as the Representatives may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company, as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Underwriters. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to counsel for the Representatives. The Company will furnish to the Representatives such conformed copies of such opinions, certificates, letters and other documents as the Representatives shall reasonably request. 8. Indemnification and Contribution. -------------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, fines, penalties, settlements, damages or liabilities, joint or several (and actions in respect thereof), to which they, or any of them, may become subject under the Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, fines, penalties, settlements, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement made by the Company in Section 3 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof -36- or filed with the Commission or any securities association or securities exchange (each, an "Application"), or (iii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or any Application a material fact required to be stated therein or necessary to make the statements therein (A) in the case of the Registration Statement, any amendment or supplement to the Registration Statement or any Application, not misleading, and (B) in the case of the Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, not misleading in light of the circumstances in which they were made, and will reimburse, as incurred, each Underwriter and each such other person for any legal or other expenses reasonably incurred by such Underwriter or such other person in connection with investigating, defending or appearing as a third-party witness in connection with any such loss, claim, fines, penalties, settlement, damage, liability or action; provided, however, that the Company will not be liable in -------- ------- any such case to the extent that any such loss, claim, fines, penalties, settlements, damage or liability is based solely upon an untrue statement or omission or alleged untrue statement or omission in any of such documents made in reliance upon and in conformity with information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of any Underwriter expressly for inclusion therein; provided, further, that such -------- ------- indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or any such other person) from whom the person asserting any such loss, claim, fine, penalty, settlements, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, fine, penalty, settlement, damage or liability (i) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (or any amendment or supplement thereto), unless such failure to deliver the Prospectus (as amended or supplemented) was the result of noncompliance by the Company with Section 5(f). This indemnity agreement will be in addition to any liability that the Company might otherwise have. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to each claim, action, suit or proceeding), unless such settlement, -37- compromise or consent includes an unconditional release of each Underwriter and each such other person from all liability arising out of such claim, action, suit or proceeding. (b) Each Underwriter will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signed the Registration Statement against any losses, claims, fines, penalties, settlements, damages or liabilities (or actions in respect thereof) to which the Company and any such director, officer or controlling person may become subject under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, fines, penalties, settlements, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or any Application, or material fact required to be stated therein or (ii) the omission or the alleged omission to state in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or any Application, a material fact required to be stated therein or necessary to make the statements therein (A) in the case of the Registration Statement, any amendment or supplement to the Registration Statement or any Application, not misleading, and (B) in the case of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, not misleading in light of the circumstances in which they were made, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives expressly for use therein; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company and any such director, officer or controlling person in connection with investigating or defending any such loss, claim, fine, penalty, settlement, damage, liability or any action in respect thereof. The Company acknowledges that, for all purposes under this Agreement, the statements set forth in the third, eighth and ninth paragraphs under the heading "Underwriting" and the information in the first two paragraphs below the map on the inside front cover of any Preliminary Prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by the Representatives on behalf of the Underwriters expressly for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. This -38- indemnity agreement will be in addition to any liability that each Underwriter might otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party or parties under this Section 8, notify such indemnifying party or parties of the commencement thereof; but the omission so to notify the indemnifying party or parties will not relieve it or them from any liability which it or they may have to any indemnified party under the foregoing provisions of this Section 8 or otherwise unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against an indemnified party and it notifies an indemnifying party or parties of its commencement, the indemnifying party or parties against which a claim is made will be entitled to participate therein and, to the extent that it or they may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, -------- ------- that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses other than reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the immediately preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions), (ii) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the -39- indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party), (iii) the indemnifying party has not in fact employed counsel within a reasonable time after receiving notice of the commencement of the action, or (iv) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. After such notice from the indemnifying party to such indemnified party, the indemnifying party will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party, unless such indemnified party waived its rights under this Section 8 in which case the indemnified party may effect such a settlement without such consent. (d) If the indemnification provided for in the foregoing paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) above in respect of any losses, claims, fines, penalties, settlements, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, fines, penalties, settlements, damages or liabilities (or actions in respect thereof) (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties, on the one hand, and the indemnified party, on the other, from the offering of the Shares or (ii) if, but only if, the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties, on the one hand, and the indemnified party, on the other, in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total proceeds from the offering of the Shares (before deducting expenses) bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Representatives on behalf of the Underwriters, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if -40- contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities (or actions in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the total underwriting discounts received by it with respect to the Shares purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 8(d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act will have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, will have the same rights to contribution as the Company, subject in each case to the provisions of this paragraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made under this Section 8(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation(s) it or they may have hereunder or otherwise than under this paragraph (d). The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may otherwise have. No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). 9. Termination. The obligations of the several Underwriters under ----------- this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any Underwriter to the Company if, prior to delivery and -41- payment for the Firm Shares (or the Option Shares, as the case may be), in the sole judgment of the Representatives, (i) trading in any of the equity securities of the Company shall have been suspended by the Commission or by an exchange that lists the Shares, (ii) trading in securities generally on the NYSE, the American Stock Exchange or the International Stock Exchange of the United Kingdom and the Republic of Ireland, Limited shall have been suspended or limited or minimum or maximum prices shall have been generally established on any of such exchanges, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any of such exchanges or by order of the Commission or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by Federal, New York State or United Kingdom authorities or (iv) any material adverse change in the financial or securities markets in the United States or United Kingdom or any outbreak or material escalation of hostilities or declaration by the United States or the United Kingdom of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Representatives, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. Any termination pursuant to Section 9 shall be without liability of any party to any other party except as provided in Sections 6(a) and 8. 10. Default of Underwriters. If one or more Underwriters default in ----------------------- their obligations to purchase Firm Shares or Option Shares hereunder and the aggregate number of such Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Shares or Option Shares to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Shares by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Shares or Option Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Shares that is more than ten percent of the aggregate number of Firm Shares or Option Shares, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including either or both of the Representatives) of the Shares -42- with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 10, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 2 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Shares or Option Shares, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 11. Survival. The respective representations, warranties, -------- agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 12. Notices. Notice given pursuant to any of the provisions of this ------- Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 470 Atlantic Avenue, Boston, Massachusetts 02210, Attention: President, or (b) if to the Underwriters, to the Representatives at the offices of (i) NatWest Securities Limited, 135 Bishopsgate, London EC2M 3XT England, Attention: Melvyn Rowe and (ii) Dean Witter Reynolds Inc., Two World Trade Center, New York, New York 10048, Attention: Samuel H. Wolcott, III. Any such notice shall be effective only upon receipt. Any notice under Section 8 or 9 may be made by telex or telephone, but if so made shall be subsequently confirmed in writing. 13. Successors. This Agreement shall inure to the benefit of and ---------- shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of -43- such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a successor because of such purchase. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party. 14. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS -------------- AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. 15. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -44- Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, HARBORSIDE HEALTHCARE CORPORATION By: ______________________________ Name: Title: Confirmed as of the date first above mentioned: By: NATWEST SECURITIES LIMITED By: __________________________ Name: Title: By: DEAN WITTER REYNOLDS INC. By: __________________________ Name: Title: Acting on behalf of themselves and as the Representatives of the other several Underwriters named in Schedule I hereof. -45- SCHEDULE I UNDERWRITERS Number of Firm Shares to be Purchased --------------- NatWest Securities Limited..................... Dean Witter Reynolds Inc. ....................... --------- Total 3,600,000 ========= -46- EXHIBIT A __________ __, 1996 NATWEST SECURITIES LIMITED 135 Bishopsgate London EC2M 3XT England Ladies and Gentlemen: In order to induce the several underwriters, for which NatWest Securities Limited ("NatWest") and Dean Witter Reynolds Inc. intend to act as the representatives, to underwrite a proposed initial public offering (the "Offering") of shares of common stock, par value $.01 per share (the "Common Stock"), of Harborside Healthcare Corporation, a Delaware corporation (the "Company"), as contemplated by a registration statement filed with the Securities and Exchange Commission on Form S-1 (Registration No. 333-3096), the undersigned hereby agrees that the undersigned will not, directly or indirectly, for a period of one hundred eighty (180) days after the commencement of the Offering, without the prior written consent of NatWest, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock. This letter shall have no further force or effect if the Company and the several underwriters shall not have executed and delivered an underwriting agreement related to the Offering by July 31, 1996 or if any underwriting agreement entered into by such parties shall be terminated prior to the initial closing date provided for therein. This letter agreement shall not prohibit the undersigned from transferring any shares of Common Stock to members of his or her immediate family or to a trust for their benefit, provided that such persons or trust agree to be bound by the terms hereof. Very truly yours, By:_________________________ A-1 EX-2.1 3 REORGANIZATION AGREEMENT EXHIBIT 2.1 REORGANIZATION AGREEMENT REORGANIZATION AGREEMENT, dated as of May 15, 1996, by and among Harborside Healthcare Corporation, a Delaware corporation (the "Corporation"), The Berkshire Companies Limited Partnership ("Berkshire"), Krupp Enterprises Limited Partnership ("Enterprises"), The Douglas Krupp 1994 Family Trust ("DKFT"), The George Krupp 1994 Family Trust ("GKFT"), Laurence Gerber ("Gerber"), Stephen L. Guillard ("Guillard") and Damian N. Dell'Anno ("Dell'Anno"). Berkshire, Enterprises, DKFT, GKFT, Gerber, Guillard and Dell'Anno are sometimes hereinafter collectively referred to as the "Subscribers." The Subscribers, through the various corporations and partnerships identified in Schedule 1 hereto (the "Contributed Entities") and the corporations listed in Schedule 2 hereto (the "Merged Entities"), are engaged in the business of owning and operating certain long-term care facilities and ancillary businesses (collectively, the "Business"). The Subscribers and the Corporation desire to consolidate the Business under the control of the Corporation. In furtherance thereof, the Subscribers and the Corporation desire that the Subscribers contribute all of their respective interests in the Contributed Entities to the Corporation and that certain subsidiaries of the Corporation (the "Subsidiaries") be merged with and into the Merged Entities, in each case in consideration of the issuance of or in exchange for common stock of the Corporation. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: 1. Agreement to Contribute and Issue Shares. The Corporation hereby ---------------------------------------- agrees to issue, and the Subscribers identified in clauses (a) through (d) below hereby agree to acquire, upon the terms and conditions hereinafter set forth, an aggregate of 3,001,152 shares of common stock, par value $.01 per share (the "Common Stock"), of the Corporation. The number of Shares to be acquired by each Subscriber, and the consideration to be contributed to the Corporation by each Subscriber therefor, is as follows: (a) Berkshire hereby subscribes for 2,695,903 shares of Common Stock of the Corporation (the "Berkshire Shares"). Berkshire hereby acknowledges that it has previously received 1,000 additional shares in connection with the formation of the Corporation. In consideration of the issuance to Berkshire of the Berkshire Shares, Berkshire shall contribute to the Corporation all of its right, title and interest in and to the assets set forth with respect to Berkshire on Schedule 1 hereto (the "Berkshire Contributed Assets"). 2 (b) Enterprises hereby subscribes for 63,360 shares of Common Stock of the Corporation (the "Enterprises Shares"). In consideration of the issuance to Enterprises of the Enterprises Shares, Enterprises shall contribute to the Corporation all of its right, title and interest in and to the assets set forth with respect to Enterprises on Schedule 1 hereto (the "Enterprises Contributed Assets"). (c) Guillard hereby subscribes for 176,289 shares of Common Stock of the Corporation (the "Guillard Shares"). In consideration of the issuance of the Guillard Shares, Guillard shall contribute to the Corporation all of his right, title and interest in and to the assets set forth with respect to Guillard on Schedule 1 hereto (the "Guillard Contributed Assets"). (d) Dell'Anno hereby subscribes for 65,600 shares of Common Stock of the Corporation (the "Dell'Anno Shares"). In consideration of the issuance of 47,563 of the Dell'Anno Shares, Dell'Anno shall contribute to the Corporation all of his right, title and interest in and to the assets set forth with respect to Dell'Anno on Schedule 1 hereto (the "Dell'Anno Contributed Assets"). The remaining 18,037 Dell'Anno Shares shall be issued in consideration of the "Equity Interest" referred to in section 4(c) of the Employment Agreement, dated as of September 12, 1994, by and between Dell'Anno and Harborside Healthcare Limited Partnership, as amended by the First Amendment thereto, effective as of July 1, 1995. (e) The Berkshire Contributed Assets, the Enterprises Contributed Assets, the Guillard Contributed Assets and the Dell'Anno Contributed Assets are hereinafter collectively referred to as the "Contributed Assets." 2. Mergers. DKFT, GKFT, Gerber and Guillard (the shareholders of the ------- Merged Entities) and the Corporation hereby agree to take, or cause to be taken, all actions necessary to effect the merger of the Subsidiaries with and into the Merged Entities (the "Mergers"), pursuant in each case to an agreement of merger in substantially the form of Exhibit A hereto (the "Merger Agreements"). Pursuant to the Merger Agreements, DKFT, GKFT, Gerber and Guillard shall receive an aggregate of 622,042, 622,042, 69,892 and 83,872 shares of Common Stock, respectively, in connection with the Mergers and the Corporation shall become the sole shareholder of the Merged Entities. The shares of Common Stock received in connection with the Mergers, together with the shares of Common Stock to be issued pursuant to Section 1 hereof, are hereinafter collectively referred to as the "Shares." 3. Shares Fully Paid. The Corporation represents to each Subscriber that ----------------- the issuances of Common Stock pursuant to this Agreement or the Merger Agreements, as the case may be, have been duly authorized and, when issued in accordance with the terms of this Agreement or the Merger Agreements, as the case may be, will be, fully paid and non-assessable and free of preemptive rights. 3 4. Representations and Warranties of the Subscribers. Each of the ------------------------------------------------- Subscribers, as to itself, hereby: (a) represents and warrants that (i) he or it has good and marketable title to all of his or its respective Contributed Assets and interest in the Merged Entities, free and clear of any liens or other encumbrances other than those certain negative pledge agreements among the Merged Entities, the stockholders of the Merged Entities and Meditrust Mortgage Investments Inc. (which Agreement expressly permits the transactions contemplated hereby) and liens and encumbrances arising in the ordinary course of business that do not materially affect their value and (ii) all Contributed Assets which constitute capital stock and the capital stock of the Merged Entities were duly authorized and validly issued and are fully paid, non-assessable and free of preemptive rights; (b) represents and warrants that the Contributed Entities and the Merged Entities have paid in full or will pay in full on a timely basis all federal or state income taxes incurred by such entities for the taxable periods ending on or before the Closing (defined below); (c) acknowledges that he or it or his or its representative has had access to the same kind of information concerning the Corporation that is required by Schedule A of the Securities Act of 1933, as amended (the "Act"), to the extent that the Corporation possesses such information; (d) represents and warrants that he or it has such knowledge and experience in financial and business matters that he or it is capable of utilizing the information that is available to him or it concerning the Corporation to evaluate the risks of investment in the Corporation and that he or it is able to bear the economic risk of his or its investment in the common stock; (e) acknowledges that he or it has been advised that the Shares have not been registered under the Act and, accordingly, that he or it may not be able to sell or otherwise dispose of the Shares when he or it wishes to do so; (f) represents and warrants that the Shares are being acquired by him or it for his or its own sole benefit and account for investment and not with a view to, or for resale in connection with, a public offering or distribution thereof except in compliance with all applicable securities laws; (g) agrees that the Shares will not be resold (i) without registration thereof under the Act (unless an exemption from such registration is available and the Subscriber has provided to the Corporation an opinion of counsel reasonably acceptable to the Corporation to such effect) or (ii) in violation of any law; 4 (h) consents that the certificate or certificates representing the Shares may be impressed with a legend indicating that the Shares are not registered under the Act and reciting that transfer thereof is restricted; and (i) consents that stop transfer instructions in respect of the Shares may be issued to any transfer agent, transfer clerk or other agent at any time acting for the Corporation. 5. Closing. The closing (the "Closing") of the transactions contemplated ------- by this Agreement shall be held at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, 1285 Avenue of the Americas, New York, New York on the same date as, and immediately prior to, the sale of Common Stock upon consummation of the public offering of Common Stock contemplated by the Registration Statement (No. 333-3096) on Form S-1 filed by the Corporation with the Securities and Exchange Commission on April 2, 1996 (the "Offering"). The parties shall deliver executed copies of all documents at a pre-closing to be held not later than the day such Registration Statement is declared effective, such documents to be held in escrow by the Corporation's counsel pending the Closing. At the Closing: (a) The Mergers will be effected; (b) Each of the Subscribers shall deliver to the Corporation: (i) certificates, duly endorsed for transfer, representing shares of stock constituting Contributed Assets to be contributed by such Subscriber to the Corporation; (ii) such assignments and other instruments of transfer or title as the Corporation may reasonably request with respect to the other Contributed Assets to be contributed by such Subscriber to the Corporation; (iii) certificates representing shares of stock constituting such Subscriber's interest in the Merged Entities (which, in accordance with the Merger Agreements, shall be canceled); and (iv) such other documents as the Corporation shall reasonably request; and (c) The Corporation shall issue and deliver to each Subscriber a certificate or certificates representing the Shares specified with respect to such Subscriber in Section 1 and Section 2. 5 6. Survival of Representations and Warranties; Obligation of Subscribers --------------------------------------------------------------------- to Indemnify. - ------------ (a) The representations and warranties of each of the Subscribers set forth in Section 4 of this Agreement shall survive execution and delivery hereof and shall thereafter terminate and expire at the end of the one-year period commencing on the date of the Closing with respect to any claim based upon, arising out of or otherwise in respect of any fact, circumstance, action or proceeding of which the Corporation shall not have given notice to each Subscriber prior to the end of such one-year period; provided, however, that the -------- ------- representations and warranties of each Subscriber set forth in Section 4(b) shall survive for such period as is provided by any statute of limitations applicable thereto. (b) Subject to paragraph (a) of this Section 6, each of the Subscribers agrees, severally and not jointly, to indemnify and hold harmless the Corporation, its directors, officers and agents (in their capacity as such) from and against any costs and expenses (including, without limitation, the reasonable fees, disbursements and other charges of counsel) based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or agreement of such Subscriber contained in this Agreement or the enforcement of this Agreement. 7. Obligation of the Corporation to Indemnify. The Corporation hereby ------------------------------------------ agrees to indemnify, defend and hold harmless each Subscriber and its directors, officers, partners and agents (in their capacity as such) from and against any and all liabilities and obligations of the Contributed Entities and the Merged Entities incurred or otherwise relating to the period from and after the Closing (the "Assumed Liabilities"). Without limiting the generality of the foregoing, the Company shall indemnify each Subscriber against any and all costs and expenses (including, without limitation, the reasonable fees, disbursements and other charges of counsel) incurred by each Subscriber in connection with the investigation or defense of any Assumed Liability or the enforcement of this Agreement. 8. Registration Rights of Pledgees. In the event that, subsequent to the ------------------------------- Closing, any of the Subscribers pledges his or its respective Shares (the "Pledged Shares") to a financial institution (a "Pledgee"), the Corporation agrees that it shall, at the request of the Subscriber, enter into an agreement with such Pledgee providing that the Corporation will register the Pledged Shares under the Act in the event that the Pledgee gives notice to the Corporation that such registration is necessary in order to sell or otherwise dispose of the Pledged Shares following foreclosure or other exercise of similar rights and remedies of the Pledgee to acquire the Pledged Shares. Such agreement shall be on reasonable and customary terms for agreements of its type (including customary limitations and restrictions) and shall provide that (i) the Company shall be responsible for all costs and expenses related to such registration and 6 (ii) the rights granted by such agreement may be exercised no more than once by a particular Pledgee with respect to Pledged Shares pledged by a particular Subscriber. 9. Indemnification of Guarantor. The Corporation and Douglas Krupp hereby ---------------------------- acknowledge that Douglas Krupp is and shall remain the guarantor under that certain Guaranty, dated as of March 1, 1988, from Douglas Krupp to Bank One, Indianapolis, NA (the "Guaranty"), relating to certain indebtedness of Riverside Retirement Limited Partnership, one of the Contributed Entities. The Corporation hereby agrees to indemnify, defend and hold harmless Douglas Krupp from and against any and all actual expenses (including, without limitation, reasonable fees, disbursements and other charges of counsel), losses, claims, damages, suits, proceedings and liabilities incurred by or threatened against him in connection with the Guaranty or in enforcing his rights hereunder. 10. Notices. Any notice or other communication required or permitted ------- hereunder shall be in writing and shall be delivered personally, telecopied or sent by recognized overnight courier. Any such notice shall be deemed given when so delivered personally or telecopied or, if delivered by recognized overnight courier, one day after the date of delivery to such courier, as follows: (i) if to the Company, to: Harborside Healthcare Corporation 470 Atlantic Avenue Boston, MA 02210 Attention: Board of Directors (ii) if to a Subscriber, to him or it at the address shown on the records of the Corporation. Any party may change such party's address for notice hereunder by notice to the other parties in accordance with this Section 10. 11. Termination. This Agreement may be terminated at the election of any ----------- party upon written notice to the other parties if the closing of the issuance and sale of the Common Stock pursuant to the Offering shall not have been completed on or prior to August 30, 1996 or such later date as the parties may hereafter agree and, if so terminated, no party shall have any further liability or obligation hereunder. 7 12. Waivers and Amendments. This Agreement may be amended, modified, ---------------------- superseded or canceled, and the terms and conditions hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right or remedy, nor any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. 13. Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 14. Assignment. This Agreement, and any rights obligations hereunder, may ---------- not be assigned by any party hereto without the prior written consent of the other parties. 15. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, each party hereto has executed or caused the execution of this Agreement as the date first above written. HARBORSIDE HEALTHCARE CORPORATION By: /s/ Stephen L. Guillard ------------------------------ Name: Stephen L. Guillard Title: President THE BERKSHIRE COMPANIES LIMITED PARTNERSHIP By: KGP-1 INCORPORATED Its General Partner By: /s/ Laurence Gerber ------------------------------ Name: Laurence Gerber Title: President 8 KRUPP ENTERPRISES LIMITED PARTNERSHIP By: KGP-1 Incorporated ------------------------------ Its General Partner By: /s/ Laurence Gerber ------------------------------ Name: Laurence Gerber Title: President THE DOUGLAS KRUPP 1994 FAMILY TRUST By: /s/ LAWRENCE I. SILVERSTEIN --------------------------------- LAWRENCE I. SILVERSTEIN, Trustee By: /s/ PAUL KRUPP ------------------------------ PAUL KRUPP, Trustee By: /s/ M. GORDON EHRLICH ------------------------------ M. GORDON EHRLICH, Trustee THE GEORGE KRUPP 1994 FAMILY TRUST By: /s/ LAWRENCE I. SILVERSTEIN -------------------------------- LAWRENCE I. SILVERSTEIN, Trustee By: /s/ PAUL KRUPP ------------------------------ PAUL KRUPP, Trustee By: /s/ M. GORDON EHRLICH ------------------------------ M. GORDON EHRLICH, Trustee 9 /s/ LAURENCE GERBER ------------------------------ LAURENCE GERBER /s/ STEPHEN L. GUILLARD ------------------------------ STEPHEN L. GUILLARD /s/ DAMIAN DELL'ANNO ------------------------------ DAMIAN DELL'ANNO The undersigned acknowledges and accepts this agreement with respect to Section 9 only. /s/ DOUGLAS KRUPP ------------------------------ DOUGLAS KRUPP SCHEDULE 1 ---------- Contributed Assets ------------------
BERKSHIRE ENTERPRISES GUILLARD DELL'ANNO ----------- ------------ --------- ---------- Stock - ----- KHI Corporation 100 shares ---- ---- ---- Limited Partnership Interests - ------------------------------- Harborside Healthcare 99.0% ---- ---- ---- Advisors Limited Partnership Riverside Retirement ---- 99.0% ---- ---- Limited Partnership Harborside Healthcare ---- ---- 6.0% 2.0% Limited Partnership
SCHEDULE 2 ---------- Merged Entities --------------- Bay Tree Nursing Center Corporation Belmont Nursing Center Corporation Countryside Care Center Corporation Oakhurst Manor Nursing Center Corporation Orchard Ridge Nursing Center Corporation Sunset Point Nursing Center Corporation West Bay Nursing Center Corporation EXHIBIT A AGREEMENT OF MERGER made and entered into on the date hereinafter set forth by and among Harborside Healthcare Corporation ("HHC"), a Delaware Corporation, [Merger Vehicle], a business corporation of the Commonwealth of Massachusetts, as approved by vote of its Board of Directors on said date, and [Existing S. Corp.], a business corporation of the Commonwealth of Massachusetts, as approved by vote of its Board of Directors on said date. WHEREAS, all of the issued shares of common stock of [Merger Vehicle] are owned by HHC; WHEREAS [Merger Vehicle] and [Existing S. Corp.] and the respective Boards of Directors thereof deem it advisable and to the advantage, welfare, and best interests of said corporations and their respective stockholders to merge [Merger Vehicle] with and into [Existing S. Corp.] pursuant to the provisions of the Business Corporation Law of the Commonwealth of Massachusetts; and WHEREAS HHC and its Boards of Directors deem it advisable and to the advantage, welfare, and best interests of HHC and its stockholders that [Merger Vehicle] merge with and into [Existing S. Corp.] pursuant to the provisions of the Business Corporation Law of the Commonwealth of Massachusetts. NOW, THEREFORE, in consideration of the premises and of the mutual agreements of the parties hereto, this Agreement and the terms and conditions thereof and the mode of carrying the same into effect, together with any provisions required or permitted to be set forth therein, are hereby determined and agreed upon for submission to the stockholders of [Merger Vehicle] and [Existing S. Corp.] as required by the provisions of the Business Corporation Law of the Commonwealth of Massachusetts. 1. [Merger Vehicle] and [Existing S. Corp.] shall, pursuant to the provisions of the Business Corporation Law of the Commonwealth of Massachusetts, be merged with and into a single corporation, to wit [Existing S. Corp.], which shall be the surviving corporation upon the effective date of the merger and which is sometimes hereinafter referred to as the "surviving corporation", and which shall continue to exist as said surviving corporation under its present name pursuant to the provisions of the Business Corporation Law of the Commonwealth of Massachusetts. The separate existence of Merger Vehicle, which is sometimes hereinafter referred to as the "terminating corporation", shall cease upon said effective date of the merger in accordance with the provisions of the Business Corporation law of the Commonwealth of Massachusetts. 2. The purposes of the surviving corporation shall be those contained in the Articles of Organization of said surviving corporation upon the effective date of the merger. 2 3. The total number of shares which the surviving corporation is presently authorized to issue is 200,000 shares, all of which are of one class, and all of which are without par value; and the total number of shares which the surviving corporation shall be authorized to issue upon the effective date of the merger is 200,000 shares, all of which are of one class, and all of which are without par value. 4. The Articles of Organization of the surviving corporation shall be the Articles of Organization of said surviving corporation and said Articles of Organization shall continue in full force and effect until amended and changed in the manner prescribed by the provisions of the Business Corporation law of the Commonwealth of Massachusetts. 5. The present by-laws of the surviving corporation will be the by-laws of said surviving corporation and will continue in full force and effect until changed, altered, or amended as therein provided and in the manner prescribed by the provisions of the Business Corporation Law of the Commonwealth of Massachusetts. 6. The persons holding the offices of directors, of President, of Treasurer, and of Clerk, respectively, of the surviving corporation upon the effective date of the merger shall constitute the Board of Directors and the president, the treasurer, and the Clerk of the surviving corporation, all of whom shall hold their directorships and offices until the election and qualification of their respective successors or until their tenure is otherwise terminated in accordance with the by-laws of the surviving corporation; and each person holding any other office of the surviving corporation upon said effective date shall continue to hold his office in like manner. 7. All of the issued shares of the surviving corporation shall, upon the effective date of the merger, be converted into shares of common stock, par value $.01 per share, of HHC in accordance with Schedule 1 hereto. Each issued share of the terminating corporation shall, upon the effective date of the merger, be converted into one share of the surviving corporation. 8. The Agreement of Merger herein made, entered into and approved shall be submitted to the stockholders of the terminating corporation and of the surviving corporation for their approval or rejection in the manner prescribed by the provisions of the Business Corporation Law of the Commonwealth of Massachusetts. 9. The effective date of the merger shall be the date of the filing of articles of merger in the office of the State Secretary of the Commonwealth of Massachusetts. 10. In the event that this Agreement shall have been fully approved on behalf of the terminating corporation and of the surviving corporation in the manner prescribed by the provisions of the Business Corporation Law of the Commonwealth of 3 Massachusetts, the terminating corporation and the surviving corporation do hereby agree that they will cause to be executed and filed and/or recorded any document or documents prescribed by the laws of the Commonwealth of Massachusetts, and that they will cause to be performed all necessary acts within said Commonwealth and elsewhere to effectuate the merger herein provided for. 11. The Board of Directors and the proper officers of the terminating corporation and of the surviving corporation, respectively are hereby authorized, empowered, and directed to do any and all acts and things, and to make, execute, deliver, file, and/or record any and all instruments, papers, and documents which shall be or become necessary, proper or convenient to carry out or put into effect any of the provisions of the Agreement of Merger or of the merger herein provided for. 12. Notwithstanding anything to the contrary contained herein, the merger provided for hereunder shall not occur unless and until the following shall have occurred on or prior to the date of effectiveness of the merger: (i) the consummation of the public offering of common stock of HHC as contemplated by the Registration Statement on Form S-1 filed by HHC with the Securities and Exchange Commission on April 2, 1996; (ii) the contribution of assets contemplated by the Reorganization Agreement, dated as of May 15, 1996 by and among HHC, The Berkshire Companies Limited Partnership, Krupp Enterprises Limited Partnership, The Douglas Krupp 1994 Irrevocable Family Trust, The George Krupp 1994 Irrevocable Family Trust, Laurence Gerber, Stephen L. Guillard and Damian N. Dell'Anno and (iii) the filing with the Secretary of State of the Commonwealth of Massachusetts of articles of merger relating to the mergers of the corporations listed on Schedule 2 hereto other than Existing S. Corp. 4 IN WITNESS WHEREOF, this Agreement has been signed by and upon behalf of the terminating corporation and of the surviving corporation upon the date hereinafter set forth. Dated: _________, 1996 [Merger Vehicle] By: -------------------------- Its President -------------------------- Its Treasurer [corporate seal] Dated: _________, 1996 [Existing S. Corp.] By: -------------------------- Its President -------------------------- Its Treasurer [corporate seal] Dated: ____________, 1996 Harborside Healthcare Corporation By: -------------------------- Its President -------------------------- Its Treasurer [corporate seal] 5 SCHEDULE 1 ---------- Conversion of Shares -------------------- Shares of Surviving Shares of HHC Corporation Converted Following Conversion --------------------- -------------------- The 1994 Douglas Krupp 50,000 Family Trust The 1994 George Krupp 50,000 Family Trust Stephen L. Guillard 6,742 Laurence Gerber 5,618 SCHEDULE 2 ---------- Merged Entities --------------- Bay Tree Nursing Center Corporation Belmont Nursing Center Corporation Countryside Care Center Corporation Oakhurst Manor Nursing Center Corporation Orchard Ridge Nursing Center Corporation Sunset Point Nursing Center Corporation West Bay Nursing Center Corporation EX-10.13 4 THE CORPORATE PLAN FOR RETIREMENT THE CORPORATE PLAN FOR RETIREMENT FIDELITY BASIC PLAN DOCUMENT NO. 07 6/4/91 ED. THE CORPORATE PLAN FOR RETIREMENT ARTICLE 1 ADOPTION AGREEMENT ARTICLE 2 DEFINITIONS 2.01. Definitions...............................................1 ARTICLE 3 PARTICIPATION 3.01. Date of Participation.....................................9 3.02. Reemployment of Participants...............................9 3.03. Participation by Owner-Employee; Controlled Businesses....9 ARTICLE 4 CONTRIBUTIONS 4.01. Deferral Contributions...................................10 4.02. Additional Limit on Deferral Contributions...............11 4.03. Matching Contributions...................................15 4.04. Limit on Matching Contributions..........................15 4.05. Special Rules............................................19 4.06. Discretionary Contributions..............................19 4.07. Time of Making Employer Contributions....................19 4.08. Return of Employer Contributions.........................19 4.09. No Contributions by Participants.........................20 4.10. Rollover Contributions...................................20 ARTICLE 5 PARTICIPANTS' ACCOUNTS 5.01. Individual Accounts......................................21 5.02. Valuation of Accounts....................................21 5.03. Code Section 415 Limitations.............................21 ARTICLE 6 INVESTMENT OF CONTRIBUTIONS 6.01. Manner of Investment.....................................28 6.02. Investment Decisions.....................................28 6.03. Direction to Trustee.....................................28 (i) ARTICLE 7 RIGHT TO BENEFITS 7.01. Normal or Early Retirement...............................29 7.02. Late Retirement..........................................29 7.03. Disability Retirement....................................29 7.04. Death....................................................29 7.05. Other Termination of Employment..........................30 7.06. Separate Account.........................................30 7.07. Forfeitures..............................................31 7.08. Adjustment for Investment Experience.....................31 7.09. Participant Loans........................................31 7.10. Hardship Distributions...................................33 7.11. Prior Plan In-Service Distribution Rules.................34 ARTICLE 8 DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION OF SERVICE 8.01. Distribution of Benefits to Participants and Beneficiaries34 8.02. Annuity Distributions....................................35 8.03. Joint and Survivor Annuities.............................35 8.04. Installment Distributions................................38 8.05. Immediate Distribution...................................40 8.06. Determination of Method of Distribution..................41 8.07. Notice to Trustee........................................41 8.08. Time of Distribution.....................................41 8.09. Whereabouts of Participants and Beneficiaries............42 ARTICLE 9 TOP-HEAVY PROVISIONS 9.01. Application..............................................43 9.02. Definitions..............................................43 9.03. Minimum Contribution.....................................46 9.04. Adjustment to the Limitation on Contributions and Benefits46 ARTICLE 10 AMENDMENT AND TERMINATION 10.01. Amendment by Employer...................................47 10.02. Amendment by Prototype Sponsor..........................48 10.03. Amendments Affecting Vested and/or Accrued Benefits.....48 10.04. Retroactive Amendments..................................48 10.05. Termination.............................................49 (ii) 10.06. Distribution upon Termination of the Plan...............49 10.07. Merger or Consolidation of Plan; Transfer of Plan Assets................................................49 ARTICLE 11 AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN; TRANSFER OF FUNDS TO OR FROM OTHER QUALIFIED PLANS 11.01. Amendment and Continuation of Predecessor Plan..........49 11.02. Transfer of Funds from an Existing Plan.................50 11.03. Acceptance of Assets by Trustee.........................51 11.04. Transfer of Assets from Trust...........................51 ARTICLE 12 MISCELLANEOUS 12.01. Communications to Participants..........................51 12.02. Limitation of Rights....................................51 12.03. Nonalienability of Benefits.............................51 12.04. Facility of Payment.....................................52 12.05. Information between Employer and Trustee................52 12.06. Effect of Failure to Qualify under Code.................52 12.07. Notices.................................................52 12.08. Governing Law...........................................53 ARTICLE 13 PLAN ADMINISTRATION 13.01. Powers and responsibilities of the Administrator........53 13.02. Nondiscriminatory Exercise of Authority.................54 13.03. Claims and Review Procedures............................54 13.04. Named Fiduciary.........................................55 13.05. Costs of Administration.................................55 ARTICLE 14 TRUST AGREEMENT 14.01. Acceptance of Trust Responsibilities....................55 14.02. Establishment of Trust Fund.............................55 14.03. Exclusive Benefit.......................................55 14.04. Powers of Trustee.......................................55 14.05. Accounts................................................56 14.06. Approving of Accounts...................................57 14.07. Distribution from Trust Fund............................57 14.08. Transfer of Amounts from Qualified Plan.................57 14.09. Transfer of Assets from Trust...........................57 (iii) 14.10. Voting; Delivery of Information.........................58 14.11. Compensation and Expenses of Trustee....................58 14.12. Reliance by Trustee on Other Persons....................58 14.13. Indemnification by Employer.............................59 14.14. Consultation by Trustee with Counsel....................59 14.15. Persons Dealing with the Trustee........................59 14.16. Resignation or Removal of Trustee.......................59 14.17. Fiscal Year of the Trust................................60 14.18. Discharge of Duties by Fiduciaries......................60 14.19. Amendment...............................................60 14.20. Plan Termination........................................60 14.21. Permitted Reversion of Funds to Employer................60 14.22. Governing Law...........................................61 (iv) The CORPORATEplan for Retirement /SM/ (Profit Sharing/401(k) Plan) A Fidelity Prototype Plan Non-Standardized Adoption Agreement 002 Basic Plan No. 07 ADOPTION AGREEMENT ARTICLE 1 NON-STANDARDIZED PROFIT SHARING PLAN 1.01 PLAN INFORMATION ---------------- (a) Name of this Plan: This is the Harborside Healthcare, Limited Partnership Retirement Savings Plan (the "Plan"). (b) Type of Plan: 401(k) and Profit Sharing. (c) The Plan Administrator is the Employer. Address: 470 Atlantic Ave. Boston, MA 02210 Phone Number: 617-556-1515 The Plan Administrator is the agent for service of legal process for Plan. (d) Limitation Year: Calendar Year (e) Three Digit Plan Number: 001 (f) Plan Year End (month/day): 12/31 (g) Plan Status: Amendment Effective Date: 1/1/93. This is an amendment of the CORPORATEplan for Retirement Adoption Agreement previously executed by the Employer. The original effective date of the Plan was January 1, 1992. The substantive provisions of the Plan shall apply prior to the Effective Date to the extent required by the Tax Reform Act of 1986 or other applicable laws. 1.02 EMPLOYER -------- (a) The Employer is: Harborside Healthcare, Limited Partnership, et al. Address: 470 Atlantic Avenue, 13th Floor, Boston, MA 02210 Contact's Name: Ronald W. Stutzman Telephone: 617-556-1515 2 (1) Employer's Tax Identification Number: 04-2985687 (2) Business form of Employer: Sole proprietor or partnership and Subchapter S Corporation (3) Employer's fiscal year end: December 31 (4) Date business commenced: See attached list (b) The term "Employer" includes the following Related Employer(s) (as defined in Section 2.01(a)(26)): See attached list 1.03 COVERAGE -------- (a) All Employees who meet the conditions specified below will be eligible to participate in the Plan: (1) Service requirement: one Year of Service (1,000 Hours of Service is required during the Eligibility Computation Period). (2) Age requirement: no age requirement. (3) The class of Employees eligible to participate in the Plan: includes all Employees of the Employer. (b) The Entry Date(s) shall be: the first day of each Plan Year and the first day of the fourth, seventh, and tenth months. (c) Date of Initial Participation - An Employee will become a Participant unless excluded by Section 1.03(a)(3) above on the Entry Date immediately following the date the Employee completes the service and age requirement(s) in Section 1.03(a), if any, except: Employees who meet the age and service requirement(s) of Section 1.03(a) on the Effective Date in Section 1.01(g) will become Participants on that date. 1.04 COMPENSATION ------------ (a) For purposes of determining Contributions under the Plan, Compensation shall be as defined in Section 2.019(a)(7). 