-----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, GLWsCq90k6sF+uO4HN34qBa7Sqb3veltLndUhBaCGqHwM4uLOJv59APtHkixmCMa tH8RXjwFNXNHMatTRLqaNQ== 0000899243-97-002440.txt : 19971230 0000899243-97-002440.hdr.sgml : 19971230 ACCESSION NUMBER: 0000899243-97-002440 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 48 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PARAGON HEALTH NETWORK INC CENTRAL INDEX KEY: 0000882287 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 742012902 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10968 FILM NUMBER: 97745773 BUSINESS ADDRESS: STREET 1: ONE RAVINA DR STE 1500 STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 7703930199 MAIL ADDRESS: STREET 1: ONE RAVINA DRIVE SUITE 1500 STREET 2: SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30346 FORMER COMPANY: FORMER CONFORMED NAME: LIVING CENTERS OF AMERICA INC DATE OF NAME CHANGE: 19930328 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10968 PARAGON HEALTH NETWORK, INC. (Exact name of registrant as specified in its Charter) DELAWARE 74-2012902 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization Identification No.) ONE RAVINIA DRIVE, SUITE 1500 30346 ATLANTA, GEORGIA (Zip Code) (Address of principal executive office) (770) 393-0199 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - ------------------- ------------------------ Common Stock, $.01 Par Value........................... New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates of the registrant as of December 19, 1997 based on the closing sale price of the Common Stock on the New York Stock Exchange on said date, was $776,905,800.75. For purpose of the foregoing sentence only, all directors are assumed to be affiliates. There were 13,737,943 shares of Common Stock of the registrant outstanding as of December 19, 1997. DOCUMENTS INCORPORATED BY REFERENCE
PART OF INCORPORATED DOCUMENT FORM 10-K --------------------- -------- Proxy Statement for the 1998 Annual Meeting of Stockholders..................................... Part III
TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. BUSINESS................................................ 3 ITEM 2. PROPERTIES.............................................. 16 ITEM 3. LEGAL PROCEEDINGS....................................... 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 19 ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT.................. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.................................... 21 ITEM 6. SELECTED FINANCIAL INFORMATION.......................... 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 59 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 59 ITEM 11. EXECUTIVE COMPENSATION.................................. 59 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 59 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................... 60
2 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE BUSINESS On November 4, 1997, the Company engaged in two merger transactions. First, pursuant to an agreement and plan of merger among Apollo Management, L.P. ("Apollo Management," and together with certain of its affiliates, "Apollo"), Apollo LCA Acquisition Corp. (a corporation owned by certain Apollo affiliates and other investors, "Apollo Sub") and Living Centers of America, Inc. ("LCA"), Apollo Sub was capitalized with $240 million in cash and was merged with and into LCA (the "Recapitalization Merger"). In the Recapitalization Merger, LCA was the surviving corporation and was renamed Paragon Health Network, Inc. ("Paragon"). Second, pursuant to an agreement and plan of merger among LCA, GranCare, Inc. ("GranCare"), Apollo Management and LCA Acquisition Sub, Inc. (a wholly owned subsidiary of Paragon, "LCA Sub"), GranCare merged with LCA Sub with GranCare surviving as a wholly owned subsidiary of Paragon (the "GranCare Merger," and collectively with the Recapitalization Merger, the "Mergers"). The GranCare Merger was accounted for using purchase accounting. The consummation of the Mergers required aggregate proceeds of approximately $1.4 billion. The funds required for the Mergers and related transaction fees and expenses were provided primarily by: (i) proceeds of approximately $449 million from the offering (the "Offering") of $275 million in Senior Subordinated Notes and $294 million in Senior Subordinated Discount Notes (collectively, the "Notes"); (ii) borrowings by the Company of approximately $740 million under a new senior credit facility which provides for aggregate commitments of up to $890 million (the "Senior Credit Facility"); and (iii) the equity investment by Apollo and certain other investors (collectively with Apollo, the "Apollo Investors") of approximately $240 million (the "Apollo Investment"). The Offering, the Senior Credit Facility and the Apollo Investment are referred to collectively herein as the "Financings," and the Financings and the Mergers are referred to collectively herein as the "Transactions." LCA and Paragon are the same legal entity. References to the "Company" herein refer to LCA and its operating subsidiaries prior to the consummation of the Transactions and to Paragon and its operating subsidiaries following consummation of the Transactions. GENERAL The Company, through its various operating subsidiaries, is one of the nation's leading providers of post-acute care. The Company's continuum of post-acute care services encompasses skilled nursing, subacute and medically complex care, as well as a variety of related ancillary services. These ancillary services include pharmacy, rehabilitation and hospital program management. The Company operates in 38 states with significant concentrations of facilities and beds in its key markets. On a pro forma basis for the year ended September 30, 1997 the Company generated revenues of approximately $1.9 billion. Following the Mergers, the Company's operations are organized into four divisions: (i) post-acute care; (ii) pharmaceutical services; (iii) rehabilitation services; and (iv) hospital services. The Company operates 327 skilled nursing and assisted living facilities containing over 38,000 beds, as well as 34 institutional pharmacies servicing more than 100,000 beds. The Company also operates over 130 outpatient rehabilitation clinics and manages specialty medical programs in acute care hospitals through more than 180 management contracts. In addition, the Company provides subacute care, home health, hospice and private duty nursing services. As a result of the Mergers, the Company has increased the density of the services it provides in many of its markets, which management believes will result in revenue enhancement and cost saving opportunities. Revenue enhancements are expected to be realized by expanding the range of services offered within each market, increasing patient acuity levels within the Company's facilities and strengthening relationships with hospitals, physicians and third-party payors. Cost saving opportunities include leveraging fixed overhead costs over a larger revenue base, eliminating redundant administrative functions and realizing purchasing synergies. The Company's principal executive offices are located at One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, and the Company's phone number at such location is (770) 393-0199. 3 INDUSTRY OVERVIEW The healthcare industry has become one of the largest sectors of the U.S. economy, representing 13.6% of the nation's gross domestic product ("GDP") in 1995. Care for the elderly encompasses a broad range of healthcare services, including skilled nursing, rehabilitation services, home healthcare, assisted living and pharmacy services. In response to increasing demands for quality care in a cost effective setting, long-term care providers are increasingly providing services for patients with specialized needs. These patients typically do not require many of the services provided in an acute care hospital setting but still have medically complex conditions that require ongoing nursing and medical supervision as well as access to specialized equipment and services. The Company believes that demand for its long-term care services and specialized medical services will increase significantly due to changing demographics, existing government restrictions, increasing focus on cost containment and industry consolidation. Demographic Trends--According to the U.S. Bureau of the Census, approximately 1.4% of the population between the ages of 65 and 74 received care in long-term care facilities in 1990; this percentage increased to 6.1% for people 75 to 84 years of age and to 24.5% for those over the age of 85. In addition, according to the U.S. Bureau of the Census, the number of individuals over the age of 75 increased from approximately 10.0 million (4.4% of the U.S. population) in 1980 to approximately 14.8 million (5.6% of the U.S. population) in 1995. By 2005, this segment of the population is projected to increase to approximately 17.8 million (6.2% of the U.S. population). Although there is limited growth projected for the population of individuals over the age of 65 between 1990 and 2000, a significant increase is expected in the population of people over the age of 85, which comprises the largest percentage of residents at long-term care facilities. This age group is the fastest growing segment of the population, projected to increase by more than 55%, from approximately 3.6 million (1.4% of the U.S. population) in 1995 to approximately 5.7 million (2.5% of the U.S. population) in the year 2010. Government Restrictions on Long-Term Care Facilities--While the demand for long-term care is growing, regulatory factors have served to limit the supply of long-term care beds. The construction of new long-term care facilities and the addition of beds to existing facilities are restricted by regulation in many states, most of which require entities that desire to enter the local long-term care market to apply for and obtain Certificates of Need ("CON") or other approvals under similar laws. The application and approval process for a CON or such other approval generally involves approval by a state regulatory agency for the construction, acquisition or closure of a long-term care facility, the addition or reduction of beds at a facility or the addition of services provided by a facility. The significant construction costs and start- up expenses in some markets may further limit the number of new beds. Emphasis on Cost Containment--Escalating healthcare costs have caused governmental and other third party payors, including managed care entities, to implement cost containment initiatives. As a result, an increasing proportion of subacute care is being delivered outside the acute care hospital setting. Subacute care refers to complex medical care and intensive nursing care and therapies provided to patients with higher acuity disorders, typically following their discharge from an acute care hospital. Management believes that this level of care is appropriately delivered in a skilled nursing environment and that clinical outcomes in these settings are comparable to those achieved in acute care settings where the cost structure is significantly higher. Skilled nursing facilities are significantly less capital intensive and do not require the specialized equipment used in acute care hospitals. Labor costs are also lower than in hospitals, which typically have a higher physician to nursing staff ratio and significantly more administrative personnel, including nursing staff not fully dedicated to providing care. Management believes that post-acute care providers can achieve successful outcomes at a lower cost than acute care hospitals and that, accordingly, hospital discharge planners, physicians and managed care and insurance company case managers are referring an increasing number of patients to post-acute care facilities, including those operated by affiliates of acute care hospitals. Industry Consolidation--Currently approximately 1.7 million people are cared for in approximately 15,000 long-term care facilities in the United States. Market share data suggests that the industry is fragmented, with the 30 largest operators accounting for less than 25% of the total beds available. The post-acute care industry 4 has become subject to increasing competitive pressure, increased government regulation and a changing reimbursement environment. As a result, management believes that there is a trend towards consolidation of smaller, local operators, which lack sophisticated management information systems and services, into larger, more sophisticated national competitors. BUSINESS STRATEGY The Company's strategy is to become the provider of choice for both patients and payors in each of its markets by offering an integrated comprehensive network of high quality, cost efficient post-acute and long-term care services. The Company's strategy includes the following five initiatives: Develop Integrated Post-Acute Networks. The Company's goal is to maintain or establish leadership positions in key markets by achieving a critical mass of skilled nursing facilities and related specialty medical businesses to form an integrated continuum of care. The Company places strategic emphasis on: (i) expanding the services offered within its existing facilities; (ii) strategically growing its base of facilities and related services; and (iii) enhancing relationships with acute care hospitals and physicians. As an integrated service provider in select markets, the Company can better respond to the changing needs of its patients and offer payors a single source from which to contract for post-acute healthcare services. Furthermore, the Company believes that specific market expertise, coupled with a broad array of ancillary services, will allow the Company to negotiate more effectively with large contract payors such as managed care organizations. Attract and Care for Higher Acuity Patients. The Company intends to capitalize on the current trend towards reducing the length of patient stays in acute care hospitals by offering specialty medical services such as enteral, intravenous and respiratory therapies. The Company can provide these services to patients with medically complex conditions who require ongoing nursing and medical supervision, as well as access to specialized equipment, and management believes that it can offer such medically complex care at costs that are below those of acute care hospitals. Management believes that the Company's ability to care for higher acuity patients will improve its payor mix, expand its customer base and generate increased operating margins. Provide Ancillary Services to Unaffiliated Facilities. In addition to increasing the number of ancillary services provided in its own facilities, the Company intends to be a leading third-party provider of ancillary services. The Company provides pharmacy services to approximately 1,000 skilled nursing facilities, and is the nation's fifth largest provider of institutional pharmacy services to the long-term care industry. The Company is also one of the largest U.S. providers of contract therapy services and provides rehabilitation services to over 450 skilled nursing facilities. In addition, the Company's hospital services division manages specialty medical programs for acute care hospitals through more than 180 contracts. By continuing to offer its contract and ancillary services to unaffiliated entities, the Company expects to increase revenues from these higher margin ancillary businesses and to increase the quality of its payor mix. Develop Industry Leading Infrastructure. Management is devoting substantial time and resources to integrating the operations of LCA and GranCare in order to realize significant benefits from the combination. Specifically, the Company is: (i) establishing standardized information systems and operating procedures; (ii) implementing a "shared services" model under which the Company's operating divisions will utilize a common financial reporting and accounting department; (iii) enhancing the internal audit process; and (iv) combining and enhancing existing compliance and ethics programs. The Company intends to be an industry leader in the implementation and maintenance of a comprehensive compliance program, resulting in increased patient satisfaction, improved staff performance and a "best practices" reputation among managed care and other payors. The Company believes the enhanced infrastructure, once completed, will enable it to market bundled services and integrate future acquisitions more efficiently. Actively Manage Portfolio of Facilities and Services. In order to increase the breadth of its facility base and range of services provided in its target markets, the Company will pursue a growth strategy which includes acquisitions as well as, in certain limited circumstances, new construction. As such, the Company intends to: 5 (i) increase the breadth and density of the Company's ancillary services within its existing markets; (ii) expand into new markets with favorable demographics, regulatory environments and competitive landscapes; and (iii) exit markets or existing lines of business in markets where the Company believes it would be inefficient to establish critical mass. The Company hopes to take advantage of the ongoing consolidation within the post-acute care industry through both small "fill-in" acquisitions and the purchase of larger corporate entities. OPERATIONS Post-Acute Care Division The Company's post-acute care division is the largest source of revenue for the Company and operates the Company's 318 skilled nursing facilities (35 of which include assisted living units) and nine freestanding assisted living facilities encompassing over 38,000 beds in 21 states. The post-acute care division is organized into three operating regions, with a total of 19 districts containing 15 to 20 facilities each. All of the Company's skilled nursing facilities are certified by the appropriate state agencies for participation in the Medicaid program and substantially all of the Company's facilities are certified for Medicare participation. The Company's skilled nursing facilities provide care to patients requiring immediate access to 24-hour nursing care. Each of the Company's skilled nursing facilities has a local medical director who assesses patient needs, coordinates care plans and, as a member of the local medical community, is familiar with the local healthcare market. Skilled nursing care is rendered in the facilities 24 hours a day by registered and licensed practical and vocational nurses and nurses' aides. All patients in the Company's facilities receive assistance with various activities of daily living ("ADL services") including, but not limited to, oversight, feeding, bathing, dressing, eating, transportation, toiletry and related services. These basic services are supplemented in the Company's Medicare certified facilities by rehabilitation services and physical, occupational, speech, respiratory and psychological therapies. In addition, the Company operates specialized units in over 90 of its long- term care facilities serving over 1,200 beds, which provide subacute care to patients with medically complex conditions. Within these specialty units, trained staff members offer care for patients in a technologically advanced physical plant as an alternative to treatment in the more costly acute care hospital setting. In addition to basic therapy services, these specialty units offer enteral therapy, intravenous therapy, specialized wound management and ventilator, tracheostomy, cancer and HIV care, although not all services are offered in all specialty units. These specialized units have a higher staffing level per patient than the Company's skilled nursing facilities and compete with acute care and rehabilitation hospitals, which management believes typically charge rates higher than those charged by the Company's specialty units. The Company's home health and hospice operations are also managed by the post-acute care division. Through over 40 branches located within nine states, the Company provides home health, private duty nursing and hospice services. The Company intends to expand its home health business through the acquisition and development of additional home health and hospice agencies in its key markets. The expansion of home health and hospice agencies will complement the Company's initiative to provide a continuum of post-acute healthcare in its targeted markets. Additionally, these home care businesses are potential customers for the Company's rehabilitation therapy and pharmacy operations. The Company's assisted living facilities provide furnished rooms and suites designed for individuals who are either able to live independently within a sheltered community or who require minimal nursing attention. For assisted living residents, the Company provides basic ADL services combined with the availability of higher acuity settings should changes in the resident's health condition require additional care. The post-acute care division also provides services to residents with Alzheimer's disease. Within specially designated and designed areas in certain of its long-term care centers, the Company operates over 60 units with approximately 1,700 beds dedicated to addressing the problems of disorientation and perceptual confusion 6 typically experienced by residents with Alzheimer's disease. The Alzheimer's care units also offer education and support to the residents' families. The Company provides specially trained activity directors and nursing staffs to these units and employs a Director of Alzheimer's Programming to supervise program development and staff training. Pharmaceutical Services Division The Company's pharmaceutical services division, American Pharmaceutical Services, Inc. ("APS") a former LCA subsidiary, is the fifth largest provider of institutional pharmacy services in the United States. Through 34 institutional pharmacies in 11 states, APS provides services and products to more than 1,000 long-term care centers with more than 100,000 beds in 35 states. APS specializes in meeting the needs of healthcare providers in subacute care, long-term care and assisted living settings. The division's primary products are pharmacy dispensing, intravenous ("IV") and enteral therapy supplies, respiratory therapy and orthotics. Through contractual agreements, APS provides consultant pharmacists specializing in long-term care drug regimen reviews and regulatory monitoring. Additionally, APS offers full clinical support for its products and services through long-term care facility staff education and quality assurance programs. Substantially all of the Company's skilled nursing facilities previously operated by GranCare are subject to pharmacy supply agreements with Vitalink Pharmacy Services, Inc. which expire in March 2002. As a result, APS will not provide pharmaceutical supplies or services to most GranCare facilities prior to such expiration date. Rehabilitation Services Division The Company's rehabilitation services division, American Rehabilitation Services, Inc., operates through three former subsidiaries of LCA: American Therapy Services, Inc. ("ATS"); Rehability Health Services, Inc. ("Rehability Health"); and Therapy Management Innovations, Inc. ("TMI"). ATS provides physical, occupational, and speech therapy to nursing facility residents through contracts with over 450 skilled nursing facilities throughout the United States. Rehability Health operates over 130 outpatient rehabilitation clinics in 18 states. The primary focus of these clinics is rehabilitation services related to occupational and sports injuries. The primary payors for services associated with occupational injuries and workers' compensation claims are private employers and their insurance carriers. TMI provides a variety of rehabilitation management consulting services to post-acute and long-term care facilities. These consulting services focus on enhancing the quality of rehabilitation therapy and include supervision of clinical procedures, documentation and billing protocols, as well as monitoring of patient outcomes. The objective of these programs is to assist the patients in attaining their optimal level of functional independence. Rehabilitation services are instrumental in lowering the overall cost of care by reducing the length of a patient's stay and in improving a patient's quality of life. Specialized management staff oversee these rehabilitation programs to ensure high-quality service delivery, program compliance and achievement of desired outcomes for the patient. Hospital Services Division The Company's hospital services division operates over 180 medical programs in 28 states. This division, operated through the Company's Cornerstone Health Management Company subsidiary ("Cornerstone"), a former GranCare subsidiary, develops and manages specialty geriatric programs on behalf of acute care hospitals. In addition, the hospital services division operates two long-term acute care ("LTAC") hospitals. The hospital services division programs include subacute skilled nursing, rehabilitation therapy, geriatric mental health, respiratory therapy and geriatric primary care networks. This division is generally responsible for managing the clinical and operational aspects of a prescribed program, including quality control. Following the 7 design and implementation of a program, Cornerstone provides a program administrator who is supported by a centralized staff of experts. Cornerstone receives a management fee, typically based on the number of beds it manages. SOURCES OF REVENUE The Company receives payments for services rendered to patients from the federal government under Medicare, from the various states where the Company operates under Medicaid and from private insurers and the patients themselves. The sources and amounts of the Company's patient revenues are determined by a number of factors, including licensed bed capacity of its facilities, occupancy rate, the payor mix, the type of services rendered to the patient and the rates of reimbursement among payor categories (private, Medicare and Medicaid). Changes in the mix of the Company's patients among the private pay, Medicare and Medicaid categories (quality mix) will significantly affect the profitability of the Company's operations. Generally, private pay patients are the most profitable and Medicaid patients are the least profitable. Also, the Company derives higher revenues from providing specialized medical services than routine skilled nursing care. Although reimbursement for Medicare residents generates a higher level of revenue per patient day, with margins that generally exceed those of Medicaid patients, profitability is not proportionally tied to the revenue growth due to the additional costs associated with providing the higher level of care and other services required by such residents. MARKETING The Company's marketing strategy is to focus on relationship development at the local market level. Information systems are being developed and implemented to provide marketing managers with the ability to assess competitors, identify and target referral sources and track several key indicators of sales performance for each local market. Management believes that these information systems will provide the Company with the ability to manage and measure performance at both the local and national level, thereby allowing the Company to identify shifts in market trends as they occur. Local market sales efforts focus on establishing and maintaining cooperative relationships and networks with physicians, acute care hospitals and other healthcare providers, with an emphasis on specialists who treat ailments involving long-term care and rehabilitation. Programs focusing on managed care payors also exist at both the local and national level. Ongoing assessment of customer satisfaction with the Company's services provides an opportunity for continual improvements in product and sales performance. Many of the Company's facilities are currently operated as part of a marketing cluster. This environment creates a strong focus on identifying more cost effective methods to provide healthcare. Opportunities to link services and sell multiple services to a single payor within these targeted markets are significant. Development of programs to coordinate sales efforts for all of the Company's services within each targeted market are currently being examined and management believes that this will improve the efficiency and effectiveness of its sales efforts, while creating an ability to offer a continuum of care of post-acute services. The Company will take advantage of other opportunities for increased profitability, including potential arrangements with healthcare providers such as health maintenance organizations ("HMOs"). The Company will continue to establish relationships with managed care providers which it believes will increase its subacute care business. Being an industry leader in a particular market is expected to enhance the Company's ability to serve large providers of managed care within its targeted markets. Typically, patients referred by managed care providers, including HMOs and preferred provider organizations, generate higher revenues per patient day than Medicaid patients as a result of the higher acuity of the enrollees. Management believes that the Company's ability to provide subacute and specialty medical services at a lower cost than acute care hospitals will be a competitive advantage in becoming the provider of choice for managed care providers. 8 MANAGEMENT INFORMATION SYSTEMS Management is devoting substantial time and resources integrating and enhancing the existing information systems of LCA and GranCare. Management expects to complete the installation of a new client-server based financial and payroll/human resource software package during 1999. The new software is expected to provide more timely retrieval of financial and operating data and enhanced analytical review capabilities, thereby increasing the utility and functionality of the Company's information systems. In preparation for this implementation, LCA completed a business process review of its financial and payroll/human resource processing procedures prior to the Mergers. This business process review was designed so that maximum benefit from the functionality offered by the new client-server software package could be attained, best practices could be adopted for financial and payroll/human resource processing based on procedures currently in use both within and outside the industry and customization of software could be minimized. Management expects the combination of the client-server implementation and business process review to strategically position the Company to operate under a shared services model. Benefits of a shared services model are expected to include standardized financial reporting, streamlined human resource management and increased access to critical and time-sensitive information across the Company. REGULATION Various aspects of the Company's business are regulated by the federal government and by the states where the Company has operations. Regulatory requirements affect the Company's business activities by controlling growth, requiring licensure and certification for the Company's facilities and healthcare services, and controlling reimbursement for services provided. The Company believes it materially complies with applicable regulatory requirements, but there can be no assurance that the Company will be able to maintain such compliance or will not be required to expend significant amounts to do so. The Company is in the process of consolidating the compliance programs and initiatives of LCA and GranCare and plans to roll-out a Company wide program during 1998. Medicare and Medicaid. The Medicare program was enacted in 1965 to provide a nationwide, federally funded health insurance program for the elderly. The Medicaid program is a joint federal-state cooperative arrangement established for the purpose of enabling states to furnish medical assistance on behalf of aged, blind, or disabled individuals, or members of families with dependent children, whose income and resources are insufficient to meet the costs of necessary medical services. All of the Company's nursing facilities, assisted living facilities, home health and hospice agencies, pharmacies, and rehabilitation clinics are licensed under applicable state law and will be certified or approved (other than the assisted living facilities) as providers or suppliers under one or more Medicare or Medicaid programs, as applicable. Long-term care facilities must comply with certain requirements to participate either as a skilled nursing facility under Medicare or a nursing facility under Medicaid. Regulations effective October 1, 1990, pursuant to the Omnibus Budget Reconciliation Act of 1987, obligate facilities to demonstrate compliance with requirements relating to resident rights, resident assessment, quality of care, quality of life, physician services, nursing services, pharmacy services, dietary services, rehabilitation services, infection control, physical environment and administration. Survey, certification, and enforcement procedures to be used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted by Health Care Finance Administration ("HCFA") regulations effective July 1, 1995. These regulations require that surveys focus on residents' outcomes of care and state that all deviations from participation requirements will be considered deficiencies, but that all deficiencies will not constitute noncompliance. The regulations identify alternative remedies against facilities and specify the categories of deficiencies for which they will be applied. The remedies include, but are not limited to: civil money penalties of $5,000 to $10,000 per violation; facility closure and/or transfer of residents in emergencies; directed plans of correction; and directed in-service training. 9 HCFA requires compliance with certain standards as a condition to participation in the Medicare and Medicaid home healthcare program. Failure to comply may result in termination of the agency's Medicare and Medicaid provider agreements. In 1989, Congress directed the Department of Health and Human Services ("HHS") to develop and implement a range of intermediate, or alternative, sanctions for home health agencies. HHS published proposed rules to implement this authority in 1991; however, these rules have not been finalized and thus far have not taken effect. The proposed sanctions would include civil monetary penalties, temporary management, suspension of payment for new admissions, and other sanctions to be imposed upon agencies found out of compliance with standards. The Company believes that its facilities and service providers materially comply with applicable regulatory requirements. From time to time, however, the Company receives notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. The Company reviews such notices for factual correctness, and based on such review, either takes appropriate corrective action or challenges the stated basis for the allegation of noncompliance. In most cases, the Company and the reviewing agency will agree upon the measure to be taken to bring the facility or service provider into compliance. Under certain circumstances, however, such as repeat violations or perceived severity of the violations, the federal and/or state agencies have the authority to take adverse actions against a facility or provider, including the imposition of monetary fines, the decertification of a facility or provider from participation in the Medicare and/or Medicaid programs, or licensure revocation. While in certain instances facilities or providers have been fined, decertified, or had licensure sanctions imposed, the Company has been able to reinstate the certifications and satisfactorily resolve the fines and licensure sanctions. No such enforcement action against a facility or provider has had a material adverse impact on the Company (or, prior to the Mergers, LCA or GranCare), although there can be no assurance that such an enforcement action will not have a material impact on the Company in the future. The Company believes it substantially complies with these regulatory requirements, but there can be no assurance that the Company will be able to maintain such compliance, or will not be required to expend significant amounts to do so. Medicare utilizes a cost-based reimbursement system for nursing facilities, long-term acute care hospitals and home health agencies for reasonable direct and indirect allowable costs incurred in providing "routine service" (as defined by the program and subject to certain limits) as well as capital costs and ancillary costs. The Company is filing Routine Cost Limit Exception requests for the facilities which exceed the limits and fit the criteria as exception candidates. The Company may benefit from exceptions to the routine cost limits. Allowable costs include nursing, administrative and general, dietary, housekeeping, laundry, social services, activities, central supply, maintenance and plant operations as well as ancillary and capital costs. There can be no assurance that any such requests for the Routine Cost Limit Exception will be granted. Congress passed a fiscal year 1996 budget reconciliation bill that contained a provision that would have required Medicare to pay skilled nursing facilities on a prospective payment basis beginning in October 1997. Although this bill was ultimately vetoed by the President, the Clinton Administration had proposed adopting prospective payment for skilled nursing facilities in 1999. See the discussion of the Balanced Budget Act below for additional discussion regarding the prospective payment system. Other legislative proposals, including one adopted by the U.S. Senate, have called for developing a prospective payment system for specialty medical care programs within acute care hospitals. Proposals to reduce the growth in Medicare and Medicaid expenditures are under active consideration in the current session of Congress. The Company cannot predict at this time whether any of these proposals will be adopted or, if adopted and implemented, what effect such proposals would have on the Company. There can be no assurance that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs, particularly with respect to the Medicaid programs, which generally provide lower reimbursement rates than the Medicare program. Medicare and Medicaid reimbursements have historically been determined from annual cost reports filed by LCA and GranCare which are subject to audit by the respective agency administering the programs. The audits generally focus on the reasonableness and necessity of the costs incurred by providers, including the costs of obtaining goods and/or services from related parties. The Company has received notices for previous cost-reporting periods that the reviewing agency intends to adjust certain costs with regard to services and supplies 10 furnished by the Company's pharmacy and rehabilitation divisions to its nursing facilities. The Company disagrees with the reviewing agency's position and is pursuing all available appeal rights. The Company believes it has substantial arguments in support of its position that the contested costs are appropriate, but there can be no assurance that the Company will prevail on all appeal issues, nor that it will not be required to expend significant amounts to complete the appeal process. Adjustments to LCA's and GranCare's cost reports historically have not had a material adverse effect on their respective operating results. However, there can be no assurance that future adjustments to such cost reports will not have a material adverse effect on the Company's operating results. The Balanced Budget Act, signed into law on August 5, 1997, makes numerous changes to the Medicare and Medicaid programs which could potentially affect the Company. With respect to the Medicare program, the new law required the establishment of a prospective payment system for Medicare skilled nursing facility services, under which facilities will be paid a federal per diem rate for virtually all covered services. The prospective payment system will be phased in over three cost reporting periods, starting with cost reporting periods beginning on or after July 1, 