3 (b) Compensation for the First Year of Participation Contributions for the Plan Year in which an Employee first becomes a Participant shall be determined based on the Employee's Compensation: for the entire Plan Year. 1.05 CONTRIBUTIONS ------------- (a) Employer Contributions: (1) [Reserved] (2) Discretionary Formula The Employer may decide each Plan Year whether to make a Discretionary Employer Contribution on behalf of eligible Participants in accordance with Section 4.06. Such contributions may only be funded by the Employer after the Plan Year ends and shall be allocated to eligible Participants based upon the following: Nonintegrated Allocation Formula: In the ratio that each eligible Participant's Compensation bears to the total Compensation paid to all eligible Participants for the Plan Year. (3) Eligibility Requirement(s) A Participant shall be entitled to Employer Contributions for a Plan Year under this Subsection (a) if the Participant is employed by the Employer of the last day of the Plan Year. Employer Contributions can only be funded by the Employer after Plan Year end. (b) Deferral Contributions (1) Regular Contributions The Employer shall make a Deferral Contribution in accordance with Section 4.01 on behalf of each Participant who has an executed salary reduction agreement in effect with the Employer for the payroll period in question, not to exceed 15% of Compensation for that period. 4 (A) A Participant may increase or decrease, on a prospective basis, his salary reduction agreement percentage as of the beginning of each payroll period. (B) A Participant may revoke, on a prospective basis, a salary reduction agreement at any time upon proper notice to the Administrator but in such case may not file a new salary reduction agreement until any subsequent Plan Entry Date. (2) Catch-Up Contributions The Employer may allow Participants upon proper notice and approval to enter into a special salary reduction agreement to make additional Deferral Contributions in an amount up to 100% of their Compensation for the payroll period(s) in the final month of the Plan Year. A Participant's Contributions under (2) may not cause the Participant to exceed the percentage limit specified by the Employer in (1) after the Plan Year. The Employer has the right to restrict a Participant's right to make Deferral Contributions if they will adversely effect the Plan's ability to pass the Actual Deferral Percentage and/or the Actual Contribution Percentage test. (3) [Reserved] (4) Qualified Discretionary Contributions The Employer may contribute an amount which it designates as a Qualified Discretionary Contribution to be included in the Actual Deferral Percentage or Actual Contribution Percentage test. Qualified Discretionary Contributions shall be allocated to Non-highly Compensated Employees in the ratio which each such Participant's Compensation for the Plan Year bears to the total of all such Participants' Compensation for the Plan Year. (c) Matching Contributions (1) The Employer shall make a Matching Contribution on behalf of each Participant in an amount equal to the percentage of a Participant's Deferral Contributions during the Plan Year declared for the year, if any, by a Board of Directors' resolution. 5 (2) [Reserved] (3) [Reserved] (4) Eligibility Requirement(s) A Participant who makes Deferral Contributions during the Plan Year under Section 1.05(b) shall be entitled to Matching Contributions for that Plan Year if the Participant is employed by the Employer on the last day of the Plan Year. Matching Contributions can only be funded by the Employer after the Plan Year ends. Any Matching Contribution funded before Plan Year end shall not be subject to the eligibility requirements of this Section 1.05(c)(4)). (d) [Reserved] 1.06 RETIREMENT AGE(S) ----------------- (a) The Normal Retirement Age under the Plan is age 65. (b) The Early Retirement Age is the first day of the month after the Participant attains age 55 and completes six Years of Service for Vesting. (c) A Participant is eligible for Disability Retirement if he/she satisfies the requirements for Social Security disability benefits. 1.07 VESTING SCHEDULE ---------------- (a) The Participant's vested percentage in Employer Contributions (Fixed or Discretionary) elected in Section 1.05(a) and/or Matching Contributions elected in Section 1.05(c) shall be based upon the schedule below, except with respect to any Plan Year during which the Plan is Top-Heavy. The schedule elected in Section 1.12(d) shall automatically apply for a Top-Heavy Plan Year and all Plan Years thereafter unless the Employer has already elected a more favorable vesting schedule below. 6 Employer Contributions and Matching Contributions Years of Service for Vesting Vesting Schedule ----------- ---------------- 0 0% 1 0% 2 20% 3 40% 4 60% 5 80% 6 100% 7 100% 1.08 [Reserved] 1.09 PARTICIPANT LOANS ----------------- Participant loans will be allowed in accordance with Section 7.09, subject to a $1,000 minimum amount and will be granted for any purpose. 1.10 HARDSHIP WITHDRAWALS -------------------- Participant withdrawals for hardship prior to termination of employment will be allowed in accordance with Section 7.10, subject to a $1,000 minimum amount. 1.11 DISTRIBUTIONS ------------- (a) Subject to Articles 7 and 8 and (b) below, distributions under the Plan will be paid as a lump sum. (b) Participants will be entitled to receive a distribution of all or any portion of all Accounts without terminating employment upon attainment of age 59 1/2. 1.12 TOP HEAVY STATUS ---------------- 7 (a) The Plan shall be subject to the Top-Heavy Plan requirements of Article 9 for each Plan Year, if any, for which the Plan is Top-Heavy as defined in Section 9.02. (b) [Not Applicable] (c) In the event that the Plan is treated as Top-Heavy for a Plan Year, each non-key Employee shall receive an Employer Contribution of at least 3% of Compensation for the Plan Year in accordance with Section 9.03 under this Plan only if the Participant is not entitled to such contribution under another qualified plan of the Employer. Such minimum Employer contribution may be less than the percentage indicated in (c) above to the extend provided in Section 9.03(a). (d) In the event that the Plan is treated as Top-Heavy for a Plan Year, the following vesting schedule shall apply instead of the schedule elected in Section 1.07(a) for such Plan Year and each Plan Year thereafter. Years of Service for Vesting Vesting Percentage ---------------------------- ------------------ 0 0 1 0 2 20% 3 40% 4 60% 5 80% 6 100% 1.13 [Not Applicable] 1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS ----------------------------------------------- (a) Investment Directions Participant Accounts will be invested in accordance with investment directions provided to the Trustee by each Participant for ----------- allocating his entire Account among the options listed in (b) below. 8 (b) Plan Investment Options The Employer hereby establishes a Trust under the plan in accordance with the provisions of Article 14, and the Trustee signifies acceptance of its duties under Article 14 by its signature below. Participant Accounts under the Trust will be invested among the Fidelity Funds listed below pursuant to Participant and/or Employer directions. (1) Fund Name Fund Number --------- ----------- (2) Puritan Fund 004 (3) Magellan Fund 021 (4) Intermediate Bond Fund 032 (5) Retirement Govt. Money Market 631 (6) Magellan Growth Co. 025 To the extent that the Employer selects as an investment option the Managed Income Portfolio of the Fidelity Group Trust for Employee Benefit Plans (the "Group Trust"), the Employer hereby (A) agrees to the terms of the Group Trust and adopts said terms as a part of this Agreement and (B) acknowledges that it has received from the Trustee a copy of the Group Trust, the Declaration of Separate Fund for the Managed Income Portfolio of the Group Trust, and the Circular for the Managed Income Portfolio. The method and frequency for change of investments will be determined under the rules applicable to the selected funds or, if applicable, the rules of the Employer adopted in accordance with Section 6.03. Information will be provided regarding expenses, if any, for changes in investment options. 1.15 RELIANCE ON OPINION LETTER -------------------------- An adopting Employer may not rely on the opinion letter issued by the National Office of the Internal Revenue Service as evidence that this Plan is qualified under Section 401 of the Code. If the Employer wishes to obtain reliance that his or her plan(s) are qualified, application for a determination letter should be made to the appropriate Key District Director of the Internal Revenue Service. Failure to properly fill out the Adoption Agreement may result in disqualification of the Plan. 9 This Adoption Agreement may be used only in conjunction with Fidelity Prototype Plan Basic Plan Document No. 07. The Prototype Sponsor shall inform the adopting Employer of any amendments made to the Plan or of the discontinuance or abandonment of the prototype plan document. 1.16 PROTOTYPE INFORMATION: --------------------- Name of Prototype Sponsor: Fidelity Management & Research Co. Address of Prototype Sponsor: 82 Devonshire Street Boston, MA 02109 Questions regarding this prototype document may be directed to the following telephone number: 1-(800) 3443-9184. 10 EXECUTION PAGE IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement to be executed this 23rd day of December, 1993. Employer: Harborside Healthcare L.P. By: Ronald W. Stutzman Title: V. P. Human Resources Employer: ________________________________ By: ________________________________ Title: ________________________________ Accepted by Fidelity Management Trust Company, as Trustee By_________________________ Date __________________________ Title_______________________ 11 ARTICLE 1. ADOPTION AGREEMENT. ------------------ ARTICLE 2. DEFINITIONS. ----------- 2.01. Definitions. ----------- (a) Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context: (1) "Account" means an account established on the books of the Trust for the purpose of recording contributions made on behalf of a Participant and any income, expenses, gains or losses incurred thereon. (2) "Administrator" means the Employer, or other person designated by the Employer in the Adoption Agreement. (3) "Adoption Agreement" means Article 1 under which the Employer establishes and adopts, or amends, the Plan and Trust and designates the optional provisions selected by the Employer, and the Trustee accepts its responsibilities under Article 14. The provisions of the Adoption Agreement shall be an integral part of the Plan. (4) "Annuity Starting Date" means the first day of the first period for which an amount is payable as an annuity or in any other form. (5) "Beneficiary" means the person or persons entitled under Section 7.04 to receive benefits under the Plan upon the death of a Participant, provided that for purposes of Section 7.04 such term shall be applied in accordance with Section 401(a)(9) of the Code and the regulations thereunder. (6) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (7) "Compensation" shall mean compensation as that term is defined in Section 5.03(e)(2) of the Plan. Compensation shall include only that compensation which is actually paid to the Participant during the Plan Year or, for purposes of Section 5.03, Limitation Year. In addition, except for purposes of Section 5.03 (relating to Code Section 415 limitations) or Article 9 (relating to top-heavy plans), the term "Compensation" shall include amounts that are not includable in the gross income of a Participant under a salary reduction agreement by reason of the application of Sections 125, 402(a)(8), 402(h) or 403(b) of the Code. In the case of any Self-Employed Individual, Compensation shall include the Individual's Earned Income. For years beginning after December 31, 1988, the annual Compensation of each Participant taken into account under the plan for any year shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If a plan determines Compensation on a period of time that contains fewer than 12 calendar months, then annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. If Compensation for any prior plan year is taken into account in determining an employee's contributions or benefits for the current year, the Compensation for such prior year is subject to the applicable annual compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual compensation limit is $200,000. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except that in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. If the $200,000 limitation is exceeded as a result of the application of these rules, then the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation. (8) "Earned Income" means the net earnings of a Self-Employed Individual derived from the trade or business with respect to which the Plan is established and for which the personal services of such individual are a material income-providing factor, excluding any items not included in gross income and the deductions allocated to such items, except that for taxable years beginning after December 31, 1989 net earnings shall be determined with regard to the deduction allowed under Section 164(f) of the Code, to the extent applicable to the Employer. Net earnings shall be reduced by contributions of the (2) Employer to any qualified plan, to the extent a deduction is allowed to the Employer for such contributions under Section 404 of the Code. (9) "Eligibility Computation Period" means each 12-consecutive month period beginning with the Employment Commencement Date and each anniversary thereof. (10) "Employee" means any individual employed by the Employer. For purposes of the Plan, an individual shall be considered to become an Employee on the date on which he first completes an Hour of Service and he shall be considered to have ceased to be an Employee on the date on which he last completes an Hour of Service. The term also includes a Leased Employee, such that contributions or benefits provided by the leasing organization which are attributable to services performed for the Employer shall be treated as provided by the Employer. Notwithstanding the above, a Leased Employee shall not be considered an Employee if Leased Employees do not constitute more than 20 percent of the Employer's non-highly compensated work force (taking into account all Related Employers) and the Leased Employee is covered by a money purchase pension plan maintained by the leasing organization which plan provides (i) a nonintegrated employer contribution rate of at least 10 percent of compensation, as defined for purposes of Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code, (ii) full and immediate vesting, and (iii) immediate participation by each employee of the leasing organization. (11) "Employer" means the employer named in the Section 1.02(a), and any Related Employers designated by Section 1.02(b). (12) "Employment Commencement Date" means the date on which the Employee first performs an Hour of Service. (13) "ERISA" means the Employee Retirement Income Security Act of 1974, as from time to time amended. (14) "Fidelity Fund" means any Registered Investment Company, and the GIC Open-End Portfolio of the Fidelity Group Trust for Employee Benefit Plans. (15) "Fund Share" means the share, unit, or other evidence of ownership in a Fidelity Fund. (3) (16) "Highly Compensated Employee" means both highly compensated active Employees and highly compensated former Employees. A highly compensated active Employee includes any Employee who performs service for the Employer during the determination year and who, during the look-back year: (i) received compensation from the Employer in excess of $75,000 (as adjusted pursuant to Section 415(d) of the Code); (ii) received compensation from the Employer in excess of $50,000 (as adjusted pursuant to Section 415(d) of the Code) and was a member of the top-paid group for such year, or (iii) was an officer of the Employer and received compensation during such year that is greater than 50 percent of the dollar limitation in effect under Section 415(b)(l)(A) of the Code. The term highly compensated Employee also includes: (i) Employees who are both described in the preceding sentence if the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 Employees who received the most compensation from the Employer during the determination year, and (ii) Employees who are 5 percent owners at any time during the look-back year or determination year. If no officer has satisfied the compensation of (iii) above during either a determination year or look-back year, the highest paid officer for such year shall be treated as a highly compensated Employee. For this purpose, the determination year shall be the Plan Year. The look-back year shall be the twelve-month period immediately preceding the determination year. A highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the Employer during the determination year, and was a highly compensated active Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or look-back year, a family member of either a 5 percent owner who is an active or former Employee or a highly compensated Employee who is one of the 10 most highly compensated Employees ranked on the basis of compensation paid by the Employer during such year, then the family member and the 5 percent owner or top-ten highly compensated Employee shall be aggregated. In such case, the family member and 5 percent owner or top-ten highly compensated Employee shall be treated as a single Employee receiving compensation and plan contributions or benefits (4) equal to the sum of such compensation and contributions or benefits of the family member and 5 percent owner or top-ten highly compensated Employee. For purposes of this Section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a highly compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top 100 Employees, the number of Employees treated as officers and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the regulations thereunder. (17) "Hour of Service" means, with respect to any Employee, (A) Each hour for which the Employee is directly or indirectly paid, or entitled to payment, for the performance of duties for the Employer or a Related Employer, each such hour to be credited to the Employee for the Eligibility Computation Period in which the duties were performed; (B) Each hour for which the Employee is directly or indirectly paid, or entitled to payment, by the Employer or Related Employer (including payments made or due from a trust fund or insurer to which the Employer contributes or pays premiums) on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity, disability, layoff, jury duty, military duty, or leave of absence, each such hour to be credited to the Employee for the Eligibility Computation Period in which such period of time occurs, subject to the following rules: (i) No mom than 501 Hours of Service shall be credited under this paragraph (B) on account of any single continuous period during which the Employee performs no duties; (ii) Hours of Service shall not be credited under this paragraph (B) for a payment which solely reimburses the Employee for medically-related expenses, or which is made or due under a plan maintained solely for the purpose of complying with applicable workmen's compensation, unemployment compensation or disability insurance laws; and (5) (iii) If the period during which the Employee performs no duties falls within two or more Eligibility Computation Periods and if the payment made on account of such period is not calculated on the basis of units of time, the Hours of Service credited with respect to such period shall be allocated between not more than the first two such Eligibility Computation Periods on any reasonable basis consistently applied with respect to similarly situated Employees; and (C) Each hour not counted under paragraph (A) or (B) for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to be paid by the Employer or a Related Employer, each such hour to be credited for the Eligibility Computation Period to which the award or agreement for back pay pertains. For purposes of determining Hours of Service, Employees of the Employer and of all Related Employers will be treated as employed by a single employer. For purposes of paragraphs (B) and (C) above, Hours of Service will be calculated in accordance with the provisions of Section 2530.200b-2(b) of the Department of Labor regulations which are incorporated herein by reference. (18) "Leased Employee" means any individual who provides services to the Employer or a Related Employer (the "recipient") but is not otherwise an employee of the recipient if (i) such services are provided pursuant to an agreement between the recipient and any other person (the "leasing organization"), (ii) such individual has performed services for the recipient (or for the recipient and any related persons within the meaning of Section 414(n)(6) of the Code) on a substantially full-time basis for at least one year, and (iii) such services are of a type historically performed by employees in the business field of the recipient. (19) "Normal Retirement Age" means the normal retirement age specified in Section 1.05(a). If the Employer enforces a mandatory retirement age, the Normal Retirement Age is the lesser of that mandatory age or the age specified in Section 1.05(a). (20) "Owner-Employee" means, if the Employer is a sole proprietorship, the individual who is the sole proprietor, or if the Employer is a partnership, a partner who owns more than 10 percent of either the capital interest or the profits interest of the partnership. (6) (21) "Participant" means any Employee who participates in the Plan in accordance with Article 3 hereof. (22) "Plan" means the plan established by the Employer in the form of the prototype plan as set forth herein as a new plan or as an amendment to an existing plan, by executing the Adoption Agreement, together with any and all amendments hereto. (23) "Plan Year" means the 12-consecutive month period designated by the Employer in Section 1.01(f). (24) "Prototype Sponsor" means Fidelity Management and Research Company, or its successor. (25) "Registered Investment Company" means any one or more corporations, partnerships or trusts registered under the Investment Company Act of 1940 for which Fidelity Management and Research Company serves as investment advisor. (26) "Related Employer" means any employer other than the Employer named in Section 1.02(a), if the Employer and such other employer are members of a controlled group of corporations (as defined in Section 414(b) of the Code) or an affiliated service group (as defined in Section 414(m)), or are trades or businesses (whether or not incorporated) which are under common control (as defined in Section 414(c)), or such other employer is required to be aggregated with the Employer pursuant to regulations issued under Section 414(o). (27) "Self-Employed Individual" means an individual who has Earned Income for the taxable year from the Employer or who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year. (28) "Trust" means the trust created by the Employer in accordance with the provisions of Section 14.01. (29) "Trust Agreement" means the agreement between the Employer and the Trustee, as set forth in Article 14, under which the assets of the Plan are held, administered, and managed. (30) "Trust Fund" means the property held in Trust by the Trustee for the Accounts of the Participants and their Beneficiaries. (31) "Trustee" means the Fidelity Management Trust Company, or its successor. (7) (32) "Year of Service for Participation" means, with respect to any Employee, an Eligibility Computation Period during which the Employee has been credited with at least 1,000 Hours of Service. If the Plan maintained by the Employer is the plan of a predecessor employer, an Employee's Years of Service for Participation shall include years of service with such predecessor employer. In any case in which the Plan maintained by the Employer is not the plan maintained by a predecessor employer, service for such predecessor shall, to the, extent provided by regulations, be treated as service for the Employer. (33) "Years of Service for Vesting" means, with respect to any Employee, the number of whole years of his periods of service with the Employer or a Related Employer. An employee will receive credit for the aggregate of all time period(s) commencing with the employee's first day of employment or reemployment and ending on the date a break in service begins. The first day of employment or reemployment is the first day the employee performs an Hour or Service. An employee will also receive credit for any period of severance of less than 12 consecutive months. Fractional periods of a year will be expressed in terms of days. Period of severance is a continuous period of time during which the employee is not employed by the employer. Such period begins on the date the employee retires, quits or is discharged, or if earlier, the 12 month anniversary of the date on which the employee was otherwise first absent from service. A break in service is a period of severance of at least 12 consecutive months. In the case of an individual who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a break in service. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. If the Plan maintained by the Employer is the plan of a predecessor employer, an Employee's Years of Service for Vesting shall include years of service with such predecessor employer. In any case in which the Plan maintained by the Employer is not the plan maintained by a predecessor employer, service for such predecessor shall be (8) treated as service for the Employer to the extent provided in Section 1.06(e). (b) Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. ARTICLE 3. PARTICIPATION. ------------- 3.01. Date of Participation. All Employees who are in the service of the --------------------- Employer on the Effective Date will become Participants on the date elected by the Employer in Section 1.03(b)(1). Any other Employee will become a Participant in the Plan as of the first Entry Date on which he first satisfies the eligibility requirements set forth in Section 1.03(a). 3.02. Reemployment of Participants. If a Participant ceases to be an ---------------------------- Employee and thereafter returns to the employ of the Employer, he will be as follows: (a) he will again become a Participant on the date on which he completes an Hour of Service for the Employer following his reemployment; and (b) any distribution which he is receiving under the Plan will continue to be made to him in accordance with the provisions of the Plan. 3.03. Participation by Owner-Employee; Controlled Businesses. If the Plan ------------------------------------------------------ provides contributions or benefits for one or more Owner-Employees who control both the trade or business with respect to which the Plan is established and one or more other trades or businesses, the Plan and any plan established with respect to such other trades or businesses must, when looked at as a single plan, satisfy Sections 401(a) and 401(d) of the Code with respect to the employees of this and all such other trades or businesses. If the Plan provides contributions or benefits for one or more Owner-Employees who control one or more other trades or businesses, the employees of each such other trade or business must be included in a plan which satisfies Sections 401(a) and 401(d) of the Code and which provides contributions and benefits not less favorable than provided for Owner-Employees under the Plan. If an individual is covered as an owner-employee under the plans of two or more trades or businesses which are not controlled and the individual controls a trade or business, then the contributions or benefits of the employees under the plan of the trades or businesses which are controlled must be as favorable as those provided for him under the most favorable plan of the trade or business which is not controlled. For purposes of this Section, an Owner-Employee, or two or more Owner-Employees, shall be considered to control a trade or business if such Owner-Employee, or such Owner-Employees together, (i) own the entire interest in an unincorporated trade or business, or (ii) in the case of a partnership, own more than (9) 50 percent of either the capital interest or the profits interest in such partnership. For this purpose, an Owner-Employee, or two or more Owner- Employees, shall be treated as owning any interest in a partnership which is owned, directly or indirectly, by a partnership controlled by such Owner- Employee or such Owner-Employees. ARTICLE 4. CONTRIBUTIONS. ------------- 4.01. Deferral Contributions. ---------------------- (a) If so provided by the Employer in Section 1.04(a), each Participant may elect to execute a salary reduction agreement with the Employer to reduce his Compensation by a specified percentage equal to a whole number multiple of one (1) percent. Such agreement shall become effective on the first day of the first payroll period for which the Employer can reasonably process the request. The Employer shall make a Deferral Contribution on behalf of the Participant corresponding to the amount of said reduction, subject to the restrictions set forth below. Under no circumstances may a salary reduction agreement be adopted retroactively. (b) A Participant may elect to change or discontinue the percentage by which his Compensation is reduced by notice to the Employer. Any such change or discontinuance shall be effective the first pay period for which the Employer can reasonably process the request. After a Participant's discontinuance of salary reduction, a Participant may execute a new salary reduction agreement, but such new agreement shall not be effective until the first day of the first payroll period for which the Employer can reasonably process the request. (c) No participant shall be permitted to have Deferral Contributions made under this plan, or any other qualified plan maintained by the Employer, during the taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. A participant may assign to this plan any Excess Deferrals made during the taxable year of the participant by notifying the plan administrator on or before March 15 following the taxable year of the amount of the Excess Deferrals to be assigned to the plan. Notwithstanding any other provision of the plan, Excess Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15 to any participant to whose account Excess Deferrals were so assigned for the preceding year and who claims Excess Deferrals for such taxable year. "Excess Deferrals" shall mean those Deferral Contributions that are includable in a participant's gross income under Section 402(g) of the Code to the extent such participant's Deferral Contributions for a taxable year exceed (10) the dollar limitation under such Code section. For purposes of determining Excess Deferrals, the term "Deferred Contributions" include the sum of all employer contributions made on behalf of such participant pursuant to an election to defer under any qualified CODA as described in Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement as described in Section 402(h)(1)(B), any eligible deferred compensation plan under Section 457, any plan as described under Section 501(c)(18), and any employer contributions made on the behalf of a participant for the purchase of an annuity contract under Section 403(b) pursuant to a salary reduction agreement. Excess Deferrals shall be treated as annual additions under the plan. Excess Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Deferrals is the sum of: (1) income or loss allocable to the participant's Deferral Contributions account for the taxable year multiplied by a fraction, the numerator of which is such participant's Excess Deferrals for the year and the denominator is the participant's account balance attributable to Deferral Contributions without regard to any income or loss occurring during such taxable year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the participant's taxable year and the date of distribution, counting the month of distribution if distribution occurs after the 15th day of such month. (d) In order for the Plan to comply with the requirements of Sections 401(k), 402(g) and 415 of the Code and the regulations promulgated thereunder, at any time in a Plan Year the Administrator may reduce the rate of Deferral Contributions to be made on behalf of any Participant, or class of Participants, for the remainder of that Plan Year, or the Administrator may require that all Deferral Contributions to be made on behalf of a Participant be discontinued for the remainder of that Plan Year. Upon the close of the Plan Year or such earlier date as the Administrator may determine, any reduction or discontinuance in Deferral Contributions shall automatically cease until the Administrator again determines that such a reduction or discontinuance of Deferral Contributions is required. 4.02. Additional Limit on Deferral Contributions. ------------------------------------------ (a) The Actual Deferral Percentage (hereinafter "ADP") for participants who are Highly Compensated Employees for each Plan Year and the ADP for participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (11) (1) The ADP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The ADP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ADP for participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the ADP for participants who are Highly Compensated Employees does not exceed the ADP for participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) The following special rules apply for the purposes of this Section: (1) The ADP for any participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Deferral Contributions (and Qualified Discretionary Contributions if treated as Deferral Contributions for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Section 401(k) of the Code, that are maintained by the employer, shall be determined as if such Deferral Contributions (and, if applicable, such Qualified Discretionary Contributions) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. (2) In the event that this plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this plan, then this section shall be applied by determining the ADP of employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (3) For purposes of determining the ADP of a participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Deferral Contributions (and Qualified Discretionary Contributions if treated as Deferral Contributions for purposes of the ADP test) and Compensation of such participant shall include the Deferral Contributions (and, if applicable, Qualified Discretionary Contributions) and Compensation for the Plan Year of Family Members (12) (as defined in Section 414(q)(6) of the Code). Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate employees in determining the ADP both for participants who are Non-highly Compensated Employees and for participants who are Highly Compensated Employees. (4) For purposes of determining the ADP test, Deferral Contributions and Qualified Discretionary Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. (5) The employer shall maintain records sufficient to demonstrate satisfaction of the ADP test and the amount of Qualified Discretionary Contributions used in such test. (6) The determination and treatment of the ADP amounts of any participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (c) The following definitions shall apply for purposes of this Section: (1) "Actual Deferral Percentage" shall mean, for a specified group of participants for a Plan Year, the average of the ratios (calculated separately for each participant in such group) of (1) the amount of employer contributions actually paid over to the trust on behalf of such participant for the Plan Year to (2) the participant's Compensation for such Plan Year (whether or not the employee was a participant for the entire Plan Year). Employer contributions on behalf of any participant shall include: (1) any Deferral Contributions made pursuant to the participant's deferral election, including Excess Deferrals of Highly Compensated Employees, but excluding Deferral Contributions that are taken into account in the Contribution Percentage test (provided the ADP test is satisfied both with and without exclusion of these Deferral Contributions); and (2) at the election of the employer, Qualified Discretionary Contributions. For purposes of computing Actual Deferral Percentages, an employee who would be a participant but for the failure to make Deferral Contributions shall be treated as a participant on whose behalf no Deferral Contributions are made. (2) "Excess Contributions" shall mean, with respect to any Plan Year, the excess of: (a) The aggregate amount of employer contributions actually taken into account in computing the ADP of Highly Compensated Employees for such Plan Year, over (13) (b) The maximum amount of such contributions permitted by the ADP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the ADPs, beginning with the highest of such percentages). (3) "Qualified Discretionary Contributions" shall mean contributions made by the Employer as elected in Section 1.04(d) in order to satisfy the ADP tests, and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the plan; that are nonforfeitable when made; and that are distributable only in accordance with the distribution provisions that are applicable to Deferral Contributions. (d) Notwithstanding any other provision of this plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed no later than the last day of each Plan Year to participants to whose accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the employer maintaining the plan with respect to such amounts. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such employees. Excess Contributions shall be allocated to Participants who are subject to the family member aggregation rules of Section 414(q)(6) of the Code in the manner prescribed by the regulations. Excess Contributions shall be treated as annual additions under the plan. Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions is the sum of: (1) income or loss allocable to the participant's Deferral Contribution account (and, if applicable, the Qualified Discretionary Contribution account) for the Plan Year multiplied by a fraction, the numerator of which is such participant's Excess Contributions of the year and the denominator is the participant's account balance attributable to Deferral Contributions (and Qualified Discretionary Contributions if any of such contributions are included in the ADP test) without regard to any income or loss occurring during such Plan Year, and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. Excess Contributions shall be distributed from the participant's Qualified Discretionary Contribution account only to the extent that such Excess (14) Contributions exceed the balance in the participant's Deferral Contributions account. 4.03. Matching Contributions. If so provided by the Employer in Section ---------------------- 1.04(2), the Employer shall make a Matching Contribution on behalf of each Participant who had Deferral Contributions made on his behalf during the year. The amount of the Matching Contribution shall be determined in accordance with Section 1.04(2), subject to the limitations set forth in Section 4.04. 4.04. Limit on Matching Contributions. ------------------------------- (a) The ACP for participants who am Highly Compensated Employees for each Plan Year and the ACP for participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The ACP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The ACP for participants who are Highly Compensated Employees for the Plan Year shall not exceed the ACP for participants who are Non-highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the ACP for participants who are Highly Compensated Employees does not exceed the ACP for participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) The following special rules apply for purposes of this section: (1) If one or more Highly Compensated Employees participate in both a CODA and a plan subject to the ACP test maintained by the employer and the sum of the ADP and ACP of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Unit, then the ACP of those Highly Compensated Employees who also participate in a CODA will be reduced (beginning with such Highly Compensated Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly Compensated Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if either the ADP or ACP of the Highly Compensated Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-highly Compensated Employees. (15) (2) For purposes of this section, the Contribution Percentage for any participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in section 401(a) of the Code, or arrangements described in section 401(k) of the Code that are maintained by the employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year be treated as a single arrangement (3) In the event that this plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this plan, then this section shall be applied by determining the Contribution Percentage of employees as if all such plans were a single plan. For plan years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same Plan Year. (4) For purposes of determining the Contribution percentage of a participant who is a five-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such participant shall include the Contribution Percentage Amounts and Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate employees in determining the Contribution Percentage both for participants who are Non-highly Compensated Employees and for participants who are Highly Compensated Employees. (5) For purposes of determining the Contribution Percentage test, Matching Contributions and Qualified Discretionary Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (6) The employer shall maintain records sufficient to demonstrate satisfaction of the ACP test and the amount of Qualified Discretionary Contributions or Qualified Matching Contributions, or both, used in such test. (16) (7) The determination and treatment of the Contribution Percentage of any participant shall satisfy such other requirements as may be prescribed by the Secretary of Treasury. (c) The following definitions shall apply for purposes of this Section: (1) "Aggregate Limit" shall mean the sum of (i) 125 percent of the greater of the ADP of the Non-highly Compensated Employees for the Plan Year or the ACP of Non-highly Compensated Employees under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the CODA and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in "(i)," above, and "greater" is substituted for "lesser" after "two plus the" in "(ii)" if it would result in a larger Aggregate Limit. (2) "Average Contribution Percentage" shall mean the average of the Contribution Percentages of the Eligible Participants in a group. (3) "Contribution Percentage" shall mean the ratio (expressed as a percentage) of the participant's Contribution Percentage Amounts to the participant's Compensation for the Plan Year (whether or not the employee was a participant for the entire Plan Year). (4) "Contribution Percentage Amounts" shall mean the sum of the Matching Contributions made under the plan on behalf of the participant for the Plan Year. Such Contribution Percentage Amounts shall include forfeitures of Excess Aggregate Contributions or Matching Contributions allocated to the participant's account which shall be taken into account in the year in which such forfeiture is allocated. The employer also may elect to use Deferral Contributions in the Contribution Percentage Amounts so long as the ADP test is met before the Deferral Contributions are used in the ACP test and continues to be met following the exclusion of those Deferral Contributions that are used to meet the ACP test. (5) "Eligible Participant" shall mean any employee who is eligible to make a Deferral Contribution (if the employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures). (6) "Matching Contribution" shall mean an employer contribution made to this or any other defined contribution plan on behalf of a participant on account of a participant's Deferral Contribution. (17) (7) "Excess Aggregate Contributions" shall mean, with respect to any Plan Year, the excess of: (a) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (b) The maximum Contribution Percentage Amounts permitted by the ACP test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). Such determination shall be made after first determining Excess Deferrals pursuant to Section 4.01 and then determining Excess Contributions pursuant to Section 4.02. (d) Notwithstanding any other provision of this plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable, or if not forfeitable, distributed no later than the last day of each Plan Year to participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions shall be allocated to participants who are subject to the family member aggregation rules of Section 414(g)(6) of the Code in the manner prescribed by the regulations. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the employer maintaining the plan with respect to those amounts. Excess Aggregate Contributions shall be treated as annual additions under the plan. Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Contributions is the sum of: (1) income or loss allocable to the participant's Matching Contribution account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified non-elective Contribution account and Deferral Contribution account for the Plan Year multiplied by a fraction, the numerator of which is such participant's Excess Aggregate Contributions for the year and the denominator is the participant's account balance(s) attributable to Contribution Percentage Amounts without regard to any (18) income or loss occurring during such Plan Year; and (2) ten percent of the amount determined under (1) multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. Forfeitures of Excess Aggregate Contributions shall be applied to reduce employer contributions; the forfeitures shall be held in the money market fund, if any, listed in Section 1.12(b) pending such application. Excess Aggregate Contributions shall be forfeited, if forfeitable, or distributed from the participant's Matching Contribution account and (if applicable, the participant's Qualified Discretionary Contribution account on a pro rata basis). 4.05. Special Rules. Deferral Contributions and Qualified Discretionary ------------- Contributions and income allocable to each are not distributable to a participant or his or her beneficiary or beneficiaries, in accordance with such participant's or beneficiary or beneficiaries election, earlier than upon separation from service, death, or disability, except as otherwise provided in Section 7.10, 7.11 or 10.06. The Participant's accrued benefit derived from Deferral Contributions, Qualified Discretionary Contributions and Employee Contributions is nonforfeitable. Separate accounts for Deferral Contributions, Qualified Discretionary Contributions, employee contributions and Matching Contributions will be maintained for each participant. Each account will be credited with the applicable contributions and earnings thereon. 4.06. Discretionary Contributions. If so provided by the Employer in --------------------------- Section 1.04(c)(l), for the Plan Year in which the Plan is adopted and for each Plan Year thereafter, the Employer will make Discretionary Contributions to the Trust in accordance with Section 1.04(c). Discretionary Contributions shall be allocated among eligible Participants, as determined in accordance with Section 1.04(c)(2), on the basis of compensation as defined in Section 2.01(a)(7). 4.07. Time of Making Employer Contributions. The Employer will pay its ------------------------------------- contribution for each Plan Year not later than the time prescribed by law for filing the Employer's federal income tax return for the fiscal (or taxable) year with or within which such Plan Year ends (including extensions thereof). The Trustee will have no authority to inquire into the correctness of the amounts contributed and paid over to the Trustee, to determine whether any contribution is payable under Article 4, or to enforce, by suit or otherwise, the Employer's obligation, if any, to make a contribution to the Trustee. 4.08. Return of Employer Contributions. To the extent a deduction is -------------------------------- available to the Employer under Section 404 of the Code, contributions under the Plan are condi- (19) tioned on their deductibility under Section 404. If a contribution by the Employer to the Trust is made by reason of a good faith mistake of fact, or, in the case of an Employer for which a deduction is available under Section 404 of the Code, by reason of a good faith belief as to the deductibility of the contribution under Section 404, but the deduction is disallowed, the Trustee shall, upon request by the Employer, return to the Employer the excess of the amount contributed over the amount, if any, that would have been contributed had there not occurred a mistake of fact or mistake in determining the deduction. Such excess shall be reduced by amounts attributable thereto which have been credited to the Accounts of Participants who have since received distributions from the Trust, except to the extent such amounts continue to be credited to such Participants' Accounts at the time the excess is returned to the Employer. Such excess shall also be reduced by the losses of the Trust attributable thereto, if and to the extent such losses exceed the gains and income attributable thereto, but will not be increased by the gains and income of the Trust attributable thereto, if and to extent such gains and income exceed the losses attributable thereto. In no event will the return of a contribution hereunder cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been credited to the Account had the mistaken amount not been contributed. No return of a contribution hereunder will be made more than one year after the mistaken payment of the contribution. 4.09. No Contributions by Participants. Except as provided in Section -------------------------------- 4.01, no Participant is required or permitted to make contributions under the Plan. 4.10. Rollover Contributions. ---------------------- (a) Rollover of Distributed Property. -------------------------------- (1) An Employee who was formerly a participant of an employees' trust described in Section 501(a) of the Code (the "Distributing Trust"), and who receives a distribution from the Distributing Trust or from an individual retirement account funded by a distribution from the Distributing Trust (the "Distribution") may transfer the Distribution to the Trust within sixty (60) days to the extent that the Distribution qualifies for tax-free rollover treatment. (b) Treatment of Rollover Amount. ---------------------------- (1) An account will be established for the transferring Employee under Article 6, the rollover amount will be credited to the account and such amount will be subject to the terms of the Plan, including Section 8.01, except as otherwise provided in this Section 4.10. (2) The Rollover Account will at all times be fully vested in and nonforfeitable by the Employee. (20) (c) Entry into Plan by Transferring Employee. Although an amount ---------------------------------------- may be transferred to the Trust Fund under this Section 4.10 by an Employee who has not yet become a Participant in accordance with Article 4, and such amount is subject to the terms of the Plan as described in paragraph (b) above, the Employee will not become a Participant entitled to share in Employer contributions until he has satisfied such requirements. (d) Monitoring of Rollovers. ----------------------- (1) The Administrator shall develop such procedures and require such information from transferring Employees as it deems necessary to insure that amounts transferred under this Section 4.10 meet the requirements for tax-free rollovers established by such Section and by Section 402(a)(5) of the Code. No such amount may be transferred until approved by the Administrator. (2) If a transfer made under this Section 4.10 is later determined by the Administrator not to have met the requirements of this Section or of the Code or Treasury regulations, the Trustee shall, within a reasonable time after such determination is made, and on instructions from the Administrator, distribute to the Employee the amounts then held in the Trust attributable to the Transferred Amount. ARTICLE 5. PARTICIPANTS' ACCOUNTS. ---------------------- 5.01. Individual Accounts. The Administrator will establish and maintain ------------------- an Account for each Participant which will reflect Employer contributions made on behalf of the Participant and earnings, expenses, gains and losses attributable thereto, and investments made with amounts in the Participant's Account. The Administrator will establish and maintain such other accounts and records as it decides in its discretion to be reasonably required or appropriate in order to discharge its duties under the Plan. 5.02. Valuation of Accounts. Participant Accounts will be valued at their --------------------- fair market value at least annually as of a date specified by the Sponsor in accordance with a method consistently followed and uniformly applied, and on such date earnings, expenses, gains and losses on investments made with amounts in each Participant's Account will be allocated to such Account. Participants will be furnished statements of their Account values at least once each Plan Year. 5.03. Code Section 415 Limitations. Notwithstanding any other provisions ---------------------------- of the Plan: (21) Subsections (a)(1) through (a)(4)--(These subsections apply to --------------------------- Employers who do not maintain any qualified plan including a Welfare Benefit - ----------------------------------------------------------------------------- Fund or an Individual Medical Account in addition to this Plan.) - -------------------------------------------------------------- (a)(1)If the Participant does not participate in, and has never participated in any other qualified plan, Welfare Benefit Fund or Individual Medical Account maintained by the Employer, the amount of Annual Additions to a Participant's Account for a Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the participant's account would cause the annual additions for the limitation year to exceed the maximum permissible amount, the amount contributed or allocated will be reduced so that the annual additions for the limitation year will equal the maximum permissible amount. (a)(2)Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Maximum Permissible Amount may be determined on the basis of a reasonable estimation of the Participant's compensation for such Limitation Year, uniformly determined for all Participants similarly situated. Any Employer contributions based on estimated annual compensation shall be reduced by any Excess Amounts carried over from prior years. (a)(3)As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (a)(4)If, pursuant to subsection (a)(3) or as a result of the allocation of forfeitures, there is an Excess Amount with respect to a Participant for a Limitation Year, such Excess Amount shall be disposed of as follows: (A) In the event that the Participant is in the service of the Employer which is covered by the Plan at the end of the Limitation Year, then such Excess Amount shall be reapplied to reduce future Employer contributions under this Plan for the next Limitation Year (and for each succeeding year, as necessary) for such Participant, so that in each such Year the sum of actual Employer contributions plus the reapplied amount shall equal the amount of Employer contributions which would otherwise be made to such Participant's Account. (B) In the event that the Participant is not in the service of the Employer which is covered by the Plan at the end of a Limitation Year, then such Excess Amount will be held unallocated in a suspense account. The suspense account will be applied to reduce future (22) Employer contributions for all remaining Participants in the next Limitation Year and each succeeding Limitation Year if necessary. (C) If a suspense account is in existence at any time during the Limitation Year pursuant to this subsection, it will not participate in the allocation of the Trust Fund's investment gains and losses. All amounts in the suspense account must be allocated to the Accounts of Participants before any Employer contribution may be made for the Limitation Year. Excess Amounts may not be distributed to Participants or former Participants. Subsections (b)(1) through (b)(6)--(These subsections apply to Employers who, ------------------------------------------ in addition to this Plan, maintain one or more plans, all of which are - ----------------------------------------------------------------------- qualified Master or Prototype defined contribution Plans, any Welfare Benefit - ------------------------------------------------------------------------------ Fund or any Individual Medical Account.) - -------------------------------------- (b)(1)If, in addition to this Plan, the Participant is covered under any other qualified defined contribution plans (all of which are qualified Master or Prototype Plans) maintained by the Employer, the amount of Annual Additions to a Participant's Account for a Limitation Year, not exceed the lesser of: (A) the Maximum Permissible Amount, reduced by the sum of any Annual Additions to the Participant's accounts for the same Limitation Year under such other defined contribution plans and Welfare Benefit Funds; or (B) any other limitation contained in this Plan. If the annual additions with respect to the participant under other defined contribution plans and welfare benefit funds maintained by the employer are less than the maximum permissible amount and the employer contribution that would otherwise be contributed or allocated to the participant's account under this plan would cause the annual additions for the limitation year to exceed this limitation, the amount contributed or allocated will be reduced so that the annual additions under all such plans and funds for the limitation year will equal the maximum permissible amount. If the annual additions with respect to the participant under such other defined contribution plans and welfare benefit funds in the aggregate are equal to or greater than the maximum permissible amount, no amount will be contributed or allocated to the participant's account under this plan for the limitation year. (b)(2)Prior to the determination of the Participant's actual Compensation for the Limitation Year, the amounts referred to in (b)(l)(A) above may be determined on the basis of a reasonable estimation of the Participant's compensation for such Limitation Year, uniformly determined for all Participants similarly (23) situated. Any Employer contribution based on estimated annual compensation shall be reduced by any Excess Amounts carried over from prior years. (b)(3)As soon as is administratively feasible after the end of the Limitation Year, the amounts referred to in (b)(1)(A) shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (b)(4)If a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount, such Excess Amount shall be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a Welfare Benefit Fund or Individual Medical Account will be deemed to have been allocated first regardless of the actual allocation date. (b)(5)If an Excess Amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributed to this Plan will be the product of: (A) the total Excess Amount allocated as of such date (including any amount which would have been allocated but for the limitations of Section 415 of the Code), times (B) the ratio of (i) the Annual Additions allocated to the Participant as of such date under this Plan, divided by (ii) the Annual Additions allocated as of such date under all qualified defined contribution plans (determined without regard to the limitations of Section 415 of the Code). (b)(6)Any Excess Amounts attributed to this Plan shall be disposed of as provided in subsection (a)(4). Subsection (c)--(This subsection applies only to Employers who, in -------------------------------------------------- addition to this Plan, maintain one or more qualified plans which are ---------------------------------------------------------------------- qualified defined contribution plans other than Master or Prototype -------------------------------------------------------------------- Plans.) ----- (c) If the Employer also maintains another plan which is a qualified defined contribution plan other than a Master or Prototype Plan, Annual Additions allocated under this Plan on behalf of any Participant shall be limited in accordance with the provisions of (b)(l) through (b)(6), as though the other plan were a Master or Prototype Plan, unless the Employer provides other limitations in the Adoption Agreement. Subsection (d)--(This subsection applies only to Employers who, in -------------------------------------------------- addition to this Plan, maintain or at any time maintained a qualified defined - ------------------------------------------------------------------------------ benefit plan.) - ------------ (d) If the Employer maintains, or at any time maintained, a qualified defined benefit plan, the sum of any Participant's Defined Benefit Fraction and (24) Defined Contribution Fraction shall not exceed the combined plan limitation of 1.0 in any Limitation Year. The combined plan limitation will be met as provided by the Employer in the Adoption Agreement. Subsections (e)(1) through (e)(9)--(Definitions.) ------------------------------------------------- (e)(1)"Annual Additions" means the sum of the following amounts credited to a Participant for a Limitation Year: (A) all Employer contributions, (B) all Employee contributions, and (C) all forfeitures. For purposes of this Section 5.03, amounts reapplied to reduce Employer contributions under subsection (a)(4) shall also be included as Annual Additions. Amounts allocated, after March 31, 1984, to an Individual Medical Account which is part of a pension or annuity plan maintained by the Employer are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee, as defined in Section 419A(d)(3) of the Code, under a Welfare Benefit Fund maintained by the Employer are treated as Annual Additions to a defined contribution plan. (e)(2)"Compensation" means wages as defined in Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Section 3401(a)(2)). (e)(3)"Defined Benefit Fraction" means a fraction, the numerator of which is the sum of the Participant's annual benefits (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) under all the defined benefit plans (whether or not terminated) maintained by the Employer, each such annual benefit computed on the assumptions that the Participant will remain in employment until the normal retirement age under each such plan (or the Participant's current age, if later) and that all other factors used to determine benefits under such plan will remain constant for all future Limitation Years, and the denominator of which is the lesser of 125 percent of the (25) dollar limitation determined for the Limitation Year under Sections 415(b)(1)(A) and 415(d) of the Code or 140 percent of the Participant's average Compensation for the 3 highest consecutive calendar years of service during which the Participant was active in each such plan, including any adjustments under Section 415(b) of Code. However, if the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986 in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986 then the denominator of the Defined Benefit Fraction shall not be less than 125 percent of the Participant's total accrued benefit as of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986, under all such defined benefit plans as met, individually and in the aggregate, the requirements of Section 415 of the Code for all Limitation Years beginning before January 1, 1987. (e)(4)"Defined Contribution Fraction" means a fraction, the numerator of which is the sum for the current and all prior Limitation Years of (A) all Annual Additions (if any) to the Participant's accounts under each defined contribution plan (whether or not terminated) maintained by the Employer, and (B) all Annual Additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans (whether or not terminated) maintained by the Employer, and the Participant's Annual Additions under each Welfare Benefit Fund or amounts attributable to an Individual Medical Account, and the denominator of which is the sum for the current and all prior Limitation Years during which the Participant was an Employee (regardless of whether the Employer maintained a defined contribution plan in any such year). The maximum aggregate amount in any Limitation Year is the lesser of 125 percent of the dollar limitation in effect under Section 415(c)(1)(A) of the Code for each such year or 35 percent of the Participant's Compensation for each such year. If the Participant was a participant as of the first day of the first Limitation Year beginning after December 31, 1986 in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986 then the numerator of the Defined Contribution Fraction shall be adjusted if the sum of this fraction and the Defined Benefit Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 times (ii) the denominator of this fraction will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 6, 1986, but using the Section 415 (26) limitation applicable to the first Limitation Year beginning on or after January 1, 1987. (e)(5)"Employer" means the Employer and any Related Employer that adopts this Plan. In the case of a group of employers which constitutes a controlled group of corporations (as defined in Section 414(b) of the Code as modified by Section 415(h)) or which constitutes trades or businesses (whether or not incor porated) which are under common control (as defined in Section 414(c) as modified by Section 415(h)) or which constitutes an affiliated service group (as defined in Section 414(m)) and any other entity required to be aggregated with the Employer pursuant to regulations issued under Section 414(o) of the Code, all such employers shall be considered a single employer for purposes of applying the limitations of this Section 5.03. (e)(6)"Excess Amount" means the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount, less loading and other administrative charges allocable to such excess. (e)(7)"Individual Medical Account" means an individual medical account as defined in Section 415(l)(2) of the Code. (e)(8)"Limitation Year" means the Plan Year. All qualified plans of the Employer must use the same Limitation Year. If the Limitation Year is amended to a different 12-consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (e)(9)"Master or Prototype Plan" means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (e)(10) "Maximum Permissible Amount" means for a Limitation Year with respect to any Participant the lesser of (i) $30,000 or, if greater, 25 percent of the dollar limitation set forth in Section 415(b)(1) of the Code, as in effect for the Limitation Year, or (ii) 25 percent of the Participant's Compensation for the Limitation Year. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different 12-consecutive month period, the Maximum Permissible Amount will not exceed the limitation in (e)(9)(i) multiplied by a fraction whose numerator is the number of months in the short Limitation Year and whose denominator is 12. The compensation limitation referred to in subsection (e)(9)(ii) shall not apply to any contribution for medical benefits within the meaning of Section 401(h) or Section 419A(f)(2) of the Code after separation from service which is otherwise treated as an Annual Addition under Section 419A(d)(2) or Section 415(t)(1) of the Code. (27) (e)(l1) "Welfare Benefit Fund" means a welfare benefit as defined in Section 419(e) of the Code. ARTICLE 6. INVESTMENT OF CONTRIBUTIONS. --------------------------- 6.01. Manner of Investment. All contributions made to the Accounts of -------------------- Participants shall be held for investment by the Trustee. The Accounts of Participants shall be invested and reinvested only in eligible investments selected by the Employer in Section 1.12(b). 6.02. Investment Decisions. -------------------- (a) Each Participant shall direct the investment of his Account among the Fidelity Funds listed in Section 1.12(b). The Participant shall file initial investment instructions with the Administrator, on such form as the Administrator may provide, selecting the Funds in which amounts credited to his Account will be invested. While any balance remains in the Account of a Participant after this death, the Beneficiary of the Participant shall make decisions as to the investment of the Account as though the Beneficiary were the Participant. To the extent required by a qualified domestic relations order as defined in Section 414(p) of the Code, an alternate payee shall make investment decisions with respect to a Participant's Account as though such alternate payee were the Participant. All dividends, interest, gains and distributions of any nature received in respect of Fund Shares shall be reinvested in additional shares of that Fidelity Fund. (b) If the Trustee receives any contribution under the Plan as to which investment instructions have not been provided, the Trustee shall promptly notify the Administrator and the Administrator shall take steps to elicit instructions from the Participant. The Trustee shall credit any such contribution to the Participant's Account and such amount shall be invested in the Fidelity Fund selected by the Employer for such purposes until investment instructions have been received by the Trustee. (c) Expenses attributable to the acquisition of investments shall be charged to the Account of the Participant for which such investment is made. 6.03. Direction to Trustee. All Participant investment instructions and -------------------- changes thereto filed with the Administrator pursuant to the provisions of Section 6.02 shall be promptly transmitted by the Administrator to the Trustee. A Participant shall transmit subsequent investment instructions directly to the Trustee by means of the Telephone (28) Exchange System maintained by the Trustee for such purposes. The Trustee shall have no duty to inquire into the investment decision of a Participant or to advise him regarding the purchase, retention or sale of assets credited to his Account. ARTICLE 7. RIGHT TO BENEFITS. ----------------- 7.01. Normal or Early Retirement. Each Participant who attains his Normal -------------------------- Retirement Age or, if so provided by the Employer in Section 1.05(b), Early Retirement Age will have a 100 percent nonforfeitable (vested) interest in his Account regardless of any vesting schedule elected in Section 1.06. If a Participant retires upon the attainment of Normal or Early Retirement Age, such retirement is referred to as a normal retirement. Upon his normal retirement the balance of the Participant's Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8 below. If a Participant separates from service before satisfying the age requirements for early retirement, but has satisfied the service requirement, the Participant will be entitled to elect an early retirement distribution upon satisfaction of such age requirement. 7.02. Late Retirement. If a Participant continues in the service of the --------------- Employer after attainment of Normal Retirement Age, he will continue to have a 100 percent nonforfeitable interest in his Account and will continue to participate in the Plan until the date he establishes with the Employer for his late retirement. Upon the earlier of his late retirement or the distribution date required under Section 8.08, the balance of his Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8 below. 7.03. Disability Retirement. If so provided by the Employer in Section --------------------- 1.05(c), a Participant who becomes disabled so that he cannot engage in any substantial, gainful activity because of a medically determinable physical or mental impairment likely to result in death or to be of a continuous period of not less than 12 months, and terminates his employment with the employer, will have a 100 percent nonforfeitable interest in his Account, the balance of which Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08, will be distributed to him in accordance with Article 8 below. Such termination of employment is referred to as a disability retirement. Determinations with respect to disability shall be made by the Administrator on the basis set forth in Section 1.05(c). 7.04. Death. Subject, if applicable, to Section 8.04 below, if a ----- Participant dies before the distribution of his Account has commenced, or before such distribution has been completed, his designated Beneficiary or Beneficiaries will be entitled to receive the balance or remaining balance of his Account, plus any amounts thereafter credited to his Account, subject to the provisions of Section 7.08. Distribution to the Beneficiary or Beneficiaries will be made in accordance with Article 8 below. (29) A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries by giving notice to the Administrator on a form designated by the Administrator. If more than one person is designated as the Beneficiary, their respective interests shall be as indicated on the designation form. In the case of a married Participant the Participant's spouse shall be deemed to be the designated Beneficiary unless the Participant's spouse has consented to another designation in the manner described in Section 8.03(d). If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant's Account, such amount will be paid to his surviving spouse or, if none, to his estate (such spouse or estate shall be deemed to be the Beneficiary for purposes of the Plan). If a Beneficiary dies after benefits to such Beneficiary have commenced, but before they have been completed, and, in the opinion of the Administrator, no person has been designated to receive such remaining benefits, then such benefits shall be paid in a lump sum to the deceased Beneficiary's estate. 7.05. Other Termination of Employment. If a Participant terminates his ------------------------------- employment for any reason other than death or normal, late, or disability retirement, he will be entitled to a termination benefit equal to (i) the vested percentage of the value of the Matching and Discretionary Contributions to his Account, as adjusted for income, expense, gain, or loss, such percentage determined in accordance with the vesting schedule selected by the Employer in Section 1.06, and (ii) the value of the Deferral and Rollover Contributions to his Account as adjusted for income, expense, gain or loss. The amount payable under this Section 7.05 will be subject to the provisions of Section 7.08 and will be distributed in accordance with Article 8 below. 7.06. Separate Account. If a distribution from a Participant's Account ---------------- has been made to him at a time when he has a nonforfeitable right to less than 100 percent of his Account, the vesting schedule in Section 1.06 will thereafter apply only to amounts in his Account attributable to Employer contributions allocated after such distribution. The balance of his Account immediately after such distribution will be transferred to a separate account which will be maintained for the purpose of determining his interest therein according to the following provisions. At any relevant time prior to a forfeiture of any portion thereof under Section 7.07 a Participant's nonforfeitable interest in his Account held in a separate account described in the preceding paragraph will be equal to P(AB + (RxD))-(RxD), where P is the nonforfeitable percentage at the relevant time determined under Section 7.05; AB is the account balance of the separate account at the relevant time; D is the amount of the distribution; and R is the ratio of the account balance at the relevant time to the account balance after distribution. Following a forfeiture of any portion of such separate account under Section 7.07 below, any balance in the Participant's separate account will remain fully vested and nonforfeitable. (30) 7.07. Forfeitures. If a Participant terminates his employment, any ----------- portion of his Account (including any amounts credited after his termination of employment) not payable to him under Section 7.05 will be forfeited by him upon the complete distribution to him of the vested portion of his Account, if any, subject to the possibility of reinstatement as described in the following paragraph. For purposes of this paragraph, if the value of an Employee's vested account balance is zero, the Employee shall be deemed to have received a distribution of his vested interest immediately following termination of employment. Such forfeitures will be applied to reduce the contributions of the Employer next payable under the Plan (or administrative expenses of the Plan); the forfeitures shall be held in the money market fund, if any, listed in Section 1.12(b) pending such application. If a Participant forfeits any portion of his Account under the preceding paragraph but does again become an Employee prior to such date, then the amount so forfeited, without any adjustment for the earnings, expenses, or losses or gains of the assets credited to his Account since the date forfeited, will be recredited to his Account (or to a separate account as described in Section 7.06, if applicable) as of the last day of the Plan Year in which he again becomes an Employee, but only if he repays to the Plan within five years after the date of his reemployment the amount previously distributed to him, without interest, under Section 7.05. The provisions of the Plan (including Section 7.06) will thereafter apply as if no forfeiture had occurred. The amount to be recredited pursuant to this paragraph will be derived first from the forfeitures, if any, which as of the date of recrediting have yet to be applied as provided in the preceding paragraph and, to the extent such forfeitures are insufficient, from a special Employer contribution to be made by the Employer. No forfeitures will occur solely as a result of an Employee's withdrawal of Employee contributions. 7.08. Adjustment for Investment Experience. If any distribution under ------------------------------------ Sections 7.01, 7.02, 7.03, 7.04 or 7.05 is not made in a single payment, the amount retained by the Trustee after the distribution will be subject to adjustment until distributed to reflect the income and gain or loss on the investments in which such amount is invested and any expenses properly charged under the Plan and Trust to such amounts. 7.09. Participant Loans. If permitted under Section 1.07, the ----------------- Administrator shall allow Participants to apply for a loan from the Plan, subject to the following: (a) Loans shall be made available to all Participants and beneficiaries on a reasonably equivalent basis. (b) Loans shall not be made available to highly compensated employees (as defined in section 414(q) of the Code) in an amount greater than the amount made available to other employees. (31) (c) Loans must be secured by the Participant's accounts, must not exceed 50 percent of the Participant's vested Account balance, and must bear a reasonable interest rate. (d) All loans shall by their terms require that repayment (principal and interest) be amortized in level payments, not less than quarterly, over a period not extending beyond five years from the date of the loan. (e) A participant must obtain the consent of his or her spouse, if any, to use a Transferred Account as security for the loan if so required under Article 8. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent be required if the account balance is used for renegotiation, extension, renewal, or other revision of the loan. (f) In the event of a default, foreclosure on the note and attachment of security will not occur until a distributable event occurs in the plan. (g) No loans will be made to any shareholder-employee or Owner-Employee. For purposes of this requirement, a shareholder-employee means an employee or officer of an electing small business (Subchapter S) corporation who owns (or is considered as owning within the meaning of section 318(a)(1) of the Code), on any day during the taxable year of such corporation, more than 5% of the outstanding stock of the corporation. (h) No participant shall be permitted to maintain more than one loan at any time; provided that this restriction shall not apply to any loans made before the Employer adopted this prototype document. Notwithstanding any other provision of this plan, the portion of the Participant's vested account balance used as a security interest held by the plan by reason of a loan outstanding to the participant shall be taken into account for purposes of determining the amount of the account balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. If less than 100% of the participant's vested account balance (determined without regard to the preceding sentence) is payable to the surviving spouse, then the account balance shall be adjusted by first reducing the vested account balance by the amount of the security used as repayment of the loan, and then determining the benefit payable to the surviving spouse. (32) No loan to any participant or beneficiary can be made to the extent that such loan when added to the outstanding balance of all other loans to the participant or beneficiary would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one year period ending on the day before the loan is made over the outstanding balance of loans from the plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable accrued benefit of the Participant. For the purpose of the above limitation, all loans from all plans of the Employer and Related Employers are aggregated. 7.10. Hardship Distributions. If permitted under Section 1.08, a ---------------------- Participant may apply to the Administrator to withdraw some or all or his Deferral Contributions (and earnings thereon accrued as of December 31, 1988) and, if applicable, Rollover Contributions in the event of hardship. For purposes of this Section, "hardship" is defined as an immediate and heavy financial need of the Employee where such Employee lacks other available resources. Determinations with respect to hardship shall be made by the Administrator and shall be conclusive for purposes of the Plan, and shall be based on the following special rules: (a) The following are the only financial needs considered immediate and heavy: deductible medical expenses (within the meaning of section 213(d) of the Code) of the employee, the employee's spouse, children, or dependents; the purchase (excluding mortgage payments) of a principal residence for the employee; payment of tuition for the next quarter or semester of postsecondary education for the employee, the employee's spouse, children or dependents; or the need to prevent the eviction of the employee from, or a foreclosure on the mortgage of, the employee's principal residence. (b) A distribution will be considered as necessary to satisfy an immediate and heavy financial need of the employee only if: (1) The employee has obtained all distributions, other than the hardship distributions, and all nontaxable loans under all plans maintained by the employer, (2) All plans maintained by the employer provide that the employee's Elective Deferrals (and Employee Contributions) will be suspended for twelve months after the receipt of the hardship distribution; (3) The distribution is not in excess of the amount of an immediate and heavy financial need; and (4) All plans maintained by the employer provide that the employee may not make Elective Deferrals for the employee's taxable year (33) immediately following the taxable year of the hardship distribution in excess of the applicable limit under section 402(g) of the Code for such taxable year less the amount of such employee's Elective Deferrals for the taxable year of the hardship distribution. (c) A Participant must obtain the consent of his or her spouse, if any, to obtain a hardship withdrawal from a Transferred Account if so required under Article 8. 7.11. Prior Plan In-Service Distribution Rules. If so designated by the ---------------------------------------- Employer in Section 1.09(b)(3) by the Employer in Section 1.09(b)(3), a Participant shall be entitled to withdraw all or a portion of his Account balance upon the Attainment of Age 59-1/2. If designated by the Employer in Section 1.09(b)(4), a Participant shall be entitled to withdraw any after-tax contributions made prior to the adoption of this Plan, at any time prior to his termination of employment. In either case, such withdrawal shall be subject to the provisions of Section 8.05. ARTICLE 8. DISTRIBUTION OF BENEFITS PAYABLE AFTER TERMINATION OF SERVICE. ------------------------------------------------------------- 8.01. Distribution of Benefits to Participants and Beneficiaries. ---------------------------------------------------------- (a) Distributions from the Trust to a Participant or to the Beneficiary of the Participant shall be made in a lump sum in cash upon retirement, death, or other termination of employment, unless another form of distribution is permitted in accordance with Section 1.09(b) and Sections 8.02, 8.03 or 8.04 or in accordance with Section 11.02. A distribution may be made in Fund Shares, at the election of the Participant, pursuant to the qualifying rollover of such distribution to a Fidelity Investments individual retirement account. (b) In the event that the Plan was adopted by amendment from another defined contribution plan, the following forms of benefit may also be available: (1) if permitted under Section 1.09(b)(1), in substantially equal annual, or more frequent, installments, in cash, over a period certain which does not extend beyond the life expectancy of the Participant or the joint life expectancies of the Participant and his Beneficiary, or, if the Participant dies prior to the commencement of his benefits, the life expectancy of the Participant's Beneficiary, as further described in Section 8.04. (2) if permitted under Section 1.09(b)(2), by the purchase and delivery of an annuity described in Sections 8.02 or 8.03. (34) (c) Notwithstanding the provisions of Section 8.01(b) above, if a Participant's Account is, and at the time of any prior distribution was, $3,500 or less, the balance of such Account shall be distributed in a lump sum as soon as practicable following retirement, disability, death or other termination of employment. 8.02. Annuity Distributions. If so provided in Section 1.09(b)(2), a --------------------- Participant may elect distributions made in whole or in part in the form of an annuity contract subject to the provisions of Section 8.03. (a) An annuity contract distributed under the Plan must be purchased from an insurance company and must be nontransferable. The terms of an annuity contract shall comply with the requirements of the Plan and distributions under such contract shall be made in accordance with Section 401(a)(9) of the Code and the regulations thereunder. (b) The payment period of an annuity contract distributed to the Participant pursuant to this Section may be as long as the Participant lives. If the annuity is payable to the Participant and his spouse or designated Beneficiary, the payment period of an annuity contract may be for as long as either the Participant or his spouse or designated Beneficiary lives. Such an annuity may provide for an annuity certain feature for a period not exceeding the life expectancy of the Participant. If the annuity is payable to the Participant and his spouse such period may not exceed the joint life and last survivor expectancy of the Participant and his spouse, or, if the annuity is payable to the Participant and a designated Beneficiary, the joint life and last survivor expectancy of the Participant and such Beneficiary. If the Participant dies prior to the commencement of his benefits, the payment period of an annuity contract distributed to the Beneficiary of the Participant may be as long as the Participant's Beneficiary lives, and may provide for an annuity certain feature for a period not exceeding the life expectancy of the Beneficiary. Any annuity contract distributed under the Plan must provide for non-increasing payments. 8.03. Joint and Survivor Annuities. ---------------------------- (a) Application. The provisions of this Section supersede any ----------- conflicting provisions of the Plan; provided, however, that this Section shall not apply if the Participant's Account does not exceed $3,500 prior to the commencement of a distribution of any benefits under the Plan. A Participant is described in this Section only if (i) the Participant has elected distribution of his Account in the form of an annuity contract in accordance with Section 8.02, or (ii) the Trustee has directly or indirectly received a transfer of assets from another plan (including a predecessor plan) to which Code section 401(a)(11) applies with respect to such Participant. (35) (b) Retirement Annuity. Unless the Participant elects to waive the ------------------ application of this subsection in a manner satisfying the requirements of subsection (d) below, to the extent applicable to the Participant, within the 90-day period preceding his Annuity Starting Date (which election may be revoked, and if revoked, remade, at any time in such period), the vested Account balance due any Participant to whom this subsection (b) applies will be paid to him by the purchase and delivery to him of an annuity contract described in Section 8.02 providing a life annuity only form of benefit or, if the Participant is married as of his Annuity Starting Date, providing an immediate annuity for the life of the Participant with a survivor annuity for the life of the Participant's spouse (determined as of the date of distribution of the contract) which is 50 percent of the amount of the annuity which is payable during the joint lives of the Participant and such spouse. The Participant may elect to receive distribution of his benefits in the form of such annuity as of the earliest date on which he could elect to receive retirement benefits under the Plan. Within the period beginning 90 days prior to the Participant's Annuity Starting Date and ending 30 days prior to such Date, the Administrator will provide such Participant with a written explanation of (i) the terms and conditions of the annuity contract described herein, (ii) the Participant's right to make and the effect of an election to waive application of this subsection, (iii) the rights of the Participant's spouse under subsection (d), and (iv) the right to revoke and the period of time effect of a revocation of the election to waive application of this subsection. (c) Annuity Death Benefit. Unless the Participant elects to waive --------------------- the application of this subsection in a manner satisfying the requirements of subsection (d) below at any time within the applicable election period (which election may be revoked, and if revoked, remade, at any time in such period), if a married Participant to whom this Section applies dies before, his Annuity Starting Date, then notwithstanding any designation of a Beneficiary to the contrary, 50 percent of his vested Account balance will be applied to purchase an annuity contract described in Section 8.03 providing an annuity for the life of the Participant's surviving spouse, which contract will then be promptly distributed to such spouse. In lieu of the purchase of such an annuity contract, the spouse may elect in writing to receive distributions under the Plan as if he or she had been designated by the Participant as his Beneficiary with respect to 50 percent of his Account. For purposes of this subsection, the applicable election period will commence on the first day of the Plan Year in which the Participant attains age 35 and will end on the date of the Participant's death, provided that in the case of a Participant who terminates his employment the applicable election period with respect to benefits accrued prior to the date of such termination will in no event commence later than the date of his termination of employment. A Participant may elect to waive the application of this subsection prior to the Plan Year in which he attains age 35, (36) provided that any such waiver will cease to be effective as of the day of the Plan Year in which the Participant attains age 35. The Administrator will provide a Participant to whom this subsection applies with a written explanation with respect to the annuity death benefit described in this subsection (c) comparable to that required under subsection (b) above. Such explanation shall be furnished within whichever of the following periods ends last: (i) the period beginning with the first day of the Plan Year in which the Participant reaches age 32 and ending with the end of the Plan Year preceding the Plan Year in which he reaches age 35, (ii) a reasonable period ending after the Employee becomes a Participant, (iii) a reasonable period ending after this Section 8.04 first becomes applicable to the Participant in accordance with Section 8.04(a), (iv) in the case of a Participant who separates from service before age 35, a reasonable period of time ending after separation from service. For purposes of the preceding sentence, the two-year period beginning one year prior to the date of the event described in clause (ii), (iii) or (iv), whichever is applicable, and ending one year after such date shall be considered reasonable, provided, that in the case of a Participant who separates from service under (iv) above and subsequently recommences employment with the Employer, the applicable period for such Participant shall be redetermined in accordance with this subsection. (d) Retirements of Elections. This subsection will be satisfied ------------------------ with respect to a waiver or designation which is required to satisfy this subsection if such waiver or designation is in writing and either (1) the Participant's spouse consents thereto in writing, which consent must acknowledge the effect of such waiver or designation and be witnessed by a notary public or Plan representative, or (2) the Participant establishes to the satisfaction of the Administrator that the consent of the Participant's spouse cannot be obtained because there is no spouse, because the spouse cannot be located or because of such other circumstances as the Secretary of Treasury may prescribe. Any consent by a spouse, or establishment that the consent of a spouse may not be obtained, will be effective only with respect to a specific Beneficiary (including any class of beneficiaries or any contingent beneficiaries) or form of benefits identified in the Participant's waiver or designation, unless the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse. A consent which permits such designations by the Participant shall acknowledge that the spouse has the right to limit consent to a specific Beneficiary and form of benefits and that the spouse voluntarily elects to relinquish both such rights. A consent by a spouse shall be irrevocable once made. Any such consent, or establishment that such (37) consent may not be obtained, will be effective only with respect to such spouse. For purposes of subsections (b) and (c) above, no consent of a spouse shall be valid unless the notice required by such subsection, whichever is applicable, has been provided to the Participant. (e) Former Spouse. For purposes of this Section 8.03, a former ------------- spouse of a Participant will be treated as the spouse or surviving spouse of the Participant, and a current spouse will not be so treated, to the extent required under a qualified domestic relations order, as defined in section 414(p) of the Code. (f) Vested Account Balance. For purposes of this Section, vested ---------------------- Account balance shall include the aggregate value of the Participant's vested Account balance derived from employer and employee contributions (including rollovers), whether vested before or upon death. The provisions of this Section shall apply to a Participant who is vested in amounts attributable to employer contributions, employee contributions, or both, at the time of death or distribution. 8.04. Installment Distributions. This Section shall be interpreted and ------------------------- applied in accordance with the regulations under Section 401(a)(9) of the Code, including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the regulations. (a) In General. If a Participant's benefit may be distributed in ---------- accordance with Section 8.01(b)(1), the amount to be distributed for each calendar year for which a minimum distribution is required shall be at least an amount equal to the quotient obtained by dividing the Participant's interest in his Account by the life expectancy of the Participant or Beneficiary or the joint life and last survivor expectancy of the Participant and his Beneficiary, whichever is applicable. For calendar years beginning before January 1, 1989, if a Participant's Beneficiary is not his spouse, the method of distribution selected must insure that at least 50 percent of the present value of the amount available for distribution is paid within the life expectancy of the Participant. For calendar years beginning after January 1, 1989 the amount to be distributed for each calendar year shall not be less than an amount equal to the quotient obtained by dividing the Participant's interest in his Account by the lesser of (i) the applicable life expectancy under Section 8.01(b), or (ii) if a Participant's Beneficiary is not his spouse, the applicable divisor determined under section 1.401(a)(9)-2, Q&A 4 of the Proposed Treasury Regulations, or any successor regulations of similar import. Distributions after the death of the Participant shall be made using the applicable life expectancy under (i) above, without regard to section 1.401 (a)(9)-2 of such regulations. The minimum distribution required under this subsection (a) for the calendar year immediately preceding the calendar year in which the (38) Participant's required beginning date, as determined under Section 8.09(a)(2), occurs shall be made on or before the Participant's required beginning date, as so determined. Minimum distributions for other calendar years shall be made on or before the close of such calendar year. (b) Additional Requirements for Distributions After Death of --------------------------------------------------------- Participant. --------- (1) Distribution beginning before Death. If the Participant ----------------------------------- dies before distribution of his benefits has begun, distributions shall be made in accordance with the provisions of this paragraph. Distributions under Section 8.01(a) shall be completed by the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. Distributions under Section 8.01(b) shall commence, if the Beneficiary is not the Participant's spouse, not later than the close of the calendar year immediately following the calendar year in which the death of the Participant occurs. Distributions under Section 8.01(b) to a Beneficiary who is the Participant's surviving spouse shall commence not later than the close of the calendar year in which the Participant would have attained age 70 1/2 or, if later, the close of the calendar year immediately following the calendar year in which the death of the Participant occurs. In the event such spouse dies prior to the date distribution to him or her commences, he or she will be treated for purposes of this subsection (other than the preceding sentence) as if he or she were the Participant. If the Participant has not designated a Beneficiary, or the Participant or Beneficiary has not effectively selected a method of distribution, distribution of the Participant's benefit shall be completed by the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. Any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. For purposes of this subsection (b)(1), the life expectancy of a Beneficiary who is the Participant's surviving spouse be recalculated annually unless the Participant's spouse irrevocably elects otherwise prior to the time distributions are required to begin. Life expectancy shall be computed in accordance with the provisions of subsection (a) above. (2) Distribution beginning after Death. If the Participant ---------------------------------- dies after distribution of his benefits has begun, distributions to the Participant's Beneficiary will be made at least as rapidly as under the method of distribution being used as of the date of the Participant's death. (39) For purposes of this Section 8.04(b), distribution of a Participant's interest in his Account will be considered to begin as of the Participant's required beginning date, as determined under Section 8.08(b). If distribution in the form of an annuity irrevocably commences prior to such date, distribution will be considered to begin as of the actual date distribution commences. (c) Life Expectancy. For purposes of this Section, life --------------- expectancy shall be recalculated annually in the case of the Participant or a Beneficiary who is the Participant's spouse unless the Participant or Beneficiary irrevocably elects otherwise prior to the time distributions are required to begin. If not calculated in accordance with the foregoing, life expectancy shall be calculated using the attained age of the Participant or Beneficiary, whichever is applicable, as of such individual's birth date in the first year for which a minimum distribution is required reduced by one for each elapsed calendar year since the date life expectancy was first calculated. For purposes of this Section, the expectancy and joint life and last survivor expectancy shall be computed by use of the expected return multiples in Table V and VI of Section 1.72-9 of the income tax Regulations. A Participant's interest in his Account for purposes of this Section 8.04 shall be determined as of the last valuation date in the calendar year immediately preceding the calendar year for which a minimum distribution is required, increased by the amount of any contributions allocated to, and decreased by any distributions from, such Account after the valuation date. Any distribution for the first year for which a minimum distribution is required made after the close of such year shall be treated as if made prior to the close of such year. 8.05. Immediate Distribution. If the Account balance distributable to a ---------------------- Participant exceeds, or at the time of any prior distribution exceeded, $3,500, no distribution will be made to the Participant before he reaches his Normal Retirement Age (or age 62, if later), unless the written consent of the Participant has been obtained. Such consent shall be made in writing within the 90-day period ending on the Participant's Annuity Starting Date. Within the period beginning 90 days before the Participant's Annuity Starting Date and ending 30 days before such Date, the Administrator will provide such Participant with written notice comparable to the notice described in Section 8.04(b) containing a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan and Participant of his right to defer receipt of the distribution until his Normal Retirement Age (or age 62, if later). The consent of the Participant's spouse must also be obtained if the Participant is subject to the provisions of Section 8.03(a), unless the distribution will be made in the form of the applicable retirement annuity contract described in Section 8.03(b). A (40) spouse's consent to early distribution, if required, must satisfy the requirements of Section 8.03(d). Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of this Plan, if the Plan does not offer an annuity option (purchased from a commercial provider) and if the employer or entity within the same controlled group as the employer does not maintain another defined contribution plan (other then an employee stock ownership plan as defined in Section 4975(e)(7) of the Code), the Participants account balance will, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the employer maintains another defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code) then the Participants account balance will be transferred, without the Participants consent, to the other plan if the Participant does not consent to an immediate distribution. 8.06. Determination of Method of Distribution. The Participant will --------------------------------------- determine the method of distribution of benefits to himself and may determine the method of distribution to his Beneficiary. Such determination will be made prior to the time benefits become payable under the Plan. If the Participant does not determine the method of distribution to his Beneficiary or if the Participant permits his Beneficiary to override his determination, the Beneficiary, in the event of the Participant's death, will determine the method of distribution of benefits to himself as if he were the Participant. A determination by the Beneficiary must be made no later than the close of the calendar year in which distribution would be required to begin under Section 8.04(b) or, if earlier the close of the calendar year in which the fifth anniversary of the death of the Participant occurs. 8.07. Notice to Trustee. Administrator will notify the Trustee in writing ----------------- whenever any Participant or Beneficiary is entitled to receive benefits under the Plan. The Administrator's notice shall indicate the form of benefits that such Participant or Beneficiary shall receive and (in the case of distributions to a Participant) the name of any designated Beneficiary or Beneficiaries. 8.08. Time of Distribution. In no event will distribution to a -------------------- Participant be made later than the earlier of the dates described in (a) and (b) below: (a) Absent the consent of the Participant (and his spouse, if appropriate), the 60th day after the close of the Plan Year in which occurs the later of the date on which the Participant age 65, the date on which the Participant ceases to be employed by the Employer, or the 10th anniversary of the year in which the Participant commenced participation in the Plan; and (41) (b) April 1 of the calendar year first following the calendar year in which the Participant attains age 70 1/2 or, in the case of a Participant who had attained age 70 1/2 before January 1, 1988, the required beginning date determined in accordance with (1) or (2) below: (1) The required beginning date of a participant who is not a 5-percent owner is the first day of April of the calendar year following the calendar year in which the later of retirement or attainment of age 70-1/2 occurs. (2) The required beginning date of a participant who is a 5-percent owner during any year beginning after December 31, 1979, is the first day of April following the later of: (i) the calendar year in which the participant attains age 70-1/2, or (ii) the earlier of the calendar year with or within which ends the plan year in which the participant becomes a 5-percent owner, or the calendar year in which the participant retires. Notwithstanding the foregoing, in the case of a Participant who attained age 70 1/2 during 1988 and who had not retired prior to January 1, 1989, the required beginning date described in this paragraph shall be April 1, 1990. Notwithstanding (a) above, the failure of a Participant (and spouse) to consent to a distribution while a benefit is immediately distributable, within the meaning of Section 8.05, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy (a) above. Once distributions have begun to a 5-percent owner under (b) above, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year. For purposes of (b) above, a participant is treated as a 5-percent owner if such participant is a 5-percent owner as defined in Section 416(i) of the Code (determined in accordance with section 416 but without regard to whether the plan is top-heavy) at any time during the plan year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent plan year. 8.09. Whereabouts of Participants and Beneficiaries. The Administrator --------------------------------------------- will at all times be responsible for determining the whereabouts of each Participant or Beneficiary who may be entitled to benefits under the Plan and will at all times be responsible for instructing the Trustee in writing as to the current address of each such Participant or Beneficiary. The Trustee will be entitled to rely on the latest written (42) statement received from the Administrator as to such addresses. The Trustee will be under no duty to make any distributions under the Plan unless and until it has received written instructions from the Administrator satisfactory to the Trustee containing the name and address of the distributee, the time when the distribution is to occur, and the form which the distribution will take. Notwithstanding the foregoing, if the Trustee attempts to make a distribution in accordance with the Administrator's instructions but is unable to make such distribution because the whereabouts of the distributee is unknown, the Trustee will notify the Administrator of such situation and thereafter the Trustee will be under no duty to make any further distributions to such distributee until it receives further written instructions from the Administrator. If a benefit is forfeited because the Participant or beneficiary cannot be found, such benefit will be reinstated if a claim is made by the Participant or Beneficiary. ARTICLE 9. TOP-HEAVY PROVISIONS. -------------------- 9.01. Application. If the Plan is or becomes a Top-Heavy Plan in any Plan ----------- Year or is automatically deemed to be Top-Heavy in accordance with the Employer's election in Section 1.10(a)(1), the provisions of this Article 9 shall supersede any conflicting provision in the Plan. 9.02. Definitions. For purposes of this Article 9, the following terms ----------- have the meanings set forth below: (a) Key Employee. Any Employee or former Employee (and the ------------ Beneficiary of any such Employee) who at any time during the determination period was (i) an officer of the Employer whose annual compensation exceeds 50 percent of the dollar limitation under section 415(b)(1)(A) of the Code, (ii) an owner (or considered an owner under section 318 of the Code) of one of the ten largest interests in the Employer if such individual's annual compensation exceeds the dollar limitation under section 415(c)(1)(A) of the Code, (iii) a 5-percent owner of the Employer, or (iv) a 1-percent owner of the Employer who has annual compensation of more than $150,000. For purposes of this paragraph, the determination period is the Plan Year containing the Determination Date and the four preceding Plan Years. The determination of who is a Key Employee shall be made in accordance with section 416(i)(1) of the Code and the regulations thereunder. Annual compensation means compensation as defined in Section 415(c)(3) of the Code, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 403(b) of the Code. (b) Top-Heavy Plan. The Plan is a Top-Heavy Plan if any of the -------------- following conditions exists: (43) (1) the Top-Heavy Ratio for the Plan exceeds 60 percent and the Plan is not part of any Required Aggregation Group or Permissive Aggregation Group; (2) the Plan is a part of a Required Aggregation Group but not part of a Permissive Aggregation Group and the Top-Heavy Ratio for the Required Aggregation Group exceeds 60 percent; or (3) the Plan is a part of a Required Aggregation Group and a Permissive Aggregation Group and the Top-Heavy Ratio for both Groups exceeds 60 percent. (c) Top-Heavy Ratio. --------------- (1) With respect to this Plan, or with respect to any Required Aggregation Group or Permissive Aggregation Group that consists solely of defined contribution plans (including any simplified employee pension plans) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the determination date(s) has or has had accrued benefits, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the account balances of all Key Employees under the plans as of the Determination Date (including any part of any account balance distributed in the 5-year period ending on the Determination Date), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date) of all participants under the plans as of the Determination Date. Both the numerator and denominator of the Top-Heavy Ratio shall be increased, to the extent required by Code Section 416, to reflect any contribution which is due but unpaid as of the Determination Date. (2) With respect to any Required Aggregation Group or Permissive Aggregation Group that includes one or more defined benefit plans which, during the 5-year period ending on the Determination Date, has covered or could cover a Participant in this Plan, the Top-Heavy Ratio is a fraction, the numerator of which is the sum of the account balances under the defined contribution plans for all Key Employees and the present value of accrued benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all participants and the present value of accrued benefits under the defined benefit plans for all participants. Both the numerator and denominator of the Top-Heavy Ratio shall be increased for any distribution of an account balance or an accrued benefit made in the 5-year period ending (44) on the Determination Date and any contribution due but unpaid as of the Determination Date. (3) For purposes of (1) and (2) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in section 416 of the Code and the regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a participant (i) who is not a Key Employee but who was a Key Employee in a prior Year, or (ii) who has not been credited with at least one Hour of Service with the Employer at any time during the 5-year period ending on the Determination Date, will be disregarded. The calculation of the Top-Heavy Ratio, and the extent to which distributions, rollovers, and transfers are taken into account, shall be made in accordance with section 416 of the Code and the regulations thereunder. Deductible employee contributions shall not be taken into account for purposes of computing the Top-Heavy Ratio. When aggregating plans, the value of account balances and accrued benefits shall be calculated with reference to the Determination Dates that fall within the same calendar year. For purposes of determining if the Plan, or any other plan included in a Required Aggregation Group of which this Plan is a part, is a Top-Heavy Plan, the accrued benefit in a defined benefit plan of an employee other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of section 411(b)(1)C) of the Code. (d) Permissive Aggregation Group. The Required Aggregation Group ---------------------------- plus any other qualified plans of the Employer or a Related Employer which, when considered as a group with the Required Aggregation Group, would continue to satisfy the requirements of sections 401(a)(4) and 410 of the Code. (e) Required Aggregation Group. -------------------------- (1) Each qualified plan of the Employer or Related Employer in which at least one Key Employee participates, or has participated at any time during the determination period (regardless of whether the plan has terminated), and (45) (2) any other qualified plan of the Employer or Related Employer which enables a plan described in (1) above to meet the requirements of sections 401(a)(4) or 410 of the Code. (f) Determination Date. For any Plan Year of the Plan subsequent ------------------ to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that Plan Year. (g) Valuation Date. The Determination Date. -------------- (h) Present Value. Present value shall be based only on the ------------- interest rate and mortality table specified in the Adoption Agreement. 9.03. Minimum Contribution. -------------------- (a) Except as otherwise provided in (b) and (c) below, the Discretionary Contributions made on behalf of any Participant who is not a Key Employee shall not be less than the lesser of 3 percent of such Participant's Compensation or, in the case where the Employer has no defined benefit plan which designates this Plan to satisfy section 401 of the Code, the largest percentage of Employer contributions, as a percentage of the first $200,000 of the Key Employee's Compensation, made on behalf of any Key Employee for that year. The minimum contribution under this Section 9.03 shall be determined without regard to any Social Security contribution, and be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive a contribution, or would have received a lesser contribution for the year, because (i) the Participant failed to complete 1,000 Hours of Service or any equivalent service requirement provided in the Adoption Agreement; or (ii) the Participant's Compensation was less than a stated amount. (b) The provisions of (a) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) The Employer contributions for the Plan Year made on behalf of each Participant who is not a Key Employee and who is a participant in a defined benefit plan maintained by the Employer shall not be less than 5 percent of such Participant's Compensation. (d) The minimum contribution required under (a) above (to the extent required to be nonforfeitable under section 416(b) of the Code) may not be forfeited under section 411(a)(3)(B) or 411(a)(3)(D) of the Code. 9.04. Adjustment to the Limitation on Contributions and Benefits. If this ---------------------------------------------------------- Plan is in Top-Heavy status, the number 100 shall be substituted for the number 125 in subsections (e)(3) and (e)(4) of Section 5.03. However, this substitution shall not take effect (46) with respect to this Plan in any Plan Year in which the following requirements are satisfied: (a) The Employer contributions for such Plan Year made on behalf of each Participant who is not a Key Employee and who is a participant in a defined benefit plan maintained by the Employer is not less than 7 1/2 percent of such Participant's Compensation. (b) The sum of the present value as of the Determination Date of (i) the aggregate accounts of all Key Employees under all defined contribution plans of the Employer and (ii) the cumulative accrued benefits of all Key Employees under all defined benefit plans of the Employer does not exceed 90 percent of the same amounts determined for all participants under all plans of the Employer that are Top-Heavy Plans, excluding account values and accrued benefits for Employees who formerly were but are no longer Key Employees. The substitutions of the number 100 for 125 shall not take effect in any limitation Year with respect to any Participant for whom no benefits are accrued or contributions made for such Year. ARTICLE 10. AMENDMENT AND TERMINATION. ------------------------- 10.01. Amendment by Employer. The Employer reserves the authority, --------------------- subject to the provisions of Article 1 and Section 10.03, to amend the Plan: (a) Changing Elections Contained in the Adoption Agreement. By ------------------------------------------------------ filing with the Trustee an amended Adoption Agreement, executed by the Employer only, on which said Employer has indicated a change or changes in provisions previously elected by it, such changes to be effective on the effective date of such amended Adoption Agreement (except that, any such change notwithstanding, no Participant's Account shall be reduced by such change below the amount to which the Participant would have been entitled if he had voluntarily left the employ of the Employer immediately prior to the date of the change). The Employer may from time to time make any amendment to the Plan that may be necessary to satisfy sections 415 or 416 of the Code because of the required aggregation of multiple plans by completing overriding Plan language in the Adoption Agreement. The Employer may also add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan; or Other Changes. By amending any provision of the Plan for any reason ------------- other than those specified in (a) above. However, upon making such amendment, including a waiver of the minimum funding requirement under Section 412(d) of the Code, the Employer may no longer participate in this prototype plan arrangement and will be (47) deemed to have an individually designed plan. Following such amendment, the Trustee will transfer the assets of the Trust to the trust forming part of such newly adopted plan upon receipt of sufficient evidence (such as a determination letter or opinion letter from the Internal Revenue Service or an opinion of counsel satisfactory to the Trustee) that such trust will be a qualified trust under the Code. 10.02. Amendment by Prototype Sponsor. The Prototype Sponsor may in its ------------------------------ discretion amend the Plan or the Adoption Agreement at any time, subject to the provisions of Article 1 and Section 10.03, and provided that the Prototype Sponsor mails a copy of such amendment to the Employer at its last known address as shown on the books of the Prototype Sponsor. For purposes of sponsoring organization amendments, the mass submitter shall be recognized as the agent of the sponsoring organization. If the sponsoring organization does not adopt the amendments made by the mass submitter, it will no longer be identical to or a minor modifier of the mass submitter plans. 10.03. Amendments Affecting Vested and/or Accrued Benefits. --------------------------------------------------- (a) Except as permitted by Section 10.04, no amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's Account balance or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment. Furthermore, if the vesting schedule of the Plan is amended, the nonforfeitable interest of a Participant in his Account, determined as of the later of the date the amendment is adopted or the date it becomes effective, will not be less than the Participant's nonforfeitable interest in his Account determined without regard to such amendment. (b) If the Plan's vesting schedule is amended, including any amendment resulting from a change to or from Top-Heavy Plan status, or the Plan is amended in any way that directly or indirectly affects the computation of a Participant's nonforfeitable interest in his Account, each Participant with at least three (3) Years of Service for Vesting with the Employer may elect, within a reasonable period after the adoption of the amendment, to have the nonforfeitable percentage of his Account computed under the Plan without regard to such amendment. The Participant's election may be made within 60 days from the latest of (i) the date the amendment is adopted; (ii) the date the amendment becomes effective; or (iii) the date the Participant is issued written notice of the amendment by the Employer or the Administrator. 10.04. Retroactive Amendments. An amendment made by the sponsor in ---------------------- accordance with Section 10.02 may be made effective on a date prior to the first day of the Plan Year in which it is adopted if such amendment is necessary or appropriate to enable the Plan and Trust to satisfy the applicable requirements of the Code or to conform the Plan to any change in federal law, or to any regulations or ruling thereunder. (48) Any retroactive amendment by the Employer shall be subject to the provisions of Section 10.01. 10.05. Termination. The Employer has adopted the Plan with the intention ----------- and expectation that contributions will be continued indefinitely. However, said Employer has no obligation or liability whatsoever to maintain the Plan for any length of time and may discontinue contributions under the Plan or terminate the Plan at any time by written notice delivered to the Trustee without any liability hereunder for any such discontinuance or termination. 10.06. Distribution upon Termination of the Plan. Upon termination or ----------------------------------------- partial termination of the Plan or complete discontinuance of contributions thereunder, each Participant (including a terminated Participant in respect of amounts not previously forfeited by him) who is affected by such termination or partial termination or discontinuance will have a fully vested interest in his Account, and, subject to Sections 8.03 and 8.04, the Trustee will distribute to each Participant or other person entitled to distribution the balance of the Participant's Account in a single lump sum payment. In the absence of such instructions, the Trustee will notify the Administrator of such situation and the Trustee will be under no duty to make any distributions under the Plan until it receives written instructions from the Administrator. Upon the completion of such distributions, the Trust will terminate, the Trustee will be relieved from all liability under the Trust, and no Participant or other person will have any claims thereunder, except as required by applicable law. 10.07. Merger or Consolidation of Plan; Transfer of Plan Assets. In case -------------------------------------------------------- of any merger or consolidation of the Plan with, or transfer of assets and liabilities of the Plan to, any other plan, provision must be made so that each Participant would, if the Plan then terminated, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had then terminated. ARTICLE 11. AMENDMENT AND CONTINUATION OF PREDECESSOR PLAN; TRANSFER OF ------------------------------------------------------------ FUNDS TO OR FROM OTHER QUALIFIED PLANS. - -------------------------------------- 11.01. Amendment and Continuation of Predecessor Plan. In the event the ---------------------------------------------- Employer has previously established a plan (the "predecessor plan") which is a defined contribution plan under the Code and which on the date of adoption of the Plan meets the applicable requirements of section 401(a) of the Code, the Employer may, in accordance with the provisions of the predecessor plan, amend and continue the predecessor plan in the form of the Plan and become the Employer hereunder, subject to the following: (a) Subject to the provisions of the Plan, each individual who was a participant or former participant in the predecessor plan immediately prior to (49) the effective date of such amendment and continuation will become a Participant or former Participant in the Plan; (b) No election may be made under the vesting provisions of the Adoption Agreement if such election would reduce the benefits of a Participant under the Plan to less than the benefits to which he would have been entitled if he voluntarily separated from the service of the Employer immediately prior to such amendment and continuation; (c) No amendment to the Plan shall decrease a participant's accrued benefit or eliminate an optional form of benefit; (d) The amounts standing to the credit of a participant's account immediately prior to such amendment and continuation which represent the amounts properly attributable to (i) contributions by the participant and (ii) contributions by the Employer and forfeitures will constitute the opening balance of his Account or Accounts under the Plan; (e) Amounts being paid to a former participant or to a beneficiary in accordance with the provisions of the predecessor plan will continue to be paid in accordance with such provisions; (f) Any beneficiary designation in effect after August 23, 1984, under the predecessor plan immediately before such amendment and continuation will be deemed a valid designation of Beneficiary under Section 8.04 if such designation satisfies the requirements of Section 8.04(d), unless and until the Participant revokes such designation or designates a new Beneficiary under the Plan; and (g) Unless the Employer and the Trustee agree otherwise, all assets of the predecessor trust will be deemed to be assets of the Trust as of the effective date of such amendment. Such assets will invested by the Trustee as soon as reasonably practicable pursuant to Article 6. The Employer agrees to assist the Trustee in any way requested by the Trustee in order to facilitate the transfer of assets from the predecessor trust to the Trust Fund. 11.02. Transfer of Funds from an Existing Plan. The Employer may from --------------------------------------- time to time direct the Trustee, in accordance with such rules as the Trustee may establish, to accept funds transferred for the benefit of Participants from a trust forming part of another qualified plan under the Code, provided such plan is a defined contribution plan. Such transferred assets will become assets of the Trust as of the date they are received by the Trustee. Such transferred amounts will be credited to Participants' Accounts in accordance with their respective interests immediately upon receipt by the Trustee. A Participant's interest under the Plan in transferred amounts which were fully vested and (50) nonforfeitable under the transferring plan will be fully vested and nonforfeitable at all times. Such transferred assets will be invested by the Trustee in accordance with the provisions of paragraph (f) of Section 11.01 as if such assets were transferred from a predecessor plan. 11.03. Acceptance of Assets by Trustee. The Trustee will not accept ------------------------------- assets which are not either in a medium proper for investment under the Plan, as set forth in Section 1.12(b), or in cash. Such assets shall be accompanied by written instructions showing separately the respective contributions by the prior employer and by the employee, and identifying the assets attributable to such contributions. The Trustee shall establish such accounts as may be necessary or appropriate to reflect such contributions under the Plan. The Trustee shall hold such assets for investment in accordance with the provisions of Article 6, and shall in accordance with the written instructions of the Employer make appropriate credits to the Accounts of the Participants for whose benefit assets have been transferred. 11.04. Transfer of Assets from Trust. The Employer may direct the Trustee ----------------------------- to transfer all or a specified portion of the Trust assets to any other plan or plans maintained by the Employer or the employer or employers of a former Participant or Participants, provided that the Trustee has received evidence satisfactory to it that such other plan meets all applicable requirements of the Code. The assets so transferred shall be accompanied by written instructions from the Employer naming the persons for whose benefit such assets have been transferred, showing separately the respective contributions by the Employer and by each Participant, if any, and identifying the assets attributable to the various contributions. The Trustee shall have no further liabilities with respect to assets so transferred. ARTICLE 12. MISCELLANEOUS. ------------- 12.01. Communications to Participants. The Plan will be communicated to ------------------------------ all Participants by the Employer promptly after the Plan is adopted. 12.02. Limitation of Rights. Neither the establishment of the Plan and -------------------- the Trust, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to any Participant or other person any legal or equitable right against the Employer, Administrator or Trustee, except as provided herein; and in no event will the terms of employment or service of any Participant be modified or in any way affected hereby. It is a condition of the Plan, and each Participant expressly agrees by his participation herein, that each Participant will look solely to the assets held in the Trust for the payment of any benefit to which he is entitled under the Plan. 12.03. Nonalienability of Benefits. The benefits provided hereunder will --------------------------- not be subject to alienation, assignment, garnishment, attachment, execution or levy of any kind, either voluntarily or involuntarily, and any attempt to cause such benefits to be so subjected will not be recognized, except to such extent as may be required by law. (51) The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined by the Plan Administrator to be a qualified domestic relations order, as defined in section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. A domestic relations order will not fail to be deemed a qualified domestic relations order merely because it requires the distribution or segregation of all or part of a Participant's Account with respect to an alternate payee before the Participant's death, disability, hardship or termination of employment, and distributions shall be made, or Accounts segregated, pursuant to the terms of any qualified domestic relations order. 12.04. Facility of Payment. In the event the Administrator determines, on ------------------- the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may direct the Trustee to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments shall be complete acquittance therefor, and any such payment to the extent thereof, shall discharge the liability of the Trust for the payment of benefits hereunder to such recipient. 12.05. Information between Employer and Trustee. The Employer agrees to ---------------------------------------- furnish the Trustee, and the Trustee agrees to furnish the Employer with such information relating to the Plan and Trust as may be required by the other in order to carry out their respective duties hereunder, including without limitation information required under the Code and any regulations issued or forms adopted by the Treasury Department thereunder or under the provisions of ERISA and any regulations issued or forms adopted by the Labor Department thereunder. 12.06. Effect of Failure to Qualify under Code. Notwithstanding any other --------------------------------------- provision contained herein, if the Employer fails to obtain or retain approval of the Plan by the Internal Revenue Service as a qualified Plan under the Code, the Employer may no longer participate in this prototype Plan arrangement and will be deemed to have an individually designed plan. 12.07. Notices. Any notice or other communication in connection with this ------- Plan shall be deemed delivered in writing if addressed as provided below and if either actually delivered at said address or, in the case of a letter, three business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified: (a) If to the Employer or Administrator, to it at the address set forth in the Adoption Agreement, to the attention of the person specified to receive notice in the Adoption Agreement; (52) (b) If to the Trustee, to it at the address set forth in the Adoption Agreement;. or, in each case at such other address as the addressee shall have specified by written notice delivered in accordance with the foregoing to the addressor's then effective notice address. 12.08. Governing Law. The Plan and the accompanying Adoption Agreement ------------- will be construed, administered and enforced according to ERISA, and to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts. ARTICLE 13. PLAN ADMINISTRATION. ------------------- 13.01. Powers and responsibilities of the Administrator. The ------------------------------------------------ Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the requirements of ERISA. The Administrator's powers and responsibilities include, but are not limited to, the following: (a) To make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (b) To interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan; (c) To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan; (d) To administer the claims and review procedures specified in Section 13.03; (e) To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan; (f) To determine the person or persons to whom such benefits will be paid; (g) To authorize the payment of benefits; (h) To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA; (i) To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan; (53) (j) By written instrument, to allocate and delegate its fiduciary responsibilities in accordance with Section 405 of ERISA. 