1998. The Balanced Budget Act also institutes consolidated billing for skilled nursing facility services, under which payments for non-physician Part B services for beneficiaries no longer eligible for Part A skilled nursing facility care will be made to the facility, regardless of whether the item or service was furnished by the facility, by others under arrangement or under any other contracting or consulting arrangement, effective for items or services furnished on or after July 1, 1998. Likewise, the Balanced Budget Act requires the Secretary of HHS to establish a prospective payment system for home health services, to be implemented beginning October 1, 1999. The legislation also requires home health agencies to submit claims for all services, and all payments will be made to the home health agencies regardless of whether the item or service was furnished by the agency, by others under arrangement or under any other contracting or consulting arrangement. The law also contains provisions affecting outpatient rehabilitation agencies and providers, including a 10 percent reduction in operating and capital costs for 1998, a fee schedule for therapy services beginning in 1999, and the application of per beneficiary therapy caps currently applicable to independent therapists to all outpatient rehabilitation services beginning in 1999. With regard to hospices, the Balanced Budget Act limits reimbursement by setting the payment rate increase at a market basket minus 1.0 percentage point for fiscal years 1998 through 2002. The law also institutes a number of reforms of the hospice benefit, including a requirement that hospices can be reimbursed based on the location where care is furnished (rather than the location of the hospice), effective for cost reporting periods beginning on or after October 1, 1997. Other provisions limit Medicare payments for certain drugs and biologicals, durable medical equipment and parenteral and enteral nutrients and supplies. The Balanced Budget Act also contains a number of changes affecting the Medicaid program. Significantly, the law repeals the so-called Boren Amendment, which required state Medicaid programs to reimburse nursing facilities for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. Effective for Medicaid services provided on or after October 1, 1997, states will have considerable flexibility in establishing payment rates. The Company is not able to predict whether any states will adopt changes in their Medicaid reimbursement systems, or, if adopted and implemented, what effect such initiatives would have on the Company. Nevertheless, there can be no assurance that such changes in Medicaid reimbursement to nursing facilities will not have an adverse effect on the Company. Further, the Balanced Budget Act allows states to mandate enrollment in managed care systems without seeking approval from the Secretary of HHS for waivers from certain Medicaid requirements as long as certain standards are met. These managed care programs have historically exempted institutional care. However, no assurance can be given that these waiver provisions ultimately will not change the reimbursement system for long-term care facilities from fee-for-service to managed care negotiated or capitated rates or otherwise affect the level of payments to the Company. Healthcare reform remains an issue for healthcare providers. Many states are currently evaluating various proposals to restructure the healthcare delivery system within their jurisdiction. It is uncertain at this time what legislation on healthcare reform will ultimately be implemented or whether other changes in the administration or interpretation of governmental healthcare programs will occur. Management anticipates that federal and state legislatures will continue to review and assess various healthcare reform proposals and alternative healthcare 11 systems and payment methodologies. Management is unable to predict the ultimate impact of any federal or state restructuring of the healthcare system, but such changes could have a material adverse impact on the operations, financial condition and prospects of the Company. Referral Restrictions and Fraud and Abuse. The Medicare and Medicaid anti- kickback statute, 42 U.S.C. (S) 1320a-7(b), prohibits the knowing and willful solicitation or receipt of any remuneration "in return for" referring an individual, or for recommending or arranging for the purchase, lease, or ordering, of any item or service for which payment may be made under Medicare or a state healthcare program. In addition, the statute prohibits the offer or payment of remuneration "to induce" a person to refer an individual, or to recommend or arrange for the purchase, lease, or ordering of any item or service for which payment may be made under the Medicare or state healthcare programs. Violation of the anti-kickback statute, pursuant to the Balanced Budget Act, now carries a civil monetary penalty of $50,000 per act, and treble the remuneration involved without regard to whether any portion of that remuneration relates to a lawful purpose. The statute contains "safe harbor" exceptions for certain discounts, group purchasing organizations, employment relationship, waivers of coinsurance by community health centers, health plans and practices defined in regulatory safe harbors. False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions at 42 U.S.C. (S) 1320a-7(b) prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid, or failing to refund overpayments or improper payments; offenses for violation are felonies punishable by up to five years imprisonment, and/or $25,000 fines. Civil provisions at 31 U.S.C. (S) 3729 prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment; penalties for violations are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. Allegations have been made under the civil provisions of the statute that the Company has filed false claims. See "Legal Proceedings" for a discussion of these allegations. The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992, generally prohibits physicians from referring Medicare patients to clinical laboratories for testing if the referring physician (or a member of the physician's immediate family) has a "financial relationship," through ownership or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of 1993 contains provisions commonly known as "Stark II" ("Stark II") expanding Stark I by prohibiting physicians from referring Medicare and Medicaid patients to an entity in which a physician has a "financial relationship" for the furnishing of certain items set forth in a list of "designated health services," including physical therapy, occupational therapy, home health services, and other services. Subject to certain exceptions, if such a financial relationship exists, the entity is generally prohibited from claiming payment for such services under the Medicare or Medicaid programs. Other provisions in the Social Security Act authorize the imposition of other penalties, including exclusion from participation in Medicare and Medicaid, for various billing and other offenses. Additionally, the Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") granted expanded enforcement authority to HHS and the U.S. Department of Justice ("DOJ"), and provided enhanced resources to support the activities and responsibilities of the Office of Inspector General ("OIG") and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to healthcare delivery and payment. The Balanced Budget Act also includes numerous health fraud provisions, including new civil money penalties for contracting with an excluded provider; new surety bond and information disclosure requirements for certain providers and suppliers; and an expansion of the mandatory and permissive exclusions added by the Health Insurance Portability and Accountability Act of 1996 to any federal healthcare program (other than the Federal Employees Health Benefits Program). Management expects that business practices of providers and financial relationships between providers will be subject to increased scrutiny as healthcare reform efforts continue at federal and state levels. Although the Company has contractual arrangements with some healthcare providers, it believes that its practices are not in violation of these federal and state prohibitions. Management cannot reasonably predict whether enforcement activities will increase at the federal or state level or the effect of any such increase on the business of the Company. In the summer of 1995, a major anti-fraud demonstration project, "Operation Restore Trust," was announced by the OIG. A primary purpose for the project is to scrutinize the activities of healthcare providers 12 who are reimbursed under the Medicare and Medicaid programs. Initial investigative efforts have focused on skilled nursing facilities, home health and hospice agencies, and durable medical equipment suppliers in Texas, Florida, New York, Illinois, California, and Louisiana. On May 20, 1997, HHS announced that Operation Restore Trust will be expanded during the next two years to include 12 additional states (Arizona, Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia and Washington), as well as several other types of healthcare services. Over the longer term, Operation Restore Trust investigative techniques will be used in all 50 states, and will be applied throughout the Medicare and Medicaid program. The OIG has issued, and will continue to issue, special Fraud Alert bulletins identifying "suspect" characteristics of potentially illegal practices by providers, and illegal arrangements between providers. The bulletins contain "Hot Line" numbers and encourage Medicare beneficiaries, healthcare company employees, competitors, and others to call to report suspected violations. Enforcement actions could include criminal prosecutions, suit for civil penalties, and/or Medicare program exclusion. While the Company does not believe that it is in violation of any such laws or is the target of any such investigation under Operation Restore Trust, there can be no assurance that substantial amounts will not be expended by the Company to cooperate with any such investigation or to defend allegations arising therefrom. If it were found that any of the Company's practices (or the practices of LCA or GranCare prior to the Mergers) failed to comply with the anti-fraud provisions, the Company could be materially adversely affected. Management is unable to predict the effect of future administrative or judicial interpretations of these laws, or whether other legislation or regulations on the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take, or their impact on the Company. There can be no assurances that such laws will ultimately be interpreted in a manner consistent with the Company's practices, nor that the Company will not be required to expend significant sums in the event it becomes subject to such investigative or enforcement actions under "Operation Restore Trust." See "--Legal Proceedings." Certificate of Need. CON statutes and regulations control the development and expansion of healthcare services and facilities in certain states. The CON process is intended to promote quality healthcare at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities. CON or similar laws generally require that approval be obtained from the designated state health planning agency for certain acquisitions and capital expenditures, and that such agency determine that a need exists prior to the expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. CONs or other similar approvals may be required in connection with the Company's future acquisitions and/or expansions. There can be no assurance that the Company will be able to obtain the CONs or other approvals necessary for any or all such projects. Contract Management Regulation. Contract managers of geriatric mental health centers, subacute care units, specialty acute hospitals and senior health centers are not typically subject to direct regulation, although the Company may be held responsible for violations of certain federal and state laws, such as the referral restrictions described above. Further, the facilities managed by the Company on a contract basis will be subject to regulation. Management contracts with these facilities may hold the Company accountable in certain instances to a facility which is cited for non-compliance with regulatory requirements. Further, there can be no assurance that the facilities managed by the Company will not be subject to statutory or regulatory changes which might adversely impact these facilities and, indirectly, the Company's contract management business. Therapy Regulation. The Company furnishes therapy services on a contract basis to certain providers as well as to patients in most of its facilities, and the providers bill Medicare for reimbursement of the amounts paid to the Company for these services. HCFA has the authority to establish limits on the amount Medicare reimburses for therapy services. For services other than inpatient hospital services, these limits are equivalent to the reasonable amount that would have been paid if provider employees had furnished the services. HCFA has exercised this authority by publishing "salary equivalency guidelines" for physical therapy and respiratory therapy services. HCFA does not currently have salary equivalency guidelines for other therapy services, but Medicare auditors may nonetheless impose disallowances with respect to purchasers that have failed to act as "prudent buyers." On March 28, 1997, HCFA issued a proposed regulation that would revise the salary equivalency guidelines for physical therapy and respiratory therapy and establish salary equivalency guidelines 13 for speech-language pathology and occupational therapy service. HCFA estimates that the proposed regulation would increase the reimbursement rates for physical therapy by 30.5% and for respiratory therapy by 8.1%. The proposed salary equivalency rates for occupational therapy and speech-language pathology, however, would reduce current reimbursement rates by 42.7% and 28.1%, respectively. Management cannot predict whether this proposed regulation will be adopted or, if adopted, the effect it would have on the Company. Pharmacy Regulation. Pharmacy operations are subject to regulation by the various states in which the Company conducts its business as well as by the federal government. The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, which is administered by the United States Drug Enforcement Administration ("DEA"), the pharmacies, as dispensers of controlled substances, must register with the DEA, file reports of inventories and transactions and provide adequate security measures. Failure to comply with such requirements could result in civil or criminal penalties. The Company believes that its pharmacy operations are in substantial compliance with such regulations. Home Health/Hospice. On September 15, 1997, President Clinton imposed a first-ever six month moratorium on the entry of new home health agencies into the Medicare program in order to allow new regulations to be written that will attempt to curb fraud and abuse within the home healthcare industry. HHS will have authority to grant exceptions from the moratorium for areas of the country with no access to home healthcare services. In addition to the moratorium, the Clinton administration will also require, among other things, that home health agencies re-enroll in the Medicare program every three years and, at the time of re-enrollment, submit to an independent audit of their records and practices. Finally, the President pledged to double the number of audits conducted of home health agencies, while at the same time, HCFA will increase the number of claims reviewed by 25%. Until the new regulations are released, the Company is unable to predict what impact, if any, the new regulations will have on its home health operations. On September 19, 1997, the OIG issued its report on "Hospice Patients in Nursing Homes" which made findings of lower frequency of services, the overlap of services and the questionable enrollment in hospice by nursing home patients, and concluded that current payment levels for hospice care in nursing homes may be excessive. The OIG recommended that HCFA seek legislation to modify Medicare or Medicaid payments for hospice patients living in nursing homes. Until such legislation is adopted, the Company is unable to predict what impact, if any, modification of payment will have. COMPETITION The long-term healthcare industry is segmented into a variety of competitive areas which market similar services. These competitors include nursing homes, assisted living facilities, hospitals, extended care centers, retirement centers and communities, and home health and hospice agencies. Many operators of acute care hospitals offer or may offer post-acute care services. These operators would have the competitive advantage of being able to offer services to patients through their affiliated post-acute care operators. The Company's facilities historically have competed on a local basis with other long-term care providers and the Company's competitive position will vary from center to center within the various communities it serves. Significant competitive factors include the quality of care provided, reputation, location and physical appearance of the long-term care facilities and, in the case of private pay residents, charges for services. Since there is little price competition with respect to Medicaid and Medicare residents, the range of services provided by the Company's facilities covered by Medicaid and Medicare as well as the location and physical condition of its facilities will significantly affect its competitive position in its markets. Competition in the institutional pharmaceutical and the rehabilitation services markets ranges from small local operators to companies that are national in scope and distribution capability. In order to enhance its ability to compete at both the national and regional market level, the Company is implementing certain marketing and information systems initiatives. See "--Marketing" and "-- Management Information Systems." 14 INSURANCE The Company maintains, on behalf of itself and its subsidiaries, insurance coverages that it deems adequate. The Company also requires that physicians practicing at its long-term care facilities carry medical malpractice insurance to cover their individual practice. Moreover, insurance coverage in certain states is not available to cover punitive damages, and proceedings involving claims of punitive damages are pending in certain of these states. EMPLOYEES At December 19, 1997, the Company employed approximately 45,000 individuals, of which approximately 1,000 worked at the corporate and field offices. The Company has collective bargaining agreements with unions representing employees at 26 facilities and with employee councils at two of its facilities, most of which are with the Service Employees International Union and expire in April or May 1998. The Company is preparing to negotiate with the Service Employees Internation Union. The Company cannot predict the outcome of these negotiations at this time. The Company cannot predict the effect continued union representation or organizational activities will have on its future activities. However, the aforementioned organizations have not caused any material work stoppages in the past. CAUTIONARY STATEMENTS Information provided herein by the Company contains, and from time to time the Company may disseminate materials and make statements which may contain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources" contains information concerning the ability of the Company to service its debt obligations and other financial commitments as they come due and "--Business Strategy" contains information regarding management's belief concerning the growth opportunities available to the Company. The aforementioned forward looking statements, as well as other forward looking statements made herein, are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, the following: (i) In recent years, an increasing number of legislative proposals have been introduced or proposed by Congress and in some state legislatures which would effect major changes in the healthcare system. However, the Company cannot predict the form of healthcare reform legislation which may be proposed or adopted by Congress or by state legislatures. Accordingly, the Company is unable to assess the effect of any such legislation on its business. There can be no assurance that any such legislation will not have a material adverse impact on the future growth, revenues and net income of the Company. (ii) The Company derives substantial portions of its revenues from third- party payors, including government reimbursement programs such as Medicare and Medicaid, and some portions of its revenues from non-governmental sources, such as commercial insurance companies, health maintenance organizations and other charge-based contracted payment sources. Both government and non government payors have undertaken cost-containment measures designed to limit payments to healthcare providers. There can be no assurance that payments under governmental and non-governmental payor programs will be sufficient to cover the costs allocable to patients eligible for reimbursement. The Company cannot predict whether or what proposals or cost-containment measures will be adopted or, if adopted and implemented, what effect, if any, such proposals might have on the operations of the Company. 15 (iii) The Company is subject to extensive federal, state and local regulations governing licensure, conduct of operations at existing facilities, construction of new facilities, purchase or lease of existing facilities, addition of new services, certain capital expenditures, cost- containment and reimbursement for services rendered. The failure to obtain or renew required regulatory approvals or licenses, the delicensing of facilities owned, leased or operated by the Company or the disqualification of the Company from participation in certain federal and state reimbursement programs could have a material adverse effect upon the operations of the Company. (iv) There can be no assurance that the Company will be able to continue its substantial growth or be able to fully implement its business strategies for its post-acute care, pharmaceutical services, rehabilitation services, or hospital services divisions or that management will be able to successfully integrate the operations of GranCare and LCA. ITEM 2. PROPERTIES As of November 30, 1997 the Company operated 327 long-term care facilities (318 skilled nursing facilities and nine free standing assisted living facilities) with 38,272 licensed beds located in 21 states. Licensed beds represent the number of beds for which a license has been issued and may vary from the actual beds available for use. As of November 30, 1997, the Company operated the following facilities:
OWNED LEASED MANAGED TOTAL ----------------- ----------------- --------------- ----------------- FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS ---------- ------ ---------- ------ ---------- ---- ---------- ------ Alabama................. 7 848 -- -- -- -- 7 848 Arizona................. 4 506 10 1,236 -- -- 14 1,742 California.............. 1 99 30 3,381 -- -- 31 3,480 Colorado................ 19 2,032 11 1,374 -- -- 30 3,406 Florida................. 2 295 -- -- -- -- 2 295 Georgia................. 4 429 6 706 -- -- 10 1,135 Illinois................ 13 1,114 6 766 1 209 20 2,089 Indiana................. -- -- 3 471 -- -- 3 471 Iowa.................... 1 99 6 448 -- -- 7 547 Louisiana............... -- -- 9 1,500 -- -- 9 1,500 Michigan................ 13 1,863 -- -- -- -- 13 1,863 Mississippi............. 1 124 10 1,104 -- -- 11 1,228 Nebraska................ 7 612 -- -- -- -- 7 612 North Carolina.......... 29 3,429 4 600 1 60 34 4,089 Ohio.................... -- -- 1 100 -- -- 1 100 South Carolina.......... 2 265 9 964 -- -- 11 1,229 Tennessee............... -- -- 2 226 -- -- 2 226 Texas................... 48 5,558 42 4,640 1 120 91 10,318 Virginia................ -- -- 5 343 -- -- 5 343 Wisconsin............... 7 1,302 7 924 -- -- 14 2,226 Wyoming................. 3 385 2 140 -- -- 5 525 --- ------ --- ------ --- --- --- ------ Total................... 161 18,960 163 18,923 3 389 327 38,272 === ====== === ====== === === === ======
16 In addition to long-term care facilities, at November 30, 1997 the Company operated 133 outpatient rehabilitation clinics in 18 states and 34 institutional pharmacies in 11 states, as follows:
OUTPATIENT INSTITUTIONAL STATE CLINICS PHARMACIES ----- ---------- ------------- Alabama........................................... -- 1 Arizona........................................... 1 2 California........................................ 5 -- Colorado.......................................... -- 3 Connecticut....................................... 3 -- Florida........................................... 17 9 Georgia........................................... 1 2 Illinois.......................................... -- 1 Indiana........................................... -- 1 Kansas............................................ 7 -- Kentucky.......................................... 1 -- Louisiana......................................... 6 2 Maryland.......................................... 2 -- Mississippi....................................... 7 -- Missouri.......................................... 4 -- Nevada............................................ 1 -- New Jersey........................................ -- 1 North Carolina.................................... 22 2 South Carolina.................................... 9 -- Tennessee......................................... 10 -- Texas............................................. 29 10 Virginia.......................................... 7 -- Washington........................................ 1 -- --- --- Total......................................... 133 34 === ===
Substantially all of the Company's outpatient rehabilitation clinics and institutional pharmacy facilities are leased under "triple net" leases. Subject to the exceptions set forth below, the Company's hospital services division enters into contracts with acute care hospitals for the management of geriatric specialty programs, generally located inside such hospitals. Such management contracts do not generally involve the lease or purchase of any property. This division does, however, own two properties. The two owned facilities are The Specialty Hospital of Austin (Texas) and The Specialty Hospital of Houston (Texas), which have 104 beds and 134 beds, respectively. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of the above properties serve as collateral for various mortgage debt instruments or capitalized lease obligations. See Notes 5 and 11 to the Consolidated Financial Statements. The Company regularly reviews its portfolio of properties and intends to divest those properties which it believes do not meet quality or financial performance standards. ITEM 3. LEGAL PROCEEDINGS As is typical in the healthcare industry, the Company is and will be subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which will be greater for higher acuity residents receiving services from the Company than for other long-term care residents. The Company is, from time to time, subject to such negligence claims and other litigation. In addition, resident, visitor, and employee injuries will also subject the Company to the risk of litigation. From time to time, the Company and its subsidiaries have 17 been parties to various legal proceedings in the ordinary course of their respective business. In the opinion of management, except as described below, there are currently no proceedings which, individually or in the aggregate, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States Attorney's Office for the Eastern District of Texas (Beaumont) advising that the office is involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation is the result of a qui tam complaint (which involves a private citizen requesting the federal government to intervene in an action because of an alleged violation of a federal statute) filed under seal against the Company, and the AUSA is investigating the allegations in order to determine if the United States will intervene in the proceedings. The AUSA has requested that the Company voluntarily produce a substantial amount of documents, including medical records of former residents. Counsel for the Company has met with the AUSA, and the parties are currently engaged in discussions on whether the voluntary production of former residents' medical records can be accomplished without violating the residents' rights to privacy and confidentiality. Based upon the information currently known about the complaint, the Company believes that given an opportunity to address the allegations, the AUSA will find intervention by the United States is without merit. The Company will vigorously contest the alleged claims if the complaint is pursued. The Department of Justice ("DOJ") has advised the Company that the United States has declined to intervene in the qui tam complaint filed against The Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries of the Company (and of LCA before the Mergers) in the federal district court for the Western District of North Carolina. The Company does not know whether the individual plaintiff will continue to pursue the alleged claims that BCC and Med-Therapy caused certain therapists to make improper therapy record entries with respect to screening services, and that any claims filed with Medicare for payments based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. The Company will vigorously contest any claims which the individual plaintiff pursues. No assurance can be given that, if the plaintiff were to prevail in his claim, the resulting judgement would not have a material adverse effect on the Company. Moreover, in connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless the Company from and against any and all loss, expense, damage, penalty and liability which could result from this claim, subject to further adjustment. Mr. Beaver's indemnity requires any payment to the Company to be in the form of shares of the Company common stock held by him. The Company was served with a Petition, Cause No. 97-1500-G, Community Healthcare Services of America, Inc., v. Rehability Health Services, Inc. and Living Centers of America, Inc., in the 319th Judicial District Court of Nueces County, Texas, seeking $5.0 million in damages, filed by Community Health Services, Inc. ("Community"), in connection with a home health agency management agreement entered into between Community and a subsidiary of the Company. Such subsidiary operated a Texas home health agency which Community managed. The Company is vigorously defending the allegations of Community that the Company breached the agreement by terminating Community's management services and has filed a lawsuit against Community for breach of the agreement, Cause No. 97-03569; Rehability Health Services, Inc. v. Community Healthcare Services, Inc., in the 353rd Judicial District Court of Travis County, Texas. The Nueces County action was transferred to Travis County and the two cases have been consolidated into Cause No. 97-03569. 18 On June 10, 1997, a GranCare stockholder filed a civil action in state district court in Harris County, Texas: Howard Gunty, Inc. Profit Sharing Plan v. Gene E. Burleson, Charles M. Blalack, Antoinette Hubenette, Joel S. Kanter, Ronald G. Kenny, Robert L. Parker, William G. Petty, Jr., Edward V. Regan, Gary U. Rolle and GranCare, Inc. This complaint alleged, generally, that the defendants breached their fiduciary duties owed to GranCare's stockholders by failing to take all reasonable steps necessary to ensure that GranCare's stockholders receive maximum value for their shares of GranCare common stock in connection with the GranCare Merger. The plaintiffs sought (i) an injunction prohibiting the consummation of the GranCare Merger or (ii) alternatively, if the GranCare Merger were consummated, to have such transaction rescinded and set aside. In addition, the plaintiffs sought unspecified compensatory damages, costs and to have the action certified as a class action. On October 28, 1997, the parties to the aforementioned litigation entered into an Agreement and Stipulation of Settlement (the "Settlement Agreement") pursuant to which the plaintiffs agreed to dismiss, with prejudice, all claims against GranCare in consideration of, among other things, (i) certain additional disclosure included in the disclosure documents sent to GranCare stockholders in connection with their approval of the GranCare Merger and (ii) the payment by GranCare of the fees and expenses of plaintiffs' counsel in an aggregate amount of no more than $350,000. The effectiveness of the Settlement Agreement is subject to a number of conditions, including, among others, the entry by the court of a final judgement approving the terms of the settlement. GranCare entered into the Settlement Agreement based upon its belief that a speedy resolution of this dispute was in the best interest of the GranCare stockholders and in so doing did not in any way admit any wrongdoing or liability in connection with this matter. The Company believes that the court will accept the Settlement Agreement once filed following appropriate shareholder notification. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- Keith B. Pitts.......... 40 Chairman of the Board, President, Chief Executive Officer and Director Leroy D. Williams....... 55 President--Post-Acute Division Dennis G. Johnston...... 50 President--Hospital Services Division William R. Korslin...... 47 President--Pharmaceutical Services Division David L. Ward........... 42 President--Rehabilitation Services Division Charles B. Carden....... 53 Executive Vice President and Chief Financial Officer R. Jeffrey Taylor....... 49 Senior Vice President, Development Susan Thomas Whittle.... 50 Senior Vice President, General Counsel and Secretary
Keith B. Pitts was appointed Chairman of the Board, President, Chief Executive Officer and a Director of the Company on November 4, 1997. Prior to this, Mr. Pitts served as a consultant to Apollo in connection with the Transactions since August 1997. From February 1997 to August 1997 Mr. Pitts was a consultant to Tenet Healthcare Corp. ("Tenet"). Mr. Pitts served as the Executive Vice President and Chief Financial Officer of OrNda HealthCorp, a healthcare service provider in the United States, from August 1992 until its merger with Tenet in January 1997. Prior to joining OrNda HealthCorp, from July 1991 to August 1992, Mr. Pitts was a partner in Ernst & Young LLP's Southeast Region Health Care Consulting Group, and from January 1988 to July 1991 he was a partner and Regional Director in Ernst & Young LLP's Western Region Health Care Consulting Group. Mr. Pitts is a director of Sunburst Hospitality Corporation, a corporation engaged in the hotel business. 19 Leroy D. Williams was appointed President--Post-Acute Care Division of the Company on November 4, 1997. Prior to this, Mr. Williams served as President, Chief Operating Officer and as a director of LCA. Mr. Williams became a director of LCA in January 1992, Chief Operating Officer of LCA in August 1995 and President in February 1996. Mr. Williams served as Executive Vice President of LCA from December 1991 to February 1996. In 1978 Mr. Williams joined LCA as Regional Controller of LCA--Eastern Region. From May 1983 to February 1985, Mr. Williams was Financial Vice President for LCA--Texas. In March 1985, he was appointed Vice President--Finance and became Senior Vice President--Finance in January 1991. Dennis G. Johnston was appointed President--Hospital Services Division of the Company on November 4, 1997. Prior to this, Mr. Johnston served as a Senior Vice President of GranCare and as President of Cornerstone, a wholly- owned subsidiary of GranCare. Mr. Johnston joined GranCare as President of Cornerstone in April 1995 and became Senior Vice President of GranCare in July 1995. Mr. Johnston was the co-founder of Cornerstone in 1990 and served as its President and Chief Executive Officer from 1990 to 1995. From 1984 to 1989, Mr. Johnston held various positions with the management subsidiary of Republic Health Corporation, including that of Senior Development Officer. William R. Korslin was appointed President--Pharmaceutical Services Division of the Company on November 4, 1997. Prior to this, Mr. Korslin served as a Vice President of LCA since September 1995 and as President of APS, LCA's pharmaceutical services subsidiary, since May 1994. Mr. Korslin joined APS in July 1987 as General Manager Enteral Services. From 1989 through 1992, he served as Eastern Area Vice President of APS and, from 1992 to 1994, Mr. Korslin was Senior Vice President in charge of all field operations of APS. David L. Ward was appointed President--Rehabilitation Services Division of the Company on November 4, 1997. Prior to this, Mr. Ward served as an officer of LCA's American Rehability Services division since joining LCA in May 1996. Prior to joining LCA, Mr. Ward served in a variety of management positions with NovaCare, Inc., a national provider of rehabilitation services to long- term care and other healthcare facilities since January 1988, including the Southern States Regional President of NovaCare's Outpatient Division, the Arizona Regional President for NovaCare's Hospital Division, NovaCare's Vice President of Organizational Planning and Development, the Southwestern Vice President of NovaCare's Contract Services Division, the Western Vice President of NovaCare's Contract Services Division and NovaCare's National Sales Manager. Charles B. Carden was appointed Executive Vice President and Chief Financial Officer of the Company on November 4, 1997. Prior to this, Mr. Carden served as Executive Vice President and Chief Financial Officer of LCA since October 1996. Before joining LCA, Mr. Carden was Chief Financial Officer of Leaseway Transportation Corp., where he was employed for 14 years. He also has held various supervisory and analytical positions in corporate finance with Ford Motor Company. R. Jeffrey Taylor was appointed Senior Vice President, Development on November 19, 1997. Prior to this, Mr. Taylor served as Senior Vice President of GranCare since January 1997, as President of GranCare's ancillary services division from November 1996 through January 1997, and as President of GCI Renal Care, Inc., a subsidiary of GranCare, from February 1996 through November 1996. Before joining GranCare, Mr. Taylor was Chief Executive Officer of American Outpatient Services Corporation, a dialysis company, from July 1995 to February 1996. From January 1992 to June 1994 he was President of Weisman, Taylor, Simpson & Sabatino, a health care merchant banking firm based in California. From 1982 through 1992 Mr. Taylor served in several executive capacities with American Medical International, Inc. including General Counsel and Executive Vice President, Chief Administrative Officer. Susan Thomas Whittle was appointed Senior Vice President, General Counsel and Secretary of the Company on November 4, 1997. Prior to this, Ms. Whittle served as Vice President, General Counsel and Secretary of LCA since September 1993. Before joining LCA, Ms. Whittle was a partner with the law firms of Clark, Thomas & Winters of Austin, Texas since February 1992 and Wood, Lucksinger & Epstein, a national healthcare law firm, from May 1981 through February 1992. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKETS AND SALES PRICES OF COMMON EQUITY SECURITIES The Company's common stock was traded on the New York Stock Exchange under the symbol "LCA" through November 4, 1997. Since the time of the Mergers, the Company's common stock has been traded on the NYSE under the symbol "PGN." The high and low sales prices for each quarter for the last two fiscal years is presented in the table below: On November 24, 1997, the Board of Directors of the Company declared a three-for-one stock split to stockholders of record as of December 15, 1997 to be paid on December 30, 1997. The information below has been adjusted to give effect to this stock split.