13.02. Nondiscriminatory Exercise of Authority. Whenever, in the --------------------------------------- administration of the Plan, any discretionary action by the Administrator is required, the Administrator shall exercise its authority in a nondiscriminatory manner so that all persons similarly situated will receive substantially the same treatment. 13.03. Claims and Review Procedures. ---------------------------- (a) Claims Procedure. If any person believes he is being denied ---------------- any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial, (ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) information as to the steps to be taken if the person wishes to submit a request for review. Such notification will be given within 90 days after the claim is received by the Administrator (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to such person within the initial 90- day period). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim. (b) Review Procedure. Within 60 days after the date on which a ---------------- person receives a written notice of a denied claim (or, if applicable, within 60 days after the date on which such denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The decision on review will be made within 60 days after the request for review is received by the Administrator (or within 120 days, if special circumstances require an extension of time for processing the request, such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period). If the decision on review is not made within such period, the claim will be considered denied. (54) 13.04. Named Fiduciary. The Administrator is a "named fiduciary" for --------------- purposes of Section 402(a)(1) of ERISA and has the powers and responsibilities with respect to the management and operation of the Plan described herein. 13.05. Costs of Administration. Unless paid by the Employer, all ----------------------- reasonable costs and expenses incurred by the Administrator and the Trustee in administering the Plan and Trust will be paid from the Trust Fund and will, unless allocable to the Accounts of particular Participants, be charged against the Accounts of all Participants on a pro rata basis. ARTICLE 14. TRUST AGREEMENT. --------------- 14.01. Acceptance of Trust Responsibilities. By executing the Adoption ------------------------------------ Agreement, the Employer establishes a trust to hold the assets of the plan. By executing the Adoption Agreement, the Trustee agrees to accept the rights, duties and responsibilities set forth in this Article 14. 14.02. Establishment of Trust Fund. A trust is hereby established under --------------------------- the Plan and the Trustee will open and maintain a Trust account for the Plan and, as part thereof, Participants' Accounts for such individuals as the Employer shall from time to time give written notice to the Trustee are Participants in the Plan. The Trustee will accept and hold in the Trust Fund such contributions on behalf of Participants as it may receive from time to time from the Employer. The Trust Fund shall be fully invested and reinvested in accordance with the applicable provisions of the Plan in Fund Shares. 14.03. Exclusive Benefit. The Trustee shall hold the assets of the Trust ----------------- Fund for the exclusive purpose of providing benefits to Participants and Beneficiaries and defraying the reasonable expenses of administering the Plan. No assets of the Plan shall revert to the Employer except as specifically permitted by the terms of the Plan. 14.04. Powers of Trustee. In addition to and not in limitation of such ----------------- powers as the Trustee has by law or under any other provisions of the Plan, the Trustee will have the following powers, provided that no such power shall be exercised in any manner inconsistent with the provisions of ERISA: (a) to deal with all or any part of the Trust Fund and to invest all or a part of the Trust Fund in investments available under the Plan, without regard to the law of any state regarding proper investment; (b) to retain uninvested such cash as it may deem necessary or advisable, without liability for interest thereon, for the administration of the Trust; (c) to sell, convert, redeem, exchange, or otherwise dispose of all or any part of the assets constituting the Trust Fund; (55) (d) to enforce by suit or otherwise, or to waive, its rights on behalf of the Trust, and to defend claims asserted against it or the Trust, provided that the Trustee is indemnified to its satisfaction against liability and expenses; (e) to employ such agents and counsel as may be reasonably necessary in collecting, managing, administering, investing, distributing and protecting the Trust Fund or the assets thereof and to pay them reasonable compensation; (f) to compromise, adjust and settle any and all claims against or in favor of it or the Trust; (g) to oppose, or participate in and consent to the reorganization, merger, consolidation, or readjustment of the finances of any enterprise, to pay assessments and expenses in connection therewith, and to deposit securities under deposit agreements; (h) to apply for or purchase annuity contracts in accordance with Section 8.02; (i) to hold securities unregistered, or to register them in its own name or in the name of nominees; (j) to appoint custodians to hold investments within the jurisdiction of the district courts of the United States and to deposit securities with stock clearing corporations or depositories or similar organizations; (k) to make, execute, acknowledge and deliver any and all investments that it deems necessary or appropriate to carry out the powers herein granted; and (l) generally to exercise any of the powers of an owner with respect to all or any part of the Trust Fund. The Employer specifically acknowledges and authorizes that affiliates of the Trustee may act as its agent in the performance of ministerial, non-fiduciary duties under the Trust. The expenses and compensation of such agent shall be paid by the Trustee. 14.05. Accounts. The Trustee will keep full accounts of all receipts and -------- disbursements and other transactions hereunder. Within 60 days after the close of each Plan Year, within 60 days after termination of the Trust, and at such other times as may be appropriate, the Trustee will determine the then net fair market value of the Trust Fund as of the close of the Plan Year, as of the termination of the Trust, or as of such other time, whichever is applicable, and will render to the Employer and Plan Administrator an account of its administration of the Trust during the period since the last such accounting, including all allocations made by it during such period. (56) 14.06. Approving of Accounts. To the extent permitted by law, the written --------------------- approval of any account by the Employer or Plan Administrator will be final and binding, as to all matters and transactions stated or shown therein, upon the Employer, Plan Administrator, Participants and all persons who then are or thereafter become interested in the Trust. The failure of the Employer or Plan Administrator to notify the Trustee within six (6) months after the receipt of any account of its objection to the account will, to the extent permitted by law, be the equivalent of written approval. If the Employer or Plan Administrator files any objections within such six (6) month period with respect to any matters or transactions stated or shown in the account, and the Employer or Plan Administrator and the Trustee cannot amicably settle the question raised by such objections, the Trustee will have the right to have such questions settled by judicial proceedings. Nothing herein contained will be construed so as to deprive the Trustee of the right to have judicial settlement of its accounts. In any proceeding for a judicial settlement of any account or for instructions, the only necessary parties will be the Trustee, the Employer and the Plan Administrator. 14.07. Distribution from Trust Fund. The Trustee shall make such ---------------------------- distribution from the Trust Fund as the Employer or Plan Administrator may in writing direct, as provided by the terms of the Plan, upon certification by the Employer or Plan Administrator that the same is for the exclusive benefit of Participants or their Beneficiaries, or for the payment of expenses of administering the Plan. 14.08. Transfer of Amounts from Qualified Plan. If the Plan provides that --------------------------------------- amounts may be transferred to the Plan from another qualified plan or trust under section 401(a) of the Code, such transfer shall be made in accordance with the provisions of the Plan and with such rules as may be established by the Trustee. The Trustee will not accept assets which are not either in a medium proper for investment under this Agreement or in cash. Such amounts shall be accompanied by written instructions showing separately the respective contributions by the prior employer and the transferring Employee, and identifying the assets attributable to such contributions. The Trustee shall hold such assets for investment in accordance with the provisions of this Agreement. 14.09. Transfer of Assets from Trust. Subject to the provisions of the ----------------------------- Plan, the Employer may direct the Trustee to transfer all or a specified portion of the Trust assets to any other plan or plans maintained by the Employer or the employer or employers of a former Participant or Participants, provided that the Trustee has received evidence satisfactory to it that such other plan meets all applicable requirements of the Code. The assets so transferred shall be accompanied by written instructions from the Employer naming the persons for whose benefit such assets have been transferred, showing separately the respective contributions by the Employer and by each Participant, if any, and identifying the assets attributable to the various contributions. The Trustee shall have no further liabilities with respect to assets so transferred. (57) 14.10. Voting; Delivery of Information. The Trustee shall deliver, or ------------------------------- cause to be executed and delivered, to the Employer or Plan Administrator all notices, prospectuses, financial statements, proxies and proxy soliciting materials received by the Trustee relating to securities held by the Trust, and the Employer or Plan Administrator shall deliver these to the appropriate Participant or the Beneficiary of a deceased Participant. The Trustee shall not vote any securities held by the Trust except in accordance with the written instructions of the Participant or the Beneficiary of the Participant, if the Participant is deceased; provided, however, that the Trustee may, in the absence of instructions, vote "present" for the sole purpose of allowing such shares to be counted for establishment of a quorum at a shareholders' meeting. 14.11. Compensation and Expenses of Trustee. The Trustee's fee for ------------------------------------ performing its duties hereunder will be such reasonable amounts as the Trustee may from time to time specify by written agreement with the Employer. Such fee, any taxes of any kind which may be levied or assessed upon or in respect of the Trust Fund and any and all expenses, including without limitation legal fees and expenses of administrative and judicial proceedings, reasonably incurred by the Trustee in connection with its duties and responsibilities hereunder will, unless paid by said Employer, be paid from the Trust Fund and will, unless allocable to the Accounts of particular Participants, be charged against the respective Accounts of all Participants, in such reasonable manner as the Trustee may determine. 14.12. Reliance by Trustee on Other Persons. The Trustee may rely upon ------------------------------------ and act upon any writing from any person authorized by the Employer or Plan Administrator to give instructions concerning the Plan and may conclusively rely upon and be protected in acting upon any written order from the Employer or Plan Administrator or upon any other notice, request, consent, certificate, or other instructions or paper reasonably believed by it to have been executed by a duly authorized person, so long as it acts in good faith in taking or omitting to take any such action. The Trustee need not inquire as to the basis in fact of any statement in writing received from the Employer or Plan Administrator. The Trustee will be entitled to rely on the latest certificate it has received from the Employer or Plan Administrator as to any person or persons authorized to act for the Employer or Plan Administrator hereunder and to sign on behalf of the Employer or Plan Administrator any directions or instructions, until it receives from the Employer or Plan Administrator written notice that such authority has been revoked. Notwithstanding any provision contained herein, the Trustee will be under no duty to take any action with respect to any Participant's Account (other than as specified herein) unless and until the Employer or Plan Administrator furnishes the Trustee with written instructions on a form acceptable to the Trustee, and the Trustee agrees thereto in writing. The Trustee will not be liable for any action taken pursuant to the Employer or Plan Administrator's written instructions (nor for the collection of (58) contributions under the Plan, nor the purpose or propriety of any distribution made thereunder). 14.13. Indemnification by Employer. Unless resulting from the Trustee's --------------------------- negligence or willful misconduct, Employer shall indemnify and save harmless the Trustee from any and all liabilities and expenses, including without limitation, reasonable attorney's fees, incurred or required to be paid by the Trustee in connection with the Plan or this Trust Agreement. 14.14. Consultation by Trustee with Counsel. The Trustee may consult with ------------------------------------ legal counsel (who may be but need not be counsel for the Employer or the Plan Administrator) concerning any question which may arise with respect to its rights and duties under the Plan and Trust, and the opinion of such counsel will, to the extent permitted by law, be full and complete protection in respect of any action taken or omitted by the Trustee hereunder in good faith and in accordance with the opinion of such counsel. 14.15. Persons Dealing with the Trustee. No person dealing with the -------------------------------- Trustee will be bound to see to the application of any money or property paid or delivered to the Trustee or to inquire into the validity or propriety of any transactions. 14.16. Resignation or Removal of Trustee. The Trustee may resign at any --------------------------------- time by written notice to the Employer, which resignation shall be effective 60 days after delivery to the Employer. The Trustee may be removed by the Employer by written notice to the Trustee, which removal shall be effective 60 days after delivery to the Trustee. Upon resignation or removal of the Trustee, the Employer may appoint a successor trustee. Any such successor trustee will, upon written acceptance of his appointment, become vested with the estate, rights, powers, discretion, duties and obligations of the Trustee hereunder as if he had been originally named as Trustee in this Agreement. Upon resignation or removal of the Trustee, the Employer will no longer participate in this prototype plan and will be deemed to have adopted an individually designed plan. In such event, the Employer shall appoint a successor trustee within said 60-day period and the Trustee will transfer the assets of the Trust to the successor trustee upon receipt of sufficient evidence (such as a determination letter or opinion letter from the Internal Revenue Service or an opinion of counsel satisfactory to the Trustee) that such trust will be a qualified trust under the Code. The appointment of a successor trustee shall be accomplished by delivery to the Trustee of written notice that the Employer has appointed such successor trustee, and written acceptance of such appointment by the successor trustee. The Trustee may, upon transfer and delivery of the Trust Fund to a successor trustee, reserve such (59) reasonable amount as it shall deem necessary to provide for its fees, compensation, costs and expenses, or for the payment of any other liabilities chargeable against the Trust Fund for which it may be liable. The Trustee shall not be liable for the acts or omissions of any successor trustee. 14.17. Fiscal Year of the Trust. The fiscal year of the Trust will ------------------------ coincide with the Plan Year. 14.18. Discharge of Duties by Fiduciaries. The Trustee and the Employer ---------------------------------- and any other fiduciary shall discharge their duties under the Plan and this Trust Agreement solely in the interests of Participants and their Beneficiaries in accordance with the requirements of ERISA. 14.19. Amendment. In accordance with provisions of the Plan, and subject --------- to the limitations set forth therein, this Trust Agreement may be amended by an instrument in writing signed by the Employer and the Trustee. No amendment to this Trust Agreement shall divert any part of the Trust Fund to any purpose other than as provided in Section 2 hereof. 14.20. Plan Termination. Upon termination or partial termination of the ---------------- Plan or complete discontinuance of contributions thereunder, the Trustee will make distributions to the Participants or other persons entitled to distributions as the Employer or Plan Administrator directs in accordance with the provisions of the Plan. In the absence of such instructions and unless the Plan otherwise provides, the Trustee will notify the Employer or Plan Administrator of such situation and the Trustee will be under no duty to make any distributions under the Plan until it receives written instructions from the Employer or Plan Administrator. Upon the completion of such distributions, the Trust will terminate, the Trustee will be relieved from all liability under the Trust, and no Participant or other person will have any claims thereunder, except as required by applicable law. 14.21. Permitted Reversion of Funds to Employer. If it is determined by ---------------------------------------- the Internal Revenue Service that the Plan does not initially qualify under section 401 of the Code, all assets then held under the Plan will be returned by the Trustee, as directed by the Plan Administrator, to the Employer, but only if the application for determination is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan was adopted or such later date as may be prescribed by regulations. Such distribution will be made within one year after the date the initial qualification is denied. Upon such distribution the Plan will be considered to be rescinded and to be of no force or effect. In the event the deduction of a contribution made by the Employer is disallowed under Section 404 of the Code, such contribution (to the extent disallowed) must be returned to the Employer within one year of the disallowance of the deduction. (60) Any contribution made by the Employer because of a mistake of fact must be returned to the Employer within one year of the disallowance of the deduction. 14.22. Governing Law. This Trust Agreement will be construed, ------------- administered and enforced according to ERISA and, to the extent not preempted thereby, the laws of the Commonwealth of Massachusetts. (61) EX-10.14 5 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.14 Harborside Healthcare Supplemental Executive Retirement Plan =============================================================================== HARBORSIDE HEALTHCARE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE SEPTEMBER 15, 1995 ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ HARBORSIDE HEALTHCARE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE SEPTEMBER 15, 1995 ARTICLE I - PURPOSE OF PLAN 1.1 PURPOSE OF PLAN. The Company intends and desires by the adoption of the Harborside Healthcare Supplemental Executive Retirement Plan (the "Plan") to recognize the value to Harborside Healthcare, Limited Partnership (the Employer") of the past and present services of Eligible Employees covered by the Plan and to encourage and assure their continued service with the Employer by making more adequate provision for their future retirement security. This Plan is adopted by the Employer for certain of its executive employees. The purpose of the Plan is to provide Eligible Employees with supplemental retirement income and to offer Eligible Employees an opportunity to elect to defer the receipt of compensation in order to provide termination of employment and related benefits taxable pursuant to section 451 of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan is intended to be a "top-hat" plan (i.e., an unfunded deferred compensation plan maintained for a select group of management or highly compensated employees) under Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). ARTICLE II - DEFINITIONS 2.1 ACCOUNTS means the accounts maintained under this Plan on the books of the Employer (also referred in this document to as the "Company") for the benefit of an Eligible Employee. 2.2 ADMINISTRATOR means the person appointed by the Executive Committee to administer the Plan. 2.3 CODE means the Internal Revenue Code of 1986, as amended. 2.4 COMPANY means Harborside Healthcare, Limited Partnership or any company which is a successor as a result of merger, consolidation, liquidation, transfer of assets, or other reorganization. ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ 2.5 COMPENSATION means the total of the base salary related to a calendar year for an Eligible Employee and any bonus which would have been available for payment during that calendar year to an Eligible Employee with respect to services provided by an Eligible Employee to the Company, prior to giving effect to any deferral elections made by an Eligible Employee. 2.6 ELIGIBLE EMPLOYEE means for any Plan Year, an employee of the Company whose Compensation during a Plan Year, prior to giving effect to any deferral elections, is expected to exceed $100,000, and who is selected by the Executive Committee to participate in this Plan. 2.7 EXECUTIVE COMMITTEE means the Executive Committee of the Company charged with the administration of the Plan. 2.8 PLAN means this Harborside Healthcare Supplemental Executive Retirement Plan. 2.9 PLAN YEAR means the twelve (12) month period ending the last day of December during which the Plan is in effect. 2.10 SALARY OR BONUS DEFERRAL ACCOUNT means the account on the books of the Company to which an Eligible Employee's salary or bonus deferrals described in Section 3.1, plus allocated investment earnings, are credited. 2.11 SUPPLEMENTAL EMPLOYER MATCHING ACCOUNT means the account on the books of the Company to which Employer deemed contributions described in Section 4.1, plus allocated investment earnings, are credited. 2.12 VALUATION DATE means the date of the end of the first payroll period following the end of each quarter within the Plan Year or any date designated by the Executive Committee as of which a valuation of Plan credits is performed. ARTICLE III - SALARY REDUCTION AND BONUS REDUCTION DEFERRALS 3.1 An Eligible Employee, as defined in Section 2.6, may for any Plan Year in which he or she is an Eligible Employee, elect to defer receipt of any whole percentage of his or her Compensation, such whole percentage not to exceed twenty-five percent (25%) of the Eligible Employee's Compensation for any Plan Year, except in the case of the initial Plan Year in which the limit shall be 100% of any Compensation not received by an Eligible Employee prior to enrollment in the Plan. ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ An Eligible Employee may select different deferral percentages for Compensation to be paid in the form of base salary (Salary Reduction Deferrals) and Compensation to be paid in the form of a bonus (Bonus Reduction Deferrals). An Eligible Employee electing to defer Compensation may elect to defer it to either (a) the earlier of an Eligible Employee's retirement or termination of -- employment, death, permanent disability, or (b) the earlier of a specific calendar year selected by the Eligible Employee (such selection be made from a list of years, as periodically made available by the Executive Committee) or an -- Eligible Employee's termination of employment, death, permanent disability, or retirement. The year in which the deferred payment is to be made must be at least at least two calendar years later than the calendar year in which the Eligible Employee is selecting the date of deferred payment. 3.2 Deferral elections allowable under this Plan may be periodically adjusted by the Executive Committee and must be made by each Eligible Employee before the beginning of the Plan Year to which such deferral elections apply except: (1) that in the case of the initial Plan Year, such elections must be made prior to September 15, 1995, (2) upon an employee's initial selection as an Eligible Employee under the Plan, such elections must be made within thirty days of his or her notification as an Eligible Employee. At the earlier of (a) the beginning of each Plan Year or (b) within thirty days of an employee's initial selection , each Eligible Employee shall complete and forward to the Plan Administrator an Enrollment and Election Form (and such other forms as the Plan Administrator periodically determines are necessary for administration of the Plan) which shall indicate the Eligible Employee's deferral elections for that Plan Year. 3.3 Once a Plan Year begins, deferral elections may only be amended if the Executive Committee determines that an Eligible Employee has experienced a worthy event (such as a change in marital status, family death, significant change in economic circumstances, or a similar event), in which case the Eligible Employee may: (a) elect to revoke future deferrals with respect to Compensation attributable to services not yet performed, or (b) elect to change the deferral elections made with respect to Compensation attributable to services performed on or after July 1 of that Plan Year by submitting amended elections at least 30 days prior to July 1 of that Plan Year. An Eligible Employee who has revoked future deferrals may only elect to resume deferrals at the beginning of the next Plan Year. ARTICLE IV - EMPLOYER DEEMED CONTRIBUTIONS 4.1 During each Plan Year the Company will credit to each Eligible Employee's Supplemental Employer Matching Account an amount equal to fifty percent (50%) of the Compensation deferred by an Eligible Employee during that year, said credit not to exceed five percent (5%) of such Eligible Employee's base salary for that year prior to giving effect to Salary Reduction Deferrals made during ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ the Plan Year. ARTICLE V - VESTING 5.1 SALARY REDUCTION CONTRIBUTIONS. An Eligible Employee shall always be one hundred percent (100%) vested in amounts credited to his or her Salary Or Bonus Deferral Account. 5.2 EMPLOYER DEEMED CONTRIBUTIONS. An Eligible Employee shall become one hundred percent (100%) vested in amounts deemed to be credited to his or her Supplemental Employer Matching Account during each Plan Year at the earliest of: (a) the second January 1st following the end of the Plan Year for which such Employer Deemed Contributions are credited, provided such Eligible Employee is employed by the Company on the date vesting is scheduled to occur; (b) the date of the Eligible Employee's death, permanent disability (as determined by the Administrator) or retirement from the Company; or (c) any other accelerated date as determined by the Executive Committee. If such Eligible Employee is not employed (employment shall include cases of leaves of absence approved by the Executive Committee) on the date specified in Section 5.2 (a) above, and the events provided for in Sections 5.2 (b) and 5.2 (c) have not occurred, such Employer Deemed Contributions shall be forfeited by that former Eligible Employee and shall be used to reduce future Employer Deemed Contributions. ARTICLE VI - PAYMENTS OF BENEFITS 6.1 PAYMENTS OF BENEFITS. The benefit payable under this Plan shall be paid in accordance with the payment option selected by an Eligible Employee in accordance with Article III of this Plan as follows: (a) Upon the earlier of an Eligible Employee's retirement or termination of -- employment, death, or determination of permanent disability by the Plan Administrator, in which case it shall be paid in a cash lump sum as soon as practicable and no later than sixty (60) days after the earlier of such retirement, termination of employment, death, or determination of disability, unless such Eligible Employee elects to receive the benefit in annual installments made over a period of five (5) years. Each Eligible Employee must select a lump sum or annual installment distribution when selecting a payment option in accordance with Section 3.1 of this Plan. ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ (b) The earlier of a specific calendar year selected by the Eligible Employee or an Eligible Employee's retirement, termination of employment, death, -- determination of permanent disability by the Plan Administrator. In the case of a payment deferred to a specific calendar year, such payment shall be made in a lump sum during the first month of the calendar year selected by the Eligible Employee unless the Eligible Employee elects to receive his or her benefit in annual installments made over a period not to exceed five (5) years, the first such installment then occurring during the first month of the calendar year selected by the Eligible Employee. Each Eligible Employee must select a lump sum or annual installment distribution when selecting a payment option in accordance with Section 3.1 of this Plan. Any death benefit payable under this Plan shall be payable to the one or more beneficiaries who are named in the Election and Enrollment Form completed by each Eligible Employee. ARTICLE VII - HARDSHIP DISTRIBUTIONS 7.1 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of an Eligible Employee, as hereinafter defined, the Eligible Employee may apply to the Executive Committee for the distribution of all or any part of his or her Salary or Bonus Deferral Account. The Executive Committee shall consider the circumstances of each such case, and the best interest of the Eligible Employee and his or her family, and shall have the right, in its sole discretion, to allow such distribution, or to direct a distribution of part of the amount requested, or to refuse to allow any distribution. Upon a finding of financial hardship, the Administrator shall instruct the Trustee (defined in Article X) to make the appropriate distribution to the Eligible Employee from amounts contributed to the Trust (defined in Article X) by the Administrator in respect of the Eligible Employee's Salary or Bonus Deferral Account. In no event shall the aggregate amount of the distribution exceed either the full value of the Eligible Employee's Salary Or Bonus Deferral Account or the amount determined by the Administrator to be necessary to alleviate the Eligible Employee's financial hardship (which financial hardship may be considered to include any taxes due as the result of the distribution occurring because of this Section), and which is not reasonably available from other resources of the Eligible Employee. For purposes of this Section, the value of the Eligible Employee's Salary Or Bonus Deferral Account shall be determined as of the date of the distribution. "Financial hardship" means (a) a severe financial hardship to the Eligible Employee resulting from a sudden and unexpected illness or accident of the Eligible Employee or of a dependent (as defined) in Code Section 152(a) of the Eligible Employee, (b) loss of the Eligible Employee's property due to casualty, or (c) other similar extraordinary and unforeseeable circumstances arising as a result of ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ events beyond the control of the Eligible Employee, each as determined to exist by the Executive Committee. A distribution may be made under this Article only with the consent of the Executive Committee. ARTICLE VIII - ACCOUNTS 8.1 ACCOUNTS. The Company will maintain on its books a Salary Or Bonus Deferral Account and a Supplemental Employer Matching Account for each Eligible Employee, to which shall be credited, as appropriate, Salary Reduction Deferrals and Bonus Reduction Deferrals under Section 3.1, Employer Deemed Contributions under Article IV, and Allocated Investment Earnings as provided in Section 8.2. 8.2 ALLOCATED INVESTMENT EARNINGS. For purposes of measuring the Allocated Investment Earnings to be credited to each Participant's Salary Or Bonus Deferral Account and each Participant's Supplemental Employer Matching Account, a Participant may select from the investment funds selected by the Plan Administrator and approved by the Executive Committee, the investment funds in which the Participant's Salary Or Bonus Deferral Account and Supplemental Employer Matching Account shall be deemed to be invested. Each Participant shall make a designation on a form provided by the Plan Administrator specifying the percentage of the Account balances deemed to be invested in each of the investment choices then offered by the Plan. This form will remain effective until another valid form has been made by the Participant and received by the Plan Administrator. Each Participant may amend these investment designations once per quarter by providing written notification to the Plan Administrator at least thirty (30) days prior to the end of the quarter or at such other times as periodically allowed by the Plan Administrator in its sole discretion. If given timely notification is provided to the Plan Administrator, a change to a Participant's investment designation shall become effective on the first day of the calendar quarter or such other period as determined by the Plan Administrator following receipt by the Plan Administrator of the written direction. 8.3 The investment funds deemed to be made available to the Participants, and any limitation on the minimum or maximum percentages of a Participant's Accounts that may be deemed to be invested in any particular investment fund shall be the same as the Plan Administrator periodically communicates to the Plan Participants. If (a) the Participant does not furnish the Plan Administrator with complete, written instructions, or (b) the written investment instructions from the Participant are unclear, then the Participant's election to defer Compensation as allowed by this Plan shall be held in abeyance and have no force or effect until; such time as the Participant shall provide the Plan Administrator with complete investment instructions. ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ ARTICLE IX - ADMINISTRATION 9.1 ADMINISTRATOR. The Executive Committee and the Administrator shall administer, construe, and interpret this Plan and shall determine, subject to the provisions of this Plan in a manner consistent with the terms of the Plan, the Eligible Employees who shall participate in the Plan from time to time and the amount, if any, due an Eligible Employee (or his or her beneficiary) under this Plan. The Administrator shall not be liable for any act done or determination made in good faith. If a member of the Executive Committee is a Eligible Employee in this Plan he or she may not vote on matters affecting his or her personal benefit under this Plan, but any such member shall otherwise be fully entitled to act in matters arising out of or affecting this Plan notwithstanding his or her participation herein. In carrying out his or her duties herein, the Administrator shall have discretionary authority to exercise all powers and to make all determinations, consistent with the terms of the plan, in all matters entrusted to him or her, and his or her determinations shall be given deference and shall be final and binding on all interested parties. 9.2 CLAIMS PROCEDURES (a) Notice of Claim. Any Eligible Employee or beneficiary, or the duly authorized representative of an Eligible Employee or beneficiary, may file with the Administrator a claim for a Plan benefit. Such a claim must be in writing on a form provided by the Administrator and must be delivered to the Administrator, in person or by mail, postage prepaid. Within thirty (30) days after the receipt of such a claim, the Administrator shall send to the claimant, by mail, postage prepaid, a notice of the granting or the denying, in whole or in part, of such claim, unless special circumstances require an extension of time for processing the claim. In no event may the extension exceed thirty (30) days from the end of the initial period. If such an extension is necessary, the claimant will be given a written notice to this effect prior to the expiration of the initial thirty (30) day period. The Administrator shall have full discretion to deny or grant a claim in whole or in part in accordance with the terms of the plan. If notice of the denial of a claim is not furnished in accordance with this Section, the claim shall be deemed denied and the claimant shall be permitted to exercise his or her right to review pursuant to paragraphs 2 (c) and 2 (d) of Article IX of the Plan, as applicable. (b) Action on Claim. The Administrator shall provide to every claimant who is denied a claim for benefits a written notice setting forth, in a manner calculated to be understood by the claimant; ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ (i) The specific reason or reasons for the denial; (ii) A specific reference to the pertinent Plan provisions on which the denial is based; (iii) A description of any additional material or information necessary of the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) An explanation of the Plan's claim review procedure. (c) Review of Denial. Within thirty (30) days after the receipt by a claimant of written notification of the denial (in whole or in part) of a claim, the claimant or the claimant's duly authorized representative, upon written application to the Administrator, delivered in person or by certified mail, postage prepaid, may review pertinent documents and may submit to the Administrator, in writing, a request for the Administrator to review the denial. (d) Decision on Review. Upon the Administrator's receipt of a notice of a request for review, the Administrator shall make a prompt decision on the review and shall communicate the decision on review in writing to the claimant. The decision on review shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. The decision on review shall be made not later than thirty (30) days after the Administrator's receipt of a request for a review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered not later than sixty (60) days after receipt of the request for review. If an extension is necessary, the claimant shall be given written notice of the extension by the Administrator prior to the expiration of the initial thirty (30) day period. If notice of the decision on review is not furnished in accordance with this Article, the claim shall be deemed denied on review. ARTICLE X - TRUST 10.1 ESTABLISHMENT OF TRUST. The Company shall establish a Trust with a Trustee, pursuant to such terms and conditions as are set forth in the Trust Agreement to be entered into ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ between the Company and the Trustee. The Trust is intended to be treated as a Grantor Trust under the Code, and the establishment of the Trust is not intended to cause an Eligible Employee to realize current income on amounts contributed thereto, and the Trust shall be so interpreted. ARTICLE XI - MISCELLANEOUS PROVISIONS 11.1 LIMITATIONS OF RIGHTS. Nothing contained in this Plan shall be construed to: (a) Limit in any way the right of the Company to terminate an Eligible Employee's employment at any time; or (b) Be evidence of any agreement or understanding, express or implied, that the Company will employ an Eligible Employee in any particular position or at any particular rate of remuneration. 11.2 NONALIENATION OF BENEFITS; NO WITHDRAWALS. Except as herein after provided with respect to family disputes, the rights of any Participant under this Plan are personal and may not be assigned, transferred, pledged, mortgaged, or hypothecated. Any attempt to do so shall be void. In cases of family disputes, the Plan Administrator and the Company will observe the terms of the Plan unless and until ordered to do otherwise by a state or Federal court. As a condition of participation, each Participant agrees to hold the Plan Administrator and the Company harmless from any claim that arises out of their compliance with any final order of any state or Federal court, whether such order effects a judgement of such court or is issued to enforce a judgement or order of another court. For purposes of this Section 11.2, "family dispute" means a dispute relating to provision of child support, alimony payments, or marital property rights to a spouse, former spouse or other dependent of a Participant. No amounts credited to an Eligible Employee's Accounts may be withdrawn or paid to the Eligible Employee prior to termination of employment, retirement, death, disability or prior to the attainment of a specific year to which Compensation was deferred in accordance with Article III, except in the case of demonstrated financial hardship as described in Article VII. 11.3 AMENDMENT OR TERMINATION OF PLAN. Although it is expected that this Plan shall continue indefinitely, the Executive Committee may amend this Plan from time to time in any respect, and may at any time terminate the Plan in its entirety; provided, however, that an Eligible Employee's Accounts as of the date of any such amendment or termination may not be reduced nor may any such amendment or termination adversely affect an Eligible Employee's entitlement to his ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ or her Accounts as of such date. In the event of the termination of the Plan, all benefit payments shall be made within sixty days. 11.4 CONSTRUCTION OF PLAN. This Plan is unfunded. The obligations of the Company with respect to the amounts payable hereunder shall be paid out of the Company's general assets and shall be secured by a grantor trust within the meaning of the subpart E, part 1, subchapter J, chapter 1, schedule A of the Code, escrow or otherwise. This Plan shall be so construed that it will be "unfunded" and maintained "primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees", as those terms are used in the Employee Retirement Income Security Act of 1974. 11.5 GENDER AND NUMBER. Wherever used in this Plan, the masculine shall be deemed to include the feminine and the singular shall be deemed to include the plural, unless the context clearly indicates otherwise. ================================================================================ Harborside HEALTHCARE September 15, 1995 Harborside Healthcare Supplemental Executive Retirement Plan ================================================================================ 11.6 LAW GOVERNING. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts to the extent such laws are not preempted by federal law. ATTEST/WITNESS HARBORSIDE HEALTHCARE LIMITED PARTNERSHIP /s/ Julie Savard By: /s/ William H. Stephan - --------------------------- ------------------------------- Print Name: Julie Savard Print Name: William H. Stephan --------------- ----------------------- Date: September 15, 1995 ----------------------------- [SEAL] EX-10.16 6 AGREEMENT TO LEASE EXHIBIT 10.16 AGREEMENT TO LEASE AGREEMENT made and entered into as of the 3d day of May, 1996 (herein called the "Effective Date") among WESTBAY MANOR COMPANY, an Ohio limited partnership ("Westbay"), WESTBAY MANOR II DEVELOPMENT COMPANY, an Ohio limited partnership ("Westbay II"), ROYALVIEW MANOR DEVELOPMENT COMPANY, an Ohio limited partnership ("Royalview LP"), BEACHWOOD CARE CENTER LIMITED PARTNERSHIP, an Ohio limited partnership ("Beachwood") (Westbay, Westbay II, Royalview LP and Beachwood are referred to hereinafter collectively as the "Landlords" and individually as a "Landlord"), ROYALVIEW MANOR COMPANY, an Ohio general partnership ("Royalview GP"), (the Landlords and Royalview GP hereinafter are individually referred to as an "Associated Company" and collectively referred to as the "Associated Companies"), as parties of the first part, and HARBORSIDE HEALTH I CORPORATION, a Delaware corporation (herein called the "Tenant"), and HARBORSIDE HEALTHCARE LIMITED PARTNERSHIP, a Massachusetts limited partnership (the "Guarantor"), as parties of the Second Part. WITNESSETH: ----------- WHEREAS, Westbay is the owner and operator of Westbay Manor I, a 153-bed nursing home facility located in Westlake, Ohio on land more particularly described in Schedule A attached hereto; and ---------- WHEREAS, Westbay II is the owner and operator of Westbay Manor II, a 106- bed nursing home facility located in Westlake, Ohio on land more particularly described in Schedule B attached hereto; and ---------- WHEREAS, Royalview LP is the owner of Royalview Manor, a 159-bed nursing home located in Broadview Heights, Ohio on land more particularly described in Schedule C attached hereto; and - ---------- WHEREAS, Beachwood is the owner and operator of Parkland Nursing Center (which, together with Westbay Manor I, Westbay Manor II, and Royalview Manor shall be referred to collectively as the "Facilities", or each as a "Facility"), a 274-bed nursing home located in Beachwood, Ohio on land more particularly described in Schedule D attached hereto (which land, together with the land ---------- described in Schedules A, B and C shall be referred to collectively as the -------------------- "Land"); and WHEREAS, Royalview GP, is the lessee and operator of Royalview Manor; and WHEREAS, Landlords desire to lease to Tenant, and Tenant desires to lease from Landlords, the Land, the Facilities and certain other assets used in or in connection with the operation of the Facilities, all upon the terms and conditions hereinafter set forth; and WHEREAS, Tenant and Guarantor are affiliated through common ownership by Harborside Healthcare Advisors Limited Partnership, and Guarantor will guaranty the obligations of Tenant under this Agreement pursuant to a form of Guaranty attached hereto as Schedule D (the "Guaranty"), the Leases (defined hereinafter), the Option to Purchase Agreements (as defined hereinafter) and other agreements required hereunder; and WHEREAS, Paul S. Dennis ("Dennis") is a general partner of all of the Associated Companies and Jeffrey I. Friedman ("Friedman") is a general partner of Westbay, Westbay II and Beachwood. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements herein contained, the parties hereto do hereby covenant and agree as follows: 1. LEASE OF ASSETS. On the Closing Date (as defined in Section 10.1 of this Agreement, Landlords and Tenant shall enter into leases in the form attached hereto as Schedules E, F, G and H (each a "Lease", collectively the "Leases") ----------------------- pursuant to which Landlords shall lease to Tenants the real property described therein (the "Premises") together with all of the other tangible assets used in or in connection with the operation of the Premises and the Facilities (except those assets listed in Schedule 1.1 attached hereto which are hereinafter ------------ referred to as the "Excluded Assets") (the "Assets"), upon the terms and conditions set forth therein. To the extent that any tangible assets (other than the Excluded Assets) used in or in connection with the operation of the Facilities as of the Effective Date or any addition thereto or replacement thereof made prior to the Lease commencement date are owned, in whole or in part, by any Persons other than the Landlords, such assets shall be transferred by such Person to the applicable Landlord prior to the Closing Date and such transfer shall be a condition precedent to Tenant's obligation to close the transaction contemplated hereunder. Attached hereto as Schedule 1.2 is a comprehensive list (by Facility) of ------------ the vehicles, fixtures, machinery, equipment, and certain furniture and furnishings owned by the Associated Companies and used in or in connection with the operation of the Premises. Attached hereto as Schedule 1.3 is a complete and accurate list (by ------------ Facility) of all vehicles, machinery, equipment, furniture and fixtures which the Associated Companies use under any lease or license agreement. - 2 - 2. CERTAIN ASSETS AND LIABILITIES. In consideration of the license, transfer or assignment to Tenant of the rights to the Intangible Assets set forth in Section 2.1 below for the term of the Leases (the "Lease Term") and of the agreement herein by the Associated Companies to perform each of their other respective obligations hereunder, Tenant will assume from the Associated Companies at Closing the liabilities set forth in Section 2.3 below. 2.1. Intangible Assets. At the Closing, the Associated Companies will ----------------- license or transfer and assign all of their right, title and interest in and to the following intangible assets (the "Intangible Assets") to Tenant for the Lease Term: (a) To the extent transferable under Ohio law, all licenses, permits, certificates and franchises necessary to operate and conduct the business conducted in each of the Premises and all waivers of any requirements pertaining to such licenses, permits, certificates and franchises, excluding the respective certificates of need for the Facilities, which shall be transferred to Tenant or its permitted assignee upon the purchase of each Facility by Tenant or its permitted assignee pursuant to the Option to Purchase Agreements (as hereinafter defined) in consideration of the Exercise Price thereunder. (b) Licenses to all registered or unregistered trademarks, trade or brand names, service marks and similar intangible property pertaining to the Facilities. 2.2. License. At the Closing, the Associated Companies shall grant to ------- Tenant or its permitted assignee a non-assignable license in the form attached thereto as Schedule 2.2 to all of the Associated Companies' right, title and ------------ interest to use any words indicating that the business of the Facilities is being carried on, including the right to use the trade names "Parkland Centre", "Westbay Manor II", "Westbay Manor", and "Royalview Manor", or any variation thereof, as part of the name or in connection with any of the Facilities or any part thereof. 2.3. Assumed Liabilities. Subject to the second paragraph of this ------------------- Section 2.3, Tenant will assume from Landlords at the Closing only those ---- liabilities and obligations which are related to (i) the Facilities which accrue or otherwise are to be performed on or after the Closing in respect of the contracts and agreements listed in Schedule 2.3 attached hereto (collectively ------------ referred to herein as the "Assumed Contracts"), in each case as in effect at the Closing and solely to the extent that the existence at or after the Closing of such liabilities or obligations does not constitute a breach of any representation or warranty made by the Associated Companies herein or in connection herewith; (ii) the Parkland Ancillary Medical Leases; (iii) the pro- ratable items which are not yet due and payable by the Associated Companies prior to or at the Closing and for which - 3 - Tenant receives a credit at Closing; and (iv) obligations with respect to any security deposits or patient trust funds held by the Associated Companies and transferred to Tenant on the Closing Date, all of which liabilities and obligations shall be appropriately adjusted for in the Closing Settlement at Closing. Notwithstanding anything to the contrary herein, or in any other writing delivered in connection herewith, nothing herein or in any such other writing shall be construed to constitute the assumption, express or implied, by Tenant of any obligations or liability of the Associated Companies, except solely for the obligations and liabilities expressly agreed to be assumed at the Closing by Tenant pursuant to the first sentence of this Section 2.3. To the extent that any of the Assumed Contracts are not assignable without the consent of a third party, this Agreement shall not of itself constitute an assignment or an attempted assignment of such Assumed Contracts if such assignment or attempted assignment would constitute a breach thereof. The Associated Companies will use their respective best efforts to obtain the consent to the assignment to Tenant of each such Assumed Contract with respect to which such consent is required for such assignment provided that no Associated Company shall thereby become obligated to make any expenditures to obtain such consents. If such consent is not obtained on or prior to the Closing Date in respect of any such Assumed Contract, each party hereto will cooperate with the other party hereto in any reasonable arrangement consistent with the representations and warranties set forth herein to enable Landlords to perform their obligations under such Assumed Contract, and to provide Tenant the benefits thereunder, including without limitation by the enforcement thereof at the expense of the Tenant. 2.4. Records and Plans. At the Closing, the Associated Companies will ----------------- transfer custody of the following records and plans to Tenant for the Lease Term: (a) All of the patient, medical, clinical and personnel records of the Facilities, and all of the operating manuals, procedures manuals, training manuals and other books and records used by the Associated Companies in operating the Premises, but excluding any corporate and partnership financial books and records. (b) All plans, specifications and architectural renderings of the Premises, if any. 2.5. Parkland Nursing Center Subleases. There currently exists at --------------------------------- Parkland Nursing Center a Lease between Beachwood, as lessor, and Associated Healthcare Management Company, Inc. ("AHCM, Inc."), as lessee (as heretofore ---------- amended and supplemented the "Parent Lease"), and a Lease, dated November 17, ------------ 1995, between Beachwood, as lessor, and Barrie Galvin OTR/L and - 4 - Associates, Ltd. (the "Current Galvin Lease)". AHMC, Inc., as sublessor, has -------------------- subleased to various parties portions of the leasable space in the first floor of Parkland Nursing Center pursuant to the leases identified on Schedule 2.5 ------------ attached hereto (the "Parkland Nursing Center Subleases"). At Closing, the --------------------------------- Associated Companies shall cause AHMC, Inc. to assign all of its right, title and interest in and to the Parkland Nursing Center Subleases to Beachwood, whereupon the Parent Lease shall be terminated. Immediately following such termination, and as part of the Closing, Beachwood shall assign to Harborside for the Term, and Harborside shall assume for the Term, all of Beachwood's right, title and interest as landlord under the Galvin Lease, as hereinafter defined, and the Parkland Nursing Center Subleases (collectively, the "Parkland -------- Ancillary Medical Leases"), retaining and reserving, however, such interest in - ----------------------- the Parkland Ancillary Medical Leases as is necessary for Beachwood to ensure that such tenants comply with the terms and conditions of any regulatory agreement between Beachwood and the United States Department of Housing and Urban Development ("HUD") with respect to Parkland Nursing Center and with the --- terms and conditions of any mortgage encumbering the fee owner's interest in Parkland Nursing Center. The "Galvin Lease" shall mean either the Current Galvin ------------ Lease, or if Tenant objects thereto, a lease in substitution thereof as contemplated in Section 2(C) of the Current Galvin Lease. Guarantor and Tenant acknowledge that the Parkland Ancillary Medical Leases, as of the date hereof, have not been approved by HUD. Beachwood agrees to seek to obtain HUD approval for the Ancillary Medical Leases prior to the Closing, but failure to obtain such approval shall not constitute a breach of contract by any party hereunder or a failure of condition entitling any party not to proceed with Closing. In such instance, the Closing shall proceed as otherwise provided herein and Beachwood, not Tenant or Guarantor, shall have the responsibility for either obtaining HUD approval for the Parkland Ancillary Medical Leases or, if not obtainable with reasonable efforts, responsibility for terminating the Parkland Ancillary Medical Leases, all at Beachwood's cost and expense. Notwithstanding the foregoing, each of Tenant and Guarantor agree that neither they, any tenant under the Leases, any optionee under the Option to Purchase Agreements, or any other party affiliated with any one of more of any of the foregoing, shall have any claim against Beachwood or any other Associated Company in the event that Beachwood terminates any of the Parkland Ancillary Medical Leases because HUD approval thereof is not obtainable with reasonable efforts or in the event rent under any of the Parkland Ancillary Medical Leases is reduced (notice thereof promptly shall be given to the Parkland Tenant) in order to obtain modifications thereof in order to obtain HUD approval thereof. 3. DEPOSIT. Subject to the terms of this Section 3, Tenant has of even date herewith deposited with Ohio Title Insurance Company - 5 - (the "Escrow Agent"), by bank check or wire transfer, the amount of Six Hundred Thousand Dollars ($600,000) (together with any interest earned thereon, the "Initial Deposit"), and agrees to deposit the additional amount of Six Hundred Thousand Dollars ($600,000) (together with any interest earned thereon, the "Second Deposit") with the Escrow Agent, by bank check or wire transfer, if the transaction contemplated by this Agreement is approved by the Board of Directors of Tenant pursuant to Section 8.7 hereof, within five (5) business days after such approval (the Initial Deposit and the Second Deposit shall collectively be referred to herein as the "Deposit"). The Escrow Agent will invest the Deposit in federally-insured money market accounts or bank certificates of deposit having a maturity not exceeding thirty (30) days. Upon the Closing contemplated hereunder, the entire amount of the Deposit shall be paid over to Landlords and applied to the Option Price payable by Tenant under the Option to Purchase Agreements. In the event that Tenant is not satisfied with the results of the due diligence to be conducted pursuant to Section 4 hereof, and Tenant and Landlords are unable to mutually agree upon a satisfactory resolution of the same, the Initial Deposit shall promptly be refunded to the Tenant. If the transaction is not consummated at Tenant's election because any condition precedent to Tenant's obligation to consummate the transaction set forth in Section 8 hereof is not satisfied as required therein, or because of a material breach of any warranty or covenant by the Associated Companies, or because of any material misrepresentation by the Associated Companies or other material default by the Associated Companies hereunder, subject to the Associated Companies' right to cure such misrepresentation, breach or default pursuant to Section 13 hereof, the Deposit shall be promptly returned to Tenant upon written demand. In the event the transaction is not consummated because any condition precedent to the Associated Companies' obligation to consummate the transaction set forth in Section 9.1, 9.2, 9.5, or 9.6 hereof is not satisfied as required therein, or because of a material breach of any warranty or covenant by Tenant or Guarantor or because of any material misrepresentation by Tenant or Guarantor or other material default by Tenant or Guarantor hereunder, subject to Tenant's and Guarantor's right to cure such misrepresentation, breach or default pursuant to Section 13 hereof, the Deposit shall be paid to the Associated Companies in accordance with Section 13 hereof. The terms of this Section 3 have been incorporated into an escrow agreement entered into by Landlords, Tenant, Guarantor and the Escrow Agent of even date herewith (the "Deposit Escrow Agreement"). - 6 - 4. DUE DILIGENCE 4.1. Tenant's Inspectional Due Diligence. The Associated Companies ----------------------------------- hereby grant to Tenant and its agents the right to conduct such due diligence regarding the Premises and the Assets as Tenant deems necessary or appropriate ("Inspectional Due Diligence"), including, without limitation, investigation of title, survey, zoning, environmental, physical plant, reimbursement, licensure, certification and labor matters, and in connection therewith the Associated Companies shall provide Tenant with access to the Premises, the Assets and all such materials reasonably required for Tenant's Inspectional Due Diligence review at any reasonable time or times during the sixty (60) day period following the Effective Date, including but not limited to any existing title policy commitments, property surveys, environmental studies and reports, and all books, records, business documents, auditor's work papers, regulatory surveys, licenses, contracts and other items which Tenant deems necessary or relevant to its Inspectional Due Diligence hereunder. Tenant agrees to provide Dennis or his designee(s) with not less than two (2) days written or oral notice prior to authorizing any representative to conduct any Inspectional Due Diligence at the Premises. In conducting its due diligence hereunder, Tenant will take reasonable efforts to maintain the confidentiality of the transaction contemplated herein. At the reasonable request of Tenant, Associated Companies will make available personnel necessary to respond to Tenant's due diligence requests. Tenant shall complete its Inspectional Due Diligence under this Section 4.1 within sixty (60) days after the Effective Date. If as a result of Tenant's Inspectional Due Diligence hereunder, Tenant becomes aware of any unsatisfactory condition or circumstance at any of the Premises or in connection with the inspection of any of the Facilities (any such condition or circumstance hereinafter being referred to as a "Deficiency"), including but not limited to the need to make capital expenditures, the Tenant shall provide written notice of the same to the Associated Companies (a "Deficiency Letter") within seventy (70) days after the Effective Date. The Associated Companies and Tenant shall negotiate in good faith with respect to the appropriate means of addressing each such Deficiency, including without limitation whether to undertake any remedy of such Deficiency at the cost of the Associated Companies and/or the Tenant or to amend the terms of the Leases and/or Option to Purchase Agreements (including the rental or option purchase price provision thereof). If, notwithstanding the parties' good faith efforts, the Associated Companies and Tenant are not able to agree upon the appropriate means of addressing any Deficiency, then Tenant may terminate this Agreement by written notice to the Associated Companies within thirty (30) days after receipt of the Deficiency Letter, in which event the Escrow Agent shall promptly - 7 - return the Deposit to Tenant and the parties shall have no further liability to each other. Notwithstanding anything in this Section 4 to the contrary, Tenant maintains the right to terminate this Agreement if the conditions of Section 8.7 below are not fulfilled. 4.2. Tenant's Operational Due Diligence. The Associated Companies shall ---------------------------------- deliver to Tenant the operational information set forth on Schedule 4.2 attached ------------ hereto within ten (10) business days following the Effective Date. Tenant shall complete its due diligence review of such operational information ("Operational Due Diligence") under this Section 4.2 within sixty (60) days after the Effective Date. 5. COVENANTS, REPRESENTATIONS AND WARRANTIES OF ASSOCIATED COMPANIES. As an inducement to Tenant's entering into this Agreement, the Associated Companies make the following covenants, representations and warranties, in addition to those contained elsewhere herein: 5.1. Partnership Matters. ------------------- 5.1.1. Organization, Power and Standing. Each of the Associated -------------------------------- Companies is a general partnership or limited partnership duly organized and validly existing and, its certificate of partnership is in full force and effect, as such under the laws of the State of Ohio, and has all requisite power and authority to execute, deliver and perform this Agreement, to carry on the business of the Facilities which it owns as now conducted, to own, lease or otherwise use its property, and to consummate the transactions contemplated hereby. The partners of the Associated Companies which are general and limited partnerships are as shown on Schedule 5.1.1 hereto. -------------- 5.1.2. Authorization and Enforceability. This Agreement and each of the -------------------------------- other agreements contemplated hereunder has been or will have been duly authorized, executed and delivered by each Associated Company, constitutes or will constitute the legal, valid and binding obligation of each Associated Company and is or will be enforceable against each Associated Company in accordance with its terms, except to the extent such enforceability may be limited or affected by bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or other similar laws of general applicability governing the enforcement of the rights of creditors and by the general principles of equity (regardless of whether considered in a proceeding at law or in equity). - 8 - 5.1.3. Compliance with Charter Documents. The execution, delivery and --------------------------------- performance of this Agreement by the Associated Companies and the consummation by the Associated Companies of the transactions contemplated hereby will not violate or conflict with or constitute a default under any term of the Partnership Agreement of any of the Associated Companies. True and complete copies of each Associated Company's Partnership Agreements in effect as of the Effective Date have been delivered to Tenant. 5.1.4. No Breach, Etc. The execution, delivery and performance of this --------------- Agreement will not conflict with or result in a breach of or default by any Associated Company under any material term, condition, or provision of any order, writ, injunction, decree, material contract, material agreement, or material instrument to which any Associated Company is a party or by which the Premises or Assets are bound, will not result in the creation or imposition of any lien, charge, or encumbrance upon any of the Premises or Assets, and will not give to others any interest or rights in, or with respect to, any of the Premises or Assets assuming Tenant secures all necessary licenses, certifications and approvals from federal, state and local governmental and administrative agencies having jurisdiction thereof required for the operation of the Facilities by Tenant. 5.2. Financial Statements. -------------------- 5.2.1. The Landlords' and Operators' Financial Statements. True, -------------------------------------------------- complete and accurate copies of the financial statements of the Associated Companies for the years ending December 31, 1992, December 31, 1993, and December 31, 1994 which have been audited by Howard, Wershbale & Co. (the "Annual Financial Statements") have been delivered to Tenant. The Annual Financial Statements (including the notes thereto) present fairly and, to the Associated Companies' knowledge, in the case of Beachwood, in conformity with generally accepted accounting principles consistently applied and in the case of Westbay, Westbay II and Royalview, in conformity with an income tax basis presentation, the financial condition of the Associated Companies at the dates thereof and the results of their respective operations for the periods covered thereby. The Associated Companies shall make the books and records of the Associated Companies available to Tenant and Tenant's auditors and otherwise cooperate with Tenant in order to permit Tenant to conduct a compliance audit of such Annual Financial Statements at Tenant's expense. True, complete and accurate copies of the unaudited annual financial statements of the Associated Companies through December 31, 1995 (the "Interim Financial Statements") have been delivered to Tenant. The Interim Financial Statements - 9 - present fairly and in the case of Beachwood, in conformity within generally accepted accounting principles consistently applied and in the case of Westbay, Westbay II and Royalview, in conformity with an income tax basis presentation, the financial position of the Associated Companies as of December 31, 1995 and the results of their respective operations for the twelve (12) month period then ended subject to audit adjustments. The Associated Companies agree to provide Tenant with audited financial statements in the same form and by the same auditing firm as the Annual Financial Statements for the fiscal year ending December 31, 1995 within ninety (90) days of the end of such fiscal year (which financial statements shall constitute Annual Financial Statements hereunder ) and to provide Tenant with year-to-date unaudited operating financial statements for each month following December 31, 1995 through Closing which are the statements used by the Associated Companies in the ordinary course of business. 5.3. Character of Operations, Compliance with Laws. --------------------------------------------- 5.3.1. Compliance Generally. Neither the execution and delivery of this -------------------- Agreement by any Associated Company nor the consummation by any Associated Company of any transaction contemplated hereby does or will violate or give rise to any violations or default under any Legal Requirement assuming Tenant secures all necessary licenses, certifications and approvals from federal, state and local governmental and administrative agencies having jurisdiction thereof required for the continued operation of the Facilities by Tenant. To the best of each Associated Company's knowledge, the operation of the Facilities as heretofore or currently conducted was not and is not in violation of, nor is any Associated Company in default under, any Legal Requirement except that the Parent Lease and the Parkland Ancillary Medical Leases have not been approved by HUD. To the best of each Associated Company's knowledge, there exists no condition or event pertaining to the Premises or the Assets which after notice or lapse of time, or both, would be held so to violate or to give rise to any such default. Except as disclosed on Schedule 5.3.1, no Associated Company has -------------- received any notice, and no Associated Company has knowledge, of any impending order or requirement which would cause additional expenditures to be made to bring the Premises or the Assets into compliance with Legal Requirements. 5.3.2. No Bribes, Illegal Payments. No Associated Company and, to the --------------------------- best of each Associated Company's knowledge, no officer, employee or agent of any Associated Company, has directly or indirectly given or agreed to give any gift, contribution, payment or similar benefit to any supplier, customer, governmental employee or other Person - 10 - who was, is or may be in a position to help or hinder any Associated Company or any Facility (a) which could subject any Associated Company or Tenant to any damage or penalty in any civil, criminal, or governmental litigation or proceeding, or (b) the non-continuation of which in the future could result in a material adverse effect on the business, operations, assets, prospects or condition, financial or otherwise, of any Facility or Tenant. To the best of each Associated Company's knowledge, no Associated Company and no officer, employee or agent of any Associated Company has (a) established or maintained any unrecorded fund or asset for any purpose, or (b) made any false entries on any books or records furnished in connection herewith to Tenant. 5.3.3. Operating Licenses. Schedule 5.3.3 attached hereto contains true ------------------ -------------- and complete copies of all nursing home licenses which have been issued to the Associated Companies by the State of Ohio Department of Health and all other material licenses, permits, approvals, certificates of need, Medicare and Medicaid certifications, which have been issued to the Associated Companies by any governmental agency (whether federal, state, local or other) in connection with the ownership of the Assets and the operation of the Facilities (collectively, the "Licenses"). The Licenses are all of the material licenses, permits, approvals, certificates of need, Medicare and Medicaid certifications and the like which are necessary for the ownership and operation by each Associated Company of the Premises and Assets which it owns, and to the best of their knowledge, each Associated Company has fulfilled all material requirements of same. Each of the Licenses is in full force and effect and none of the Licenses are conditional or restricted except as to conditions and restrictions described on Schedule 5.3.3 hereto. To their knowledge, the Licenses and the -------------- Facilities are all in good standing with the governmental agencies which issued the Licenses. 5.3.4. Compliance of Facility with State Licensure and Medicare and ------------------------------------------------------------ Medicaid Certification Requirements. To their knowledge, except as otherwise - ----------------------------------- set forth in Schedule 5.3.4 attached hereto, each Facility currently meets, and -------------- as of the Closing in all material respects shall meet, all regulatory standards and conditions for the operation and licensure of skilled nursing facilities (to the extent such standards and conditions are applicable to the Facility) and for participation in the Medicare and Medicaid programs under federal, state and local governmental laws, rules, regulations, guidelines, standards and conditions, and is not, and as of the Closing will not be, subject to any variances or waivers with respect to licensure or operational requirements, except as to variances and waivers - 11 - described on Schedule 5.3.4 hereto, all of which variances and waivers are -------------- transferable to Tenant. 5.3.5. Returns, Reports, etc. All Medicare and Medicaid cost reports, --------------------- tax returns, plans and filings of any kind or nature which the Associated Companies have filed or will file prior to the Closing Date with any governmental authorities have been or will be properly completed in all material respects and timely filed (including extensions thereof) and are or will be true and correct and comply in all material respects with all applicable requirements. 5.3.6. Work Orders; Statements of Deficiencies. Except as set forth in --------------------------------------- Schedule 5.3.6 attached hereto, there are no pending work orders or statements - -------------- of deficiencies relating to the Premises which have been required or issued by any state department of health or state or local licensure agency or Medicare or Medicaid certification agency, or police or fire department, sanitation, health or work authorities or any other federal, state or municipal authority. The Associated Companies shall provide to Tenant a copy of any such work order or statement of deficiency received by any Associated Company after the Effective Date within three (3) business days after receipt thereof. 5.3.7. Environmental Matters. Except as otherwise set forth in Schedule --------------------- -------- 5.3.7 attached hereto, to their knowledge, no Associated Company is subject to - ----- any type of enforcement action or compliance order for any violation or alleged violation of any environmental laws, rules, standards or regulations, including, but not limited to, those related to waste-management, air pollution control, waste-water treatment or noise abatement. Except as otherwise set forth in Schedule 5.3.7 hereto, no Associated Company has received any written notice or - -------------- citation for noncompliance by it with respect to any of the foregoing relating to any of the Premises or has any knowledge of any circumstance which could reasonably be expected to result in any such enforcement action or compliance order. Except as set forth in Schedule 5.3.7 hereto, to their knowledge: -------------- (i) There are no Contaminants which have at any time been generated, transported, disposed of, recycled or otherwise handled in any way by any Associated Company or others in or about any of the Premises, except as occurs in the ordinary course of the lawful operation of a nursing home facility in the State of Ohio. (ii) There are no locations in or about any of the Premises where Contaminants or Infectious Wastes from the operation of the Facilities or the Premises have been disposed of. - 12 - (iii) There has been no prior use (including uses by any predecessor) of any of the Premises whereby Contaminants were at any time located on or contained within the Facilities or the Premises, except as occurs in the ordinary course of the lawful operation of a nursing home facility in the State of Ohio. (iv) There are no past or continuing releases of Contaminants from any of the Premises, except as occurs in the ordinary course of the lawful operation of a nursing home facility in the State of Ohio. (v) No Associated Company has been notified that any person's health has or may have been impaired (including any past or present employee) as the result of the use, existence or disposal of Contaminants or Infectious Wastes on the Premises. (vi) Since operated by Associated Companies, all Infectious Wastes have been stored, transported and disposed of in accordance with all laws, licensure and certification standards applicable to the Associated Companies and the Facilities. (vii) There are no underground storage tanks ("USTs") at any of the ---- Premises nor has any of the Associated Companies removed any such USTs from any of the Premises. (viii) There has been no leakage from any of the USTs identified on Schedule 5.3.7 (as opposed to surface spills associated with the filling, or - -------------- "topping off", of any of such USTs). 5.3.8. Litigation. There is no litigation, at law or in equity, or any ---------- proceeding before or, to their knowledge, investigation by any federal, state or municipal court, board or other governmental or administrative agency or any arbitrator, against any Associated Company in connection with the ownership or operation of any Facility, the Premises or the Assets, pending or to the best of each Associated Company's knowledge, threatened, except for such of the foregoing as are described in Schedule 5.3.8 attached hereto. The matters -------------- described in Schedule 5.3.8 will not, individually or in the aggregate, result -------------- in any material liability or expense or otherwise result in any material adverse effect upon the business, operations, assets, prospects or conditions, financial or otherwise, of any Associated Company, or the operation of any Facility. No judgment, decree or order of any federal, state or municipal court, board or other governmental or administrative agency or any arbitrator (i) to their knowledge has been issued against any Person other than one of the Associated - 13 - Companies which could have any material adverse effect on the business, operations, assets or condition, financial or otherwise, of any Associated Company or the operation of any Facility as currently operated, or (ii) has been issued against any Associated Company. 5.3.9. No Bankruptcy or Insolvency Proceedings. There are no bankruptcy --------------------------------------- or insolvency proceedings, at law or in equity, pending or, to the Associated Companies' knowledge, threatened or filed by or against any of the Associate Companies in any federal, state or municipal court or before any other board or governmental or administrative agency. Each Associated Company has existed and continues to exist for the sole purpose of owning and/or operating the respective Facilities. 5.4. Assets and Liabilities. ---------------------- 5.4.1. Conditions of Certain Assets. To their knowledge, except as set ---------------------------- forth in Schedule 5.4.1 attached hereto, all machinery and equipment included in -------------- the Assets, including without limitation, all heating, air conditioning, electrical and life safety equipment/systems installed on the Premises, are in all material respects in good working order, ordinary wear and tear excepted, and, to their knowledge, the roof of each Facility is in good repair. Except as described on Schedule 5.4.1 hereto, there are no known defects, damage or -------------- dangerous conditions existing in or with respect to any buildings or other improvements located on the Premises. 5.4.2. Warranties and Guarantees. Schedule 5.4.2 attached hereto ------------------------- -------------- contains true and complete copies of all written warranties and guarantees currently in effect in connection with the roofs of the buildings and any warranties and guarantees in connection with any heating, air conditioning, or other major equipment in, on or about said buildings or improvements (collectively, the "Warranties and Guarantees"). The Associated Companies shall assign the Warranties and Guaranties to Tenant, at Closing, to the extent such Warranties and Guaranties are transferable or assignable. 5.4.3. Inventory. To their knowledge, all items of inventory to be --------- purchased by Tenant and included in the Assets consist and will consist as of the Closing of items of a quality usable in the ordinary course of the business of the Facilities and conform to generally accepted standards in the long-term care industry. 5.4.4. Ingress and Egress. To their knowledge, existing ingress and ------------------ egress to each of the Premises are from public streets, or if such access is through private - 14 - property, the same is in accordance with valid easements of record benefiting such Premises. 5.4.5. Utility Access. To their knowledge, all public utilities required -------------- for the operation of each of the Premises either enter such Premises through adjoining public streets, or if they pass through adjoining private land, do so in accordance with valid and assignable easements benefiting such Premises. 5.4.6. Trade Names. The respective Associated Company has the right to ----------- use the names "Parkland Nursing Centre", "Westbay Manor II", "Westbay Manor I", and "Royalview Manor" in the market area of the respective Facilities, and has not licensed or entered into any agreement to permit any person or entity to use such names or any variation thereof. To the best of each Associated Company's knowledge, the use of such names by the Associated Companies does not, and the use of such names by Tenant in such market area will not, conflict with any rights to any similar name owned by any other person or entity known to any Associated Company. 5.4.7. Liabilities. Except as set forth in Schedule 5.4.7 attached ----------- -------------- hereto, to their knowledge, there are no material liabilities of any Associated Company or any material liabilities affecting the Premises or the Assets, whether absolute, contingent or fixed, liquidated or unliquidated, matured or not yet due, of any nature, including tax liabilities, other than (i) liabilities expressly accounted for and disclosed in the Annual Financial Statements or the Interim Financial Statements, or (ii) liquidated, noncontingent liabilities incurred by any Associated Company in the ordinary course of business since the Effective Date. 5.4.8. Liens. The Premises and Assets are not subject to any Lien except ----- as described in Schedule 5.4.8 attached hereto and except for the Parent Lease -------------- and the Parkland Ancillary Medical Leases. After the execution of Leases at the Closing, the Premises and Assets will not be subject to any Lien created by, from, through, or under any Associated Company except (i) the Leases, (ii) any Lien included in the Permitted Encumbrances as defined in the Leases, (iii) any Lien created by, from, through or under Tenant, and (iv) the Parent Lease and the Parkland Ancillary Medical Leases. If, subsequent to the Closing, any mechanics or other lien, charge or order for the payment of money shall be filed against the Premises or the Assets or against Tenant or its assigns, based upon any act or omission of any Associated Company, or its agents, servants, or employees, or any contractor or subcontractor connected with construction on the Premises prior to Closing (whether - 15 - or not such lien, charge or order shall be valid or enforceable as such), within sixty (60) days after notice to the Associated Companies of the filing thereof, the Associated Companies shall take such action, by bonding, deposit, payment or otherwise, as will remove and satisfy such lien of record as against the Premises. 5.4.9. Taxes. Each Associated Company has filed all Tax Returns that it ----- was required to file. All such Tax Returns were correct and complete in all material respects. All Taxes owed by each Associated Company (whether or not shown on any Tax Return) have been paid. No Associated Company is currently the beneficiary of any extension of time within which to file any Tax Return. There are no liens or security interests on any of the Premises or Assets arising in connection with any failure (or alleged failure) to pay any Tax. The Associated Companies have withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor or other third party. There are no actions, suits, proceedings, investigations or claims for additional Taxes asserted by any taxing authority of which any Associated Company has notice. 5.4.10. Certain Real Estate Matters. Except as set forth on Schedule --------------------------- -------- 5.4.10, there are no pending real estate tax abatement actions or proceedings, - ------ and there are no pending or, to the best of each Associated Company's knowledge, threatened eminent domain or condemnation proceedings, with respect to the Premises. 5.4.11. Trade Payables. At the Closing, the Associated Companies shall -------------- provide Tenant with a substantially complete listing (by Facility) of all of the known outstanding trade payables of the Associated Companies relating to the Facilities (the "Trade Payables") identifying the amount of Trade Payables due and payable or paid to each trade creditor as of a date not earlier than the last day of the second month prior to the Closing Date. The Associated Companies shall pay all such Trade Payables when and as due in accordance with past practices unless they are disputed in good faith, in which case such Associated Company, upon prior written notice to Tenant, shall be entitled to contest payment of same. 5.4.12. Patient Accounts. At the Closing, the Associated Companies ---------------- shall provide Tenant with a true and complete listing of any patients at the Facility who are delinquent in the payment of their bills as of a date not more than ten (10) days prior to the Closing. - 16 - 5.5. Contractual Matters. ------------------- 5.5.1. Contracts. Schedule 5.5.1 attached hereto contains true and --------- -------------- complete copies of all material written contracts, agreements and leases (other than (i) agreements described in Section 5.6.1 hereto (the "Labor Contracts"); and (ii) occupancy agreements with existing patients of each Facility (the "Occupancy Agreements")), between each Associated Company and any other person or entity currently in effect in connection with the Premises or the operation of the Facilities (together with the Labor Contracts and Occupancy Agreements collectively referred to herein as the "Contracts"). Each Contract is in full force and effect and, to the best of each Associated Company's knowledge and except as set forth in Schedule 5.5.1.2, no Associated Company or any other ---------------- party to any Contract is in material default of its respective obligations thereunder, and to the best of each Associated Company's knowledge, no event exists which, with notice or passage of time, would become an event of default by any Associated Company or such other party thereunder. 5.5.2. Transactions with Affiliates. Except as set forth in Schedule ---------------------------- -------- 5.5.2 hereto, no Affiliate of any Associated Company is a party to any Contract - ----- for goods or services with, or has other material arrangements with, any Associated Company in connection with the operation of any Facility (collectively, "Affiliate Arrangements"). Unless Tenant otherwise agrees in writing, each Associated Company shall terminate or cause to be terminated each such Affiliate Arrangement described in Schedule 5.5.2 hereto on or before the -------------- Closing. Except as set forth on Schedule 5.5.2 hereto, there are no trade -------------- names, proprietary knowledge or licenses that any such Affiliate owns or is licensed or otherwise has the right to use and which is used or useful in, or necessary to the operation of any Facility; and the right to use any such trade names, proprietary knowledge or license so owned or leased, licensed or used by any such Affiliate shall be assigned or licensed to the Associated Companies prior to Closing, and by the Associated Companies to Tenant at Closing in accordance with Section 2.1 hereof. 5.5.3. Occupancy Agreements and Tenant Leases. Schedule 5.5.3.1 attached -------------------------------------- ---------------- hereto is a true and complete copy of the standard form of occupancy agreement entered into by patients at each Facility (the "Occupancy Agreement Forms"). There are no occupancy or residency agreements under which patients currently occupy all or any part of any Facility which materially deviate from the Occupancy Agreement Forms. There are no material undisclosed amendments or agreements to any such occupancy agreements, nor any special rates, services or concessions promised by any Associated Company - 17 - to any patients of any Facility except as disclosed in Schedule 5.5.3.2 attached ---------------- hereto. 5.5.4. Insurance. Attached as Schedule 5.5.4 hereto is a list of all --------- -------------- insurance coverage maintained by each Associated Company as of the Effective Date in connection with the Premises and the operation of the Facilities. All such insurance coverage is in full force and effect (with no overdue premium) in the amounts set forth on Schedule 5.5.4. The Associated Companies agree to -------------- maintain the insurance coverage listed in Schedule 5.5.4 without material change -------------- thereto through the Closing Date. The Associated Companies further agree that if any of the coverages listed on Schedule 5.5.4 are on a claims-made basis, the -------------- Associated Companies shall purchase and maintain sufficient tail coverage to cover claims which may be brought after the Closing Date with regard to occurrences on or prior to the Closing Date. Certificates evidencing such insurance coverage will be supplied by each Associated Company to the Tenant at the Tenant's request. The Associated Companies shall promptly inform the Tenant of any non-renewal, material change, cancellation or replacement of any such insurance coverage prior to the Closing. In the event of any non-renewal, material change or cancellation of the insurance coverage currently maintained by any Associated Company hereunder, Tenant shall have the right during the period prior to Closing to provide replacement insurance generally comparable to the insurance coverage currently maintained by such Associated Company at the Associated Companies' expense and to deduct the cost thereof from the Associated Companies' Base Rent due under the Lease Agreement. 