FISCAL YEAR 1997 FISCAL YEAR 1996 ----------------------- ----------------------- QUARTER ENDED HIGH LOW HIGH LOW ------------- -------- -------- -------- -------- December 31...... 9 7/16 9 3/16 11 11/16 8 1/2 March 31......... 11 3/4 11 1/4 13 11/16 10 1/2 June 30.......... 13 1/4 12 15/16 13 1/16 10 7/8 September 30..... 13 11/16 12 1/2 9 3/8 6 15/16
NUMBER OF STOCKHOLDERS As of December 19, 1997, there were approximately 1,248 owners of record of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends on its common stock since inception and it does not currently anticipate paying any such dividends on its common stock. The Company's Senior Credit Facility, indenture with respect to the Notes, and various other note agreements contain covenants which effectively limit the ability of the Company to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 5 to the Consolidated Financial Statements. 21 ITEM 6. SELECTED FINANCIAL INFORMATION The following selected financial data are derived from LCA's Consolidated Financial Statements, which have been audited by Ernst & Young LLP, independent auditors. The Consolidated Financial Statements give retroactive effect to the acquisition of BCC as though the transaction occurred on September 30, 1992; such transaction has been accounted for using the pooling of interests method of accounting. THE CONSOLIDATED FINANCIAL STATEMENTS DO NOT GIVE EFFECT TO THE MERGERS. The information set forth below is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this filing. All dollar amounts are presented in thousands, except per share amounts.
YEARS ENDED SEPTEMBER 30, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) INCOME STATEMENT DATA: Net revenues.......... $ 1,140,288 $ 1,114,491 $ 893,869 $ 708,873 $ 576,140 Income from operations........... 95,108 89,556 57,005 49,468 38,464 Interest expense, net................ 16,852 12,461 10,817 10,894 8,998 Equity earnings/minority interests.......... (735) (156) (204) 1,603 1,582 Net Income.......... 43,917 43,180 24,234 26,616 20,899 Pro forma taxes(1).... -- -- 599 899 899 Pro forma net income(1)............ 43,917 43,180 23,635 25,717 20,000 Earnings per share(2). $ 0.74 $ 0.71 $ 0.42 $ 0.52 $ 0.44 Pro forma earnings per share(1)(2).......... $ 0.74 $ 0.71 $ 0.41 $ 0.50 $ 0.42 Weighted average number of shares outstanding (in thousands)(2)........ 59,325 60,945 57,102 51,240 47,472 OPERATING STATISTICS: Number of centers (end of period)........... 202 206 294 288 267 Average occupancy rate................. 82.9% 83.9% 85.1% 85.2% 84.3% Percentage of patient revenues from: Private............. 33.4% 31.9% 25.5% 23.7% 24.0% Medicare............ 25.7 25.5 23.9 17.5 13.6 Medicaid............ 40.9 42.6 50.6 58.8 62.4 Percentage operating margin............... 8.3% 8.0% 6.4% 7.0% 6.7% SEPTEMBER 30, -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------- ------------ ------------ ------------ BALANCE SHEET DATA: Working capital....... $102,104 $101,091 $34,631 $ 14,955 $ 15,960 Total assets.......... 874,367 809,612 730,708 525,639 376,248 Long term debt, including current portion.............. 295,959 276,448 216,910 206,097 135,409 Stockholders' equity.. 375,283 329,315 303,596 172,018 119,432 Total capitalization.. 671,242 605,763 520,506 378,115 254,841
- -------- (1) A pro forma income tax provision has been provided to reflect the estimated federal and state income taxes as if all BCC S corporations were taxable entities. See Note 1 to Consolidated Financial Statements. (2) Earnings per share and number of shares outstanding have been adjusted to reflect the three-for-one stock split. See Note 19 to Consolidated Financial Statements. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW On November 4, 1997, in connection with the Mergers, LCA changed its name to "Paragon Health Network, Inc." While "Paragon" is the same legal entity as "LCA," following the Mergers the financial position of the Company was significantly different from the financial position of the Company prior to the Mergers. The historical financial information contained herein does not reflect the financial position of the Company on a combined basis because the Mergers were consummated subsequent to the Company's fiscal year end of September 30, 1997. Accordingly, all financial information as of September 30, 1997 contained herein should not be construed as being indicative of the financial position of the Company following the Mergers unless otherwise noted. For an additional discussion of the Mergers, see Notes 1 and 19 to the Consolidated Financial Statements. On November 24, 1997, the Board of Directors of the Company declared a three-for-one stock split to stockholders of record as of December 15, 1997 to be paid on December 30, 1997. The per share information contained in this section, and in the Company's Consolidated Financial Statements, is presented on a pro forma basis in order to give effect to the stock split. The Company derives its revenues by providing: (i) post-acute care; (ii) pharmacy, therapy, subacute and other specialty medical services; and (iii) contract management of specialty medical programs for acute care hospitals. In general, the Company generates higher revenues and operating income from the provision of specialty medical services than from routine skilled nursing care. The Company seeks to enhance its operating margins by increasing the proportion of its revenues derived from specialty medical services. Subacute care refers to complex medical care and intensive nursing care provided to patients with high acuity disorders. Post-acute care refers to any care that a patient receives after discharge from an acute care hospital setting, including subacute, long-term and specialty medical care. Long-term care refers to care, typically conducted over an extended period of time, at a skilled nursing or assisted living facility, as well as care rendered in a patient's home, regardless of whether such care is rendered following discharge from an acute care hospital. Specialty medical services refer to any service provided by the Company other than routine skilled nursing care. The Company's revenues and profitability are affected by ongoing efforts of third-party payors to contain healthcare costs by limiting reimbursement rates, increasing case management review and negotiating reduced contract pricing. Government payors, such as state-administered Medicaid programs and, to a lesser extent, the federal Medicare program, generally provide more restricted coverage and lower reimbursement rates than private pay sources. 23 RESULTS OF OPERATIONS The following table sets forth data from the statement of income expressed as a percentage of net revenues:
YEARS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 1995 -------- -------- -------- Net Revenues: Nursing home.............................. 65.6% 69.7% 82.6% Non-nursing home: Pharmacy................................ 17.3 11.4 10.4 Therapy................................. 15.7 18.5 6.6 Other................................... 1.4 0.4 0.4 -------- -------- -------- 100.0 100.0 100.0 -------- -------- -------- Costs and Expenses: Salaries and wages........................ 38.5 40.9 40.3 Employee benefits......................... 8.6 8.7 9.1 Nursing, dietary, and other supplies...... 4.7 5.4 6.3 Ancillary services........................ 19.7 16.9 16.6 General and administrative................ 14.2 15.1 15.1 Depreciation and amortization............. 3.5 3.5 3.5 Provision for bad debts................... 2.3 1.5 1.3 Life insurance proceeds................... -- (0.2) -- Gain on sale.............................. -- (2.0) -- Impairment of long-lived assets........... -- 1.9 -- Other..................................... -- 0.3 -- Mergers and acquisition cost.............. 0.2 -- 1.4 -------- -------- -------- Income from operations...................... 8.3 8.0 6.4 Interest expense, net....................... 1.5 1.1 1.2 -------- -------- -------- Income before income taxes and equity earnings/minority interest................. 6.8 6.9 5.2 Provision for income taxes.................. 2.9 3.0 2.4 -------- -------- -------- Income before equity earnings/minority interest................................... 3.9 3.9 2.8 Equity earnings/minority interest........... -- -- -- -------- -------- -------- Net income.................................. 3.9 3.9 2.8 Pro forma taxes............................. -- -- 0.1 -------- -------- -------- Pro forma net income........................ 3.9% 3.9% 2.7% ======== ======== ========
Nursing home revenues are derived from the provision of two basic services: routine services ($590.7 million or 79.0% in fiscal year 1997) and ancillary services ($157.4 million or 21.0% in fiscal year 1997) and are a function of occupancy rates in the long-term care facilities and the payor mix. Occupancy rates, as identified in the following table, decreased in fiscal year 1997 due to the divestiture of DevCon (see Note 2 to the Consolidated Financial Statements) in the fourth quarter of fiscal year 1996 and a higher level of competitive activity resulting from an increase in hospital-operated skilled units, assisted living facilities, and other alternative care providers in key markets. The DevCon divestiture reduced weighted average licensed bed count by 1,604 and total average residents by 1,428 for fiscal year 1997. The Company has invested in the marketing and managed care areas and has implemented an aggressive marketing program to increase census and improve quality mix. 24
YEARS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 1995 -------- -------- -------- Weighted average licensed bed count......... 23,028 25,498 26,355 Total average residents..................... 19,095 21,405 22,428 Average occupancy........................... 82.9% 83.9% 85.1%
Payor mix is the source of payment for the services provided and consists of private pay, Medicare and Medicaid. Private pay includes revenue from individuals who pay directly for services without governmental assistance through the Medicare and Medicaid programs. These sources include managed care companies, commercial insurers, health maintenance organizations and Veteran's administration contractual payments. Managed care as a payor source to health care providers is expected to increase over the next several years. The Company has increased its managed care contracting capabilities and has created a system which allows the centralized case management of these patients within targeted markets. However, the impact to the Company of this increasing payor source cannot be determined at this time. Reimbursement rates from government sponsored programs, such as Medicare and Medicaid, are strictly regulated and subject to funding appropriations from federal and state governments. To the extent unfavorable changes in economic conditions impact payments under governmental or third-party payor programs, the Company would be adversely affected. See "Business--Regulation." Revenues derived from the Company's pharmacy and therapy groups are also influenced by payor mix. The table below presents the approximate percentage of the Company's net patient revenues derived from the various sources of payment for the periods indicated:
YEARS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 1995 -------- -------- -------- Private pay................................. 33.4% 31.9% 25.5% Medicare.................................... 25.7% 25.5% 23.9% Medicaid.................................... 40.9% 42.6% 50.6%
The higher percentage of revenues derived from private pay sources for fiscal year 1997 is primarily attributable to the growth in the Company's pharmacy operations, which had a higher percentage of revenue derived from private pay sources than any other pay source, and the divestiture of DevCon in the fourth quarter of fiscal year 1996 which resulted in a reduction in the percentage of net revenue derived from the Medicaid program for fiscal year 1997. In addition to pharmacy operations, the higher percentages of revenue derived from private pay and Medicare sources in fiscal year 1996 is primarily attributable to the acquisitions of American Rehabilitation Services, Inc. and TMI late in fiscal year 1995. Average reimbursement rates for Medicare patients have also increased more rapidly than for Medicaid residents due primarily to the higher reimbursement rates associated with the increase in acuity levels. Although cost reimbursement for Medicare residents generates a higher level of revenue per patient day, profitability is not proportionally increased due to the additional costs associated with the required higher level of care and other services for such residents. The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled with the applicable administrative agencies. The Company does not expect any differences between revenue recorded and as finally determined to have a significant effect on the Company's results of operations or financial position. See Note 1 to the Consolidated Financial Statements. Costs and expenses, excluding depreciation and amortization, primarily consist of salaries, wages, and employee benefits. Various federal, state, and local regulations impose, depending on the services provided, a variety of regulatory standards for the type, quality and level of personnel required to provide care or services. These regulatory requirements have an impact on staffing levels, as well as the mix of staff, and therefore impact total costs and expenses. See "Business--Regulation." The cost of ancillary services, which includes pharmaceuticals, is also affected by the level of service provided and patient acuity. General and administrative 25 expenses include the cost of the Company's various insurance programs, except worker's compensation. See Note 12 to the Consolidated Financial Statements. Fiscal 1997 Compared to Fiscal 1996. Net revenues comprising nursing home and non-nursing home operations totaled $1.1 billion for the year ended September 30, 1997, an increase of $25.8 million or 2.3%, as compared to fiscal 1996. Revenues from nursing home operations decreased by $28.5 million, which included $63.5 million due to divestitures, primarily the disposition of the DevCon operations in the fourth quarter of fiscal 1996, and an $8.0 million reduction due to lower average occupancy rates. Rate increases of $30.2 million and higher ancillary service billings of $13.8 million resulting from the improvement in mix, primarily Medicare, partially offset the nursing home revenue decreases. Non-nursing home revenue increased by $54.3 million which consisted of an increase of $69.3 million for pharmacy services, a decrease of $26.3 million for therapy services, and an increase of $11.3 million from home health, hospice and other services. The acquisition of pharmacies in fiscal year 1996 that occurred late in the year primarily caused the increase in pharmacy services revenue. The closure of approximately 30 clinics during fiscal 1996 that no longer met the Company's financial or operating objectives resulted in a decrease in therapy services revenue. The increase in home health, hospice and other services is primarily due to the purchase of Colorado Home Care, Inc. in January 1997 and the purchase of the remaining 50% interest in Heart of America Hospice, LLC during fiscal year 1997. Costs and expenses totaled $1.0 billion for the year ended September 30, 1997, an increase of $20.2 million or 2.0%, as compared to fiscal 1996. Excluding divestitures, costs for payroll and employee benefits, ancillary, and general and administrative increased by $19.2, $38.1, and $7.0 million, respectively. The increase in ancillary services was primarily the result of higher pharmaceutical costs related to the increase in pharmacy services revenue. Divestitures, primarily DevCon, reduced total expenses by $53.0 million. The provision for bad debt expense increased by $9.6 million for the year ended September 30, 1997, which included a reduction of $1.9 million due to collection of a note receivable and other receivable that were substantially reserved. The remaining increase of $11.5 million was primarily due to an increase in average days outstanding for accounts receivable related to the increase in pharmacy revenues, which have a higher provision for bad debts, and focused Medicare reviews in several states for therapy operations, which delays the payment cycle for Medicare receivables while each claim receives a medical review. In addition, the centralization of billing and collection for therapy operations resulted in delayed billing and a longer billing cycle which resulted in an increase in average days outstanding for receivables. In order to improve the collection process, therapy operations have improved the timeliness of billing, implemented new collection procedures, and opened three new regional collections sites for the clinics. Therapy operations were partially removed from focused billing review in Texas during the third fiscal quarter and fully removed in October 1997, although certain other states remain on billing review. Although significant reductions in average days outstanding were achieved during the fourth quarter of fiscal 1997, average days outstanding for the therapy operations remain high compared to historical levels. As a result, the Company recorded an additional provision for bad debts of $5.0 million during the fourth quarter to reserve for potential uncollectibility on the older accounts. Merger and acquisition costs increased total expenses in fiscal year 1997 by $2.6 million compared to a reduction of costs and expenses in fiscal 1996 of $1.1 million from non-recurring items. The merger and acquisition costs of $2.6 million for fiscal 1997 were related to the Mergers. The $1.1 million reduction of expense from non-recurring items for 1996 consisted of a $2.0 million gain from the receipt of life insurance proceeds on the former President of the rehabilitation services group, a $22.5 million gain in September 1996 on the sale of the DevCon operations, a $2.9 million charge primarily related to the closure of the Company's medical supplies business and write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement, and a $20.5 million impairment loss related to the adoption of SFAS 121 (see Note 8 to the Consolidated Financial Statements). Net interest expense totaled $16.9 million for the year ended September 30, 1997, an increase of $4.4 million as compared to the same period for fiscal 1996. The increase reflected interest expense to finance the 26 higher average level of working capital during fiscal year 1997, additional debt to purchase $20.0 million of the Company's common stock late in fiscal 1996, and acquisitions, investments, and other capital expenditures during fiscal 1997. The provision for income taxes totaled $33.6 million in fiscal year 1997, a decrease of $0.2 million from fiscal year 1996. The 1997 effective tax rate of 43.3% was 0.5% lower than the 1996 effective rate as a result of lower amortization of non-deductible goodwill amortization and higher tax credits which were partially offset by non-deductible merger and acquisition costs. Fiscal 1996 Compared to Fiscal 1995. Net revenues comprising nursing home and non-nursing home operations totaled $1.1 billion for the year ended September 30, 1996, an increase of $220.6 million or 24.7%, as compared to fiscal 1995. Nursing home operations contributed $38.1 million of the increase which included rate increases of $37.2 million and higher ancillary service billings resulting from the improvement in patient mix, primarily Medicare, of $22.6 million. Divestiture of nursing home operations decreased revenue $19.6 million and lower census reduced revenue by $7.6 million. Non-nursing home operations contributed $182.5 million of the increase, consisting of $34.6 million from pharmacy operations, $146.5 million from therapy services and $1.4 million from medical supplies. Acquisitions, primarily Rehability, provided $177.0 million of the $182.5 million increase in non-nursing home revenue. Costs and expenses, including non-recurring items, totaled $1.0 billion for the year ended September 30, 1996, an increase of $188.1 million or 22.5%, as compared to fiscal 1995. Acquisitions, primarily Rehability and TMI, were $171.0 million of the increase, and divestitures reduced total expenses by $24.3 million. Other increases include payroll and related items ($15.8 million) and ancillary services ($28.4 million). The increase in ancillary services corresponds to the increase in ancillary revenue and the higher level of patient acuity as well as an increase in the cost of pharmaceuticals related to higher pharmacy services revenue. Non-recurring items reduced total costs and expenses in fiscal year 1996 by $1.1 million compared to the $12.4 million of merger and acquisition costs from the BCC purchase in fiscal 1995. Non-recurring items included a $2.0 million gain from the receipt of life insurance proceeds on the former President of the Rehabilitation Services Group. In addition, the Company recognized a $22.5 million gain in September 1996 on the sale of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million. The Company also recorded charges of $2.9 million primarily related to the closure of its medical supplies business and the write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement. The adoption of SFAS 121, which occurred in the fourth quarter, resulted in the identification and measurement of an impairment loss of $20.5 million related to nursing facilities with a history of cash flow losses ($1.8 million), certain other nursing facilities where management believed an impairment existed as a result of the competitive environment ($0.6 million), goodwill, primarily TMI ($9.7 million), and other assets to be disposed ($8.4 million). Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The facilities with a history of cash flow losses operated at a loss for periods ranging from one to four years. The undiscounted cash flows for TMI were estimated based on the operating results of TMI subsequent to the death of the President of the rehabilitation services group (founder of TMI) and adjusted for the loss of contracts and impending business changes as a result of his death (See Note 7 to the Consolidated Financial Statements). The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.4 million during fiscal 1996, was completed at the time of adoption of SFAS 121. See Note 8 to the Consolidated Financial Statements. 27 Net interest expense totaled $12.5 million for the year ended September 30, 1996, an increase of $1.6 million or 15.2%, as compared to the same period for fiscal 1995. The increase reflects a full year of interest expense for fiscal 1996 versus three months of interest expense for fiscal 1995 on the additional debt incurred to acquire Rehability. The provision for income taxes increased $12.0 million in fiscal year 1996 but resulted in a lower effective tax rate of 43.8% compared to 47.1% in fiscal year 1995. The decrease in non-deductible merger and acquisition costs reduced the effective tax rate by 7.2% while the elimination of the Targeted Jobs Tax Credit, increased non-deductible goodwill amortization, and other items resulted in an increase of 3.9%. SEASONALITY The Company's revenues and operating income generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, the number of work days in the period, and seasonal census cycles. LIQUIDITY AND CAPITAL RESOURCES--HISTORICAL Cash and cash equivalents were $14.4 million at September 30, 1997, a $7.0 million decrease from September 30, 1996, and working capital was $102.1 million, an increase of $1.0 million during fiscal year 1997. Cash provided by operations was $54.8 million or $23.0 million more than fiscal year 1996. Net income of $43.9 million and non-cash items totaling $65.6 million contributed to the cash provided by operations. These items were offset by the decrease in accrued expenses and other current liabilities of $5.7 million, primarily related to income taxes due on the gain on sale of DevCon stock that were paid in the second quarter of fiscal year 1997, and an increase in receivables of $44.4 million. The increase in receivables was primarily attributable to acquisitions ($4.1 million), revenue increases ($18.8 million), and an increase in average days outstanding ($14.8 million). The increase in receivables resulting from an increase in average days outstanding is primarily related to the Company's therapy operations. The increase in receivables for the therapy operations is related to the centralization of billing and collection which resulted in delayed billing and a longer billing cycle, and focused billing review, primarily in Texas. Focused billing review substantially increases the processing time for payment of therapy services by fiscal intermediaries. Therapy operations were partially removed from focused billing review in Texas during the third fiscal quarter and fully removed in October 1997, although certain other states remain on billing review. In addition, therapy operations have implemented new collection procedures and opened three new regional collection sites for the clinics to improve the collection process. Although significant reductions in average days outstanding were achieved during the fourth quarter of fiscal 1997, average days outstanding for the therapy operations remain high compared to historical levels. As a result, the Company recorded an additional provision for bad debts of $5.0 million during the fourth quarter to reserve for potential uncollectibility on the older accounts. Cash used in investing activities was $77.3 million in fiscal 1997 compared to $66.7 million in fiscal year 1996. Investing activities in fiscal year 1997 included five pharmacy related acquisitions ($6.9 million), construction of three assisted living facilities and expansion of existing facilities ($8.2 million), the acquisition of the remaining 50% interest in a hospice operation ($3.3 million), the acquisition of two home health agencies ($4.1 million), and routine capital expenditures. Capital commitments on one assisted living facility remaining under construction and expansion of existing long-term care facilities totaled $2.2 million at September 30, 1997. These commitments are expected to be funded by cash from operations or the Senior Credit Facility. Cash flow from the disposition of assets was primarily related to the divestiture of two long-term care facilities in Texas. Restricted investments increased $20.5 million due to the collection of outstanding receivables from the Company's third party insurance carrier and current year funding. Financing activities provided $15.4 million during fiscal 1997 and were primarily used to fund acquisitions, investments, and other capital expenditures. In addition to the Senior Credit Facility, the Company has a lease arrangement providing for up to $100.0 million to be used as a funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions (the "Synthetic Lease"). This leasing program allows the Company to complete these projects without committing significant financing 28 resources. The lease is an unconditional "triple net" lease for a period of seven years with the annual lease obligation a function of the amount spent by the lessor to acquire or construct the project, a variable interest rate, and commitment and other fees. The Company guarantees a minimum of approximately 83% of the residual value of the leased property and also has an option to purchase the properties at any time prior to the maturity date at a price sufficient to pay the entire amount financed, accrued interest, and certain expenses. At September 30, 1997 approximately $28.9 million of this leasing arrangement was utilized. The leasing program is accounted for as an operating lease. LIQUIDITY AND CAPITAL RESOURCES--FOLLOWING THE TRANSACTIONS Senior Credit Facility. Prior to the Mergers, both LCA and GranCare maintained senior credit facilities that were replaced with a new Senior Credit Facility in connection with the Mergers. The Senior Credit Facility consists of four components: a 6 1/2 year term loan facility in an aggregate principal amount of $240 million (the "Tranche A Term Loan Facility"); a 7 1/2 year term loan facility in an aggregate principal amount of $250 million (the "Tranche B Term Loan Facility"); an 8 1/2 year term loan facility in an aggregate principal amount of $250 million (the "Tranche C Term Loan Facility"); and a 6 1/2 year revolving credit facility in the maximum amount of $150 million (the "Revolving Credit Facility"). Loans made under the Tranche A Term Loan Facility ("Tranche A Term Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively referred to herein as "Term Loans." Advances under the Revolving Credit Facility are sometimes referred to as "Revolving Loans." The proceeds from borrowings under the Term Loans were used, along with the proceeds of the Senior Subordinated Notes offering, to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses associated with the Mergers. The Term Loans will be amortized in quarterly installments totaling $0, $26.5 million, $49.0 million, $51.5 million, $51.5 million, $56.5 million, $186.0 million, $239.0 million and $80 million in the fiscal years 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005 and 2006, respectively. Principal amounts outstanding under the Revolving Credit Facility will be due and payable in April 2005. With the exception of approximately $14.0 million of letter of credit issuances, as of December 19, 1997, there were no amounts borrowed under the Revolving Credit Facility. Interest on outstanding borrowings will accrue, at the option of the Company, at the customary Alternate Base Rate (the "ABR") of The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the "Eurodollar Rate") plus, in each case, an Applicable Margin. The term "Applicable Margin" means a percentage that will vary in accordance with a pricing matrix based upon the respective term loan tenor and the Company's leverage ratio. Through April 1998, the Applicable Margin for Revolving Loans and Tranche A Term Loans will equal 1.25% for loans based on ABR ("ABR Loans") and 2.25% for loans based on the Eurodollar Rate ("Eurodollar Loans"); for Tranche B Term Loans, 1.50% in the case of ABR Loans and 2.50% in the case of Eurodollar Loans; and for Tranche C Term Loans, 1.75% in the case of ABR Loans and 2.75% in the case of Eurodollar Loans. Subject in each case to certain exceptions, the following amounts are required to be applied, as mandatory prepayments, to prepay the Term Loans: (i) 75% of the net cash proceeds of the sale or issuance of equity by the Company; (ii) 100% of the net cash proceeds of the incurrence of certain indebtedness; (iii) 75% of the net cash proceeds of any sale or other disposition by the Company or any of its subsidiaries of any assets (excluding the sale of inventory and obsolete or worn-out property, and subject to a limited exception for reinvestment of such proceeds within 12 months); and (iv) 75% of excess cash flow for each fiscal year, which percentage will be reduced to 50% in the event the Company's leverage ratio as of the last day of such fiscal year is not greater than 4.50 to 1.00. Mandatory prepayments will be applied pro rata to the unmatured installments of the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans; provided, however, that as long as any Tranche A Term Loans remain outstanding, each holder of a Tranche B Term Loan or a Tranche C Term Loan will have the right to refuse any such mandatory prepayment otherwise allocable to it, in which case the amount so refused will be applied as an additional prepayment of the Tranche A Term Loans. The Company will also have the right to prepay the Senior Credit Facility, in whole or in part, at its option. Partial prepayments must be in minimum amounts of $1 million and in increments of $100,000 in excess thereof. 29 Amounts applied as prepayments of the Revolving Credit Facility may be reborrowed; amounts prepaid under the Term Loans may not be reborrowed. Senior Subordinated Notes. Also in connection with the Mergers, on November 4, 1997 the Company completed a private offering to institutional investors of $275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of 99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value (collectively, the "Notes"). Interest on the Senior Subordinated Notes is payable semi-annually commencing May 1, 1998. Interest on the Senior Subordinated Discount Notes will accrete until November 1, 2002 at a rate of 10.57% per annum, compounded semi- annually, and will be cash pay thereafter. The Notes will mature on November 1, 2007. The net proceeds from this offering, along with proceeds from the Senior Credit Facility, were used to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses associated with the Mergers. Other Significant Indebtedness. In connection with the Mergers, the Company became a party to various agreements between GranCare and Health and Retirement Properties Trust ("HRPT") and Omega Healthcare Investors, Inc. ("Omega"). HRPT is the holder of a mortgage loan to AMS Properties, Inc. ("AMS Properties"), a wholly owned subsidiary of the Company, dated October 1, 1994, in the aggregate principal amount of $11.5 million (the "HRPT Loan"). The HRPT Loan is secured, in part, by mortgage and security agreements dated as of March 31, 1995 (collectively, the "HRPT Mortgage") in favor of HRPT and encumbering two nursing facilities in Wisconsin owned by AMS Properties. HRPT has also leased seven nursing facilities located in Arizona, California and South Dakota to GCI Health Care Centers, Inc. ("GCIHCC") under a master lease agreement dated as of June 30, 1992 (the "GCIHCC Lease"). In connection with certain transactions effected in February 1997 by GranCare's predecessor with Vitalink Pharmacy Services, Inc. ("Vitalink"), Vitalink (a) paid a consent fee to HRPT in the amount of $10 million, which was promptly reimbursed by GranCare immediately following the consummation of the transactions with Vitalink and (b) entered into a limited guaranty (not to exceed $15 million in the aggregate) of the obligations by GranCare, AMS Properties and GCIHCC under the HRPT Mortgages, the GCIHCC Lease and the HRPT Loan (collectively, the "HRPT Obligations") for so long as such obligations remained outstanding. To support Vitalink's limited guaranty of the foregoing obligations, GranCare caused an irrevocable letter of credit to be issued to Vitalink in the event Vitalink made any payments under the limited guaranty (the "HRPT Letter of Credit"). In connection with obtaining HRPT's consent to the Mergers, GranCare and HRPT executed a Restructure and Asset Exchange Agreement dated October 31, 1997 pursuant to which HRPT and GranCare are in the process of restructuring their relationship (the "HRPT/GranCare Restructuring"). As a part of the HRPT/GranCare Restructuring, HRPT consented to the consummation of the Mergers and the transactions related thereto. In addition, Vitalink's guaranty of the HRPT Obligations was released and the HRPT Letter of Credit was terminated and replaced with an unlimited guaranty by the Company and all subsidiaries of the Company having an ownership interest in AMS and/or GCIHCC (individually, a "Tenant Entity" and collectively, the "Tenant Entities") which guaranty is secured by a cash collateral deposit of $15 million, the earned interest on which is retained by HRPT. The performance by the Tenant Entities of their respective obligations to HRPT continues to be secured by a pledge of one million shares of HRPT common stock beneficially owned by GranCare and, as part of the HRPT/GranCare Restructuring, GranCare agreed to waive the ability to request a release of such collateral upon the attainment of certain financial conditions. Accordingly, the Company does not have the ability to sell these shares to meet any capital requirements. The terms of the leases between HRPT and the Tenant Entities were extended to January 31, 2013, constituting lease extensions ranging from 3 to 7 years and the aggregate base rental for all facilities leased from HRPT (excluding the Exchange Facilities (as defined below)) increased by $500,000 per year. AMS Properties will also prepay the $11.5 million HRPT Loan and HRPT will release the HRPT Mortgage. In addition, by April 29, 1998 the Tenant Entities will exchange, in a transaction structured as a like-kind exchange transaction (the "Exchange Transaction"), five nursing facilities (the two nursing facilities previously subject to the HRPT Mortgage and three nursing facilities currently owned by the Company (collectively the "Exchange Facilities")) for four nursing facilities owned by HRPT. Following completion of the Exchange Transaction, the Tenant Entities will 30 lease back the Exchange Facilities for an aggregate annual rent amount equal to the aggregate rent on the four HRPT facilities. In consideration of the HRPT/GranCare Restructuring, the Company paid HRPT a one time restructuring payment of $10 million. The overall impact of the HRPT/GranCare Restructuring is not expected to have any material effect on the Company's operations or cash flows. The Company also paid an aggregate amount of $19.0 million to Vitalink Pharmacy Services, Inc. ("Vitalink") and ManorCare, Inc. ("ManorCare") in connection with the settlement of certain litigation initiated by Vitalink and ManorCare seeking to enjoin the consummation of the GranCare Merger. A wholly owned subsidiary of the Company, Professional Health Care Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note executed on August 14, 1997 (the "Omega Note") in favor of Omega, and under the related Michigan loan agreement dated as of June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding as of December 28, 1997. The Omega Loan bears interest at a rate which is adjusted annually based on either (i) changes in the Consumer Price Index or (ii) a percentage of the change in gross revenues of PHCMI and its subsidiaries from year to year, divided by 58.8 million, whichever is higher, but in any event subject to a maximum rate not to exceed 105% of the interest rate in effect for the Omega Loan for the prior calendar year. The current interest rate is 14.5% per annum. The Omega Loan currently requires monthly, interest-only payments. Additional interest accrues on the outstanding principal of the Omega Loan at the rate of 1% per annum. Such interest is compounded annually and is due and payable on a pro rata basis at the time of each principal payment or prepayment. Beginning October 1, 2002, quarterly amortizing installments of principal in the amount of $1.5 million will also become due and payable on the first day of each calendar quarter. The entire outstanding principal amount of the Omega Loan is due and payable on August 13, 2007. The Omega Loan may be prepaid without penalty during the first 100 days following August 14, 2002. Payment of the Omega Loan after acceleration upon the occurrence of an event of default will result in a prepayment penalty in the nature of a "make whole" premium. In addition to the interest on the Omega Loan described in the preceding paragraph, and as a condition to obtaining Omega's consent to the transaction between Vitalink and GranCare, PHCMI agreed to pay additional interest to Omega in the amount of $20,500 per month, through and including July 1, 2002. If the principal balance of the Omega Loan for any reason becomes due and payable prior to that date, there will be added to the indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus; (ii) interest thereon at 11% per annum to the prepayment date; less (iii) the amount of such additional interest paid to Omega prior to the prepayment date. As substitute collateral for certain divested PHCMI facilities, and as consideration for granting its consent to such divestiture, Omega required GranCare to cause a letter of credit in favor of Omega to be issued in the amount of $9.0 million (the "Omega Letter of Credit"). The Omega Letter of Credit can be drawn upon following the occurrence of: (i) any event of default under the Omega Loan documents; (ii) if the Omega Letter of Credit is not renewed or extended at least 30 days prior to its scheduled expiration date (currently March 31, 1998); or (iii) if certain representations, warranties or covenants of PHCMI under the Omega Loan documents are breached and such breaches are not cured within the prescribed time after notice. Following the Mergers, the Company caused the Omega Letter of Credit to be replaced with a new standby letter of credit issued under the Senior Credit Facility. The Omega Loan Agreement obligates PHCMI, among other things, to maintain a minimum tangible net worth of at least $10 million, increased or decreased by 25% of PHCMI's net income (but in no event less than $10 million). The Company must contribute additional equity to PHCMI if and when necessary to assure that such minimum tangible net worth test is met. PHCMI has satisfied this test in the past without the contribution of additional equity and management believes that it will continue to do so in the future. Other Factors Affecting Liquidity and Capital Resources. While federal regulations do not provide states with grounds to curtail payments under their Medicaid reimbursement programs due to state budget deficiencies or delays in enactment of new budgets, states have nevertheless curtailed payments in such circumstances in the past. In particular, some states have delayed the payment of significant amounts owed to health care providers 31 such as the Company for health care services provided under their respective Medicaid programs. The failure by a state to reimburse the Company for its Medicaid receivables could have a material adverse effect on the financial position of the Company. In addition to principal and interest payments on its long-term indebtedness, the Company has significant rent obligations relating to its leased facilities. The Company's estimated principal payments, cash interest payments, and rent obligations for 1998 are approximately $187 million. The Company's operations require capital expenditures for renovations of existing facilities in order to continue to meet regulatory requirements, to upgrade facilities for the treatment of subacute patients and to accommodate the addition of specialty medical services, and to improve the physical appearance of its facilities for marketing purposes. The Company estimates that total capital expenditures for the year ending September 30, 1998 will be approximately $60 million of which $30 million represents maintenance capital expenditures. Management is in the process of integrating the operations of LCA and GranCare and conforming their respective accounting policies. As discussed above, LCA's provision for bad debt expense increased by $9.6 million for the year ended September 30, 1997 as compared to the prior fiscal year, primarily as the result of an increase in average days outstanding for accounts receivable related to the increase in pharmacy revenues, focused Medicare reviews in several states for therapy operations, and the centralization of billing and collection for therapy operations. In addition, GranCare increased its provision for bad debt expense by $8.0 million in the quarter ended June 30, 1997 as a result of a change in methodology in calculating bad debt expense. In connection with conforming the accounting policies of LCA and GranCare, management is continuing to monitor trends in the Company's accounts receivable and is reviewing the Company's collection procedures (including the timing of filing claims for reimbursement) and allowance policy, which could result in a historical adjustment to GranCare's allowance for bad debts and in future changes to the Company's bad debt expense. The Company believes that the cash flow generated from its operations, the Company's cash and cash equivalents, together with amounts available under the Senior Credit Facility, should be sufficient to fund its debt service requirements, working capital needs, anticipated capital expenditures and other operating expenses. The Revolving Credit Facility will provide the Company with revolving loans in an aggregate principal amount at any time not to exceed $150 million, of which $136 million is expected to be available after considering approximately $14 million in outstanding letters of credit. The Company's future operating performance and ability to service or refinance the Notes and to extend or refinance the Senior Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. As discussed above, the Company's revenues are a function of occupancy rates in the Company's facilities and payor mix. Management believes that the Mergers will have a slightly positive effect on the Company's occupancy rates and payor mix. Because the Mergers were completed on November 4, 1997, the Company plans to recognize the costs associated therewith during the quarter ending December 31, 1997. While management has not yet determined the amount of the costs, management expects that such costs will be significant. IMPACT OF INFLATION The health care industry is labor intensive. Wages and other labor-related costs are especially sensitive to inflation. Increases in wages and other labor-related costs as a result of inflation, or the increase in minimum wage requirements effective September 1997, without a corresponding increase in Medicaid and Medicare reimbursement rates would adversely impact the Company. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Paragon Health Network, Inc. We have audited the accompanying consolidated balance sheets of Paragon Health Network, Inc. (formerly Living Centers of America, Inc.) and subsidiaries as of September 30, 1997 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1997. Our audits also included the financial statement schedule listed in the index at Item 14. These consolidated financial statements and schedule are the responsibility of the management of Paragon Health Network, Inc. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paragon Health Network, Inc., and subsidiaries at September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in the fourth quarter of 1996, the Company changed its method of accounting for impairment of long-lived assets in accordance with the adoption of SFAS 121. ERNST & YOUNG LLP Houston, Texas December 10, 1997 33 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, ------------------ ASSETS 1997 1996 ------ -------- -------- CURRENT ASSETS: Cash and cash equivalents................................ $ 14,355 $ 21,394 Receivables (less allowances of $33,138 and $17,405)..... 211,989 192,340 Notes receivable, net.................................... 2,223 3,756 Supplies................................................. 21,237 16,582 Prepaid expenses......................................... 5,276 6,450 Deferred income taxes.................................... 24,294 19,644 Other (including patient trust funds of $3,799 and $3,768)................................................. 7,855 9,273 -------- -------- TOTAL CURRENT ASSETS................................... 287,229 269,439 PROPERTY AND EQUIPMENT: Land, buildings and improvements......................... 378,251 359,137 Furniture, fixtures and equipment........................ 121,698 104,363 Leased property under capital leases..................... 12,551 12,551 -------- -------- 512,500 476,051 Less accumulated depreciation............................ 210,117 186,333 -------- -------- 302,383 289,718 GOODWILL, NET.............................................. 196,120 188,508 RESTRICTED INVESTMENTS..................................... 51,976 31,040 INVESTMENT IN UNCONSOLIDATED AFFILIATE..................... 5 3,016 NOTES RECEIVABLE, NET...................................... 11,200 10,780 OTHER ASSETS............................................... 25,454 17,111 -------- -------- $874,367 $809,612 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable and current maturities of long-term debt... $ 43,196 $ 13,746 Accounts payable......................................... 46,872 48,088 Accrued payroll and related expenses..................... 66,866 60,089 Accrued property taxes................................... 5,342 4,995 Patient trust funds...................................... 3,799 3,768 Accrued income taxes payable............................. 6,231 16,921 Other accrued expenses................................... 12,819 20,741 -------- -------- TOTAL CURRENT LIABILITIES.............................. 185,125 168,348 LONG-TERM DEBT, NET OF CURRENT MATURITIES.................. 252,763 262,702 LONG-TERM INSURANCE RESERVES............................... 27,555 26,093 MINORITY INTERESTS......................................... 733 289 DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES..... 32,908 22,865 COMMITMENTS AND CONTINGENCIES.............................. STOCKHOLDERS' EQUITY: Preferred stock, par value $ .01; 4,650,000 shares authorized; none issued................................. -- -- Series A--Junior participating preferred stock, par value $.01; 350,000 authorized and reserved; none issued...... -- -- Common stock, par value $ .01; 75,000,000 shares authorized; 60,803,760 shares issued.................... 608 608 Capital surplus.......................................... 226,972 227,766 Retained earnings........................................ 164,650 120,733 Unrealized gain (loss) on securities available-for-sale.. 244 (18) Treasury stock at cost--2,004,444 and 2,301,159 shares... (17,191) (19,774) -------- -------- TOTAL STOCKHOLDERS' EQUITY............................. 375,283 329,315 -------- -------- $874,367 $809,612 ======== ========
The accompanying notes are an integral part of these financial statements. 34 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30, -------------------------------- 1997 1996 1995 ---------- ---------- -------- NET REVENUES Nursing home revenue: Net patient services..................... $ 742,046 $ 767,747 $724,924 Other.................................... 6,004 8,799 13,556 Non-nursing home revenue: Pharmacy services........................ 196,748 127,439 92,843 Therapy services......................... 179,506 205,785 59,278 Home health, hospice, and other.......... 15,984 4,721 3,268 ---------- ---------- -------- 1,140,288 1,114,491 893,869 COSTS AND EXPENSES: Salaries and wages......................... 438,693 455,702 360,571 Employee benefits.......................... 98,070 96,716 82,007 Nursing, dietary and other supplies........ 53,531 60,427 55,991 Ancillary services......................... 224,912 188,937 148,746 General and administrative................. 161,795 168,333 134,697 Depreciation and amortization.............. 39,309 39,214 31,158 Provision for bad debts.................... 26,282 16,666 11,220 Life insurance proceeds.................... -- (2,015) -- Gain on sale............................... -- (22,451) -- Impairment of long-lived assets............ -- 20,489 -- Other expenses............................. -- 2,917 -- Merger and acquisition costs............... 2,588 -- 12,474 ---------- ---------- -------- 1,045,180 1,024,935 836,864 ---------- ---------- -------- INCOME FROM OPERATIONS................. 95,108 89,556 57,005 INTEREST EXPENSE, NET: Interest expense........................... 21,492 16,750 15,073 Interest income............................ (4,640) (4,289) (4,256) ---------- ---------- -------- 16,852 12,461 10,817 ---------- ---------- -------- INCOME BEFORE INCOME TAXES AND EQUITY EARNINGS/MINORITY INTEREST............ 78,256 77,095 46,188 PROVISION FOR INCOME TAXES................... 33,604 33,759 21,750 ---------- ---------- -------- INCOME BEFORE EQUITY EARNINGS/ MINORITY INTEREST.............................. 44,652 43,336 24,438 EQUITY EARNINGS/MINORITY INTEREST............ (735) (156) (204) ---------- ---------- -------- NET INCOME................................... $ 43,917 $ 43,180 $ 24,234 ========== ========== ======== PRO FORMA DATA (UNAUDITED): INCOME BEFORE PRO FORMA TAXES.............. $ 43,917 $ 43,180 $ 24,234 PRO FORMA TAXES............................ -- -- 599 ---------- ---------- -------- PRO FORMA NET INCOME................... $ 43,917 $ 43,180 $ 23,635 ========== ========== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING.......................... 59,325 60,945 57,102 ========== ========== ======== EARNINGS PER SHARE........................... $ 0.74 $ 0.71 $ 0.42 ========== ========== ======== PRO FORMA EARNINGS PER SHARE................. $ 0.74 $ 0.71 $ 0.41 ========== ========== ========
The accompanying notes are an integral part of these financial statements. 35 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
UNREALIZED COMMON STOCK GAIN TREASURY STOCK ------------- CAPITAL RETAINED (LOSS) ON ---------------- SHARES AMOUNT SURPLUS EARNINGS SECURITIES SHARES AMOUNT TOTAL ------ ------ -------- -------- ---------- ------ -------- -------- BALANCE, SEPTEMBER 30, 1994................... 51,405 $514 $119,500 $54,802 -- 525 $(2,798) $172,018 Net income.............. 24,234 24,234 Transfer S corporation earnings, net of distributions.......... (898) 898 0 Stockholder distributions.......... (2,381) (2,381) Proceeds from additional public offering........ 8,625 86 98,975 99,061 Issuance of stock as consideration for TMI merger transaction..... 774 8 8,315 8,323 Funding of employee benefit plans.......... 656 (132) 678 1,334 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax....... 146 (162) 861 1,007 ------ ---- -------- -------- ---- ----- -------- -------- BALANCE, SEPTEMBER 30, 1995................... 60,804 608 226,694 77,553 -- 231 (1,259) 303,596 Net income.............. 43,180 43,180 Funding of employee benefit plans.......... 736 (138) 846 1,582 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax....... 336 (120) 639 975 Purchase of treasury stock.................. 2,328 (20,000) (20,000) Unrealized loss on securities available- for-sale............... (18) (18) ------ ---- -------- -------- ---- ----- -------- -------- BALANCE, SEPTEMBER 30, 1996................... 60,804 608 227,766 120,733 (18) 2,301 (19,774) 329,315 Net income.............. 43,917 43,917 Funding of employee benefit plans.......... 92 (177) 1,521 1,613 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax....... (15) (21) 191 176 Issuance of treasury stock in exchange for warrants............... (871) (99) 871 0 Unrealized gain on securities available- for-sale............... 262 262 ------ ---- -------- -------- ---- ----- -------- -------- BALANCE, SEPTEMBER 30, 1997................... 60,804 $608 $226,972 $164,650 $244 2,004 $(17,191) $375,283 ====== ==== ======== ======== ==== ===== ======== ========
The accompanying notes are an integral part of these financial statements. 36 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 1995 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................... $ 43,917 $ 43,180 $ 24,234 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 39,309 39,214 31,158 Income taxes deferred...................... (753) (9,141) (3,429) Equity earnings/minority interest.......... 735 156 204 Provision for bad debts.................... 26,282 16,666 11,220 Gain on sale............................... -- (22,451) -- Impairment of long-lived assets............ -- 20,489 -- Changes in noncash working capital: Receivables................................ (44,362) (69,634) (35,387) Receivable from affiliates................. -- 2,698 (844) Supplies................................... (3,984) (519) 258 Prepayments, including insurance........... 1,227 4,053 (4,106) Other current assets....................... (1,032) (221) (2,073) Accounts payable........................... (2,073) (13,774) 34,194 Accrued expenses and other current liabilities............................... (5,673) 17,465 8,860 Changes in long-term insurance reserves...... 1,462 3,107 1,321 Other........................................ (215) 520 824 -------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES...... 54,840 31,808 66,434 CASH FLOWS USED IN INVESTING ACTIVITIES: Acquisitions and investments................. (30,548) (68,710) (87,602) Purchases of property and equipment.......... (36,961) (53,366) (38,946) Proceeds from sale of DevCon................. -- 47,500 -- Disposals of property, equipment and other assets...................................... 8,365 2,690 7,022 Restricted investments....................... (20,543) 5,564 (19,822) Additions to notes receivable................ (2,069) (1,519) (3,488) Collections on notes receivable.............. 4,649 981 3,173 Other........................................ (211) 209 (198) -------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES.......... (77,318) (66,651) (139,861) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt................. 1,875 1,469 219,342 Net draws under credit line.................. 22,685 194,615 1,955 Repayment of long-term debt.................. (9,297) (138,708) (247,461) Proceeds from additional public offering..... -- -- 99,061 Purchase of treasury stock................... -- (20,000) -- Shareholder distributions.................... -- -- (2,381) Funding of options under 1992 employee stock option plan and employee benefit plans...... 176 975 1,007 -------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES...... 15,439 38,351 71,523 INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS......................................... (7,039) 3,508 (1,904) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. 21,394 17,886 19,790 -------- --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 14,355 $ 21,394 $ 17,886 ======== ========= =========
The accompanying notes are an integral part of these financial statements. 37 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Paragon Health Network, Inc. ("Paragon"), formerly known as Living Centers of America, Inc. ("LCA"), was formed in November 1997 through the recapitalization by merger of LCA with a newly-formed entity owned by certain affiliates of Apollo Management, L.P. and certain other investors (the "Recapitalization Merger"), and the subsequent merger of GranCare, Inc. ("GranCare") with a wholly-owned subsidiary of LCA (the "GranCare Merger" and collectively with the Recapitalization Merger, the "Mergers"). See Note 19. The accompanying consolidated financial statements include the accounts of LCA and its subsidiaries and all significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements do not give effect to the Mergers as they occurred subsequent to September 30, 1997 and are not indicative of the consolidated financial statements following the Mergers. References to the "Company" herein refer to LCA and its operations prior to the consummation of the Mergers and to Paragon and its operations following the consummation of the Mergers. The Company's continuum of post-acute care services encompasses skilled nursing, subacute and medically complex care as well as a variety of related ancillary services. These ancillary services include pharmacy, rehabilitation, and hospital program management. The Company operates in 38 states with significant concentration of facilities and beds in its key markets. Effective July 31, 1995, the Company issued approximately 19,437,000 shares (6,479,000 shares prior to the three-for-one stock split, see Note 19) of its common stock in a merger transaction with The Brian Center Corporation ("BCC") and 16 related S corporations (collectively the "BCC Entities"). The merger was accounted for using the pooling of interests methodology and the accompanying financial statements have been restated to include the accounts of the BCC Entities as though the transaction occurred on September 30, 1992. See Note 3. Cash Management The Company maintains a centralized cash management system in which cash receipts are transferred daily from facility and ancillary company depository accounts to a cash concentration account. Cash is then used to provide for normal working capital requirements, including reduction of the outstanding credit lines or placement of excess funds in commercial grade investments. To the extent that cash transferred from the facility and ancillary company depository accounts is not sufficient to provide for cash disbursement requirements, a cash advance is obtained from the Company's bank credit facility. See Note 5. Cash equivalents consist of temporary investments with original maturities of three months or less. Notes Receivable, net Notes receivable, net, aggregating $13.4 million and $14.5 million at September 30, 1997 and 1996, respectively, consist primarily of notes which arose from divestitures of certain operating facilities. These notes, which are generally collateralized by long-term care facilities, have interest rates ranging generally from 5% to 12% and maturities through 2012, including approximately $9.8 million due after 2000. Notes receivable, net, at September 30, 1997 and 1996, include reserves for potential uncollectible amounts of $1.2 million and $3.5 million, respectively. Management believes the collateral values are sufficient to recover the net carrying amount of these notes in the event of default. Supplies Supplies, consisting principally of pharmaceutical and medical supplies, are valued at the lower of cost (first-in, first-out) or market. 38 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Property and Equipment Property and equipment are stated at cost and include interest on funds borrowed to finance construction. Capitalized interest was $0.3 million, $0.2 million and none for the three years ended September 30, 1997, 1996 and 1995, respectively. Maintenance and repairs are charged to operations as incurred and replacements and significant improvements are capitalized. Depreciation and amortization are provided over the estimated useful lives of the assets on a straight-line basis as follows: Buildings..................................................... 25-40 years Building improvements......................................... 10-15 years Furniture, fixtures and equipment............................. 3-15 years
Goodwill, net Goodwill represents an allocation from the Company's previous parent as a result of a management buyout transaction which is amortized on a straight- line basis over 40 years and the excess of purchase price over fair market value of assets acquired in various purchase transactions which is amortized on a straight-line basis over 30 years. Accumulated amortization at September 30, 1997 and 1996 was $20.3 million and $11.7 million, respectively. Amortization of goodwill charged to expense was $7.3 million, $5.6 million and $2.8 million for the three years ended September 30, 1997, 1996 and 1995, respectively. Impairment of Long-Lived Assets In September 1996 the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of these assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of carrying value over fair value written off. Fair value is based on market prices where available, an estimate of market value, or determined by various valuation techniques including discounted cash flow. See Note 8. Prior to adoption of SFAS 121 the Company performed its analyses of impairment of long-lived assets by consideration of the projected undiscounted cash flows on an entity-wide basis. Restricted Investments Restricted investments represent cash and other investments that have been designated to pay insurance claims of the Company's wholly-owned insurance subsidiary. The invested funds restricted to pay insurance claims have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are recorded at their estimated fair value. See Note 4. Investment in Unconsolidated Affiliate Investment in unconsolidated affiliate at September 30, 1996 primarily consisted of a 50% owned interest in Heart of America Hospice, LLC, ("HOA") a Kansas-based hospice which was recorded under the equity method. The remaining 50% interest of HOA was purchased during fiscal 1997. See Note 3. 39 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes Noncurrent deferred income taxes arise primarily from timing differences resulting from using accelerated depreciation for tax purposes and reserves for uninsured losses not deductible in the current period. Current deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes which are expected to reverse within one year. See Note 10. The Company filed a consolidated federal income tax return for the year ended September 30, 1995 which included pre-merger (non-BCC entities) operations and has continued to file on a consolidated basis for subsequent years. Federal and state income tax payments made (including the BCC Entities) for the three years ended September 30, 1997, 1996 and 1995 were $40.0 million, $31.5 million and $21.2 million, respectively. The various corporations (exclusive of the S corporations) included in the BCC Entities filed consolidated tax returns through the date of the BCC merger. For state income tax purposes, each corporation within the federal consolidated group filed a separate income tax return. The S corporations included in the BCC merger were not subject to income taxes as their attributes flow through to their individual stockholders; accordingly, the accompanying consolidated financial statements do not include a provision for income taxes with respect to the earnings of these entities through July 31, 1995. A pro forma income tax provision has been provided to reflect the estimated federal and state income taxes as if all of the S corporations were taxable entities. This estimate is based on the maximum effective federal and state income tax rates in effect during the years presented. Effective August 1, 1995, all of these corporations became taxable entities and the operations of these companies are included in the consolidated tax return of LCA. Treasury Stock During fiscal year 1996, the Company acquired 2,327,220 shares of treasury stock (775,740 shares prior to the three-for-one stock split) on the open market for a total cost of $20.0 million. The shares repurchased were primarily intended to be used as part of a plan to fund the employer's contributions to the Company's 401(k) Plan and Deferred Retirement Incentive Plan and to fund employee purchases made under the Company's Employee Stock Purchase Plan. See Note 16. Net Revenues Revenues are recorded in the period in which services are provided at established rates whether or not collection in full is anticipated. Contractual adjustments and the results of other arrangements for providing services at less than established rates are reported as deductions to arrive at net revenues. Contractual adjustments include differences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas or contracts in effect. An appropriate provision for bad debt expense is included as an operating expense and a corresponding reserve for doubtful accounts is reflected in net receivables to reduce gross receivables to an amount actually expected to be collected. The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled with the applicable administrative agencies. Normal estimation differences between final settlements and amounts recorded in previous years are generally reported as current year contractual adjustments. The Company does not expect any differences between revenue recorded and as finally determined to have a significant effect on the Company's results of operations or financial position. Medicare revenues represented 26%, 26% and 24% and Medicaid revenues represented 41%, 43% and 51% of net revenue for the three years ended September 30, 1997, 1996 and 1995, respectively. 40 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company is aware of one current investigation and an additional possible investigation involving allegations of potential wrongdoing. See Note 11. While the Company believes that it is in compliance with all applicable laws and regulations, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion 25 "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for the stock option grants. In October 1995 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies the option to retain the current accounting approach for recognizing stock-based expense in the financial statements or to adopt a new accounting method based on the estimated fair value of the employee stock options. Companies that do not follow the new fair-value based method are required to provide pro forma disclosures of net income and earnings per share as if the fair-value method of accounting had been applied. See Note 16 for the pro forma effects on the Company's reported net income and earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS 123. Earnings per Share In February 1997 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 is designed to simplify the standards for computing earnings per share and increase the comparability of earnings per share data on an international basis. The Company will implement SFAS 128 in the first quarter of fiscal year 1998. The earnings per share impact of this implementation has not yet been determined. 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 amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events, they may ultimately differ from actual results. Other Certain prior year amounts have been reclassified to conform with the 1997 presentation. NOTE 2. DIVESTITURES In September 1996, the Company completed the divestiture of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million in cash. The Company retained a small ownership interest in the recapitalized company. Proceeds from the divestiture were utilized to reduce debt related to various acquisitions. 41 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3. ACQUISITIONS Fiscal Year 1997 Acquisitions During fiscal year 1997 the Company acquired the remaining 50% interest in Heart of America Hospice, L.L.C., a Kansas based hospice company, for $3.3 million in cash. This transaction was recorded using the purchase method of accounting. The Company also acquired institutional pharmacies, home health agencies, and therapy operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. Fiscal Year 1996 Acquisitions In May 1996, the Company acquired a 50% interest in Heart of America Hospice, L.L.C., for $2.8 million in cash. In June 1996, the Company acquired certain assets of Lahr Pharmacy, Inc. and related companies for $13.4 million in cash. An additional $2.0 million was paid during 1997 in connection with this acquisition based on the achievement of predetermined earnings targets and an additional $1.5 million may be paid if predetermined earnings targets are achieved during the subsequent two years. Additional consideration is included in goodwill when paid. Effective September 1, 1996, the Company acquired the stock of Allied Pharmacy Management, Inc., which operated five institutional pharmacies and a home health care business in Florida, for $29.6 million in cash. The Company also acquired other previously leased long-term care facilities, institutional pharmacies, and therapy operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. Fiscal Year 1995 Acquisitions On June 30, 1995, LCA completed a merger with Rehability Corporation in which it acquired all of the outstanding stock of the company through a cash tender offer of $11.50 per share. In the transaction, the Company paid approximately $88.1 million in cash for the stock and various transaction costs and assumed approximately $36.0 million in debt. The name of the acquired company was subsequently changed to American Rehabilitation Services, Inc. ("ARS" or "Rehability"). The transaction was recorded using the purchase method of accounting. The allocation of purchase price included approximately $81.9 million of goodwill which will be amortized over a 30-year period. Effective August 1, 1995 the Company issued approximately 774,000 shares (258,000 shares prior to the three-for-one stock split) of its common stock valued at $8.3 million in exchange for all of the capital stock of Therapy Management Innovations, Inc. and related entities ("TMI"). The transaction was recorded using the purchase method of accounting. The allocation of purchase price included approximately $7.9 million of goodwill. The goodwill was subsequently written off in September, 1996. See Notes 7 and 8. 42 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following information presents the results of operations on a pro forma basis as though the Rehability and TMI transactions all occurred on October 1, 1994. Information is presented for informational purposes only and may not be indicative of actual operating results that would have been achieved. All amounts are in thousands, except per share amounts.