5.6. Labor Matters. ------------- 5.6.1. Employment Related Contracts. Attached hereto as Schedule 5.6.1.1 ---------------------------- ---------------- are true and complete copies of all collective bargaining agreements and labor agreements relating to any employee of the Associated Companies; all employment agreements relating to any employee of the Associated Companies; all compensation, pension, retirement, welfare, profit sharing, incentive or other similar plans relating to any employee of the Associated Companies; and all plans, agreements, arrangements or practices which constitute "fringe benefits" to any of the employees of the Associated Companies, including without limitation, group medical insurance, group life insurance, workers compensation coverage, disability insurance and related benefits. Landlords' and Operators' Pension Plan(s) in effect for employees are in the Summary Plan Description(s) attached hereto in Schedule 5.6.1.2. Each Welfare Plan, if any, is in material ---------------- compliance with the applicable provisions of ERISA and the Code. Tenant shall not assume - 18 - any liabilities or obligations of any Associated Company whatsoever under or with respect to any profit sharing plan and trust established by any Associated Company for the benefit of Facility employees, each of which plan shall be terminated by the Associated Companies on or before the Closing Date. 5.6.2. Employee Compensation and Benefits. Attached hereto as Schedule ---------------------------------- -------- 5.6.2 is a true and complete list of all current Facility employees of the - ----- Associated Companies (by Facility), including employees on authorized leaves of absence, and their current levels of compensation, and this list shall be true and correct as of the Closing except for those changes specifically authorized by SECTION 7.1 hereof and except for the addition or removal of employees in the ordinary course. 5.6.3. Labor Relations. To their knowledge, no employee of any --------------- Associated Company is currently part of any collective bargaining unit or represented by any collective bargaining representative. The Associated Companies have not received notice of, and to their knowledge there has not been, any petition filed or proceeding instituted by any such employee or group of employees with any labor relations board seeking recognition of a bargaining representative. To their knowledge, there are no strikes, grievances, disputes or controversies with individual employees, except for disputes and controversies with individual employees arising in the ordinary course of business consistent with past experience which do not and will not, individually or in the aggregate, have a material adverse effect on the business, operations, assets, prospects or conditions, financial or otherwise, of any Associated Company, Operator, Tenant or the operation of the Facilities. 5.7. Other Representations. --------------------- 5.7.1. Completeness and Accuracy of Contracts and Documents. To their ------------------------------------------ --------- knowledge, all copies of contracts and documents delivered by the Associated Companies to Tenant in connection with the transactions contemplated hereby are complete and accurate in all material respects, and no such contract or agreement has been amended or modified by any oral agreements. 5.7.2. No Misrepresentations. No Associated Company has made an untrue --------------------- statement of material fact in any representation or warranty by such Associated Company in this Agreement, any schedule or exhibit attached hereto or delivered pursuant hereto, to Tenant nor has any Associated Company omitted to state a material fact necessary to make the statements contained herein or therein not misleading. - 19 - 5.8. Unfunded Liabilities for Workers' Compensation or Group Health -------------------------------------------------------------- Plans. No Associated Company has any unfunded liabilities (including without limitation contingent liabilities) in connection with any workers' compensation, employers' liability, or group health plan, except as described in Schedule 5.8 ------------ attached hereto. The matters described in Schedule 5.8 will not, individually ------------ or in the aggregate, have any material adverse effect upon the business or operations of any Associated Company, Tenant, or the operation of any Facility as presently operated. The Associated Companies hereby acknowledge and warrant that each of the liabilities listed on Schedule 5.8, as well as any other ------------ liabilities arising out of the operations of the Facilities prior to closing which may become payable in the future, will remain the obligation of the Associated Companies. 5.9. Definition of Associates Companies' Knowledge. As used in this --------------------------------------------- Agreement, all references to "the best of Associated Companies' knowledge," "to their knowledge," or similar phrases, shall mean to (i) the actual knowledge of Dennis, Friedman and the management personnel of the Associated Companies and Associated Health Care Management Company, Inc. set forth on Schedule 5.9 ------------ attached hereto and (ii) to any knowledge that could have been obtained (constructive knowledge) by such management personnel based upon a review of any documents or records which are or have been in the possession of the Associated Companies. The management personnel listed on Schedule 5.9 attached hereto are ------------ all of the persons currently serving in the following positions for the Facilities: administrators, operations directors, controllers and nurse consultants. 6. TENANT'S AND GUARANTOR'S COVENANTS, REPRESENTATIONS AND WARRANTIES. As an inducement to Landlords' entering into this Agreement, Tenant and Guarantor make the following covenants, representations and warranties, in addition to those contained elsewhere herein: 6.1. Organization, Power and Standing of Tenant. Tenant is a corporation ------------------------------------------ duly organized, validly existing and in good standing under the laws of the State of Delaware, is currently or will be qualified to do business in the State of Ohio prior to the Closing, and has all requisite power and authority, corporate and otherwise, to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. 6.2. Organization, Power and Standing of Guarantor. Guarantor is a --------------------------------------------- limited partnership duly formed under the laws of the Commonwealth of Massachusetts, is currently or will be qualified to do business in the State of Ohio prior to the Closing, and has all requisite power and authority, partnership - 20 - and otherwise, to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. 6.3. Authorization and Enforceability. This Agreement and each of the -------------------------------- other agreements contemplated hereunder when executed and delivered has been or will have been duly authorized, executed and delivered by Tenant and Guarantor, constitutes the legal, valid and binding obligation of Tenant and Guarantor and is enforceable against Tenant and Guarantor in accordance with its terms, except to the extent such enforceability may be limited or affected by bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance or other similar laws of general applicability governing the enforcement of the rights of creditors and by the general principles of equity (regardless of whether considered in a proceeding at law or in equity). 6.4. Compliance with Charter Documents. The execution, delivery and --------------------------------- performance of this Agreement by Tenant and Guarantor and the consummation by Tenant and Guarantor of the transactions contemplated hereby will not violate or conflict with or constitute a default under any term of the Articles of Incorporation or By-laws or Partnership Agreement of Tenant or Guarantor, respectively. True and complete copies of the Articles of Incorporation, By- laws and the Partnership Agreement of Tenant and Guarantor, respectively, have been delivered to Associated Companies. 6.5. No Breach, Etc. The execution, delivery and performance of this -------------- Agreement will not conflict with or result in a breach of or default by Tenant or Guarantor under any material term, condition, or provision of any order, writ, injunction, decree, material contract, material agreement, or material instrument to which Tenant or Guarantor is a party. 6.6. Litigation. There is no litigation, at law or in equity, or any ---------- proceeding before or, to their knowledge, investigation by any federal, state or municipal court, board of arbitrator, against Tenant or Guarantor, pending or, to the best of Tenant's or Guarantor's knowledge, threatened, except as described in Schedule 6.6 attached hereto. ------------ 6.7. No Misrepresentation. Neither Tenant nor Guarantor has made an -------------------- untrue statement of a material fact in any representation or warranty by Tenant or Guarantor to the Associated Companies, nor has Tenant or Guarantor omitted to state a material fact necessary to make the statements contained herein or therein not misleading. 6.8. Guarantor's Financial Statements. True, complete and accurate -------------------------------- copies of the financial statements of Guarantor for the years ending December 31, 1994 and December 31, 1995 which have been audited by Coopers and Lybrand, LLP ("Guarantor's Financial Statements") have been delivered to the Associated Companies. - 21 - The Guarantor's Financial Statements (including the notes thereto) present fairly and, to the Guarantor's knowledge, in conformity with generally accepted accounting principles consistently applied the financial condition of Guarantor at the dates thereof and the results of its operation for the periods covered thereby. 6.9. No Pending Bankruptcy or Insolvency Procedures. There are no ---------------------------------------------- bankruptcy or insolvency proceedings at law or in equity, pending or to Tenant's or Guarantor's knowledge threatened or filed by or against Tenant or Guarantor in any federal state or municipal court or before any other board or governmental or administrative agency. 6.10. Definition of Tenant's or Guarantor's Knowledge. As used in this ----------------------------------------------- Agreement, all references to "the best of Tenant's knowledge," "to the best of Guarantor's knowledge," "to their knowledge," or similar phrases, shall mean to (i) the actual knowledge of the corporate officers of Tenant and officers of Guarantor and (ii) any knowledge that could have been obtained (constructive knowledge) by such officers based upon a review of any documents or records which are or have been in the possession of Tenant or Guarantor. 7. CERTAIN AGREEMENTS OF THE PARTIES. 7.1. Conduct of Landlords Prior to Closing. The Associated Companies ------------------------------------- covenant and agree that, through the period prior to Closing: (i) the Premises and the Assets, including without limitation each Facility, shall be operated in the ordinary course of business and in a manner consistent with the Associated Companies' past practice; (ii) no sale, disposition, removal or encumbrance of any material furniture, fixtures or equipment located at the Premises shall be made without the approval of Tenant which will not be unreasonably withheld; (iii) except in accordance with established practice and rates of increase, no Associated Company shall pay or obligate itself to pay any bonus, pension, retirement, insurance, death or other form of incentive or special compensation to any employee or agent or make any increase in rates of pay of any employees or agents, without the approval of Tenant which will not be unreasonably withheld; (iv) no contract, agreement, lease or other obligation providing for the payment of consideration or the incurrence of indebtedness of more than Twenty Five Thousand Dollars ($25,000) shall be executed, entered into or made by any Associated Company in connection with the operation of the Facilities, without the approval of Tenant which will not be unreasonably withheld; (v) no material change shall be made in the usual rates charged to patients at any Facility without the approval of Tenant which will not be unreasonably withheld; (vi) the Associated Companies will replace the inventory used in the operation of the Facilities as and when required in the ordinary course of business and the quantity of the inventory at Closing shall be - 22 - substantially the same as exists on the Effective Date; (vii) Associated Companies shall use their reasonable efforts to preserve the business operation of the Facilities and to preserve for the Tenant the good will of Facilities' suppliers, the patients in the Facilities, and others having business relations with the Facilities, provided, however, that the Associated Companies shall not be required to do anything not in the ordinary course of business; and (viii) the Associated Companies shall use their reasonable efforts to retain the services of the Facilities' current management-level and professional employees and to maintain existing Facility staffing patterns, provided, however, that the Associated Companies shall not be required to do anything not in the ordinary course of business. 7.2. Preparation for Closing. The Associated Companies shall use ----------------------- reasonable and diligent efforts to assist the Tenant and Tenant agrees to use its best efforts to apply for and obtain any such permits, licenses, authorization and approvals required of the Tenant under applicable Ohio and federal law in order to lease the Assets and operate the Facilities as contemplated hereby. Each of the parties hereto shall use its reasonable and diligent efforts to bring about the fulfillment of each of the conditions precedent to the obligations of the other party hereto set forth in this Agreement. 7.3. Prohibited Acts. The Associated Companies covenant and agree that, --------------- through the period prior to Closing, except for the merger or other combination of Royalview GP and Royalview LP, as contemplated by Section 7.12 below, and the issuance or transfer of limited partnership interests (but not general partner interests) in the Landlords to AHMC, Inc., or to and among existing limited partners or in connection with a limited partners' estate planning, as the case may be, the Associated Companies will not merge or consolidate with or into any other corporation, partnership or trust, sell, lease or otherwise dispose of any of the Premises or the Assets (except in accordance with Section 7.1 hereof), sell any additional partnership or equity interests, liquidate or dissolve (except if the same constitutes a statutory dissolution and such Landlord promptly makes an election, if required, to continue Landlord's business) and shall not agree to do any of the foregoing, without the consent of Tenant. 7.4. Access to Premises and Information. Prior to the Closing Date, upon ---------------------------------- not less than two (2) days prior notice to Dennis or his designee(s), the Associated Companies shall permit Tenant and Tenant's counsel, accountants, engineers, consultants and other authorized representatives to have full and complete access to the Premises and the Associated Companies' documents, books and records (including auditor's work papers) and to make copies during normal business hours of such financial and operating data and other information with respect to the Facilities as Tenant or any of its authorized representatives - 23 - shall reasonably request. In making any investigation hereunder, Tenant will, and will cause any representative of Tenant, to use discretion so as not to cause any undue disruption of the operation of the Facilities. Any investigation undertaken by Tenant hereunder shall not diminish Tenant's right to rely on the Associated Companies' representations and warranties herein. In the event the transaction does not close for any reason, Tenant shall return to the Associated Companies all written materials and copies provided by the Associated Companies to Tenant hereunder. 7.5. Expenses of Transaction. The Associated Companies and Tenant each ----------------------- agree to be responsible for all fees of their respective attorneys and accountants for services rendered in connection with this transaction. 7.6. No Finder's or Broker's Fees. Each of the parties hereto represents ---------------------------- and warrants to the other party hereto that its conduct has not given and will not give rise to any liability for any fee, compensation or reimbursement of expenses to any agent, finder or broker, either in the nature of a finder's fee or otherwise, in connection with the transaction contemplated hereby. 7.7. Certain Post-Closing Agreements. The Associated Companies ------------------------------- acknowledge that the success of the business of Tenant depends upon both the absence of competition from the Associated Companies and the continued preservation of the confidentiality of certain information possessed by the Associated Companies, that an absence of such competition and the preservation of the confidentiality of such information is an essential premise of the bargain between the Associated Companies and Tenant, and that Tenant would be unwilling to enter into this Agreement in the absence of this Section 7.7. Accordingly, the Associated Companies hereby agree with Tenant as follows: 7.7.1. Confidentiality Covenant. No Associated Company or any Affiliate ------------------------ of any Associated Company will, at any time from and after the Closing Date, directly or indirectly, without the prior written consent of Tenant, disclose or use, in any way harmful to the business, operations, assets, prospects or condition, financial or otherwise, of Tenant or Guarantor, or otherwise contrary to the interests of Tenant or Guarantor, any confidential information involving or relating to the operation of any Facility ("Confidential Facility Information") or Tenant or Guarantor, or any business, venture or other activity of Tenant or Guarantor, past, present or future, actual or prospective ("Confidential Tenant Information"); provided, however, that such information ----------------- shall not include any information known generally to the public (other than as a result of disclosure in violation hereof by any Associated Company or any Affiliate of any Associated Company), or as - 24 - to Confidential Tenant Information, was available to the Associated Companies, or any Affiliate thereof, on a nonconfidential basis prior to the disclosure in connection with the transactions contemplated hereby, or is lawfully obtained by the Associated Companies, or any Affiliate thereof, from a third party under no duty of confidentiality to Tenant or Guarantor; and provided, further, that the ----------------- provisions of this Section 7.7.1 shall not prohibit any disclosure required by law in connection with any judicial or administrative proceeding or inquiry. This Confidentiality Covenant shall survive the Closing for a period of two years with respect to Confidential Tenant Information and for the term of the Lease plus two (2) years with respect to Confidential Facility Information. 7.7.2. Non-Competition Covenant. During the term of the Lease neither ------------------------ Dennis, Friedman nor any Associated Company nor any Affiliate of any Associated Company, other than Friedman in his capacity as an officer and director of Associated Estates REIT, shall, directly or indirectly, (i) acquire, own, manage, operate, control or participate in any manner in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director, principal, consultant, agent or otherwise with, or have any financial interest in, or aid or assist anyone else in the conduct of, any nursing home, assisted or congregate living or residential care facility, or nursing home, assisted or congregate living or residential care business, venture or activity operating within a radius of fifteen (15) miles from any of the Premises, provided that such non-competition covenant shall not apply to (A) -------- the ownership, operation or management by the Associated Companies or any Affiliate of the Associated Companies of the nursing homes and congregate care centers listed on Schedule 7.7.2, or (B) Friedman or Dennis serving as a -------------- director or trustee on the board of a non-profit organization, or (C) Dennis providing consulting services to a non-profit organization operating within such radius if, and only if, Tenant in its sole discretion consents thereto, or (D) the ownership, operation or management by Royalview GP, Royalview LP or Associated Health Care Management Company, Inc. of Royalview Manor, if and only if, a Royalview Removal occurs as defined in Section 7.12 of this Agreement, or (ii) recruit or otherwise seek to induce any employee of any Facility, Tenant or any Affiliate of Tenant, to terminate his or her employment or violate any agreement with or duty to Tenant or any Affiliate of Tenant or (iii) solicit or encourage any Person who to the best of any the Associated Company's knowledge is a customer, resident or supplier of any of the Facilities, Tenant or any Affiliate of Tenant to terminate its relationship with such Facility, Tenant or Affiliate of Tenant. For purposes of clause (ii) above, a person shall not be deemed to be an employee of any Facility if s/he is - 25 - not an employee of any Facility at any time within the six (6) month period - --- prior to the date such person is recruited, engaged or hired by any Associated Company or any Affiliate of any Associated Company, or if his/her employment is terminated by Tenant or an Affiliate of Tenant due to layoffs, cutbacks or lack of work. This Non-Competition Covenant shall survive the Closing until termination of the Lease. 7.7.3. Enforcement. The Associated Companies, Dennis and Friedman ----------- acknowledge and agree that, because the legal remedies of Tenant may be inadequate in the event of a breach of, or other failure to perform, any of the covenants and obligations set forth in this SECTION 7.7, Tenant may, in addition to obtaining any other remedy or relief available to it (including without limitation consequential and other damages at law), enforce this SECTION 7.7 by injunction and other equitable remedies. The Associated Companies also acknowledge and agree that no breach by Tenant of, or other failure by Tenant to perform, any of the covenants and obligations of Tenant under this Agreement or otherwise shall relieve the Associated Companies of any of their obligations under this SECTION 7.7. 7.7.4. Severability; etc. The parties agree that the provisions set ----------------- forth in this SECTION 7.7, including without limitation as to duration and geographic scope, are reasonable to protect the legitimate interests of Tenant and the good will of the Facilities during the Lease Term. The provisions of this SECTION 7.7 are severable, and in the event that any provision hereof should, for any reason, be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof, and such invalid or unenforceable provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable law. 7.7.5. Tax Reporting. The parties hereto agree that each of them which ------------- is a party to one of the Leases shall report the Lease as an "operating lease" and not as a "capital lease" for federal income tax purposes. 7.8. Consulting Arrangement. At Closing, Guarantor shall enter into a ---------------------- consulting agreement with Dennis in the form which the parties have agreed to, pursuant to which Dennis will provide the consulting services described therein. 7.9. Post-Closing Confidentiality Covenant of Tenant and Guarantor. ------------------------------------------------------------- Neither Tenant nor Guarantor or any Affiliate of Tenant or Guarantor will, directly or indirectly, without the prior written consent of the Associated Companies, disclose or use, in any way harmful to the business, operations, assets, - 26 - prospects or condition, financial or otherwise, of the Associated Companies, or otherwise contrary to the interests of the Associated Companies, any confidential information involving or relating to the operation of any Facility ("Confidential Operation Information") or the Associated Companies, or any business, venture or other activity of the Associated Companies, past, present or future, actual or prospective ("Confidential Associated Company Information"); provided, however, that such information shall not include any ----------------- information known generally to the public (other than as a result of disclosure in violation hereof by any Tenant or Guarantor or any Affiliate of any Tenant or Guarantor), or as to Confidential Associated Company Information, which was available to Tenant or Guarantor or any Affiliate of Tenant or Guarantor on a nonconfidential basis prior to the disclosure in connection with the transactions contemplated hereby, or is lawfully obtained by Tenant or Guarantor or any of their Affiliates from a third party under no duty of confidentiality to the Associated Companies; and provided, further, that the provisions of this ----------------- Section 7.9 shall not prohibit any disclosure which Tenant or Guarantor or any of their Affiliates reasonably deems necessary or appropriate in connection with (i) any judicial or administrative proceeding or inquiry, (ii) regulatory or governmental approvals required to complete the transactions contemplated under this Agreement after Tenant Board of Director authorization has been obtained pursuant to Section 8.7 of this Agreement, (iii) governmental filings or other disclosure in connection with any securities filings to be made by Tenant, Guarantor or any of their Affiliate, or (iv) other disclosure in the ordinary course of operation of the Facilities after the Closing. This Confidentiality Covenant shall survive the Closing for a period of two (2) years with respect to Confidential Associated Company Information and for the term of the Lease plus two (2) years with respect to Confidential Operation Information. 7.9.1. Enforcement Tenant and Guarantor acknowledge and agree that, ----------- because the legal remedies of the Associated Companies may be inadequate in the event of a breach of, or other failure to perform, any of the covenants and obligations set forth in this Section 7.9, the Associated Companies may, in addition to obtaining any other remedy or relief available to it (including without limitation consequential and other damages at law), enforce this Section 7.9 by injunction and other equitable remedies. Tenant and Guarantor also acknowledge and agree that no breach by the Associated Companies of, or other failure by the Associated Companies to perform any of the covenants and obligations of the Associated Companies under this Agreement or otherwise shall relieve Tenant or Guarantor of any of their obligations under this Section 7.9. 7.10. Option to Purchase Agreements. At Closing, Landlords and Tenant or ----------------------------- an Affiliate of Tenant shall enter into Option to - 27 - Purchase Agreements in the form attached to this Agreement as Schedules 7.10.1, ----------------- 7.10.2, 7.10.3 and 7.10.4 attached hereto pursuant to which Landlords shall - -------------- ------ grant Tenant (or Tenant's designee) the option to purchase the Premises and Assets at the end of the Lease Term in accordance with the terms and provisions therein. 7.11. Further Assurances. Each of the parties hereto, both before and ------------------ after the Closing, upon the request from time to time of any other party hereto and without further consideration, will do each and every act and thing as may be necessary or reasonably requested to consummate the transactions contemplated hereby and to effect an orderly transfer to Tenant of operational control of the Facilities under the Leases and assumption by Tenant of the Assumed Contracts, including without limitation executing, acknowledging and delivering assurances, assignments, powers of attorney and other documents and instruments, furnishing information and copies of documents, books and records (including without limitation tax records); filing reports, returns, applications, filings and other documents and instruments with governmental authorities; and cooperating with each other party hereto in exercising any right or pursuing any claim, whether by litigation or otherwise, other than rights and claims running against the party from whom or which such cooperation is requested. 7.12. Agreement of the Parties re Royalview LP and Royalview. Royalview ------------------------------------------------------ GP shall promptly use reasonable and diligent efforts to achieve a plan of reorganization of the ownership interests of Royalview LP acceptable to the partners of Royalview LP (a "Royalview LP Reorganization Plan"). If by May 3, 1996, a Royalview LP Reorganization Plan has not been agreed to by the Royalview LP partners, following written notice to Tenant and Guarantor, the parties will take the following actions: (a) the parties will proceed to effect the Closing on the Closing Date; provided, however, i) Royalview GP and Royalview LP will be released as parties to this Agreement (such event hereinafter referred to as the "Royalview Removal") and as a result, the Lease and the Option to Purchase Agreement for the Royalview Facility will not be executed and delivered at the Closing; and ii) any and all assets relating to the operation of Royalview Manor shall be excluded from the transaction effected at the Closing, including, without limitation, the Premises leased to Tenant at the Closing shall not include the Land described in Schedule C hereto, the Assets shall not include any assets relating to the operation - 28 - of Royalview Manor, the License shall not include the right to use the tradename "Royalview Manor," the Assumed Contracts shall not include any contracts identified on Schedule 2.2 as relating to the operation of Royalview Manor or the assumed liabilities described in Section 2.3 above relating to the operation of Royalview Manor, the records and plans described in Section 2.4 above relating to Royalview Manor shall not be delivered to Tenant, and Tenant will not be granted an option to purchase the Premises relating to Royalview Manor pursuant to an Option Purchase Agreement; and (b) all amounts payable to Dennis under the Consulting Agreement referenced in Section 7.8 above shall be reduced by 18.25%. 7.13. Covenants, Representations and Warranties to Guarantor. ------------------------------------------------------ Notwithstanding anything to the contrary in this Agreement, all representations, warranties and covenants made by the Associated Companies to the Tenant in this Agreement shall inure to the benefit of the Guarantor as though made directly to the Guarantor. 7.14. Removal of Underground Storage Tanks. Tenant shall have the right, ------------------------------------ prior to Closing (and at any time after Closing), to remove the USTs disclosed on Schedule 5.3.7. In the event Tenant undertakes such removal, Tenant shall -------------- remove the USTs in accordance with all applicable laws and regulations and, as part of such removal, shall remediate, to the extent required by all applicable laws and regulations, any hydrocarbon contamination of soil and groundwater caused by any leaking of the USTs or by the removal process, and shall install, in replacement thereof, above-ground tanks of the same capacity as those removed or of such other capacity as may be agreed upon by the parties hereto. Such removal, remediation, and installation shall be at the cost and expense of Tenant and Guarantor without contribution from any of the Associated Companies, whether or not the same is performed prior to Closing and, if such work is performed prior to Closing, regardless of whether the Closing occurs. Such work shall be performed by such contractor or contractors as are retained by Tenant, subject, however, to approval by the Associated Companies of the identity of any such contractor or contractors. 8. CONDITIONS TO TENANT'S OBLIGATION TO CLOSE. The obligations of Tenant at the Closing to lease the Premises and Assets from the Landlords and to assume the Assumed Contracts are subject to the satisfaction, at or prior to Closing, of all of the following conditions, compliance with which, or the occurrence of which, may be waived in whole or in part by Tenant: - 29 - 8.1. Representations, Warranties and Covenants. ----------------------------------------- 8.1.1. Continued Accuracy of Representations and Warranties. All ----------------------------------------- ---------- representations and warranties of the Associated Companies contained in this Agreement shall be true and correct in all material respects as of the Closing with the same force and effect as if made at and as of the Closing. 8.1.2. Performance of Agreements. The Associated Companies shall have ------------------------- performed and satisfied all covenants, agreements and conditions required by this Agreement to be performed or satisfied by the Associated Companies at or prior to Closing. 8.1.3. Closing Certificate. At the Closing, the Associated Companies ------------------- shall furnish to Tenant a certificate signed by the Associated Companies dated the Closing Date, to the effect that the conditions specified in SECTIONS 8.1.1 and 8.1.2 hereof have been satisfied. 8.2. Licenses and Approvals. To the extent that they can be obtained by ---------------------- Tenant under applicable law prior to the actual transfer of operational control of the Facilities to Tenant on or before the one hundred and twentieth (120th) day following the Effective Date, Tenant shall have secured all necessary licenses, permits, certifications and approvals from federal, state and local governmental or administrative agencies having jurisdiction thereof required for the operation of the Facilities by Tenant on substantially the same basis as the Associated Companies are currently operating the same and without the imposition of material conditions on the Tenant or the Facilities, and on or before the one hundred and eightieth (180th) day following the Effective Date, Landlords and Tenant shall have obtained all necessary consents from HUD and any fee mortgagee to lease the Premises pursuant to the Leases without the imposition of material conditions on the Tenant or the Facilities. 8.3. Legality; No Change in Law. Tenant's lease of the Premises and the -------------------------- Assets, operations of the Facilities and assumption of the Assumed Contracts shall not be prohibited by any Legal Requirement (except any Legal Requirements in the HUD mortgages and Regulatory Agreements which Tenant can reasonably satisfy). No Legal Requirement shall have been enacted nor shall any legislation have been introduced in either house of Congress or of the legislature of Ohio and favorably reported for passage to either house of Congress or the legislature of Ohio or by any committee of any thereof, nor shall any investigation against an Associated Company by any governmental authority or administrative agency have been commenced, nor shall any decision of any court of competent jurisdiction have been rendered against any Associated Company or any of the Premises, which materially and adversely affects, restrains, prevents or - 30 - changes the transactions contemplated by this Agreement, or has a material adverse effect on the business, operations, assets, prospects or condition, financial or otherwise, of any of the Facilities as presently operated. 8.4. Litigation. No action or proceeding shall have been instituted at ---------- or prior to the Closing before any court, arbitrator or other governmental body, or instituted or threatened by any public authority, pertaining to Tenant's lease of the Premises and Assets, operation of the Facilities and assumption of the Assumed Contracts or any of the other transactions contemplated hereby, the results of which action or proceeding could prevent or make illegal the consummation of such transactions, or which could otherwise have a material adverse effect on the business, operations, assets, prospects or condition, financial or otherwise, of any of the Facilities as presently operated. 8.5. Opinion of the Associated Companies' Counsel. The Tenant shall have -------------------------------------------- received an opinion of Jones, Day, Reavis & Pogue, legal counsel to the Associated Companies dated as of the Closing Date, addressed to Tenant, in form and substance satisfactory to the Tenant in substantially the form of Schedule -------- 8.5 attached hereto. - --- 8.6. Change in Occupancy or Payor Mix. The monthly occupancy (as -------------------------------- measured on an average daily census basis) at any Facility for the calendar month which precedes the Effective Date will not exceed the monthly occupancy at such Facility for the calendar month which precedes the Closing Date by more than the number of patients set forth for such Facility on Schedule 8.6 attached hereto. The aggregate monthly occupancy at all of the Facilities for the calendar month which precedes the Effective Date will not exceed the aggregate monthly occupancy at all of the Facilities for the calendar month which precedes the Closing Date by more than the number of patients set forth for all Facilities on Schedule 8.6 attached hereto. The private pay patient monthly occupancy in any Facility for the calendar month which precedes the Effective Date will not exceed the private pay patient monthly occupancy in such Facility for the calendar month which precedes the Closing Date by more than the number of private pay patients set forth for such Facility on Schedule 8.6 attached hereto. The aggregate private pay patient monthly occupancy in all of the Facilities for the calendar month which precedes the Effective Date will not exceed the aggregate private pay patient monthly occupancy in all of the Facilities for the calendar month which precedes the Closing Date by more than the number of private pay patients set forth for all the Facilities on Schedule 8.6 attached hereto. 8.7. Board Approval. On or before the seventieth (70th) day after the -------------- Effective Date, the Board of Directors of Tenant shall have voted to approve the transactions contemplated by this - 31 - Agreement provided that the Board may only disapprove the transactions if the Board deems the results of the due diligence under Section 4 to be unsatisfactory, in which case Tenant shall in writing advise the Associated Companies of the basis of any such disapproval. 9. CONDITIONS TO THE ASSOCIATED COMPANIES' OBLIGATION TO CLOSE. The obligations of the Associated Companies at the Closing to lease the Premises and Assets to Tenant and to assign the Assumed Contracts to Tenant are subject to the satisfaction at or prior to Closing, of all of the following conditions, compliance with which, or the occurrence of which, may be waived in whole or in part by the Associated Companies: 9.1. Representations, Warranties and Covenants. ----------------------------------------- 9.1.1. Continued Accuracy of Representations and Warranties. All ----------------------------------------- ---------- representations and warranties of Tenant and Guarantor contained in this Agreement shall be true and correct in all material respects as of the Closing with the same force and effect as if made at and as of the Closing. 9.1.2. Performance of Agreements. The Tenant and Guarantor shall have ------------------------- performed and satisfied all covenants, agreements and conditions required by this Agreement to be performed or satisfied by it at or prior to Closing. 9.1.3. Closing Certificate. At the Closing, Tenant and Guarantor shall ------------------- furnish to the Associated Companies a certificate signed by the President or a Vice President of Tenant and Guarantor dated the Closing Date, to the effect that the conditions specified in Sections 9.1.1 and 9.1.2 hereof have been satisfied. 9.2. Litigation. No action or proceeding shall have been instituted at or ---------- prior to the Closing before any court, arbitrator or other governmental body, or instituted or threatened by any public authority, pertaining to the lease of the Premises and the Assets to Tenant and the assumption of the Assumed Contracts by Tenant or any of the other transactions contemplated hereby, the results of which action or proceeding could prevent or make illegal the consummation of such transactions. 9.3. Licenses and Approvals. To the extent that they can be obtained by ---------------------- Tenant under applicable law prior to the actual transfer of operational control of the Facilities to Tenant, Tenant on or before the one hundred and twentieth (120th) day following the Effective Date, shall have secured all necessary licenses, permits, certifications and approvals from federal, state and local governmental or administrative agencies having jurisdiction thereof required for the operation of the Facilities by Tenant, and on or before the one hundred and eightieth (180th) - 32 - day following the Effective Date Landlords and Tenant shall have obtained all necessary consents from HUD and any fee mortgagee to lease the Premises to Tenant; provided, that, all such licenses, permits, certifications and approvals necessary to effectuate the transfer in accordance with applicable law shall have been obtained. 9.4. Opinion of Tenant's and Guarantor's Counsel. The Associated ------------------------------------------- Companies shall have received an opinion of McDermott, Will & Emery, legal counsel to the Tenant and the Guarantor, dated as of the Closing Date, addressed to the Associated Companies, in form and substance satisfactory to the Associated Companies, and in substantially the form of Schedule 9.4 attached ------------ hereto. 9.5. Guaranty Matters. The Associated Companies shall have received ---------------- either: (a) The Guaranty and evidence that the Guarantor has a Net Worth, as hereinafter defined, of not less than $5,000,000; or (b) The Guaranty and an additional guaranty (the "Additional Guaranty") from a Public Company, as hereinafter defined. 9.6. Security Deposit. Landlords shall have received either: ---------------- (a) A security deposit under the Leases aggregating $5,000,000 (the "Security Deposit"), which Security Deposit shall be held by National City Bank pursuant to a Security Deposit Agreement (the "Security Deposit Agreement") by and among the Associated Companies, Tenant, Guarantor, and National City Bank, as trustee; or (b) The Guaranty and the Additional Guaranty from a Public Company. 10. CLOSING. 10.1. Closing Date. The closing of the transaction contemplated herein ------------ (the "Closing") shall be consummated as of the first day of the month following the date on which Landlord and Tenant have secured all of the necessary licenses and approvals described in Section 8.2 above (i.e., that can be obtained by the ---- parties under applicable law prior to the lease of the Facilities to Tenant), provided that, if the last of such approvals is received after the twentieth (20th) day of a month either party may extend the Closing Date to the first day of the second month following such month or on such other date as may be mutually agreed upon by the Associated Companies and the Tenant - 33 - (the "Closing Date"), at a place mutually agreeable to the Associated Companies and Tenant. 10.2. Landlords' Deliveries at Closing. At the Closing, the Associated -------------------------------- Companies shall execute (if applicable) and deliver to Tenant: (1) The Certificate described in Section 8.1.3 hereof, and the lists required under Sections 5.4.11 and 5.4.12 hereof. (2) The Leases, Option to Purchase Agreements and License Agreements. (3) Unless the Parkland Ancillary Medical Leases theretofore have been terminated, the assignments of the Parkland Ancillary Medical Leases (and evidence that the Parent Lease has been terminated). (4) The opinion of counsel required under Section 8.5 hereof. (5) Certificate of Full Force and Effect, as applicable, for each Associated Company issued by the Secretary of State of Ohio (dated within ten (10) days of the Closing). (6) The settlement statement of this transaction as approved by the parties hereto. (7) Partnership resolutions of each Associated Company authorizing it to undertake the transactions contemplated by this Agreement and authorizing its signatories to execute this Agreement and all other documents required to effect the Closing, certified as of the Closing Date by a managing partner as appropriate of such Associated Company as having been duly adopted and being in full force and effect on the Closing Date and a Certificate of Incumbency as to the partners executing and delivering said documents. 10.3. Tenant's and Guarantor's Deliveries at Closing. At the Closing, ---------------------------------------------- Tenant and Guarantor shall execute (if applicable) and deliver to the Associated Companies: (1) The Certificate described in Section 9.1.3 hereof. (2) The Leases, Option to Purchase Agreements, the Guaranty, the Additional Guaranty, if applicable, evidence of the Net Worth of Guarantor, if applicable, and evidence, if applicable, that the - 34 - guarantor under the Additional Guaranty is a Public Company. (3) Unless the Parkland Ancillary Medical Leases theretofore have been terminated, the assignments of the Parkland Ancillary Medical Leases joined in by the tenant under the Lease for Parkland Nursing Center in order to evidence assumption by such tenant of the obligations of the lessor or sublessor thereunder (exclusive of the obligations retained by Beachwood as provided above). (4) The opinion of counsel required under Section 9.4 hereof. (5) A corporate resolution of Tenant and partnership resolutions of Guarantor authorizing the transaction contemplated by this Agreement and authorizing its signatories to execute this Agreement and all other documents required to effect the Closing, certified as of the Closing Date by an officer of Tenant and Guarantor, respectively, as having been duly adopted and being in full force and effect on the Closing Date and a Certificate of Incumbency as to the officers and partners executing and delivering said documents. (6) Certificate of Legal Existence and Good Standing of Tenant and a Certificate of Legal Existence for Guarantor issued by the Secretary of the State of Ohio and the Secretary of State of Massachusetts, respectively. (7) The settlement statement of this transaction as approved by the parties hereto. 10.4. Personal Property Tax Prorations. Personal property taxes shall be -------------------------------- prorated at the Closing based upon the last available tax duplicate, which prorations shall thereafter be adjusted directly between the Associated Companies and Tenant based upon the actual amount of taxes for the year in which the Closing occurs, promptly following receipt of the official statement therefor and notice thereof by Tenant to the Associated Companies. 