YEAR ENDED SEPTEMBER 30, 1995 ------------------ Net revenues .......................................... $1,041,228 Net income............................................. 26,893(a) Earnings per share..................................... $ 0.46(a)
- -------- (a) Excluding non-recurring merger and acquisition and other related costs of $14.3 million, net income and earnings per share would have been $38.8 million and $0.67, respectively. On July 31, 1995, the Company acquired all of the outstanding stock of the BCC Entities in exchange for approximately 19,437,000 shares (6,479,000 shares prior to the three-for-one stock split) of its common stock in a merger transaction which was accounted for as a pooling of interests. In addition, the Company paid $3.7 million in cash to acquire various minority interests associated with several of the BCC affiliates. The Company used a portion of its bank credit facility to retire approximately $70.0 million of existing debt of BCC. The retained earnings of the S corporations ($1.8 million at July 31, 1995 and $2.6 million at September 30, 1994) have been reclassified to Capital Surplus. Separate results of operations of the companies prior to the acquisition are summarized below (in thousands):
TEN MONTHS ENDED JULY 31, 1995 -------------------------- LIVING BCC CENTERS ENTITIES COMBINED -------- -------- -------- Net Revenues........................................ $529,405 183,127 $712,532 Income from Operations (a).......................... $ 37,310 10,004 $ 47,314 Net Income.......................................... $ 20,110 2,109 $ 22,219 Pro Forma Net Income................................ $ 20,110 1,510 $ 21,620
- -------- (a) Includes merger and acquisition expenses of $4.5 million for LCA and $1.3 million for BCC Entities. In addition to the above, the Company acquired other long-term care facilities and five separate pharmaceutical operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. 43 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4. RESTRICTED INVESTMENTS Restricted investments at September 30, 1997 and 1996 included the following:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE - ------------------ --------- ---------- ---------- --------- U.S. Treasury Notes................... $36,234 $234 $ (9) $36,459 Asset-backed securities............... 2,604 32 (2) 2,634 Corporate debt securities............. 5,073 68 -- 5,141 Mortgage-backed securities............ 4,273 54 (2) 4,325 Repurchase Pooling Arrangement........ 539 -- -- 539 Cash.................................. 2,878 -- -- 2,878 ------- ---- ---- ------- Total............................... $51,601 $388 $(13) $51,976 ======= ==== ==== =======
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 1996 COST GAINS LOSSES VALUE - ------------------ --------- ---------- ---------- --------- U.S. Treasury Notes................... $14,187 $122 $(186) $14,123 Asset-backed securities............... 5,859 21 (32) 5,848 Corporate debt securities............. 2,691 25 (27) 2,689 Mortgage-backed securities............ 1,401 59 -- 1,460 Repurchase Pooling Arrangement........ 5,892 -- -- 5,892 Cash.................................. 1,028 -- -- 1,028 ------- ---- ----- ------- Total............................... $31,058 $227 $(245) $31,040 ======= ==== ===== =======
Proceeds from the sale and maturities of investments were $19.1 million, $14.5 million and $3.7 million for the three years ended September 30, 1997, 1996 and 1995, respectively. Gross gains (losses) of ($0.2) million, $0.1 million and $0.1 million were realized for the three years ended September 30, 1997, 1996 and 1995, respectively. The amortized cost and estimated fair value of debt securities and other investments at September 30, 1997 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less..................................... $ 7,044 $ 7,047 Due after one year through five years....................... 26,579 26,752 Due after five years through ten years...................... 7,684 7,801 ------- ------- 41,307 41,600 Asset-backed securities..................................... 2,604 2,634 Mortgage-backed securities.................................. 4,273 4,325 Repurchase Pooling Arrangement.............................. 539 539 Cash........................................................ 2,878 2,878 ------- ------- Total..................................................... $51,601 $51,976 ======= =======
The Repurchase Pooling Arrangement is subject to market risk associated with changes in the value of the underlying financial instruments as well as the risk of loss of appreciation if a counter party fails to perform. 44 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5. DEBT Long-term debt at September 30, 1997 and 1996 is summarized in the following table (in thousands):
SEPTEMBER 30, ------------------ 1997 1996 -------- -------- Bank Credit Facility........................................ $255,000 $225,315 SouthTrust Bank of Alabama, NA.............................. 20,000 20,000 Variable Annuity Life Insurance Company..................... 10,000 10,000 NationsBank of Texas, NA.................................... 3,000 10,000 Mortgage notes (6% to 10.75% due through 2014).............. 609 1,444 Other notes payable (8% to 10% due through 2008)............ 3,547 5,688 -------- -------- 292,156 272,447 Obligations under capital leases ........................... 3,803 4,001 -------- -------- 295,959 276,448 Less short-term notes payable and current portion........... (43,196) (13,746) -------- -------- Total long-term debt........................................ $252,763 $262,702 ======== ========
Interest expense paid was $21.8 million, $19.3 million and $17.7 million during the three years ended September 30, 1997, 1996 and 1995, respectively. Substantially all of the above indebtedness was refinanced in connection with the Mergers. See Note 19. In February 1992, the Company entered into an agreement (the "Bank Credit Facility") with several banks in which the banks provided financing to the Company. During the last several years, the Bank Credit Facility has been amended and/or restated to provide working capital financing and expansion capital for various purchase transactions. In August 1996, the Company entered into a Third Amended and Restated Credit Agreement (the "1996 Bank Credit Facility"), pursuant to which the banks agreed to provide $500 million to LCA, including a $350 million five-year revolving credit and competitive advance facility ("Tranche A") and a $150 million 364-day revolving credit facility with a four-year term out ("Tranche B"). The Company recorded a non-recurring charge of $0.9 million for the write-off of unamortized deferred financing costs related to the Second Amended and Restated Credit Agreement. See Note 8. The 1996 Bank Credit Facility allows LCA to borrow at the base rate in effect at NationsBank of Texas, N.A. or at LIBOR plus an applicable margin ranging from 0.25% to 0.65% and also provides for a facility fee of 0.15% to 0.225%. The applicable margin and facility fee are subject to adjustment depending on LCA's leverage ratio at the quarter-end immediately preceding the borrowing. LCA may prepay borrowings made under Tranche A at any time, but all amounts drawn must be repaid by August 19, 2001 with a provision for earlier extension if the Company and banks agree. The Tranche B balance at August 18, 1997 of $140.0 million was converted to a term loan and scheduled to be repaid in equal quarterly installments beginning October 1, 1997. The 1996 Bank Credit Facility is an unsecured credit facility and contains various financial covenants similar to those in the original Bank Credit Facility. Balances available under the 1996 Bank Credit Facility and predecessor agreements at September 30, 1997 and 1996 (after giving consideration to outstanding letters of credit of $4.7 million) were $230.3 million and $270.0 million, respectively. As of September 30, 1997 and 1996, the announced base rate of NationsBank was 8.5% and 8.25%, respectively. The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At September 30, 1997, the Company had outstanding three interest rate swap agreements with commercial banks having a total notional principal amount of $60 million. These 45 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) agreements effectively changed the Company's interest rate exposure on $60 million under the 1996 Bank Credit Facility to approximately 6.8% through 2005. The Company receives floating rates on these swaps which are based on LIBOR. The Company's use of swap agreements and reverse swap agreements did not have a material effect on the weighted-average borrowing rate of reported interest expense during the years ended September 30, 1997, 1996, and 1995 and the Company is not exposed to credit loss on these swaps. See Note 13 for fair value disclosures. The difference between amounts paid and received on swap agreements is recorded on an accrual basis as an adjustment to interest expense over the periods covered by the agreements. The related amount receivable from or payable to counter parties is included in other receivables or payables, respectively. The fair values of the swap agreements and changes thereto are not recognized in the consolidated financial statements. In October 1993 the Company borrowed $20 million from SouthTrust Bank of Alabama, NA which is unsecured and bears interest at the rate of 6.95%, payable semi-annually. The principal is repayable in five annual payments of $4 million beginning October 1, 1998. In January 1994, the Company issued, in a private placement, a $10 million note to American General Insurance Company that was later sold to The Variable Annuity Life Insurance Company ("Variable Annuity Life") at a fixed rate of interest of 7.79%. The note is unsecured and will mature in a single payment due in ten years. The note agreement contains restrictions similar to other unsecured debt of the Company. In May 1994, the Company executed a $10 million promissory note with NationsBank of Texas, N.A. Subject to NationsBank's prior approval of any request for an advance, the Company may borrow, repay and reborrow principal amounts in increments such that the unpaid principal balance at anytime shall not exceed $10 million. The original maturity date of the earlier of demand or May 1995 was extended by several subsequent extension agreements to November 1997. The interest rate on each advance is quoted separately based on market conditions that exist at that time. At September 30, 1997, there was $3.0 million outstanding under the note agreement. Long-term debt maturing in the next five fiscal years, prior to the Mergers (see Note 19), is presented below (in thousands):
SEPTEMBER 30, 1997 ------------------ 1998................................................. $43,196 1999................................................. 5,468 2000................................................. 4,990 2001................................................. 222,541 2002................................................. 4,913
The covenants governing the 1996 Bank Credit Facility and the notes with SouthTrust Bank and Variable Annuity Life provide for the maintenance of various financial ratios and limitations on dividends. See Note 19 which details long-term debt subsequent to the Mergers. NOTE 6. EMPLOYEE RETIREMENT PLANS The Company's employees are eligible to participate in defined contribution retirement plans sponsored by the Company. Company contributions to these plans represent a matching percentage of certain employee contributions which is subject to management's discretion based upon consolidated financial performance. The employees of ARS are also covered by a defined contribution plan which provides for Company contributions in cash of up to 50% of certain employee contributions. Total combined expense recognized by the Company under both of these plans was $3.5 million, $2.2 million and $1.8 million for the three years ended September 30, 1997, 1996 and 1995, respectively. 46 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company does not provide post-retirement health care or life insurance benefits to employees. Accordingly, the Company is not subject to the requirements of Statement of Financial Accounting Standards No. 106, "Employers Accounting for Post Retirement Benefits Other Than Pensions." NOTE 7. LIFE INSURANCE PROCEEDS In the third quarter of fiscal year 1996 the Company recorded a non-taxable gain of $2.0 million from the receipt of insurance proceeds on Don W. Wortley, former President of TMI. NOTE 8. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER EXPENSES In the fourth quarter of fiscal year 1996 the Company adopted SFAS 121 which resulted in the identification and measurement of an impairment loss of $20.5 million related to nursing facilities with a history of cash flow losses, certain other nursing facilities where management believed an impairment existed as a result of the competitive environment, goodwill (primarily attributable to TMI), and other assets to be disposed. Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The facilities with a history of cash flow losses operated at a loss for periods ranging from one to four years. The undiscounted cash flows for TMI were estimated based on the operating results of TMI subsequent to the death of the President of the rehabilitation services group (founder of TMI) and adjusted for the loss of contracts and impending business changes as a result of his death. See Note 7. The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.4 million during fiscal 1996, was completed at the time of adoption of SFAS 121. Facilities to be disposed of had a carrying value of $1.5 million and $4.8 million at September 30, 1997 and 1996, respectively. The Company also recorded other charges of $2.9 million in the fourth quarter of fiscal year 1996 primarily related to the closure of its medical supplies business and the write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement. 47 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9. RESTRUCTURING PLAN On June 14, 1996, the Company finalized and approved a plan originating in June 1995 to restructure the operations and exit certain activities of ARS. This plan included centralization of billing and collection, closing or downsizing unprofitable clinics and offsite contracts, and staff reductions of approximately 300 employees in both corporate overhead and field management. This plan resulted in an increase to the original purchase price of the acquisition by $10.1 million, which was recorded in June 1996 and included an accrual for estimated exit costs of $4.4 million related to termination/severance for displaced employees and $4.2 million related to future lease costs for abandoned real property. During the fourth quarter of fiscal year 1997 the Company lowered its original estimate of the accrual for exit costs which resulted in a reduction to the original purchase price of $1.9 million. The revised increase in purchase price as a result of the restructuring plan includes the following: Termination/severance for displaced employees..................... $3,760 Future lease costs for abandoned real property.................... 2,561 Write off of abandoned tangible and intangible assets at closed locations........................................................ 1,920 ------ Total........................................................... $8,241 ======
Through September 30, 1997 the Company has charged $3.3 million against the accrual for termination/severance for approximately 350 displaced employees and $1.5 million against the accrual for future lease costs. The restructuring was substantially completed by March 31, 1997. At September 30, 1997, the Company believes the remaining accruals for the restructuring are adequate. NOTE 10. INCOME TAXES The provision for income taxes is presented in the table below (in thousands):
YEARS ENDED SEPTEMBER 30, ------------------------- 1997 1996 1995 ------- ------- ------- Current: Federal............................................ $34,214 $38,326 $21,982 State & Local...................................... 5,370 5,141 4,237 ------- ------- ------- 39,584 43,467 26,219 Deferred: Federal............................................ (4,922) (8,276) (3,698) State & Local...................................... (1,058) (1,432) (771) ------- ------- ------- (5,980) (9,708) (4,469) ------- ------- ------- Total............................................ $33,604 $33,759 $21,750 ======= ======= =======
48 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax income as a result of the following:
YEARS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 1995 -------- -------- -------- Federal statutory income tax rate................ 35.0% 35.0% 35.0% Increased (decrease) in taxes resulting from: State & local taxes, net of federal tax benefits...................................... 3.6 3.4 4.9 Permanent book/tax differences, primarily resulting from goodwill....................... 2.7 7.0 2.0 Work opportunity/targeted job tax credits...... (0.3) -- (2.7) Non-deductible merger and acquisition cost..... 1.0 -- 7.2 Other, net....................................... 1.3 (1.6) 0.7 -------- -------- -------- Effective tax rate............................... 43.3% 43.8% 47.1% ======== ======== ========
The components of deferred income taxes are as follows (in thousands):
YEARS ENDED SEPTEMBER 30, ------------------------- 1997 1996 1995 ------- ------- ------- Reserves for potential claims....................... $ 907 $(2,134) $(1,984) Purchase accounting................................. (1,835) (1,749) (1,828) FAS 121 asset valuation............................. 1,669 (4,030) -- Tax depreciation under book......................... (1,066) (1,822) (1,023) Bad debts........................................... (6,841) (1,295) (761) Texas Occupational Injury accrual................... -- 1,847 835 Net operating losses................................ (59) (262) -- Other, net.......................................... 1,186 (525) 292 Changes in valuation allowance...................... 59 262 -- ------- ------- ------- Total............................................. $(5,980) $(9,708) $(4,469) ======= ======= =======
49 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the net deferred tax liability are as follows (in thousands):
SEPTEMBER 30, ------------------ 1997 1996 -------- -------- Deferred tax liabilities: Amounts relating to property and equipment................ $(32,967) $(34,773) Other..................................................... (5,107) (1,596) -------- -------- Total deferred tax liabilities ....................... (38,074) (36,369) -------- -------- Deferred tax assets: Financial reserves not yet deductible for tax purposes: Asset valuation......................................... 3,552 4,243 Insurance............................................... 7,261 8,524 Notes receivable allowance.............................. -- 821 Payroll and benefits.................................... 4,362 4,884 Bad debts............................................... 13,429 6,572 Restructuring reserve................................... 863 3,159 NOL carryforwards....................................... 1,844 1,785 Other miscellaneous..................................... 6,183 5,243 Timing differences in Medicare.......................... 1,716 1,592 -------- -------- Total deferred tax assets............................. 39,210 36,823 Less valuation allowances................................... (1,844) (1,785) -------- -------- Net deferred tax liability.................................. $ (708) $ (1,331) ======== ========
The net change in the valuation allowance for deferred tax assets was an increase of $59 and $977 at September 30, 1997 and 1996, respectively. NOTE 11. COMMITMENTS AND CONTINGENCIES Certain of the Company's facilities are held under operating or capital leases. All capital leases will expire by 2009. Certain of these leases also contain provisions allowing the Company to purchase the leased assets during the term or at the expiration of the lease, at fair market value. Facilities operating under capital leases are summarized as follows (in thousands):
SEPTEMBER 30, ---------------- 1997 1996 ------- ------- Facilities operating under capital leases............... $12,551 $12,551 Less accumulated amortization........................... (5,799) (5,084) ------- ------- $ 6,752 $ 7,467 ======= =======
In October 1996 the Company entered into a leasing program, initially totaling $70.0 million and subsequently increased to $100.0 million, to be used as a funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions. The lease is an unconditional "triple net" lease for a period of seven years with the annual lease obligation a function of the amount spent by the lessor to acquire or construct the project, a variable interest rate, and commitment and other fees. The Company guarantees a minimum of approximately 83% of the residual value of the leased property and also has an option to purchase the properties at any time prior to the maturity date at a price sufficient to pay the entire amount financed, accrued interest, and certain expenses. At September 30, 1997, approximately $28.9 million of this leasing arrangement was utilized. The leasing program is accounted for as an operating lease. 50 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rental expense, net of sublease rent income, for all operating leases was $42.5 million, $44.2 million and $36.9 million for the three years ended September 30, 1997, 1996 and 1995, respectively. Certain leases also contain increases based on the Consumer Price Index, Medicaid reimbursement rates, or at amounts specified in the lease agreement. Sublease rent income was $6.5 million, $6.9 million and $6.1 million for the three years ended September 30, 1997, 1996 and 1995, respectively. Contingent rent based primarily on revenues was $1.8 million, $1.6 million and $1.4 million for the three years ended September 30, 1997, 1996 and 1995, respectively. The table below presents a schedule of the future minimum rental commitments and sublease income under all noncancellable leases as of September 30, 1997 (in thousands):
SUBLEASE OPERATING INCOME CAPITAL --------- -------- ------- 1998.......................................... $ 36,383 $ 6,869 $1,281 1999.......................................... 30,371 4,881 953 2000.......................................... 24,181 1,656 853 2001.......................................... 21,697 1,675 658 2002.......................................... 18,507 1,467 664 Subsequent years.............................. 77,629 6,503 -- -------- ------- ------ Total minimum rental obligations.............. $208,768 $23,051 4,409 ======== ======= Less amount representing interest............. (606) ------ Present value of capital leases............... 3,803 Less current portion.......................... (1,097) ------ Long-term obligations under capital leases.... $2,706 ======
As is typical in the healthcare industry, the Company is and will be subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which will be greater for higher acuity residents receiving services from the Company than for other long-term care residents. The Company is, from time to time, subject to such negligence claims and other litigation. In addition, resident, visitor, and employee injuries will also subject the Company to the risk of litigation. From time to time, the Company and its subsidiaries have been parties to various legal proceedings in the ordinary course of their respective business. In the opinion of management, except as described below, there are currently no proceedings which, individually or in the aggregate, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States Attorney's Office for the Eastern District of Texas (Beaumont) advising that the office is involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation is the result of a qui tam complaint (which involves a private citizen requesting the federal government to intervene in an action because of an alleged violation of a federal statute) filed under seal against the Company, and the AUSA is investigating the allegations in order to determine if the United States will intervene in the proceedings. The AUSA has requested that the Company voluntarily produce a substantial amount of documents, including medical records of former residents. Counsel for the Company has met with the AUSA, and the parties are currently engaged in discussions on whether the voluntarily production of former residents' medical records can be accomplished without violating the residents' rights to privacy and confidentiality. Based upon the information currently known about the complaint, the Company believes that given an opportunity to address the 51 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) allegations, the AUSA will find intervention by the United States is without merit. The Company will vigorously contest the alleged claims if the complaint is pursued. The Department of Justice ("DOJ") has advised the Company that the United States has declined to intervene in the qui tam complaint filed against The Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries of the Company (and of LCA before the Mergers) in the federal district court for the Western District of North Carolina. The Company does not know whether the individual plaintiff will continue to pursue the alleged claims that BCC and Med-Therapy caused certain therapists to make improper therapy record entries with respect to screening services, and that any claims filed with Medicare for payments based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. The Company will vigorously contest any claims which the individual plaintiff pursues. No assurance can be given that, if the plaintiff were to prevail in his claim, the resulting judgement would not have a material adverse effect on the Company. Moreover, in connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless the Company from and against any and all loss, expense, damage, penalty and liability which could result from this claim, subject to further adjustment. Mr. Beaver's indemnity requires any payment to the Company to be in the form of shares of the Company common stock held by him. The Company was served with a Petition, Cause No. 97-1500-G, Community Healthcare Services of America, Inc., v. Rehability Health Services, Inc. and Living Centers of America, Inc., in the 319th Judicial District Court of Nueces County, Texas, seeking $5.0 million in damages, filed by Community Health Services, Inc. ("Community"), in connection with a home health agency management agreement entered into between Community and a subsidiary of the Company. Such subsidiary operated a Texas home health agency which Community managed. The Company is vigorously defending the allegations of Community that the Company breached the agreement by terminating Community's management services and has filed a lawsuit against Community for breach of the agreement, Cause No. 97-03569; Rehability Health Services, Inc. v. Community Healthcare Services, Inc., in the 353rd Judicial District Court of Travis County, Texas. The Nueces County action was transferred to Travis County and the two cases have been consolidated into Cause No. 97-03569. NOTE 12. INSURANCE COVERAGES The Company insures automobile, general, and professional liability and workers' compensation risks through insurance policies with third parties. Some of these third-party policies subsequent to February 21, 1994 are subject to reinsurance agreements between the insurer and LCA Insurance Company, Ltd., a wholly-owned subsidiary of the Company that was formed during 1994. The business written by LCA Insurance Company, Ltd. is the reinsurance of policies providing coverage for nursing home professional liability, automobile liability, and workers' compensation. All of these are occurrence policies which cover only the Company and its subsidiaries and their employees. Pursuant to the reinsurance agreements, LCA Insurance Company, Ltd. is responsible to pay all losses which are incurred by the company issuing the policies. The maximum loss exposure with respect to these policies is $0.5 million per occurrence (policy periods prior to July 1, 1996) and $1.0 million per occurrence (policy periods subsequent to July 1, 1996) for nursing home professional liability; $0.25 million per occurrence for automobile liability; and $0.5 million per occurrence for workers' compensation liability. The liabilities for incurred losses are estimated by independent actuaries on an undiscounted basis. The obligations of LCA Insurance Company, Ltd. under the reinsurance agreements are collateralized through a security trust account which has been designated as restricted investments to pay for future claims experience applicable to policy periods subsequent to February 21, 1994. Restricted investments at September 30, 1997 and 1996 designated to pay such claims were $52.0 million and $31.0 million, respectively. 52 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1992, the Company elected under Texas law to decline to participate in the Texas workers' compensation insurance program. As part of the election, the Company implemented an employee benefit plan providing for employer-paid benefits comparable to those provided under the Texas workers' compensation program and obtained insurance that limits the Company's exposure for any individual injury. During 1994, the Company established a trust in which to fund the amount applicable to actuarially determined claims to be incurred for fiscal year 1994 and subsequent years. The BCC Entities are insured for current and past workers' compensation claims under various types of insurance and financial plans, certain of which are loss-sensitive in nature and design, which subject the BCC Entities to additional future premiums for losses incurred in a prior year but paid in a subsequent fiscal period, as losses develop. The BCC Entities have recorded expenses under these plans based upon actual and estimated losses based on the available incurred loss structure. Additionally, certain of these loss-sensitive workers' compensation plans in which the BCC Entities have participated were organized as pools or funds, with joint and several or pro rata liability ascribed to its members. Such plans may lead to the potential of future loss assessments for the BCC Entities; however, the amount of such additional potential assessments, if any, is not determinable at this time. It is the opinion of management that any additional assessments will not have a material adverse effect on the financial position or results of operations of the Companies. NOTE 13. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Notes Receivable Fair value for each significant note receivable was estimated based on the net present value of cash flows that would be received on each note over the remaining note term using current market interest rates rather than stated interest rates. The discount factor was the estimated rate for long-term debt in effect at September 30, 1997 and 1996. Further adjustments were made to the value of the notes based on management's opinion of the credit risk of the note obligee. Long-Term Debt The Company believes that the fair value of the long-term debt is properly reflected at current carrying amounts except for certain fixed rate debt instruments. Fair values for each significant fixed rate debt instrument was estimated based on the net present value of cash flows that would be paid on each note over the remaining note term using the Company's current incremental borrowing rate rather than the stated interest rates on the notes. See Note 5. Interest Rate Swap Agreements Fair values for the Company's various interest rate swap agreements were based on market quotes which would be required to terminate the agreement. See Note 5. 53 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The estimated values of the Company's financial instruments as of September 30, 1997 and 1996 are as follows (in thousands):
SEPTEMBER 30, ---------------------------------- 1997 1996 ---------------- ---------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- Cash and cash equivalents............. $14,355 $14,355 $21,394 $21,394 Notes receivable...................... 13,423 14,172 14,536 15,517 Restricted investments................ 51,976 51,976 31,040 31,040 Long-term debt........................ 295,959 298,843 276,448 277,413 Interest rate swap agreements......... -- (1,622) -- 341
NOTE 14. RELATED PARTY TRANSACTIONS The Company purchases services and medical supplies from APS at current market prices under certain service and supply agreements and all significant intercompany purchases have been eliminated for the three years ended September 30, 1997, 1996 and 1995. The Company also purchases therapy services from ARS and TMI at current market prices under certain service agreements. The total purchases from these companies prior to their acquisition by the Company on June 30, 1995 and August 1, 1995, respectively amounted to $1.5 million for ARS and $1.9 million for TMI. All significant intercompany purchases from these two subsidiaries since their acquisition have been eliminated. NOTE 15. EARNINGS PER COMMON SHARE On November 24, 1997, the Board of Directors declared a three-for-one stock split to be distributed on December 30, 1997 to shareholders of record on December 15, 1997. See Note 19. The table below represents a reconciliation of the number of weighted average common shares used in computing primary earnings per share (in thousands) and reflects the stock split identified above.
YEARS ENDED SEPTEMBER 30, ------------------------ 1997 1996 1995 ------ ------ ------ Common shares outstanding, end of period...... 58,794 58,503 60,570 Effect of using weighted average shares outstanding.................................. (180) 1,869 (4,020) Effect of using treasury stock method on stock options...................................... 711 573 552 ------ ------ ------ Shares used in computing earnings per share... 59,325 60,945 57,102 ====== ====== ======
In February 1995, the Company issued an additional 8,625,000 shares (2,875,000 shares prior to the three-for-one stock split) of its common stock in an additional public offering. The net proceeds of the transaction, approximately $99.1 million, were used primarily to retire existing debt. Assuming the transaction had occurred on October 1, 1994, net income and earnings per share for the year ended September 30, 1995 would have been $25.5 million and $0.42, respectively. NOTE 16. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS The Company established an Employee Stock Option Plan in 1992 which authorizes the granting of incentive stock options, nonqualified options, or any combination of the foregoing to purchase up to 4,200,000 shares (1,400,000 shares prior to the three-for-one stock split) of the Company's common stock. The exercise 54 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) price per share of common stock with respect to each incentive stock option is the fair market value of a share of common stock (defined as the closing price per share of the common stock on the New York Stock Exchange) on the date such option is granted while the exercise price per share of common stock with respect to a nonqualified option is the fair market value of a share of common stock on the date such option is granted or on a subsequent date or as otherwise provided in any agreement with the recipient, but in no event will the exercise price with respect to a nonqualified option be less than 50% of the fair market value of a share of common stock on the date of the grant. The options have a term as fixed by the Stock Option Committee, but, in no event, longer than ten years after the date of grant. Options are exercisable only by the optionee and only while the optionee is an employee or nonemployee director of the Company or, unless such optionee's employment is terminated for cause, within three months after the optionee ceases to be an employee or director of the Company. Options are exercisable for 12 months after the death or permanent disability of an optionee. The option exercise price must be paid in cash or, at the discretion of the Stock Option Committee, may be paid in whole or in part in shares of common stock valued at fair market value on the date of exercise. As of September 30, 1997 and 1996, there were 3,901,404 and 3,778,644, respectively (1,300,468 and 1,259,548 prior to the three-for-one stock split, respectively), options granted and outstanding. All of these options were converted into cash or shares of Company common stock in connection with the Mergers. See Note 19. The following is a summary of the stock option activity and related information which has been adjusted to reflect the three-for-one stock split:
YEARS ENDED SEPTEMBER 30, -------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------ -------- ------------ -------- ------------ -------- Outstanding at beginning of period.............. 3,778,644 $9.18 2,338,875 $ 8.27 1,793,325 $ 6.62 Granted................. 645,972 8.30 2,074,620 10.23 1,002,750 11.08 Exercised............... (21,831) 6.86 (118,302) 6.28 (162,030) 6.14 Forfeited............... (501,381) 9.95 (516,549) 9.87 (295,170) 8.99 ------------ ----- ------------ ------ ------------ ------ Outstanding at end of period................. 3,901,404 8.95 3,778,644 9.18 2,338,875 8.27 ============ ============ ============ ====== Exercisable at end of period................. 1,567,092 7.71 951,033 6.99 621,840 5.46 ============ ============ ============ ====== Price range............. $4.42-$12.92 $4.42-$12.92 $4.42-$12.92 ============ ============ ============ Weighted average fair value of options granted during the year................... $5.00 $ 5.59 $ 6.28 ===== ====== ======
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the 55 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) following weighted-average assumptions for 1997, 1996 and 1995: risk-free interest rates ranging from 5.99% to 6.11%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of 0.42; and a weighted-average expected life of the option of eight years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
WEIGHTED AVERAGE WEIGHTED REMAINING AVERAGE CONTRACTUAL EXERCISE LIFE RANGE OPTIONS PRICE (YEARS) ----- --------- -------- ----------- $4.42--$5.83............................... 631,260 $ 4.82 4.83 $6.75--$8.25............................... 1,107,042 $ 7.89 9.08 $8.58--$9.88............................... 501,255 $ 9.48 7.58 $10.54--$10.96............................. 1,061,100 $10.62 7.83 $11.79--$12.92............................. 600,747 $11.86 8.42 --------- 3,901,404 =========
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1997 1996 1995 ------- ------- ------- Pro forma net income............................. $42,489 $42,405 $23,920 Pro forma earnings per share..................... $ 0.72 $ 0.70 $ 0.42
The Company established an Employee Stock Purchase Plan in 1993. The plan authorizes the purchase of up to 360,000 shares (120,000 shares prior to the three-for-one stock split) of the Company's common stock by eligible employees. The provisions of the plan include eligibility for all full time employees who have completed one year of service, employee contributions equal to the lesser of 10% of base salary or $10,000, the purchase price being equal to the lesser of the fair market value of the stock on the first or the last day of the plan year, and an option to purchase shares of stock or withdraw all payroll deductions plus interest at the end of the plan year. As of September 30, 1997 and 1996, a total of 177,789 and 129,480 shares, respectively, (59,263 and 43,160 prior to the three-for-one stock split) had been issued under the plan. The Employee Stock Purchase Plan was terminated effective September 17, 1997. 56 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The table below sets forth summarized quarterly financial data for the years ended September 30, 1997 and 1996 (in thousands, except per share amounts) and has been adjusted to reflect the three-for-one stock split. See Note 19.
FOURTH THIRD SECOND FIRST 1997 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- -------- Net revenues...................... $286,335 $288,433 $285,318 $280,202 Income from operations............ 19,126 (a) 28,456 25,844 21,682 Income before income taxes and equity earnings/minority interests........................ 15,198 23,968 21,462 17,628 Equity earnings/minority interest. (330) (223) (119) (63) Net income........................ $ 7,709 $ 13,669 $ 12,214 $ 10,325 ======== ======== ======== ======== Earnings per share................ $ 0.13 $ 0.23 $ 0.21 $ 0.18 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding.... 59,796 59,658 59,241 58,797 ======== ======== ======== ======== - -------- (a) Includes $2.6 million merger and acquisition costs (or $0.04 per share expense after tax.) FOURTH THIRD SECOND FIRST 1996 QUARTER QUARTER QUARTER QUARTER - ---- -------- -------- -------- -------- Net revenues...................... $284,838 $281,217 $278,056 $270,380 Income from operations............ 21,172 (b) 22,951(b) 24,110 21,323 Income before income taxes and equity earnings/minority interests........................ 17,700 20,038 21,154 18,203 Equity earnings/minority interests........................ (87) 122 (189) (2) Net income........................ $ 7,053 $ 12,816 $ 12,412 $ 10,899 ======== ======== ======== ======== Earnings per share................ $ 0.12 $ 0.21 $ 0.20 $ 0.18 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding.... 59,739 61,503 61,509 61,080 ======== ======== ======== ========
- -------- (b) Includes $2.0 million income and $0.9 million expense of non-recurring items in the third and fourth quarters, respectively (or $0.03 per share income and $0.06 per share expense after tax, respectively) NOTE 18. STOCKHOLDER RIGHTS PLAN Since November 17, 1994, when the Company's Board of Directors declared a dividend of one right for each outstanding share of the Company's common stock, each share of the Company's outstanding common stock carries with it such right. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, for an exercise price of $160, subject to adjustment. Such rights will not be exercisable nor transferable apart from the Common Stock until such time as a person or group acquires 15% of the Company's Common Stock or initiates a tender offer or exchange offer that will result in ownership of 15% of the Company's Common Stock. In the event that the Company is merged, and its Common Stock is exchanged or converted, the rights will entitle the holders to buy shares of the acquiror's common stock at a 50% discount. Under certain other circumstances, the rights can become rights to purchase the Company's Common Stock at a 50% discount. The 57 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) rights may be redeemed by the Company for $0.01 per right at any time until 10 days following the first public announcement of a 15% acquisition of beneficial ownership of the Company's Common Stock. On May 7, 1997, LCA's Board of Directors amended the Rights Agreement under which the rights were granted such that the Rights Agreement terminated immediately prior to the Mergers. See Note 19. NOTE 19. SUBSEQUENT EVENTS Recapitalization Merger Agreement During 1997 the Company entered into a Recapitalization Merger Agreement (the "Recapitalization Merger") with Apollo Management, L.P. ("Apollo") and one of its affiliates which was completed effective November 1, 1997. In connection with the Recapitalization Merger, certain affiliates of Apollo and certain other investors (the "Apollo Investors") invested $240 million to purchase approximately 5.9 million shares of newly issued common stock of LCA (see below). Concurrent with the Recapitalization Merger, LCA changed its name to Paragon Health Network, Inc. ("Paragon"). Also effective November 1, 1997, Paragon sold $275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of 99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value (collectively the "Notes"), in a private offering to institutional investors. Concurrent with the private Notes offering, Paragon entered into a new Senior Credit Facility which is composed of $740 million in Term Loans and a Revolving Credit Facility which provides for borrowings up to an additional $150 million. The Term Loans consist of (i) a $240 million Term Loan for 6 1/2-years, (ii) a $250 million Term Loan for 7 1/2-years, and (iii) a $250 million Term Loan for 8 1/2-years. Borrowings under the Senior Credit Facility are at the Chase Manhattan, N.A. base rate or LIBOR plus an applicable margin ranging from 0.75% to 2.75% depending upon the respective term loan tenor and the Company's leverage ratio. The Senior Credit Facility imposes restrictions on the Company's ability to make capital expenditures and both the Senior Credit Facility and the indenture governing the Notes limit the Company's ability to incur additional indebtedness. The covenants contained in the Senior Credit Facility also, among other things, restrict the ability of the Company to dispose of assets, repay other indebtedness or amend other debt instruments, pay dividends, and make acquisitions. Annual maturities of Paragon's long-term debt in the next five fiscal years are expected to be as follows: $3.3 million in 1998, $29.4 million in 1999, $50.9 million in 2000, $53.3 million in 2001, $52.8 million in 2002, and $1.1 billion thereafter. Paragon used the $240 million invested by Apollo Investors, the $1.189 billion of net proceeds provided by the Notes offering and the Term Loans to (i) purchase approximately 90.5% of the issued and outstanding common stock of the Company for a per share price of $40.50 (prior to the three-for-one stock split), (ii) to repay substantially all amounts outstanding under the Company's and under GranCare Inc.'s (see below for description of the GranCare, Inc. merger acquisition) previous credit facilities and (iii) pay for certain costs associated with the Mergers. GranCare Purchase Business Combination Effective November 1, 1997, and subsequent to the Company's recapitalization, Paragon completed the merger acquisition of GranCare, Inc. ("GranCare") pursuant to the terms of the previously announced GranCare Merger Agreement. In the merger acquisition, GranCare common stock was exchanged for 0.2346 of a share of Paragon common stock. The acquisition was accounted for under the purchase method. Following the recapitalization and acquisition, the Apollo Investors and certain other investors owned approximately 44.0%, prior GranCare shareholders owned approximately 41.9% and prior LCA shareholders retained approximately 14.1% of the outstanding shares of Paragon common stock. The Recapitalization Merger and the GranCare Merger effectively reduced the Company's total stockholders' equity from $375 million at September 30, 1997 to approximately $77 million following the Mergers. 58 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Paragon Stock Split On November 24, 1997, the Board of Directors of Paragon declared a three- for-one stock split on Paragon's (formerly LCA's) common stock. In all instances throughout the financial statements and footnotes, common stock and additional paid-in capital as of September 30, 1997 and 1996 have been restated to reflect this split. The number of shares issued at September 30, 1997 and 1996 after giving effect to the split was 60,803,760 shares (20,267,920 shares before the split). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on directors of the registrant will appear in the Company's Proxy Statement for the 1998 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information required by this item for the Company's executive officers is contained in Item 4 of this report. ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation will appear in the Company's Proxy Statement for the 1998 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of certain beneficial owners will appear in the Company's Proxy Statement for the 1998 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information on certain relationships and related transactions will appear in the Company's Proxy Statement for the 1998 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following reports, financial statements and schedule are filed herewith on the pages indicated:
PAGE ---- Report of Independent Auditors............................................ 33 Consolidated Balance Sheets at September 30, 1996 and 1997................ 34 Consolidated Statements of Income for Fiscal Years 1995, 1996 and 1997.... 35 Consolidated Statements of Stockholders' Equity for Fiscal Years 1995, 1996 and 1997............................................................ 36 Consolidated Statements of Cash Flows for Fiscal Years 1995, 1996 and 1997..................................................................... 37 Notes to Consolidated Financial Statements................................ 38 FINANCIAL STATEMENT SCHEDULE Schedule II--Valuation and Qualifying Accounts and Reserves............... 69
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted.
EXHIBITS -------- *2.1 Stock Purchase Agreement by and between Abbey Healthcare Group, Incorporated and Living Centers of America, Inc. with respect to the sale of Abbey Pharmaceutical Services, Inc. (filed as Exhibit 99.2 to Registrant's Form 8-K dated October 14, 1994 and incorporated herein by reference). *2.2 Schedule 14D-1 Tender Offer Statement for Rehability Corporation filed on May 23, 1995. *2.3 Amended and Restated Agreement and Plan of Merger dated March 27, 1995 among Living Centers of America, Inc. and Living Centers/Brian Care Company and the Brian Care Center Corporation, The Beaver Property Entities and Donald C. Beaver, as amended (filed as Exhibit 2.1 of the Fourth Amendment to the Registrant's Registration Statement on Form S-4, Registration No. 33-90676, and incorporated herein by reference). *2.4 Agreement of Purchase and Exchange among Living Centers of America, Inc. and Living Centers Specialty Care Services, Inc. and Cason, Inc., Don W. Wortley, Don W. Wortley Trust, Mary Ann Wortley Trust, and 726 Cottonwood, Ltd. dated as of August 1, 1995 (filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-3, Registration No. 33-97616, and incorporated herein by reference). *2.5 Recapitalization Agreement, as amended, by and among Living Centers of America, Inc., DevCon Holding Company, Living Centers-DevCon, Inc., and Golber, Thoma, Cressey, Raimer Fund IV, L.P. (filed as Exhibit 2.7 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1996, File No. 001-10968, and incorporated herein by reference). *2.6 Amended and Restated Agreement and Plan of Merger dated September 17, 1997 among Apollo Management, L.P. ("Apollo"), Apollo LCA Acquisition Corp. and Living Centers of America, Inc. (filed as Annex I to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *2.7 Amended and Restated Agreement and Plan of Merger dated September 17, 1997 among Living Centers of America, Inc., GranCare, Inc. ("GranCare"), Apollo and LCA Acquisition Sub, Inc. (filed as Annex II to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference).
60
EXHIBITS -------- *3.1 Amended and Restated Certificate of Incorporation of Paragon Health Network, Inc. (filed as Annex III to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of Paragon Health Network, Inc. (filed as Annex IV to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). 4.1 Amended and Restated Certificate of Incorporation of Paragon Health Network, Inc. (filed as Exhibit 3.1 hereto). 4.2 Amended and Restated Bylaws of Paragon Health Network, Inc. (filed as Exhibit 3.2 hereto). *4.3 Stockholders' Agreement by and among Paragon Health Network, Inc., Apollo and certain other investors (filed as Annex V to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *4.4 Registration Rights Agreement among Paragon Health Network, Inc. and certain investors (filed as Exhibit 4.7 to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). 4.5 Indenture dated as of November 4, 1997, between Paragon Health Network, Inc. and IBJ Schroder Bank & Trust Company. 4.6 Exchange and Registration Rights Agreement dated as of November 4, 1997, among Paragon Health Network, Inc., Chase Securities, Inc., Smith Barney Inc. and Credit Suisse First Boston Corporation. 4.7 Form of Common Stock Certificate of Paragon Health Network, Inc. 4.8 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to CUSIP No. 698940 AB 9. 4.9 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to CUSIP No. U69879 AB 7. 4.10 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to CUSIP No. 698940 AD 5. 4.11 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No. 698940 AA 1. 4.12 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No. U69879 AA 9. 4.13 9 1/2% Senior Subordinated Note Due 2007 pertaining to CUSIP No. 698940 AC 7. 10.1 +Employment Agreement between Paragon Health Network, Inc. and Keith B. Pitts. 10.2 +Employment Agreement between Paragon Health Network, Inc. and John D. Lee. 10.3 +Employment Agreement between Paragon Health Network, Inc. and Susan Thomas Whittle. 10.4 +Employment Agreement between Paragon Health Network, Inc. and William R. Korslin. 10.5 +Employment Agreement between Paragon Health Network, Inc. and Dennis G. Johnston. 10.6 +Employment Agreement between Paragon Health Network, Inc. and David W. Budke. 10.7 +Employment Agreement between Paragon Health Network, Inc. and David L. Ward. 10.8 +Employment Agreement between Paragon Health Network, Inc. and Charles B. Carden. 10.9 +Employment Agreement between Paragon Health Network, Inc. and Aruna Poddatoori. 10.10 +Employment Agreement between Paragon Health Network, Inc. and Leroy D. Williams. 10.11 +Employment Agreement between Paragon Health Network, Inc. and R. Jeffrey Taylor.
61
EXHIBITS -------- 10.12 +Form of Employment Agreement entered into between Paragon Health Network, Inc. and its Vice Presidents. *10.13 +1992 Stock Option Plan of Living Centers of America, Inc., as amended (filed as Exhibit 10.1 to Registrant's Registration Statement Form S-8, Registration Statement No. 333-09707, and incorporated herein by reference). *10.14 +Deferred Retirement Incentive Plan of Living Centers of America, Inc. (filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, File No. 001- 10968, and incorporated herein by reference). *10.15 +Management Incentive Bonus Plan of Living Centers of America, Inc. (filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, File No. 001-10968, and incorporated herein by reference). *10.16 +Employee Stock Purchase Plan of Living Centers of America, Inc. (filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 001-10968, and incorporated herein by reference). 10.17 +Paragon Health Network, Inc. 1997 Long-Term Incentive Plan. 10.18 +Paragon Health Network, Inc. Incentive Compensation Plan. *10.19 +GranCare, Inc. 1996 Stock Incentive Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.20 +GranCare, Inc. 1996 Replacement Stock Option Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.21 +GranCare, Inc. Outside Directors' Stock Incentive Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.22 +Executive Deferred Compensation Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333- 19097, and incorporated herein by reference). *10.23 +GranCare, Inc. 401(k) Savings Plan and Trust (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.24 +Assignment, Assumption and Amendment of the GranCare, Inc. 401(k) Savings Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.25 Indemnification Agreement dated as of February 21, 1992 between Living Centers of America, Inc. and the ARA Group, Inc. (filed as Exhibit 10.4 to Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference). *10.26 Assignment Agreement dated as of February 21, 1992 between Living Centers of America, Inc. and The ARA Group, Inc. (filed as Exhibit 10.6 to Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference). 10.27 Purchase Agreement dated October 30, 1997, by and among Living Centers of America, Inc. and Chase Securities, Inc., Smith Barney Inc. and Credit Suisse First Boston Corporation. 10.28 Termination Release Agreement dated as of September 3, 1997, by and among GranCare, Manor Care, Inc. and Vitalink Pharmacy Services, Inc., Apollo Management, L.P. and Living Centers of America, Inc.
62
EXHIBITS -------- 10.29 Letter Agreement regarding Liquidated Damages Calculation in Pharmaceutical Supply Agreements dated September 3, 1997, by and among GranCare, Inc., TeamCare, Inc. and Vitalink Pharmacy Services, Inc. 10.30 Letter Agreement regarding Preferred Provider Arrangement dated August 29, 1997, by and among Vitalink Pharmacy Services, Inc. and GranCare. 10.31 Amendment to AMS Properties, Inc. Facility Leases dated as of October 31, 1997 between Health and Retirement Properties Trust ("HRPT") and AMS Properties, Inc. ("AMS"). 10.32 Collateral Pledge Agreement dated as of October 31, 1997 by and between Paragon Health Network, Inc. and HRPT. 10.33 Guaranty by GranCare dated as of October 31, 1997 by GranCare in favor of HRPT. 10.34 Guaranty by Paragon Health Network, Inc. dated as of October 31, 1997 by Paragon Health Network, Inc. in favor of HRPT. 10.35 Restructure and Asset Exchange Agreement dated as of October 31, 1997 among HRPT, GranCare, AMS and GCI Health Care Centers, Inc. 10.36 Subordination Agreement dated as of October 31, 1997 by and among HRPT and the corporations listed on the signature page thereto. 10.37 Amendment to GCI Health Care Centers, Inc. Facility Leases dated as of October 31, 1997. *10.38 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of December 29, 1993 among HRPT, GranCare, AMS and GCI Health Care Centers, Inc. (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.39 Master Lease Document dated December 28, 1990, between HRPT and AMS Properties, Inc. ("AMS") (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.40 Form of Guaranty dated December 28, 1990, by American Medical Services, Inc. and each of its subsidiaries in favor of HRPT (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.41 Amendment to Master Lease between HRPT and AMS dated as of December 29, 1993 (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.42 Amendment to Master Lease Document and Facility Lease between GCI Health Care Center, Inc. and HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.43 Amendment to Master Lease Document and Facility Lease between AMS and HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.44 Promissory Note from AMS to HRPT in the principal amount of $11.5 million, dated October 1, 1994 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.45 Mortgage and Security Agreement from AMS to HRPT for the Northwest and River Hills West Health Care Centers dated as of March 31, 1995 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.46 Assumption Agreement by GranCare in favor of HRPT (filed with GranCare's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference).
63
EXHIBITS -------- *10.47 Consent and Amendment to Transaction Documents dated as of December 31, 1996 (the "Consent and Amendment") among GCI Health Care Centers, Inc., GranCare, Vitalink Pharmacy Services, Inc., HRPT and AMS (filed with GranCare's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). 10.48 Credit Agreement for $890,000,000 dated as of November 4, 1997, by and among Paragon Health Network, Inc., as Borrower, The Chase Manhattan Bank, as Administrative Agent, NationsBank, N.A., as Documentation Agent, and the several lenders from time to time parties thereto 10.49 Guarantee and Collateral Agreement dated as of November 4, 1997, by and among Paragon Health Network, Inc. and certain of its subsidiaries in favor of The Chase Manhattan Bank, as Collateral Agent. 10.50 Amended and Restated Participation Agreement dated November 4, 1997, by and among Living Centers Holding Company, as Lessee, FBTC Leasing Corp., as Lessor, The Chase Manhattan Bank, as Agent for the Lenders, the Fuji Bank Limited (Houston Agency), as Co-Agent, and the Lenders parties thereto. 10.51 Amended and Restated Guaranty dated November 4, 1997, by and among Paragon Health Network, Inc. and certain other guarantors signatory thereto in favor of The Chase Manhattan Bank, as Administrative Agent. 10.52 Lease dated October 10, 1996, between FBTC Leasing Corp., as Lessor, and Living Centers Holding Company, as Lessee. 10.53 Amendment to Lease dated as of November 4, 1997 between FBTC Leasing Corp. and Living Centers Holding Company. *10.54 Form of Mortgage and Security Agreement with respect to five of GranCare's facilities located in the State of Illinois to secure a loan in the aggregate principal amount of $16.5 million from Health Care Capital Finance, Inc. (the "Health Care Capital Loan"), each agreement dated as of March 23, 1995 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference). *10.55 Master Settlement Agreement between GranCare and the Service Employees International Union ("SEIU"), dated as of November 6, 1995 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995). *10.56 Settlement Agreement between GranCare and the SEIU with respect to four of GranCare's facilities located in the State of Michigan, dated as of January 29, 1996 (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995). *10.57 Settlement Agreement between GranCare and the SEIU with respect to seven of GranCare's facilities located in the State of Wisconsin (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995). *10.58 Settlement Agreement between GranCare and the SEIU with respect to seven of GranCare's facilities located in the State of California (filed with GranCare's Annual Report on Form 10-K for the year ended December 31, 1995). 10.59 +Agreement Respecting Termination of Employee--Employer Relationship between Paragon Health Network, Inc. and Keith Krein dated November 4, 1997. 10.60 +Agreement Respecting Termination of Employee--Employer Relationship between Paragon Health Network, Inc. and Edward L. Kuntz dated November 4, 1997. 11 Statement regarding computation of earnings per share. 21 Subsidiaries of Paragon Health Network, Inc.
64
EXHIBITS -------- 23 Consent of Ernst & Young LLP. 24 Power of Attorney. 27 Financial Data Schedule.