10.5. Disposition of Certain Employee Benefit Obligations Before and -------------------------------------------------------------- After the Closing Date. The Associated Companies' accrued and vested employee - ---------------------- vacation pay and sick leave expense and associated employment-related taxes and benefit expense for each Facility's employees through the Closing Date shall be paid by the Associated Companies at Closing or at Tenant's option, assumed by Tenant at Closing, in which case the - 35 - amount of such expenses assumed by Tenant shall be paid by the Associated Companies to the Tenant at Closing and reflected on the Closing settlement statement and shall be determined in accordance with the method described in Schedule 10.5 attached hereto. - ------------- 10.6. Other Closing Adjustments. All expenses attributable to the -------------------------- operation of the Facility (measured on an accrual basis) and all income (measured on an accrual basis) through 11:59 p.m. on the day before the Closing shall be for the account of the Associated Companies. Thereafter, such income and expense shall be for the account of Tenant. Such income will include, but shall not be limited to, all payments under Occupancy Agreements, including Medicare and Medicaid reimbursement and other insurance payments or advances. The Associated Companies shall retain title to all accounts receivable for services rendered at each Facility through 11:59 p.m. on the day before the Closing and governmental reimbursements for same. Tenant shall provide reasonable assistance to the Associated Companies in the collection of such accounts receivable. Except as otherwise expressly provided in this Agreement, the Associated Companies shall remain responsible for all accounts payable through 11:59 p.m. on the day before the Closing. As of the Closing, the Associated Companies shall calculate wages and payroll taxes accrued through 11:00 p.m. on the day before the Closing Date (the "Outstanding Payroll") which Outstanding Payroll shall be paid by Landlord on the immediately following scheduled payroll date. To secure Landlord's obligation to pay the Outstanding Payroll, Landlord shall deposit with the Escrow Agent the amount of the Outstanding Payroll (as reasonably estimated by the parties) which shall be held in escrow by the Escrow Agent in the same manner as the Deposit until the Outstanding Payroll has been paid by Landlords; provided, however, that funds already held in escrow by the Escrow Agent may be applied for this purpose. Except as otherwise provided below, all apportionable items of operating income and expense applicable to any periods commencing before the Closing Date and continuing after the Closing Date shall be prorated between the Associated Companies and Tenant as of 11:59 p.m. on the day before the Closing. In effecting the proration, the Associated Companies shall be credited for items of expense paid in advance and debited for items of expense accrued but not paid for as of the Closing Date. Apportionable operating expenses shall not include prepaid insurance premiums. In addition, on or about the Closing, the Associated Companies and/or Tenant shall cause final utility meter readings to be made for all utilities serving the Premises and the Associated Companies shall pay or cause to be paid all final bills rendered from such meter readings. All deposits and other patient funds held in trust by the Associated Companies shall be accounted for (including any interest required on such funds) and transferred to Tenant at - 36 - Closing. The Associated Companies shall furnish to Tenant on or before the Closing, lists, by Facility, of all such deposits and other patient funds held by the Associated Companies, each certified to by an officer of the appropriate Associated Company, which lists the Associated Companies warrant will be true and correct. Tenant shall assume the obligation to maintain, repay and/or return such deposits in accordance with the terms and subject to the conditions and requirements under which they are being held by the Associated Companies or imposed by applicable law or regulation. 10.7. Inventory. At Closing, Tenant shall purchase linens, food, non- --------- prescription drugs and medical and office supplies and maintenance, housekeeping and dietary supplies at the Facilities (the "Inventory") from the Associated Companies for an amount equal to the actual cost to the Associated Companies of the Inventory, based upon a list of the Inventory compiled within five (5) days prior to the Closing Date by representatives of both the Associated Companies and Tenant, which list shall state the actual cost to the Associated Companies of the Inventory based upon applicable invoices and accounting records of the Associated Companies. The purchase price for the Inventory shall be paid by Tenant to the Associated Companies at the Closing and reflected on the Closing settlement statement. Notwithstanding the foregoing, Purchaser shall not be required under this Section 10.7 to purchase more than a thirty (30) day supply ------------ of any item in the Inventory (or a sixty day supply with respect to those items for which the Associated Companies maintain a sixty (60) day supply in the ordinary course of business) nor any item that does not conform to the generally accepted standards of the long-term care industry in Ohio. Any item of Inventory not so purchased by Purchaser shall remain the property of the Associated Companies and may be removed from the Premises by the Associated Companies as of the Closing Date. 10.8. Termination. This Agreement may be terminated, and the transactions ----------- contemplated hereby may be abandoned, at any time before the Closing: (a) by mutual written consent of the Associated Companies, Tenant and Guarantor; or (b) by Tenant and Guarantor if any of the conditions set forth in Section 8 shall not have been complied with or performed in any material respect and such noncompliance or nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by the Associated Companies within one hundred and eighty (180) days following the Effective Date; or (c) by the Associated Companies, if any of the conditions set forth in Section 9 shall not have been complied with or performed in any material respect and such noncompliance or - 37 - nonperformance shall not have been cured or eliminated (or by its nature cannot be cured or eliminated) by Tenant or Guarantor within one hundred and eighty (180) days following the Effective Date; or (d) by the Associated Companies, Tenant, or Guarantor, in the event the Closing Date has not occurred on or prior to the close of business on October 31, 1996 or such later date as the parties hereto may agree in writing (unless such event has been caused by the breach of this Agreement by the party seeking such termination). 11. CASUALTY. 11.1. Major Damage. If any of the Premises, or any portion thereof, ------------ shall be damaged or destroyed by reason of any casualty or other cause prior to the Closing and the cost of restoration thereof is equal to or in excess of One Hundred Thousand Dollars ($100,000) ("Major Damage"), then Tenant, at Tenant's option, may either: (A) terminate this Agreement upon written notice of same to the Associated Companies; or (B) proceed to complete the transactions contemplated under this Agreement (i) upon written notice of same to the Associated Companies and an agreement to an equitable abatement of the Annual Rent applicable to the damaged Premises which abatement shall be effective for the period from the commencement date of the Lease to the date such damaged Premises are restored and the patient occupancy and private pay occupancy is substantially restored to the status immediately preceding the casualty, but not to exceed one hundred and eighty (180) days after completion of the restoration, and (ii) receipt by Tenant of satisfactory assurance that the insurance proceeds payable in the event of such damage or destruction will be made available to Tenant and are in an amount reasonably sufficient to restore the damaged Premises to the condition preceding the casualty. Except as otherwise specifically set forth in this Section 11, any notice of termination under this Section 11 shall be made by Tenant within thirty (30) days after the cost of repairing the damage and/or destruction has been determined but not later than the sixtieth (60th) day following the occurrence of the damage. If Tenant does not elect to terminate this Agreement within such thirty (30) day period, then Tenant shall be deemed to have elected option (B) set forth above. Upon the termination of this Agreement by Tenant as a result of Major Damage, Tenant shall be entitled to the return of the Deposit and the parties hereto shall be free of any further liability hereunder, except as otherwise set forth in this Agreement. 11.2. Other Damage. If the cost of repair of such damage or destruction ------------ is less than One Hundred Thousand Dollars ($100,000.00) and such damage or destruction is covered by the Associated Companies' insurance coverage, the Associated Companies shall pay such applicable insurance proceeds, plus the amount of any applicable deductible, to Tenant and upon an - 38 - equitable abatement of the applicable portion of the Annual Rent, Tenant shall consummate the transaction contemplated under this Agreement. If (i) such damage or destruction is not covered by the Associated Companies' insurance coverage, or (ii) such insurance proceeds are insufficient to cover the cost of repairing such damage or destruction and the Associated Companies do not pay the applicable deficiency to Tenant, then there shall be an abatement of rent until Tenant has recouped (A) an amount equal to the cost of restoring the Premises in the case of subparagraph (i); or (B) an amount equal to such deficiency in the case of subparagraph (ii), in either event, as determined by the architect selected in accordance with Section 11.3 hereof. 11.3. Determination of Repair Cost. In the event of a dispute between ---------------------------- the Associated Companies and Tenant regarding the cost of repairing such damage or destruction, the Associated Companies and Tenant agree that an architect acceptable to both the Associated Companies and Tenant shall be retained, the cost of such appraisal being borne equally by the Associated Companies and Tenant, and such architect shall determine the cost of repairing such damage or destruction, which cost shall include all professional fees incurred in connection therewith. The Associated Companies and Tenant agree that the determination by such architect of the cost of repair shall be conclusive as to both the Associated Companies and Tenant. 12. CONDEMNATION. (a) If prior to the Closing any proceedings are commenced by any governmental agency to effect a taking of any part of the Premises in or by condemnation or other eminent domain proceedings (or by conveyance in lieu thereof), and the loss of such part of the Premises would materially interfere with the Tenant's ability to operate the Facilities in substantially the same manner as the Associated Companies currently operate the Facilities, Tenant may terminate this Agreement, whereupon the Deposit shall be returned to Tenant and all rights and obligations of the parties hereto shall expire and terminate, provided that, if Tenant does not exercise its right to terminate in such event, this Agreement shall continue in full force and effect, without adjustment to the Annual Rent and Option Purchase Price. (b) If such taking of a part of the Premises in or by condemnation or other eminent domain proceedings (or by conveyance in lieu thereof), would not materially interfere with Tenant's ability to operate the Facilities in substantially the same manner as the Associated Companies currently operate the Facilities, this Agreement shall continue in full force and effect, without adjustment to the Annual Rent and Option Purchase Price. - 39 - 13. DEFAULT. Prior to Closing, in the event of a material misrepresentation by any Associated Company, or by Tenant or Guarantor in this Agreement, or a material breach of any warranty or covenant by any Associated Company or by Tenant or Guarantor, or other default by any Associated Company or by Tenant or Guarantor, and the defaulting party's failure to rectify such misrepresentation, breach or default within thirty (30) days after receipt of written notice thereof from the non-defaulting party, then the nondefaulting party shall have the right, upon written notice to the defaulting party, to rescind this Agreement, and upon rescission, (a) if any Associated Company is in default, the Deposit then held by the Escrow Agent shall be promptly returned to Tenant and Tenant shall be entitled to such remedies as shall be provided by law, including the recovery of reasonable attorney's fees; provided, however, in no case shall Tenant or Guarantor be entitled to special or consequential damages, which shall include, without limitation, damages, other than actual and direct costs, relating to or arising from any adverse effect on any planned or effective registration or offering of securities, and any judgments or settlements against Tenant, Guarantor or any of their Affiliates arising from claims under federal or state securities laws in excess of Five Million Dollars ($5,000,000); and (b) if Tenant or Guarantor is in default, the Associated Companies shall be paid the Deposit then held by the Escrow Agent as full liquidated damages of the Associated Companies, it being understood that the Associated Companies' damages would not be subject to accurate calculation and the amount established hereby as liquidated damages is a reasonable estimate of the damages which would be incurred by the Associated Companies. In lieu of rescission, the Tenant shall be entitled to specific performance of this Agreement and, in addition, the recovery of reasonable attorneys' fees. 14. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements of fact contained in this Agreement, or in any certificate delivered by or on behalf of one party to the other pursuant to this Agreement or in connection with the transaction contemplated hereby, shall be deemed representations and warranties by such party making such statement of fact. Each party understands that the other party has relied on each of said representations and warranties in entering into this Agreement. Notwithstanding any investigations made by or on behalf of the Associated Companies or Tenant or any distribution in liquidation, dissolution or other voluntary or involuntary act of the Associated Companies or Tenant, (i) the representations and warranties of Associated Companies set forth in Section 7.7 hereof shall survive the Closing as set forth therein; (ii) the representations and warranties set forth in Sections 5.3.7, 5.3.8 and 5.4.7 shall survive the Closing for the term of the Lease, (iii) the representations and warranties set forth in Section 5.4.9 shall survive the Closing for the applicable periods of the statutes of limitations, (iv) all other representations and warranties of the Associated Companies herein shall survive the Closing for a - 40 - period of 24 months notwithstanding the execution and delivery of the Leases or the consummation of the other transactions contemplated herein, whereupon such representations and warranties shall become unenforceable except to the extent that notice of a claim relating to such representations and warranties has been given pursuant to Section 15.3 hereof prior to the expiration of the Lease Term (each termination date an "Expiration Date"). 15. INDEMNIFICATION PROVISIONS. 15.1. Indemnification of Tenant. Subject to Section 15.5, the Associated ------------------------- Companies shall defend, indemnify and hold harmless Tenant and Guarantor and any Affiliate of Tenant and Guarantor against all damages, punitive damages, civil and criminal monetary penalties, losses and reasonable expenses, including any reasonable attorneys' and other professional fees (hereinafter referred to collectively as "Liabilities"), but not including special or consequential damages relating to, or arising from, any adverse effect on any planned or effective registration, offering or sale of securities which shall include, without limitation, any judgments or settlements against Tenant, Guarantor or any of their Affiliates arising from claims under federal or state securities laws, in connection with any of the following matters: 15.1.1. Material Misrepresentation, etc. Any and all Liabilities arising -------------------------------- out of or related to any material breach of the agreements, representations, warranties or covenants of the Associated Companies in this Agreement, provided, -------- however, that Tenant's right to indemnification hereunder for Liabilities - ------- arising out of or related to any material breach of the Associated Companies' representations and warranties shall be limited to claims asserted by Tenant in accordance with Section 15.3 hereof during the period during which said representations and warranties survive the Closing as provided under Section 14 hereof. 15.1.2. Audits, Investigations, Refund Obligations and Other Pre-Closing ---------------------------------------------------------------- Liabilities. Any and all Liabilities arising out of or related to any of the - ----------- following: (i) any audit or investigation conducted at any time by any governmental authority or administrative agency concerning the operation of the Facility or the Premises or any other Assets by the Associated Companies prior to the Closing or any amounts paid to the Associated Companies prior to the Closing; (ii) any assessments, adjustments or offsets made against Tenant or any Facility or the Premises or other Assets as a result of such an audit or investigation or in connection with the recovery by any governmental authority or administrative agency of any overpayments made to any Associated Company for services performed prior to Closing or any depreciation recapture liability applicable to the - 41 - period prior to Closing; (iii) any reasonable costs of defense of, and any judgment against Tenant with respect to, any litigation relating to the operation of the Premises or the Assets prior to the Closing; (iv) any suit, claim or proceeding of any nature seeking to recover damages for personal injury, death or property damage due in connection with the operation of the Premises or the Assets prior to the Closing; and (v) any other liability, damage, cost, claim, expense or assessment asserted against Tenant or the Premises or the Assets as a result of, or with respect to, the Associated Companies' ownership or operation of the Premises or the Assets prior to the Closing. 15.2. Indemnification of the Associated Companies. Tenant and Guarantor ------------------------------------------- shall jointly and severally defend, indemnify and hold harmless the Associated Companies and any Affiliate of the Associated Companies against all Liabilities in connection with any of the following matters: 15.2.1. Misrepresentations, etc. Any and all Liabilities arising out of ----------------------- or related to any breach of the agreements, representations, warranties or covenants of Tenant or Guarantor in this Agreement, provided, however, that the -------- ------- Associated Companies' right to indemnification hereunder for Liabilities arising out of or related to any breach of Tenant's or Guarantor's representations and warranties shall be limited to claims asserted by the Associated Companies in accordance with Section 15.3 hereof during the period during which said representations and warranties survive the Closing as provided in Section 14 hereof. 15.2.2. Audits, Investigations and Other Post-Closing Liabilities. Any ---------------------------------------------------------- and all Liabilities arising out of or related to any of the following: (i) any audit or investigation conducted at any time by any governmental authority or administrative agency concerning the operation of the Facilities and the Premises or the other Assets by Tenant subsequent to the Closing or any amounts paid to Tenant subsequent thereto; (ii) any assessments, adjustments or offsets made against the Associated Companies as a result of any such audit or investigation or in connection with the recovery by any governmental authority or administrative agency of any other payments made to Tenant for services performed after Closing; (iii) any reasonable costs of defense of, and any judgment against the Associated Companies with respect to, any litigation relating to the operation of the Premises or the Assets by Tenant subsequent to the Closing; (iv) any suit, claim or proceeding of any nature seeking to recover damages, for personal injury, death or property damage due or alleged to be due to occurrences in connection with the operation of the Premises or the Assets subsequent to the Closing; and (v) any other - 42 - liability, damage, cost, claim, expense or assessment asserted against the Associated Companies as a result of, or with respect to, Tenant's operation of the Premises or the Assets subsequent to the Closing, and (vi) any and all Liabilities in connection with or as a result of claims arising under, or a registration statement filed by an Affiliate of Tenant pursuant to federal or state securities laws, including, without limitation, any liability arising as a result of any inclusion of financial statements or other information with respect to the Facilities furnished by the Associated Companies in such registration statement. 15.2.3. Contribution In Lieu of Indemnification. In order to provide for --------------------------------------- just and equitable contribution in circumstances in which the indemnity agreement provided for in subsection 15.2.2(vi) is for any reason held to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Tenant and the Guarantor shall contribute to the aggregate Liabilities contemplated by such indemnity agreement as incurred. For purposes of this Section, each Affiliate of an Associated Company shall have the same rights to contribution as the Associated Company. 15.3. Notice and Defense of Claims. A party claiming indemnification ---------------------------- under this Agreement (the "Asserting Party") must promptly notify in writing the party from which indemnification is sought (the "Defending Party") of the nature and basis of such claim for indemnification. In the event Tenant is the Asserting Party, Tenant shall concurrently send a copy of such notice to the Escrow Agent if such claim is made at any time prior to the Expiration Date. If such claim relates to a claim, litigation or other action by a third party against the Asserting Party, or any fixed or contingent liability to a third party (a "Third Party Claim"), the Defending Party may elect to assume the defense of the Third Party Claim within a reasonable time after receipt of the notice referred to above at its own expense with counsel selected by the Defending Party and approved by the Asserting Party, which approval shall not be unreasonably withheld; provided, however, that if any claim for indemnification under this Agreement is covered by the Defending Party's applicable insurance coverage, then the assumption of such defense and the selection of counsel shall be governed by the applicable insurance coverage. Subject to the foregoing sentence, the Defending Party may not assume the defense if the named parties to the Third Party Claim (including any impleaded parties) include both the Defending Party and the Asserting Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, in which case the Asserting Party shall have the right to employ counsel approved by the Defending Party at the expense of the Defending Party. If the Defending Party, or the Defending Party's applicable insurer, assumes the defense of the - 43 - Third Party Claim, the Defending Party shall not be liable for any fees and expenses of counsel for the Asserting Party incurred thereafter in connection with the Third Party Claim. 15.4. Partners' Indemnification in the Event of Liquidation or -------------------------------------------------------- Dissolution of the Associated Companies. In addition to any and all rights - --------------------------------------- accorded to Tenant under applicable law, in the event subsequent to Closing any of the Associated Companies proposes a plan of liquidation, dissolution or other transaction having the effect of distributing to its partners a substantial portion of its assets, then, as a condition of such proposal, and in consideration of the proceeds to be received by said partners upon consummation of such proposal, the Associated Company shall secure from said partners an undertaking acknowledging and agreeing to stand in the shoes of the Associated Company to the extent of the Net Proceeds, as defined in Section 15.5(b), --------------- received by said partners in the event of a claim for indemnification from Tenant subject to the limitations of Section 15.5. Such partner undertaking shall be in the form attached hereto as Schedule 15.4. Each Associated Company ------------- further agrees to provide notice to Tenant of any such proposal not less than thirty (30) days in advance of the anticipated effective date thereof accompanied by documents reasonably sufficient to demonstrate compliance with the provisions hereof. 15.5. Limitations on Indemnity by Associated Companies. Notwithstanding ------------------------------------------------ any other provision of this Agreement, including Section 15.1 hereof, the rights of Tenant and Guarantor to be indemnified and held harmless under this Agreement or pursuant hereto and the liability of the Associated Companies, shall be limited as follows: (a) Each of the Associated Companies shall indemnify and hold harmless the Tenant, Guarantor and their Affiliates only with respect to the Facility actually owned or operated by such Associated Company, and shall not indemnify and hold harmless the Tenant, Guarantor and their Affiliates with respect to any damages incurred by Tenant, Guarantor or their Affiliates with respect to any of the other Facilities. (b) No claim for indemnity by Tenant or Guarantor pursuant to Section 15.1.1 shall be made against any Associated Company, unless and until the aggregate dollar amount of the claims against the Associated Companies, collectively, shall have exceeded $50,000, in which case the applicable indemnitors shall be obligated to indemnify, defend and hold harmless the Tenant and Guarantor for all damages in excess of $50,000, but any indemnification liability of an Associated Company under Section 15.1.1 hereof shall not exceed the Net Proceeds (as defined herein) of the Associated Company from and after the Closing Date. The term "Net Proceeds" as used herein shall mean the amount calculated in accordance with Schedule 15.5(b). ---------------- - 44 - (c) The liability of the Associated Companies, Dennis and Friedman with respect to any claim for indemnity by the Tenant or Guarantor pursuant to Section 15.1 shall be offset dollar for dollar by (i) any insurance proceeds received by the Tenant after the Closing in respect of the damages for which indemnification is claimed, and (ii) any other recovery made by the Tenant from any third-party on account of the damages for which indemnification is claimed, provided Tenant shall not be obligated to pursue any recovery from any other party. 15.6. Survival. The Indemnification Provisions set forth in Section 15 -------- of this Agreement shall survive the Closing. 16. DEFINITIONS. For purposes of this Agreement: 16.1. Cross Reference Table. The following terms defined elsewhere in --------------------- this Agreement in the Sections set forth below shall have the respective meanings therein defined: Term Definition "Additional Guaranty" Section 9.5(b) "Affiliate Arrangements" Section 5.5.2 "AHCM, Inc." Section 2.5 "Annual Financial Statements" Section 5.2.1 "Asserting Party" Section 15.3 "Assets" Section 1 "Associated Company" and "Associated Companies" Preamble "Assumed Contracts" Section 2.3 "Beachwood" Preamble "Closing" Section 10.1 "Closing Date" Section 10.1 "Confidential Associated Company Information" Section 7.9 "Confidential Facility Information" Section 7.7.1 "Confidential Operation Information" Section 7.9 "Confidential Tenant Information" Section 7.7.1 "Contracts" Section 5.5.1 "Current Galvin Lease" Section 2.5 "Defending Party" Section 15.3 "Deficiency" Section 4.1 "Deficiency Letter" Section 4.1 "Dennis" Eighth Whereas Clause "Deposit" Section 3 "Deposit Escrow Agreement" Section 3 "Effective Date" Preamble "Escrow Agent" Section 3 "Excluded Assets" Section 1 - 45 - "Expiration Date" Section 14 "Facility" and "Facilities" Fourth Whereas Clause "Friedman" Eighth Whereas Clause "Galvin Lease" Section 2.5 "Guarantor" Preamble "Guarantor's Financial Statements" Section 6.8 "Guaranty" Seventh Whereas Clause "HUD" Section 2.5 "Initial Deposit" Section 3 "Inspectional Due Diligence" Section 4.1 "Intangible Assets" Section 2.1 "Interim Financial Statements" Section 5.2.1 "Inventory" Section 10.7 "Labor Contracts" Section 5.5.1 "Landlord" and "Landlords" Preamble "Land" Third Whereas Clause "Lease" and "Leases" Section 1 "Lease Term" Section 2 "Liabilities" Section 15.1 "Licenses" Section 5.3.3 "Major Damage" Section 11.1 "Net Proceeds" Section 15.5(b) "Occupancy Agreements" Section 5.5.1 "Occupancy Agreement Forms" Section 5.5.3 "Operational Due Diligence" Section 4.2 "Outstanding Payroll" Section 10.6 "Parent Lease" Section 2.5 "Parkland Ancillary Medical Leases" Section 2.5 "Parkland Nursing Center Subleases" Section 2.5 "Premises" Section 1 "Royalview GP" Preamble "Royalview LP" Preamble "Royalview LP Reorganization Plan" Section 7.12 "Royalview Removal" Section 7.12(a)(i) "Second Deposit" Section 3 "Security Deposit" Section 9.6(a) "Security Deposit Agreement" Section 9.6(a) "Tenant" Preamble "Third Party Claim" Section 15.3 "Trade Payables" Section 5.4.11 "USTs" Section 5.3.7(vii) "Warranties and Guarantees" Section 5.4.2 "Westbay" Preamble "Westbay II" Preamble 16.2. Affiliate. The term "Affiliate" shall mean (i) any Person directly --------- or indirectly controlling, controlled by or - 46 - under direct or indirect common control with any Associated Company (or other specified Person), (ii) any Person who is an officer, director or a general partner of any Associated Company or any holder of twenty-five percent (25%) or more of a limited partnership interest of in any Associated Company (or other specified Person), (iii) any person of which the Associated Company (or other specified Person) shall, directly or indirectly, beneficially own at least 25% of any class of outstanding capital stock or other evidence of beneficial interest. 16.3. Articles of Incorporation. The term "Articles of Incorporation" ------------------------- shall mean the certificate or articles of incorporation or organization, statute, constitution, joint venture or articles or other charter documents of any Person (other than an individual), each as from time to time in effect. 16.4. Regulations. The term "Regulations" shall mean all written rules, ----------- regulations and by-laws, and all other documents (other than the Articles of Incorporation), relating to the management, governance or internal regulation of a Person (other than an individual) or interpretative of the Articles of Incorporation of such Person, each as from time to time in effect. 16.5. Code. The term "Code" shall mean the federal Internal Revenue Code ---- of 1986 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereto, collectively and as from time to time amended and in effect. 16.6. Contaminants. The term "Contaminants" shall mean (i) any ------------ pollutant, contaminant or hazardous substance (within the meaning of such terms under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and any implementing regulations) but excepting Infectious Wastes or (ii) any hazardous or toxic substance or material within the meaning of any federal, state or local law applicable to the Associated Companies or the Premises, but excepting Infectious Wastes. 16.7. ERISA. The term "ERISA" shall mean the federal Employee Retirement ----- Income Security Act of 1974 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereto, collectively and as from time to time amended and in effect. 16.8. Generally Accepted Accounting Principles. The term "generally ---------------------------------------- accepted accounting principles" shall mean generally accepted accounting principles, as defined by the Financial Accounting Standards Board and as applied by the - 47 - Associated Company in preparing the Financial Statements and consistently followed. 16.9. Infectious Wastes. The term "Infectious Wastes" shall have the ----------------- meaning assigned to the term "Infectious Wastes" as such term is defined in Chapter 3734, Section 3734.01 of the Ohio Revised Code. 16.10. Legal Requirement. The term "Legal Requirement" shall mean any ----------------- federal, state, local or foreign law, statute, ordinance, code, order, rule, regulation, or any order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit or similar right granted under any of the foregoing, or any similar provision having the force and effect of law. 16.11. Lien. The term "Lien" shall mean (i) any encumbrance, mortgage, ---- pledge, lien, charge or other security interest of any kind upon any property or assets of any character, or upon the income or profits therefrom; or (ii) any arrangement or agreement which prohibits the creation of such encumbrances, mortgages, pledges, liens, charges or other security interests or which restricts transfer of capital stock (other than restrictions on transfer imposed by applicable securities laws) or other property or assets. 16.12. Partnership Agreement. The term "Partnership Agreement" shall --------------------- mean the partnership agreement of any Person which is a partnership, each as from time to time in effect. 16.13. Pension Plan. The term "Pension Plan" shall mean each pension ------------ plan (as defined in Section 3(2) of ERISA) established or maintained in connection with the business, or to which contributions are or were made to the Associated Company, or by any Person which is a member of the same Controlled Group with the Associated Company. 16.14. Person. The term "Person" shall mean any individual, partnership, ------ corporation, association, trust, joint venture, unincorporated organization, or entity, and any government, governmental department or agency or political subdivision thereof. 16.15. Tax. The term "tax" shall mean any federal, state, local, or --- foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code (S)59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, - 48 - including any interest, penalty, or addition thereto, whether disputed or not. 16.16. Tax Return. The term "Tax Return" shall mean any return, ---------- declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. 16.17. Welfare Plan. The term "Welfare Plan" shall mean each welfare ------------ plan (as defined in Section 3(1) of ERISA) established or maintained in connection with the Business, or to which any contributions are or were made, by the Associated Company, or by any Person which is a member of the same Controlled Group with the Associated Company. 16.18. Net Worth. "Net Worth" shall mean the total assets of the party --------- --------- in question and its subsidiaries which would be shown as assets on a consolidated balance sheet of the party in question and its subsidiaries as of such time prepared in accordance with generally accepted accounting principles, consistently applied, after deducting any amounts for intangible assets and good will and eliminating all amounts properly attributable to minority interests, if any, in the stock and surplus of subsidiaries, minus the total liabilities of ----- the party in question and its subsidiaries which would be shown as liabilities on a consolidated balance sheet of the party in question and its subsidiaries as of such time prepared in accordance with generally accepted accounting principles, consistently applied, plus the aggregate amount payable by the party ---- in question to its affiliates, the payment of which is subordinate to the party in question's obligations to the party or parties who are entitled to the protection of any net worth covenant of the party in question under this Agreement or any document executed pursuant hereto pursuant to a subordination agreement acceptable to the Associated Companies, or, in the case of Guarantor, pursuant to a subordination agreement among such affiliates of Guarantor, Guarantor, and the Associated Companies in form substantially identical to Exhibit F attached to the Guaranty. - --------- 16.19. Public Company. "Public Company" shall mean a company which owns -------------- -------------- all or substantially all of the partnership interests in Guarantor or a company which owns all or substantially all of the issued and outstanding stock of a corporation, all or substantially all of the partnership interests in a partnership, or all or substantially all of the membership interests in a limited liability company which, in turn, owns all or substantially all of the partnership interests in Guarantor, and whose initial public offering was substantially similar to that described in Form S-1 filed on behalf of Harborside Healthcare Corporation with the Securities and Exchange Commission on April 2, 1996. - 49 - 17. MISCELLANEOUS 17.1. Headings. Section and subsection headings are not to be considered -------- part of this Agreement, are included solely for convenience, are not intended to be full or accurate descriptions of the content thereof and shall not affect the construction hereof. 17.2. Schedules; Exhibits; Contemplated Transactions. Schedules, ---------------------------------------------- exhibits, agreements and documents expressly referred to in, or having been delivered pursuant to, this Agreement are an integral part of this Agreement. For all purposes of this Agreement, the transactions contemplated hereby shall be deemed to include, without limitation, all transactions contemplated by any agreement entered into by the Associated Company and Tenant at the Closing. 17.3. Severability. The provisions of this Agreement are severable, and ------------ in the event that any provision hereof should, for any reason, be held invalid or unenforceable in any respect, it shall not invalidate, render unenforceable or otherwise affect any other provision hereof, and such invalid or unenforceable provision shall be construed by limiting it so as to be valid and enforceable to the maximum extent compatible with, and possible under, applicable law. 17.4. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 17.5. Integration. This Agreement and the schedules and exhibits hereto ----------- constitute the entire agreement among the parties and supersede all prior agreements, whether written or oral, with respect to the subject matter hereof. Neither this Agreement, nor the provisions hereof may be waived, modified, amended, discharged, or terminated except by an instrument in writing signed by the party against which the enforcement or such waiver, modification, amendment, discharge or termination is sought, and then only to the extent set forth in such instrument. 18. ASSIGNMENT. The rights and obligations of the Associated Companies, Tenant and Guarantor hereunder shall not be assignable without the express written consent of the other parties, except that Tenant shall have the right, without the Associated Companies' consent, to assign its interests herein to an Affiliate of Tenant or Guarantor as defined in Subsection 16.2(i); provided, however, that if any such entity shall default in its performance hereunder, Tenant and Guarantor shall continue to be obligated for such performance. - 50 - 19. NOTICES. All notices required to be given hereunder shall be given in writing to the appropriate party or parties at the following addresses: To the Associated Companies: Paul Dennis 30 Pebblebrook Lane Moreland Hills, OH 44022 and 3800 Park East Beachwood, Ohio 44122 With a copy to: David W. Sloan, Esq. JONES, DAY, REAVIS & POGUE North Point 901 Lakeside Avenue Cleveland, OH 44114 Jeffrey I. Friedman President Associated Estates Realty Corp. 5025 Swetland Court Richmond Heights, Ohio 44143 To Tenant: Harborside Health I Corp. c/o Harborside Healthcare Harbor Plaza 470 Atlantic Avenue Boston, MA 02210 Attn: Stephen L. Guillard, President To Guarantor: Harborside Healthcare Limited Partnership c/o Harborside Healthcare Harbor Plaza 470 Atlantic Avenue Boston, MA 02210 Attn: Stephen L. Guillard, President With a copy to: Martin R. Leinwand, Esq. McDermott, Will & Emery 75 State Street Boston, MA 02109 or at such other place as such party may designate in writing to the other party. All notices shall be deemed to have been delivered (a) upon delivery if hand-delivered, (b) on the next business day after deposit with a recognized overnight courier, or (c) on the date shown on the return receipt if delivered by registered mail, return receipt requested. 20. SUCCESSORS AND ASSIGNS. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of the - 51 - parties hereto and their respective transferees, delegatees, heirs, devisees, successors and assigns. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. Tenant: HARBORSIDE HEALTH I CORPORATION By: /s/ Bruce J. Beardsley --------------------------- Its: Vice President Guarantor: HARBORSIDE HEALTHCARE LIMITED PARTNERSHIP By: KHI Corporation Its General Partner By: /s/ Bruce J. Beardsley --------------------------- Its: Vice President --------------------------- Associated Companies: WESTBAY MANOR COMPANY By: /s/ Paul S. Dennis --------------------------- Its General Partner By: /s/ Jeffrey Friedman --------------------------- Its: Managing General Partner ----------------------- By: --------------------------- Its: ----------------------- WESTBAY MANOR DEVELOPMENT II COMPANY, L.P. By: /s/ Paul S. Dennis --------------------------- Its General Partner By: /s/ Jeff Friedman --------------------------- Its: Managing General Partner ----------------------- - 52 - ROYALVIEW MANOR DEVELOPMENT COMPANY By: /s/ Paul S. Dennis --------------------------- Its General Partner By: --------------------------- Its: ----------------------- By: --------------------------- Its: ----------------------- - 53 - BEACHWOOD CARE CENTER LIMITED PARTNERSHIP By: /s/ Paul S. Dennis --------------------------- Its General Partner By: /s/ Jeffrey Friedman --------------------------- Its: By: --------------------------- Its: ROYALVIEW MANOR COMPANY By: /s/ Paul S. Dennis --------------------------- Its: General Partner By: --------------------------- Its: The undersigned agree to the provisions of Sections 7.7.2 and 7.7.3 of this Agreement: /s/ Paul S. Dennis ___________________________________ Paul S. Dennis, individually /s/ Jeffrey I. Friedman ___________________________________ Jeffrey I. Friedman, individually - 54 - EX-23.1 7 CONSENT OF COOPERS & LYBRAND EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-3096) of our reports dated March 19, 1996, on our audits of the combined financial statements of Harborside Healthcare Corporation and Combined Affiliates and the financial statements of Bowie Center Limited Partnership. We also consent to the reference to our firm under the caption "Experts." /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts May 16, 1996 EX-23.2 8 CONSENT OF LEVERONE & COMPANY EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-3096) of our report dated February 9, 1996, on our audits of the combined financial statements of Sowerby Enterprises. We also consent to the reference to our firm under the caption "Experts". /s/ Leverone & Company LEVERONE & COMPANY Billerica, Massachusetts May 16, 1996 EX-23.3 9 CONSENT OF HOWARD, WERSHBALE & CO. Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 (File No. 333-3096) of our report dated March 15, 1996, on our audits of the combined financial statements of Beachwood Care Center, Westbay Manor Company, Westbay Manor II Development Company, Royalview Manor Company, and Royalview Manor Development Company. We also consent to the reference to our firm under the caption "Experts". /s/ Howard, Wershbale & Co. Howard, Wershbale & Co. Cleveland, Ohio May 16, 1996 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 MAR-31-1996 40,157 10,000 0 0 9,967 11,354 0 0 0 0 56,169 24,573 30,139 30,185 0 0 92,632 63,378 45,434 12,178 0 0 0 0 0 0 0 0 4,130 5,001 92,632 63,378 109,425 34,931 109,425 34,931 0 0 101,446 33,624 0 0 0 0 5,107 975 1,234 205 481 80 0 0 0 0 0 0 0 0 753 125 0.17 0.03 0.17 0.03
EX-99.2 11 CONSENT OF ROBERT BARNUM Exhibit 99.2 CONSENT The undersigned hereby consents to serve as a director of Harborside Healthcare Corporation (the "Company"), if duly elected. The undersigned further consents pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, to being named in the Registration Statement on Form S-1 of the Company (the "Registration Statement") and to the presentation of information concerning the undersigned in the Registration Statement in accordance with the rules and regulations of the Securities and Exchange Commission. /s/ Robert T. Barnum ----------------------- Name: Robert T. Barnum Dated: 5/2/96 EX-99.3 12 CONSENT OF ROBERT M. BRETHOLTZ EXHIBIT 99.3 CONSENT The undersigned hereby consents to serve as a director of Harborside Healthcare Corporation (the "Company"), if duly elected. The undersigned further consents pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, to being named in the Registration Statement on Form S-1 of the Company (the "Registration Statement") and to the presentation of information concerning the undersigned in the Registration Statement in accordance with the rules and regulations of the Securities and Exchange Commission. /s/ Robert M. Bretholtz ------------------------- Name: Robert M. Bretholtz Dated: 4/20/96 EX-99.4 13 CONSENT OF SALLY W. CRAWFORD EXHIBIT 99.4 CONSENT The undersigned hereby consents to serve as a director of Harborside Healthcare Corporation (the "Company"), if duly elected. The undersigned further consents pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended, to being named in the Registration Statement on Form S-1 of the Company (the "Registration Statement") and to the presentation of information concerning the undersigned in the Registration Statement in accordance with the rules and regulations of the Securities and Exchange Commission. /s/ Sally W. Crawford ----------------------- Name: Sally W. Crawford Dated: 2 May 1996 -----END PRIVACY-ENHANCED MESSAGE-----