- -------- * Incorporated by reference as indicated. + Represents management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(d)(10)(iii) of Regulation S-K. Paragon Health Network, Inc. will furnish a copy of any exhibit described above to any beneficial holder of its securities upon receipt of a written request therefor, provided that such request sets forth a good faith representation that as of December 18, 1997, the date of record for its 1998 annual stockholders' meeting to be held on February 19, 1998, such beneficial owner is entitled to vote at such meeting, and provided further that such holder pays to Paragon Health Network, Inc. a fee compensating it for its reasonable expenses in furnishing such exhibits. (B) REPORTS ON FORM 8-K. There were no reports filed on Form 8-K during the quarter ended September 30, 1997. (C) EXHIBITS The response to this portion of Item 14 is contained in Item 14(a)(3) of this report. (D) FINANCIAL STATEMENT SCHEDULE The response to this portion of Item 14 is contained in Item 8 of this report. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PARAGON HEALTH NETWORK, INC. (Registrant) By: /s/ Susan Thomas Whittle ----------------------------------- Susan Thomas Whittle Senior Vice President, General Counsel and Secretary Date: December 29, 1997 66 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Keith B. Pitts Chairman of the Board, December 29, 1997 - ------------------------------------ President and Chief Keith B. Pitts Executive Officer (Principal Executive Officer) /s/ Charles B. Carden Executive Vice President and December 29, 1997 - ------------------------------------ Chief Financial Officer Charles B. Carden (Principal Financial Officer) * Director December 29, 1997 - ------------------------------------ Donald C. Beaver * Director December 29, 1997 - ------------------------------------ Laurence M. Berg * Director December 29, 1997 - ------------------------------------ Gene E. Burleson * Director December 29, 1997 - ------------------------------------ Peter P. Copses * Director December 29, 1997 - ------------------------------------ Jay M. Gillert * Director December 29, 1997 - ------------------------------------ Joel S. Kanter * Director December 29, 1997 - ------------------------------------ John H. Kissick * Director December 29, 1997 - ------------------------------------ Baltej S. Maini, M.D. * Director December 29, 1997 - ------------------------------------ William G. Petty, Jr. * Director December 29, 1997 - ------------------------------------ Robert L. Rosen /s/ Ronald W. Fleming Vice President, Controller December 29, 1997 - ------------------------------------ and Chief Accounting Ronald W. Fleming Officer (Principal Accounting Officer)
*Executed on behalf of the aforementioned directors by Susan Thomas Whittle pursuant to the powers of attorney included in Exhibit 24. /s/ Susan Thomas Whittle December 29, 1997 - ------------------------------- Susan Thomas Whittle
67 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES PARAGON HEALTH NETWORK, INC. (DOLLARS IN THOUSANDS)
BALANCE DEDUCTION ADDITIONS BALANCE BEGINNING CHARGED FROM FROM END OF OF PERIOD TO INCOME RESERVE ACQUISITIONS PERIOD --------- --------- --------- ------------ -------- Fiscal Year 1997: Allowance for doubtful accounts............... $17,405 $27,760 $(12,027) $ -- $ 33,138 ======= ======= ======== ====== ======== Notes receivable reserves............... $ 3,516 $(1,478)(a) $ (850) $ -- $ 1,188 ======= ======= ======== ====== ======== Fiscal Year 1996: Allowance for doubtful accounts............... $13,332 $16,666 $(14,702) $2,109 $ 17,405 ======= ======= ======== ====== ======== Notes receivable reserves............... $ 3,550 $ -- $ (34) $ -- $ 3,516 ======= ======= ======== ====== ======== Fiscal Year 1995: Allowance for doubtful accounts............... $ 6,632 $10,520 $(11,659) $7,839 $ 13,332 ======= ======= ======== ====== ======== Notes receivable reserves............... $ 2,850 $ 700 $ -- $ -- $ 3,550 ======= ======= ======== ====== ========
- -------- (a) Includes reversal of reserves based on collections of notes previously considered doubtful. 68 EX-4.5 2 INDENTURE EXHIBIT 4.5 ================================================================================ PARAGON HEALTH NETWORK, INC., as Issuer and IBJ SCHRODER BANK & TRUST COMPANY, as Trustee ____________________ INDENTURE Dated as of November 4, 1997 _____________________ 9 1/2% Senior Subordinated Notes due 2007 9 1/2% Series B Senior Subordinated Notes due 2007 10 1/2% Senior Subordinated Discount Notes due 2007 10 1/2% Series B Senior Subordinated Discount Notes due 2007 ================================================================================ RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND INDENTURE, DATED AS OF NOVEMBER 4, 1997/***/
TRUST INDENTURE ACT SECTION INDENTURE SECTION (S) 310(a)(1) ................................... 608 (a)(2) ................................... 608 (b) ................................... 609 (S) 312(a) ................................... 701 (c) ................................... 702 (S) 313(a) ................................... 703 (c) ................................... 703 (S) 314(a)(4) ................................... 1010(a) (c)(1) ................................... 102 (c)(2) ................................... 102 (e) ................................... 102 (S) 315(a) ................................... 601(a) (b) ................................... 602 (c) ................................... 601(b) (d) ................................... 601(c), 603 316(a)(last sentence)................................. 101 ("Outstanding") (a)(1)(A) ................................... 502, 512 (a)(1)(B) ................................... 513 (b) ................................... 508 (c) ................................... 104(d) (S) 317(a)(1) ................................... 503 (a)(2) ................................... 504 (b) ................................... 1003 (S) 318(a) ................................... 111
____________________________ /***/Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. TABLE OF CONTENTS/***/
Page ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions..................................................................... 1 SECTION 102. Compliance Certificates and Opinions............................................ 18 SECTION 103. Form of Documents Delivered to Trustee.......................................... 18 SECTION 104. Acts of Holders................................................................. 19 SECTION 105. Notices, Etc., to Trustee, the Company and any Guarantor........................ 19 SECTION 106. Notice to Holders; Waiver....................................................... 20 SECTION 107. Effect of Headings and Table of Contents........................................ 20 SECTION 108. Successors and Assigns.......................................................... 20 SECTION 109. Separability Clause............................................................. 20 SECTION 110. Benefits of Indenture........................................................... 21 SECTION 111. Governing Law................................................................... 21 SECTION 112. Legal Holidays.................................................................. 21 SECTION 113. No Personal Liability of Directors, Officers, Employees, Stockholders or Incorporators......................................................................... 21 SECTION 114. Counterparts.................................................................... 21 SECTION 115. Communications by Holders with Other Holders.................................... 21 ARTICLE TWO. NOTE FORMS SECTION 201. Forms Generally................................................................. 22 SECTION 202. Restrictive Legends............................................................. 22 SECTION 203. OID Legend...................................................................... 25 SECTION 204. Form of Senior Subordinated Note................................................ 25 SECTION 205. Form of Senior Subordinated Discount Note....................................... 38 SECTION 206. Form of Trustee's Certificate of Authentication................................. 50 ARTICLE THREE. THE NOTES SECTION 301. Title and Terms................................................................. 50 SECTION 302. Denominations................................................................... 51 SECTION 303. Execution, Authentication, Delivery and Dating.................................. 51 SECTION 304. Temporary Notes................................................................. 52 SECTION 305. Registration, Registration of Transfer and Exchange............................. 52 SECTION 306. Book-Entry Provisions for Global Notes.......................................... 53 SECTION 307. Special Transfer Provisions..................................................... 54 SECTION 308. Form of Certificate to Be Delivered in Connection with Transfers to Institutional Accredited Investors....................................................... 56 SECTION 309. Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S................................................................. 58 SECTION 310. Mutilated, Destroyed, Lost and Stolen Notes..................................... 59 SECTION 311. Payment of Interest; Interest Rights Preserved.................................. 59 SECTION 312. Persons Deemed Owners........................................................... 60 SECTION 313. Cancellation.................................................................... 60
___________________ /***/ Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.
Page ---- SECTION 314. Computation of Interest......................................................... 61 SECTION 315. CUSIP Numbers................................................................... 61 ARTICLE FOUR. SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture................................................................................ 61 SECTION 402. Application of Trust Money...................................................... 62 ARTICLE FIVE. REMEDIES SECTION 501. Events of Default............................................................... 63 SECTION 502. Acceleration of Maturity; Rescission and Annulment.............................. 64 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee................. 65 SECTION 504. Trustee May File Proofs of Claim................................................ 65 SECTION 505. Trustee May Enforce Claims Without Possession of Notes.......................... 66 SECTION 506. Application of Money Collected.................................................. 66 SECTION 507. Limitation on Suits............................................................. 66 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest................................................................................. 67 SECTION 509. Restoration of Rights and Remedies.............................................. 67 SECTION 510. Rights and Remedies Cumulative.................................................. 67 SECTION 511. Delay or Omission Not Waiver.................................................... 67 SECTION 512. Control by Holders.............................................................. 68 SECTION 513. Waiver of Past Defaults......................................................... 68 SECTION 514. Waiver of Stay or Extension Laws................................................ 68 SECTION 515. Undertaking for Costs........................................................... 69 ARTICLE SIX. THE TRUSTEE SECTION 601. Certain Duties and Responsibilities............................................. 69 SECTION 602. Notice of Defaults.............................................................. 70 SECTION 603. Certain Rights of Trustee....................................................... 70 SECTION 604. Trustee Not Responsible for Recitals or Issuance of Notes....................... 71 SECTION 605. May Hold Notes.................................................................. 72 SECTION 606. Money Held in Trust............................................................. 72 SECTION 607. Compensation and Reimbursement.................................................. 72 SECTION 608. Corporate Trustee Required; Eligibility......................................... 73 SECTION 609. Resignation and Removal; Appointment of Successor............................... 73 SECTION 610. Acceptance of Appointment by Successor.......................................... 74 SECTION 611. Merger, Conversion, Consolidation or Succession to Business..................... 74 SECTION 612. Trustee's Application for Instructions from the Company......................... 75 ARTICLE SEVEN. HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Company to Furnish Trustee Names and Addresses.................................. 75 SECTION 702. Disclosure of Names and Addresses of Holders.................................... 75 SECTION 703. Reports by Trustee.............................................................. 75 ARTICLE EIGHT. MERGER, CONSOLIDATION, OR SALE OF ASSETS SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............................ 76 SECTION 802. Successor Substituted........................................................... 76
Page ---- ARTICLE NINE. SUPPLEMENTS AND AMENDMENTS TO INDENTURE SECTION 901. Supplemental Indentures Without Consent of Holders.............................. 77 SECTION 902. Supplemental Indentures with Consent of Holders................................. 77 SECTION 903. Execution of Supplemental Indentures............................................ 78 SECTION 904. Effect of Supplemental Indentures............................................... 78 SECTION 905. Conformity with Trust Indenture Act............................................. 78 SECTION 906. Reference in Notes to Supplemental Indentures................................... 79 SECTION 907. Notice of Supplemental Indentures............................................... 79 SECTION 908. Effect on Senior Indebtedness................................................... 79 ARTICLE TEN. COVENANTS SECTION 1001. Payment of Principal, Premium, if any, and Interest............................ 79 SECTION 1002. Maintenance of Office or Agency................................................ 79 SECTION 1003. Money for Note Payments to Be Held in Trust.................................... 80 SECTION 1004. Corporate Existence............................................................ 81 SECTION 1005. Payment of Taxes and Other Claims.............................................. 81 SECTION 1006. Maintenance of Properties...................................................... 81 SECTION 1007. Insurance...................................................................... 81 SECTION 1008. Compliance with Laws........................................................... 81 SECTION 1009. Limitation on Restricted Payments.............................................. 82 SECTION 1010. Limitation on Indebtedness..................................................... 83 SECTION 1011. Limitation on Layering......................................................... 84 SECTION 1012. Limitation on Affiliate Transactions........................................... 85 SECTION 1013. Limitation on Restrictions on Distributions from Restricted Subsidiaries............................................................................. 85 SECTION 1014. Limitation on Sale or Issuance of Preferred Stock of Restricted Subsidiaries............................................................................. 86 SECTION 1015. Limitation on Liens............................................................ 86 SECTION 1016. Change of Control.............................................................. 87 SECTION 1017. Limitation on Sales of Assets.................................................. 87 SECTION 1018. Statement by Officers as to Default............................................ 89 SECTION 1019. Reporting Requirements......................................................... 89 SECTION 1020. Limitations on Issuances of Guarantees of Indebtedness by Restricted Subsidiaries.................................................................. SECTION 1021. Designation of Unrestricted Subsidiaries....................................... 90 ARTICLE ELEVEN. REDEMPTION OF NOTES SECTION 1101. Optional Redemption............................................................ 90 SECTION 1102. Applicability of Article....................................................... 90 SECTION 1103. Election to Redeem; Notice to Trustee.......................................... 90 SECTION 1104. Selection by Trustee of Notes to Be Redeemed................................... 90 SECTION 1105. Notice of Redemption........................................................... 91 SECTION 1106. Deposit of Redemption Price.................................................... 92 SECTION 1107. Notes Payable on Redemption Date............................................... 92 SECTION 1108. Notes Redeemed in Part......................................................... 92 ARTICLE TWELVE. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company's Option to Effect Legal Defeasance or Covenant Defeasance............. 92
Page ---- SECTION 1202. Legal Defeasance and Discharge................................................. 92 SECTION 1203. Covenant Defeasance............................................................ 93 SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance.......................... 93 SECTION 1205. Deposited Money and Government Obligations to Be Held in Trust; Other Miscellaneous Provisions........................................................... 95 SECTION 1206. Reinstatement.................................................................. 95 ARTICLE THIRTEEN. SUBORDINATION OF NOTES SECTION 1301. Notes Subordinate to Senior Indebtedness....................................... 95 SECTION 1302. Payment over of Proceeds upon Dissolution, Etc................................. 96 SECTION 1303. Suspension of Payment When Senior Indebtedness in Default...................... 96 SECTION 1304. Acceleration of Notes.......................................................... 97 SECTION 1305. When Distribution Must Be Paid Over............................................ 97 SECTION 1306. Notice by Company.............................................................. 97 SECTION 1307. Payment Permitted If No Default................................................ 97 SECTION 1308. Subrogation to Rights of Holders of Senior Indebtedness........................ 97 SECTION 1309. Provisions Solely to Define Relative Rights.................................... 98 SECTION 1310. Trustee to Effectuate Subordination............................................ 98 SECTION 1311. Subordination May Not Be Impaired by Company................................... 98 SECTION 1312. Distribution or Notice to Representative....................................... 98 SECTION 1313. Notice to Trustee.............................................................. 99 SECTION 1314. Reliance on Judicial Order or Certificate of Liquidating Agent................. 99 SECTION 1315. Rights of Trustee as a Holder of Senior Indebtedness; Preservation of Trustee's Rights......................................................................... 100 SECTION 1316. Article Applicable to Paying Agents............................................ 100 SECTION 1317. No Suspension of Remedies...................................................... 100 SECTION 1318. Modification of Terms of Senior Indebtedness................................... 100 SECTION 1319. [Intentionally Omitted]........................................................ 100 SECTION 1320. Trust Moneys Not Subordinated.................................................. 100 SIGNATURES......................................................................................... 124
INDENTURE, dated as of November 4, 1997, between PARAGON HEALTH NETWORK, INC., a Delaware corporation (the "Company"), having its principal office at One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, and IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation, as trustee (the "Trustee"), having its Corporate Trust Office at 1 State Street, New York, New York 10004. RECITALS OF THE COMPANY The Company has duly authorized the creation of and issuance of (i) the Company's 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"), (ii) the Company's 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes", and together with the Senior Subordinated Notes, the "Initial Notes"), (iii) if and when issued in exchange for Senior Subordinated Notes as provided in the Registration Rights Agreement (as defined herein), the Company's 9 1/2% Series B Senior Subordinated Notes due 2007 (the "Senior Subordinated Exchange Notes") and (iv) if and when issued in exchange for Senior Subordinated Discount Notes as provided in the Registration Rights Agreement, the Company's 10 1/2% Series B Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Exchange Discount Notes", and together with the Senior Subordinated Exchange Notes, the "Exchange Notes") (collectively, the Initial Notes and the Exchange Notes are referred to herein as the "Notes"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. Upon the issuance of the Exchange Notes, if any, or the effectiveness of the Shelf Registration Statement (as defined herein), this Indenture will be subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939, as amended, that are required or deemed to be part of and to govern indentures qualified thereunder. All things necessary have been done to make the Notes, when executed and duly issued by the Company and authenticated and delivered hereunder by the Trustee or the Authenticating Agent, the valid obligations of the Company and to make this Indenture a valid agreement of the Company in accordance with their and its terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE ONE. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION 100. SECTION 101. Definitions. ----------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and words in the singular include the plural as well as the singular, and words in the plural include the singular as well as the plural; 2 (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, or defined by Commission rule and not otherwise defined herein have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP (as defined herein); (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) the word "or" is not exclusive; and (f) provisions of this Indenture apply to successive events and transactions. Certain terms, used principally in Articles Two, Ten, Twelve and Thirteen, are defined in those Articles. "Accreted Value" with respect to any Senior Subordinated Discount Note means, as of the date of issuance of the Senior Subordinated Discount Notes, 59.557% of the stated principal amount at maturity of such Senior Subordinated Discount Note, and as of any date after such date of issuance and prior to November 1, 2002 as of which the Accreted Value is being calculated (the "Calculation Date"), (i) if the Calculation Date is a May 1 or November 1 interest payment date, the percentage of the stated principal amount of such Senior Subordinated Discount Note as of such date as shown in the table below or (ii) if the Calculation Date is not a May 1 or a November 1 interest payment date, an amount equal to the sum of (A) the Accreted Value of such Senior Subordinated Discount Note (as shown in the table below) as of the May 1 or November 1, as the case may be, immediately preceding the Calculation Date plus (B) the accrued amortization of the original issue discount from (but excluding) such immediately preceding May 1 or November 1 to (and including) the Calculation Date, calculated as the product of (x) 5.285% of the Accreted Value of such Senior Subordinated Discount Note as of such immediately preceding May 1 or November 1 and (y) a fraction, the numerator of which is the number of days from (but excluding) such immediately preceding May 1 or November 1 to (and including) the Calculation Date (assuming a 360-day year of twelve 30-day months), and the denominator of which is 180. The Accreted Value of each Senior Subordinated Discount Note as of each May 1 and November 1 on or prior to November 1, 2002 shall be an amount in dollars equal to a percentage of the stated principal amount of such Senior Subordinated Discount Note as set forth below:
MAY 1 INTEREST NOVEMBER 1 INTEREST PAYMENT DATE PAYMENT DATE -------------- ------------------- 1998.......................... 62.740% 66.055% 1999.......................... 69.547% 73.222% 2000.......................... 77.092% 81.166% 2001.......................... 85.456% 89.972% 2002.......................... 94.727% 99.733%
Thereafter, the Accreted Value of each Senior Subordinated Discount Note increases, such that on the Stated Maturity, the Accreted Value shall be equal to 100% of the stated principal amount thereof. "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) to be used by the Company or a Restricted Subsidiary in a Related Business; (ii) the Capital Stock 3 of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; (iii) Capital Stock of any Person that at such time is a Restricted Subsidiary, acquired from a third party; provided, however, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a Related Business; or (iv) Capital Stock or Indebtedness of any Person which is primarily engaged in a Related Business; provided, however, for purposes of the covenant described under Section 1017, (A) the aggregate amount of Net Available Cash permitted to be invested pursuant to this clause (iv) shall not exceed at any one time outstanding 5% of Consolidated Tangible Assets and (B) the aggregate amount invested pursuant to this clause (iv) and clause (vi) of paragraph (b) of Section 1009 shall not exceed at any one time outstanding 10% of Consolidated Tangible Assets. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. Chase and its Affiliates shall not be deemed an Affiliate of the Company. "Apollo" means Apollo Management, L.P., Apollo Advisors, L.P., Lion Advisors, L.P. or any entity controlled thereby or any of the partners and associates thereof. "Apollo Stockholders Agreement" means the Stockholders Agreement to be dated as of the Issue Date among the Company and the Investors. "Asset Disposition" means any sale, lease, transfer or other disposition of shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares), property or other assets (each referred to for the purposes of this definition as a "disposition") by the Company or any of its Restricted Subsidiaries (including any disposition by means of a merger, consolidation or similar transaction) other than (i) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Restricted Subsidiary, (ii) a disposition of inventory, equipment, obsolete assets or surplus personal property in the ordinary course of business, (iii) the sale of Temporary Cash Investments or Cash Equivalents in the ordinary course or business, (iv) a transaction or a series of related transactions in which either (x) the fair market value of the assets disposed of, in the aggregate, does not exceed 2.5% of the Consolidated Tangible Assets of the Company or (y) the EBITDA related to such assets does not, in the aggregate, exceed 2.5% of the Company's EBITDA, (v) the sale or discount (with or without recourse, and on commercially reasonable terms) of accounts receivable or notes receivable arising in the ordinary course of business, or the conversion or exchange of accounts receivable for notes receivable, (vi) the licensing of intellectual property in the ordinary course of business, (vii) a Healthcare Facility Swap, (viii) for purposes of the covenant contained in Section 1017 only, a disposition subject to the covenant contained in Section 1009 or (ix) a disposition of property or assets that is governed by the provisions of Article 8. "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as of the time of determination, the present value (discounted at the interest rate assumed in making calculations in accordance with FAS 13) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Indebtedness or Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. 4 "Bank Indebtedness" means any and all amounts, whether outstanding on the Issue Date or thereafter incurred, payable under or in respect of the Senior Credit Facility, including, without limitation, principal, premium (if any), interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company or any Restricted Subsidiary whether or not a claim for postfiling interest is allowed in such proceedings), fees, charges, expenses, reimbursement obligations, guarantees, other monetary obligations of any nature and all other amounts payable thereunder or in respect thereof. "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banking institutions are authorized or required by law to close in New York City. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligation" means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease. "Cash Equivalents" means any of the following: (i) securities issued or fully guaranteed or insured by the United States Government or any agency or instrumentality thereof, (ii) time deposits, certificates of deposit or bankers' acceptances of (A) any lender under the Senior Credit Agreement or (B) any commercial bank having capital and surplus in excess of $500,000,000 and the commercial paper of the holding company of which is rated at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's (or if at such time neither is issuing ratings, then a comparable rating of another nationally recognized rating agency), (iii) commercial paper rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's (or if at such time neither is issuing ratings, then a comparable rating of another nationally recognized rating agency) and (iv) investments in money market funds complying with the risk limiting conditions of Rule 2a-7 or any successor rule of the SEC under the Investment Company Act. "Change of Control" means (i) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) directly or indirectly, of more than 50% of the Voting Stock of the Company or a Successor Company (as defined below) (including, without limitation, through a merger or consolidation or purchase of Voting Stock of the Company); provided that the Permitted Holders do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by (A) Apollo in accordance with the Apollo Stockholders Agreement or (B) a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office; (iii) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its Subsidiaries taken as a whole to any Person or group of related Persons (a "Group") (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) 5 other than a Permitted Holder; or (iv) the adoption of a plan relating to the liquidation or dissolution of the Company. "Chase" means The Chase Manhattan Bank. "Code" means the Internal Revenue Code of 1986, as amended. "Company" means Paragon Health Network, Inc., a Delaware corporation. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA of the Company and its Restricted Subsidiaries for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination for which consolidated financial statements of the Company are available to (ii) Consolidated Interest Expense for such four fiscal quarters (in each of clause (i) and (ii), determined, for each fiscal quarter (or portion thereof) of the four fiscal quarters ending prior to the Issue Date, on a pro forma basis to give effect to the Transactions as if they had occurred at the beginning of such four-quarter period); provided, however, that: (1) if the Company or any Restricted Subsidiary (x) has Incurred any Indebtedness since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period (except that in making such computation, the amount of Indebtedness under any revolving credit facility outstanding on the date of such calculation shall be computed based on (A) the average daily balance of such Indebtedness during such four fiscal quarters or such shorter period for which such facility was outstanding or (B) if such facility was created after the end of such four fiscal quarters, the average daily balance of such Indebtedness during the period from the date of creation of such facility to the date of such calculation) and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, or (y) has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of the period that is no longer outstanding on such date of determination, or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio involves a discharge of Indebtedness (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid), EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such discharge of such Indebtedness, including with the proceeds of such new Indebtedness, as if such discharge had occurred on the first day of such period; (2) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition of any company or any business or any group of assets constituting an operating unit of a business, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (and, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale); (3) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Person that thereby becomes a Restricted Subsidiary, or otherwise acquired any company or any business or any group of assets constituting an operating unit of a business, including any such acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness and including the pro forma expenses and cost reductions calculated on a basis consistent 6 with Regulation S-X of the Securities Act) as if such Investment or acquisition occurred on the first day of such period; and (4) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (2) or (3) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an Asset Disposition, Investment or acquisition of assets, or any transaction governed by the provisions of Article 8, or the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred or repaid, repurchased, defeased or otherwise discharged in connection therewith, the pro forma calculations in respect thereof shall be as determined in good faith by a responsible financial or accounting officer of the Company, based on reasonable assumptions. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). If any Indebtedness bears, at the option of the Company or a Restricted Subsidiary, a fixed or floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be computed by applying, at the option of the Company or such Restricted Subsidiary, either a fixed or floating rate. If any Indebtedness which is being given pro forma effect was Incurred under a revolving credit facility, the interest expense on such Indebtedness shall be computed based upon the average daily balance of such Indebtedness during the applicable period. "Consolidated Interest Expense" means, as to any Person, for any period, the total consolidated interest expense of such Person and its Subsidiaries determined in accordance with GAAP, minus, to the extent included in such interest expense, amortization or write-off of financing costs and cash dividends paid to the Company with respect to its investment in Health and Retirement Properties Trust, plus, to the extent incurred by such Person and its Subsidiaries in such period but not included in such interest expense, without duplication, (i) interest expense attributable to Capitalized Lease Obligations and the interest component of rent expense associated with Attributable Debt in respect of the relevant lease giving rise thereto, determined as if such lease were a capitalized lease, in accordance with GAAP, (ii) amortization of debt discount, (iii) interest in respect of indebtedness of any other Person that has been Guaranteed by such Person or any Subsidiary, but only to the extent that such interest is actually paid by such Person or any Restricted Subsidiary, (iv) non-cash interest expense, (v) net costs associated with Hedging Obligations, (vi) the product of (A) mandatory Preferred Stock cash dividends in respect of all Preferred Stock of Subsidiaries of such Person and Disqualified Stock of such Person held by Persons other than such Person or a Subsidiary multiplied by (B) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, determined on a consolidated basis in accordance with GAAP; and (vii) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest to any Person (other than the referent Person or any Subsidiary thereof) in connection with Indebtedness Incurred by such plan or trust; provided, however, that as to the Company, there shall be excluded therefrom any such interest expense of any Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by the Company or any Restricted Subsidiary. For purposes of the foregoing, gross interest expense shall be determined after giving effect to any net payments made or received by such Person and its Subsidiaries with respect to Interest Rate Agreements. "Consolidated Net Income" means, as to any Person, for any period, the consolidated net income (loss) of such Person and its Subsidiaries, determined in accordance with GAAP; provided, however, 7 that there shall not be included in such Consolidated Net Income: (i) any net income (loss) of any Person if such Person is not (as to the Company) a Restricted Subsidiary and (as to any other Person) an unconsolidated Person, except that (A) subject to the limitations contained in clause (iv) below, the referent Person's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the referent Person or a Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution to a Subsidiary, to the limitations contained in clause (iii) below) and (B) the net loss of such Person shall be included to the extent of the aggregate Investment of the referent Person or any of its Subsidiaries in such Person; (ii) any net income (loss) of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition; (iii) any net income (loss) of any Restricted Subsidiary (as to the Company) or of any Subsidiary (as to any other Person) if such Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Subsidiary, directly or indirectly, to the Company, except that (A) subject to the limitations contained in (iv) below, such Person's equity in the net income of any such Subsidiary for such period shall be included in Consolidated Net Income up to the aggregate amount of cash that could have been distributed by such Subsidiary during such period to such Person or another Subsidiary as a dividend (subject, in the case of a dividend that could have been made to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the net loss of such Subsidiary shall be included in determining Consolidated Net Income; (iv) any charges for costs and expenses associated with the Mergers; (v) any extraordinary gain or loss; (vi) the cumulative effect of a change in accounting principles; and (vii) non-recurring items related to (A) costs and expenses incurred in connection with acquisitions and dispositions of assets and (B) costs related to the discharge of legal judgments or settlement costs related to the settlement of a bona fide dispute between the Company and a third party. "Consolidated Tangible Assets" means, as of any date of determination, the total assets, less goodwill and other intangibles (other than patents, trademarks, copyrights, licenses and other intellectual property), shown on the balance sheet of the Company and its Restricted Subsidiaries as of the most recent date for which such a balance sheet is available, determined on a consolidated basis in accordance with GAAP less all write-ups (other than write- ups in connection with acquisitions) subsequent to the date of this Indenture in the book value of any asset (except any such intangible assets) owned by the Company or any of its Restricted Subsidiaries. "Consolidation" means the consolidation of the accounts of each of the Restricted Subsidiaries with those of the Company in accordance with GAAP; provided, however, that "Consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Company in any Unrestricted Subsidiary will be accounted for as an Investment. The term "Consolidated" has a correlative meaning. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement or arrangement (including derivative agreements or arrangements) as to which such Person is a party or a beneficiary. "Default" means any event or condition that is, or after notice or passage of time or both would be, an Event of Default. "Depositary" means The Depository Trust Company, its nominees and their respective successors and assigns, or such other depository institution hereinafter appointed by the Company. "Designated Senior Indebtedness" means (i) the Bank Indebtedness and (ii) any other Senior Indebtedness which, at the date of determination, has an aggregate principal amount of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $25.0 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of this Indenture. 8 "Disqualified Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the 91st day after the Stated Maturity of the Notes. "EBITDA" means, as to any Person, for any period, the Consolidated Net Income for such period, plus the following to the extent included in calculating such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization of intangibles, (v) other non-cash charges or non-cash losses and (vi) the rent expense associated with Sale/Leaseback Transactions to the extent not included in Consolidated Interest Expense and minus any gain (but not loss) realized upon the sale or other disposition of any asset of the Company or its Restricted Subsidiaries (including pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business. "Equity Offering" means a primary public or private offering or sale of common stock of the Company, the proceeds of which shall be at least $25.0 million. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the Issue Date (for purposes of the definitions of the terms "Consolidated Coverage Ratio," "Consolidated Interest Expense," "Consolidated Net Income" and "EBITDA," all defined terms in this Indenture to the extent used in or relating to any of the foregoing definitions, and all ratios and computations based on any of the foregoing definitions) and as in effect from time to time (for all other purposes of this Indenture), including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in this Indenture shall be computed in conformity with GAAP. "GranCare Merger" means the merger of LCA Acquisition Sub, Inc. with and into GranCare, Inc. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other nonfinancial obligation of any other Person, including any such obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or such other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection, or deposits made, in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means each Subsidiary of the Company that executes a Guarantee in respect of the Notes in accordance with the covenant described under Section 1020, and their respective successors and assigns. "Healthcare Facility" means (i) a hospital, outpatient clinic, nursing center, assisted or independent living community, long-term care facility or any other facility that is used or useful in the 9 provision of healthcare or custodial care services, (ii) any healthcare business affiliated or associated with a Healthcare Facility described in clause (i) of this definition or (iii) any business related or ancillary to the provision of healthcare services or the operation of a Healthcare Facility, including, but not limited to, contract therapy services such as rehabilitation, pharmacy, respiratory, speech and occupational therapy services, as well as hospice and home care services. "Healthcare Facility Swap" means an exchange of assets (including Capital Stock of a Subsidiary or the Company) by the Company or a Restricted Subsidiary for one or more Healthcare Facilities or for Capital Stock, Indebtedness or other securities (including cash, provided, however, that any cash received must be applied in accordance with the covenant contained in Section 1017 as if such cash were Net Available Cash) of any Person owning or operating one or more Healthcare Facilities and primarily engaged in Related Business. "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement. "Holder" or "Noteholder" means the Person in whose name a Note is registered in the Register. "HRPT Agreements" means collectively, (i) the Restructure and Asset Exchange Agreement to be dated on or about November 4, 1997 among Health and Retirement Properties Trust ("HRPT"), GranCare, Inc., AMS Properties, Inc. and GCI Health Care Centers, Inc., (ii) the Master Lease Document General Terms and Conditions dated as of December 28, 1990, and related facility leases, as amended, between HRPT and AMS Properties, Inc., (iii) the Master Lease Document General Terms and Conditions dated as of June 30, 1992, and the related facility leases, as amended, between HRPT and GCI Health Care Centers, Inc., and (iv) all documents and agreements contemplated therein and executed in connection therewith. "Incur" means issue, assume, enter into any Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Subsidiary at the time it becomes a Subsidiary. Any Indebtedness issued at a discount (including Indebtedness on which interest is payable through the issuance of additional Indebtedness) shall be deemed incurred at the time of original issuance of the Indebtedness at the initial accreted amount thereof. "Indebtedness" means, with respect to any Person on any date of determination (without duplication): (i) the principal of indebtedness of such Person for borrowed money, (ii) the principal of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all reimbursement obligations of such Person (including reimbursement obligations) in respect of letters of credit or other similar instruments (the amount of such obligations being equal at any time to the aggregate then undrawn and unexpired amount of such letters of credit or other instruments plus the aggregate amount of drawings thereunder that have not then been reimbursed), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables), which purchase price is due more than one year after the date of placing such property in final service or taking final delivery and title thereto or the completion of such services, (v) all Capitalized Lease Obligations and Attributable Debt of such Person, (vi) the redemption, repayment or other repurchase amount of such Person with respect to any Disqualified Stock or (if such Person is a Subsidiary of the Company) any Preferred Stock of such Subsidiary, but excluding, in each case, any accrued dividends (the amount of such obligation to be equal at any time to the maximum fixed involuntary redemption, repayment or repurchase price for such Capital Stock, or if such Capital Stock has no fixed price, to the involuntary redemption, repayment or repurchase price therefor calculated in accordance with the terms thereof as if then redeemed, repaid or repurchased, and if such price is based upon or measured by the fair market value of such Capital Stock, such fair market 10 value shall be as determined in good faith by the Board of Directors or the board of directors of the issuer of such Capital Stock), (vii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, however, that the amount of Indebtedness of such Person shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Persons, (viii) all Indebtedness of other Persons to the extent Guaranteed by such Person, and (ix) to the extent not otherwise included in this definition, net Hedging Obligations of such Person (such obligations to be equal at any time to the termination value of such agreement or arrangement giving rise to such Hedging Obligation that would be payable by such Person at such time). Notwithstanding the preceding sentence, obligations arising under (i) the Master Lease Agreement dated October 10, 1996 between FBTC Leasing Corp. and Living Centers Holding Company and the related agreements (as amended) and (ii) the HRPT Agreements, in each case without giving effect to any amendment or other modification thereto relating to the total amount of such obligations, shall not be deemed Indebtedness for the purposes of this Indenture. The amount of Indebtedness of any Person at any date shall be determined as set forth above or otherwise provided in this Indenture, or otherwise in accordance with GAAP. "Indenture" means this Indenture as amended or supplemented from time to time. "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement (including derivative agreement or arrangements) as to which such Person is party or a beneficiary; provided, however, any such agreements entered into in connection with the Notes shall not be included. "Investment" in any Person by any other Person means any direct or indirect advance, loan or other extension of credit (other than to customers, directors, officers or employees of any Person in the ordinary course of business) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by, such Person. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Capital Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such entity is no longer a Subsidiary of the Company, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Capital Stock of such Subsidiary not sold or disposed of. "Investors" means Apollo, Chase Venture Partners L.P., Healthcare Equity Partners L.P., Healthcare Equity QP Partners L.P., Walnut Growth Partners, L.P., Keith B. Pitts, Key Capital Corporation and Key Equity Partners 97. "Issue Date" means the date on which the Initial Notes are originally issued. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Mergers" means the Recapitalization Merger and the GranCare Merger. "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in 11 the form of assumption by the acquiring person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other noncash form) therefrom, in each case net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses incurred (including, without limitation, fees and expenses of legal counsel, accountants and financial advisors), and all federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness that is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, or that must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition or to any other Person (other than the Company or a Restricted Subsidiary) owning a beneficial interest in the assets disposed of in such Asset Disposition and (iv) appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds" means, with respect to any issuance or sale of any securities of the Company or any Subsidiary by the Company or any Subsidiary, or any capital contribution, the cash proceeds of such issuance, sale or contribution net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance, sale or contribution and net of taxes paid or payable as a result thereof. "Non-Recourse Debt" means indebtedness (i) as to which neither the Company nor any Restricted Subsidiary (A) provides any guarantee or credit support of any kind (including any undertaking, guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (B) is directly or indirectly liable (as a guarantor or otherwise) and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Offering Memorandum" means the Offering Memorandum dated October 30, 1997 relating to the Initial Notes. "Officer" means the Chief Executive Officer, President, Chief Financial Officer, any Vice President, Controller, Secretary or Treasurer of the Company. "Officer's Certificate" means a certificate signed by one Officer. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Business Venture" means a Person other than a Restricted Subsidiary (i) that is engaged in a Related Business; (ii) no debt or equity interest (except any director's qualifying shares) of which is or will be directly or indirectly held by (A) an officer or director of either the Company or any Restricted Subsidiary or (B) any other Affiliate of the Company; and (iii) unless the Investment by the Company or a Restricted Subsidiary is less than $5.0 million, the Company and/or any Restricted Subsidiary has at least a 35% ownership interest in each such Person, provided, however, that in no event shall the aggregate amount of all Investments by the Company and all Restricted Subsidiaries in Permitted Business Ventures wherein the ownership interest of the Company or such Restricted Subsidiary is less than 35% exceed $20.0 million in the aggregate. 12 "Permitted Holders" means the Investors, their respective Affiliates and successors or assigns and any Person acting in the capacity of an underwriter in connection with a public or private offering of the Company's Capital Stock. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in any of the following: (i) a Restricted Subsidiary, the Company or a Person that will, upon the making of such Investment, become a Restricted Subsidiary; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; (iii) Temporary Cash Investments or Cash Equivalents; (iv) receivables owing to the Company or any Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) securities or other Investments received in connection with any Healthcare Facility Swaps or as consideration in sales or other dispositions of property or assets, including Asset Dispositions made in compliance with the covenant contained in Section 1017; (vi) securities or other Investments received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary, or as a result of foreclosure, perfection or enforcement of any Lien, or in satisfaction of judgments, including in connection with any bankruptcy proceeding or other reorganization of another Person; (vii) binding written commitments in existence on the Issue Date; (viii) Currency Agreements, Interest Rate Agreements and related Hedging Obligations, which obligations are Incurred in compliance with the covenant contained in Section 1017; (ix) pledges or deposits (A) provided to third parties in the ordinary course of business with respect to leases or utilities or (B) otherwise described in the definition of "Permitted Liens"; (x) Investments made on commercially reasonable terms by wholly owned insurance subsidiaries of the Company that are permitted pursuant to federal, state or local regulations governing the investment activities of such Persons; and (xi) other Investments in an aggregate amount outstanding at any time not to exceed $10.0 million. "Permitted Liens" means: (i) Liens for taxes, assessments or other governmental charges not yet delinquent or the nonpayment of which in the aggregate would not be reasonably expected to have a material adverse effect on the Company and its Restricted Subsidiaries, or that are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like Liens arising in the 13 ordinary course of business in respect of obligations that are not overdue for a period of more than 60 days or that are bonded or that are being contested in good faith and by appropriate proceedings; (iii) pledges, deposits or liens in connection with workers' compensation, unemployment insurance and other social security legislation and/or similar legislation or other insurance-related obligations (including without limitation, pledges or deposits securing liability to insurance carriers under insurance or self-insurance arrangements); (iv) pledges, deposits or liens to secure the performance of bids, tenders, trade, government or other contracts (other than for borrowed money), obligations for or under or in respect of utilities, leases, licenses, statutory obligations, surety, judgment and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (v) easements (including reciprocal easement agreements), rights-of-way, building, zoning and similar restrictions, utility agreements, covenants, reservations, restrictions, encroachments, changes, and other similar encumbrances or title defects incurred, or leases or subleases granted to others, in the ordinary course of business, which do not in the aggregate materially interfere with the ordinary conduct of the business of the Company and its Subsidiaries, taken as a whole; (vi) Liens existing on, or provided for under written arrangements existing on, the Issue Date, or (in the case of any such Liens securing Indebtedness of the Company or any of its Subsidiaries existing or arising under written arrangements existing on the Issue Date) securing any Refinancing Indebtedness in respect of such Indebtedness so long as the Lien securing such Refinancing Indebtedness is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or under such written arrangements could secure) the original Indebtedness; (vii) Liens securing Hedging Obligations Incurred in compliance with the covenant contained in Section 1010; (viii) Liens arising out of judgments, decrees, orders or awards in respect of which the Company shall in good faith be prosecuting an appeal or proceedings for review which appeal or proceedings shall not have been finally terminated, or the period within which such appeal or proceedings may be initiated shall not have expired; (ix) Liens securing (A) Indebtedness incurred in compliance with clause (i), (iv) or (v) of the second paragraph of Section 1010 or clause (iii) thereof (other than, Refinancing Indebtedness Incurred in respect of Indebtedness described in the first paragraph thereof) or (B) Bank Indebtedness; (x) Liens on properties or assets of the Company securing Senior Indebtedness; (xi) Liens existing on property or assets of a Person at the time such Person becomes a Subsidiary of the Company (or at the time the Company or a Restricted Subsidiary acquires such property or assets); provided, however, that such Liens are not created in connection with, or in contemplation of, such other Person becoming such a Subsidiary (or such acquisition of such property or assets), and that such Liens are limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which such Liens arose, could secure) the obligations to which such Liens relate, (xii) Liens on Capital Stock of an Unrestricted Subsidiary that secure Indebtedness or other obligations of such Unrestricted Subsidiary; (xiii) Liens securing the Notes; and (xiv) Liens securing Refinancing Indebtedness Incurred in respect of any Indebtedness secured by, or securing any refinancing, refunding, extension, renewal or replacement (in whole or in part) of any other obligation secured by, any other Permitted Liens, provided that any such new Lien is limited to all or part of the same property or assets (plus improvements, accessions, proceeds or dividends or distributions in respect thereof) that secured (or, under the written arrangements under which the original Lien arose, could secure) the obligations to which such Liens relate. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Purchase Money Obligations" means any Indebtedness of the Company or any Restricted Subsidiary incurred to finance the acquisition, construction or capital improvement of any property or 14 business (including Indebtedness incurred within 90 days following such acquisition or construction), including Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed by the Company or a Restricted Subsidiary in connection with the acquisition of assets from such Person; provided, however, that any Lien on such Indebtedness shall not extend to any property other than the property so acquired or constructed. "Recapitalization Merger" means the merger of Apollo LCA Acquisition Corp. with and into Living Centers of America, Inc. (renamed Paragon Health Network, Inc.). "Refinancing Indebtedness" means Indebtedness that is Incurred to refund, refinance, replace, renew, repay or extend (including pursuant to any defeasance or discharge mechanism) (collectively, "refinances" and "refinanced" shall have a correlative meaning) any Indebtedness existing on the date of this Indenture or Incurred in compliance with this Indenture (including Indebtedness of the Company that refinances Indebtedness of any Restricted Subsidiary (to the extent permitted in this Indenture) and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary) including Indebtedness that refinances Refinancing Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced, plus fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such Refinancing Indebtedness; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary. "Registration Rights Agreement" means the Registration Rights Agreement dated as of November 4, 1997 among the Company, Chase Securities Inc., Smith Barney Inc. and Credit Suisse First Boston Corporation. "Regular Record Date" means, with respect to any Interest Payment Date, the April 15 or October 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Related Business" means those businesses in which the Company or any of its Subsidiaries is engaged on the date of this Indenture or that are reasonably related or incidental thereto, including any aspect of the healthcare or assisted living industry. "Representative" means the trustee, agent or representative (if any) of an issue of Senior Indebtedness. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Revolving Credit Facility" means the revolving credit facility under the Senior Credit Facility (which may include any swing line or letter of credit facility or subfacility thereunder). "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired by the Company or a Restricted Subsidiary whereby the Company or such Restricted Subsidiary transfers such property to a Person and the Company or such Restricted Subsidiary leases it from such Person, other than leases (i) between the Company and a Restricted Subsidiary or between 15 Restricted Subsidiaries or (ii) required to be classified and accounted for as capitalized leases for financial reporting purposes in accordance with GAAP. "SEC" means the Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Securities Act" means the Securities Act of 1933, as amended. "Senior Credit Agreement" means the credit agreement dated as of November 4, 1997, among the Company, the banks and other financial institutions party thereto from time to time, and Chase, as administrative agent, as such agreement may be assumed by any successor in interest, and as such agreement may be amended, supplemented, waived or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid, increased or extended front time to time (whether in whole or in part, whether with the original agent and lenders or other agents and lenders or otherwise, and whether provided under the original Senior Credit Agreement or otherwise). "Senior Credit Facility" means the collective reference to the Senior Credit Agreement, any Loan Documents (as defined therein), any notes and letters of credit issued pursuant thereto and any guarantee and collateral agreement, patent and trademark security agreement, mortgages, letter of credit applications and other security agreements and collateral documents, and other instruments and documents, executed and delivered pursuant to or in connection with any of the foregoing, in each case as the same may be amended, supplemented, waived or otherwise modified from time to time, or refunded, refinanced, restructured, replaced, renewed, repaid, increased or extended from time to time (whether in whole or in part, whether with the original agent and lenders or other agents and lenders or otherwise, and whether provided under the original Senior Credit Agreement or otherwise). Without limiting the generality of the foregoing, the term "Senior Credit Facility" shall include any agreement (i) changing the maturity of any Indebtedness Incurred thereunder or contemplated thereby, (ii) adding Subsidiaries of the Company as additional borrowers or guarantors thereunder, (iii) increasing the amount of Indebtedness Incurred thereunder or available to be borrowed thereunder or (iv) otherwise altering the terms and conditions thereof. "Senior Indebtedness" means the following obligations, whether outstanding on the date of this Indenture or thereafter issued, without duplication: (i) all obligations consisting of Bank Indebtedness; and (ii) all obligations consisting of the principal of and premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company regardless of whether postfiling interest is allowed in such proceeding) on, and fees and other amounts owing in respect of, all other Indebtedness of the Company, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that the obligations in respect of such Indebtedness are not superior in right of payment to the Notes; provided, however, that Senior Indebtedness shall not include (A) any obligation of the Company to any Subsidiary or any other Affiliate of the Company, or any such Affiliate's Subsidiaries, (B) any liability for federal, state, foreign, local or other taxes owed or owing by the Company, (C) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities) or other current liabilities (other than current liabilities which constitute Bank Indebtedness or the current portion of any long-term Indebtedness which would constitute Senior Indebtedness but for the operation of this clause (C)), (D) any Indebtedness, Guarantee or obligation of the Company that is expressly subordinate or junior to any other Indebtedness, Guarantee or obligation of the Company, (E) Indebtedness which is represented by Disqualified Stock or (F) that portion of any Indebtedness that is Incurred in violation of this Indenture. If any Designated Senior Indebtedness is disallowed, avoided or subordinated pursuant to the provisions of Section 548 of Title 11 of the United States Code or any applicable state fraudulent conveyance law, such Designated Senior Indebtedness nevertheless will constitute Senior Indebtedness. 16 "Senior Subordinated Indebtedness" means the Notes and any other Indebtedness of the Company that (i) specifically provides that such Indebtedness is to rank pari passu with the Notes or is otherwise entitled Senior Subordinated Indebtedness and (ii) is not subordinated by its terms to any Indebtedness or other obligation of the Company that is not Senior Indebtedness. "Shelf Registration Statement" has the meaning ascribed thereto in the Registration Rights Agreement. "Significant Subsidiary" means each Restricted Subsidiary that for the most recent fiscal year of such Restricted Subsidiary had consolidated revenues greater than $10.0 million or as at the end of such fiscal year had assets or liabilities greater than $10.0 million. "S&P" means Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. and its successors. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the date of this Indenture or thereafter Incurred) which is subordinate or junior in right of payment to the Notes pursuant to a written agreement. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person or (ii) one or more Subsidiaries of such Person. "Successor Company" shall have the meaning assigned thereto in Section 801. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations (x) of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof or (y) of any foreign country recognized by the United States of America rated at least "A" by S&P or "A-1" by Moody's, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company that is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America having capital and surplus aggregating in excess of $250 17 million (or the foreign currency equivalent thereof), and whose long-term debt is rated "A" by S&P or "A-1" by Moody's, (iii) repurchase obligations with a term of not more than 180 days for underlying securities of the types described in clause (i) or (ii) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) Investments in commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's, (vi) any money market deposit accounts issued or offered by a domestic commercial bank or a commercial bank organized and located in a country recognized by the United States of America, in each case, having capital and surplus in excess of $250 million (or the foreign currency equivalent thereof), or investments in money market funds complying with the risk limiting conditions of Rule 2a-7 (or any short-term successor rule) of the SEC, under the Investment Company Act of 1940, as amended, and (vii) similar short-term investments approved by the Board of Directors in the ordinary course of business. "Term Loan Facility" means the term loan facilities provided under the Senior Credit Facility. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa- 77bbbb) as in effect on the date of this Indenture. "Trade Payables" means, with respect to any Person, any accounts payable or any Indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Transactions," means collectively the Mergers, the offering of the Initial Notes, the initial borrowings under the Senior Credit Facility, and all other transactions relating to the Mergers or the financing thereof. "Transfer Restricted Notes" means Notes that bear or are required to bear the legend set forth in Section 202 hereof. "Trustee" means the party named as such in this Indenture until a successor replaces it and, thereafter, means the successor. "Trust Officer" means an officer of the Trustee assigned by the Trustee to administer its corporate trust matters or to any other officer of the Trustee to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total consolidated assets of $10,000 or less or (B) if such Subsidiary has consolidated assets greater than $10,000, then such designation would be permitted under Section 1009. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation, (x) the Company could Incur at least $1.00 of additional Indebtedness under the first paragraph in the covenant contained in Section 1010 and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Company's Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. 18 "Voting Stock" of an entity means all classes of Capital Stock of such entity then outstanding and normally entitled to vote in the election of directors or all interests in such entity with the ability to control the management or actions of such entity. "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company, all of the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or another Wholly Owned Subsidiary. SECTION 102. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company and any Guarantor (if applicable) and any other obligor on the Notes (if applicable) shall furnish to the Trustee an Officers' Certificate in form and substance reasonably acceptable to the Trustee stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (including certificates provided pursuant to Section 1018(a)) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual or such firm, he or it has made such examination or investigation as is necessary to enable him or it to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company, any Guarantor or other obligor on the Notes may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company, any Guarantor or other obligor on the Notes stating that the information with respect to such factual matters is in the possession of the Company, any Guarantor or other obligor on the Notes unless 19 such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. --------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section 104. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Notes held by any Person, and the date of holding the same, shall be proved by the Note Register. (d) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Notes have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Notes shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Note shall bind every future Holder of the same Note and the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof (including in accordance with Section 310) in respect of anything done, omitted or suffered to be done by the Trustee, any Paying Agent or the Company or any Guarantor in reliance thereon, whether or not notation of such action is made upon such Note. 20 SECTION 105. Notices, Etc., to Trustee, the Company and any ---------------------------------------------- Guarantor. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company or any Guarantor or any other obligor on the Notes shall be sufficient for every purpose hereunder if made, given, furnished or delivered in writing and mailed, first-class postage prepaid, or delivered by recognized overnight courier, to or with the Trustee and received at its Corporate Trust Office, Attention: Corporate Trust Administration. (2) the Company or any Guarantor by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if made, given, furnished or delivered, in writing, or mailed, first-class postage prepaid, or delivered by recognized overnight courier, to the Company or such Guarantor addressed to it and received at the address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company or such Guarantor. SECTION 106. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Note Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. Neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. If the Company mails any notice or communication to any Holder, it shall mail a copy to the Trustee at the same time. SECTION 107. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. 21 SECTION 109. Separability Clause. ------------------- In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Notes, express or implied, shall give to any Person, (other than the parties hereto, any agent and their successors hereunder and each of the Holders and, with respect to any provisions hereof relating to the subordination of the Notes or the rights of holders of Senior Indebtedness, the holders of Senior Indebtedness) any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. ------------- THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. UPON THE ISSUANCE OF THE EXCHANGE NOTES OR THE EFFECTIVENESS OF THE SHELF REGISTRATION STATEMENT, THIS INDENTURE SHALL BE SUBJECT TO THE PROVISIONS OF THE TRUST INDENTURE ACT THAT ARE REQUIRED TO BE PART OF THIS INDENTURE AND SHALL, TO THE EXTENT APPLICABLE, BE GOVERNED BY SUCH PROVISIONS. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE U.S. FEDERAL COURTS, IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN, AND WAIVES ANY OBJECTION AS TO VENUE OR FORUM NON CONVENIENS. SECTION 112. Legal Holidays. -------------- In any case where any interest payment date, any date established for payment of Defaulted Interest pursuant to Section 311 or redemption date or Stated Maturity of any Note shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Notes) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the interest payment date or date established for payment of Defaulted Interest pursuant to Section 311, Redemption Date, or at the Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such interest payment date, redemption date or date established for payment of Defaulted Interest pursuant to Section 311, Stated Maturity or Maturity, as the case may be, to the next succeeding Business Day. SECTION 113. No Personal Liability of Directors, Officers, Employees, -------------------------------------------------------- Stockholders or Incorporators. - ----------------------------- No director, officer, employee, incorporator or stockholders, as such, of the Company or any Guarantor of the Notes shall have any liability for any obligations of the Company or such Guarantor under the Notes, this Indenture or any Guarantee of the Notes or for any claim based on, in respect of, or by reason of, such obligations or their creations. Each Holder by accepting a Note waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Notes. 22 SECTION 114. Counterparts. ------------ This Indenture may be executed in any number of counterparts, each of which shall be original; but such counterparts shall together constitute but one and the same instrument. SECTION 115. Communications by Holders with Other Holders. -------------------------------------------- Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Note Registrar and anyone else shall have the protection of TIA (S) 312(c). ARTICLE TWO. NOTE FORMS 200. SECTION 201. Forms Generally. --------------- The Notes and the Trustee's certificate of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with applicable laws or the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of the Notes. Any portion of the text of any Note may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Note. Each Note shall be dated the date of its authentication. Initial Notes offered and sold to the qualified institutional buyers (as defined in Rule 144A under the Securities Act) in the United States of America ("Rule 144A Note") will be issued on the Issue Date in the form of a permanent global Note substantially in the form set forth in Sections 204 and 205 (a "Rule 144A Global Note") deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Rule 144A Global Note may be represented by more than one certificate, if so required by the Depositary's rules regarding the maximum principal amount to be represented by a single certificate. The aggregate principal amount of the Rule 144A Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Notes offered and sold outside the United States of America ("Regulation S Note") in reliance on Regulation S shall be issued in the form of a permanent global Note substantially in the form set forth in Sections 204 and 205 (a "Regulation S Global Note"). The Regulation S Global Note will be deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Regulation S Global Note may be represented by more than one certificate, if so required by the Depositary's rules regarding the maximum principal amount to be represented by a single certificate. The aggregate principal amount of the Regulation S Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Initial Notes offered and sold to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act) in the United States of America ("Institutional Accredited Investor Note") will be issued in the form of a permanent global Note substantially in the form set forth in Sections 204 and 205 (a "Institutional Accredited Investor Global Note") deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Institutional Accredited Investor Global Note may be represented by more than one certificate, if so required by the Depositary's rules regarding the maximum principal amount to be represented by a single certificate. The aggregate principal amount of the Institutional Accredited Investor Global Note may 23 from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. The Rule 144A Global Note, the Regulation S Global Note and the Institutional Accredited Investor Global Note are sometimes collectively herein referred to as the "Global Notes". The definitive Notes shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner, all as determined by the officers of the Company executing such Notes, as evidenced by their execution of such Notes. 24 SECTION 202. Restrictive Legends. ------------------- Unless and until (i) an Initial Note is sold under an effective Registration Statement or (ii) an Initial Note is exchanged for an Exchange Note in connection with an effective Registration Statement, in each case pursuant to the Registration Rights Agreement, such Rule 144A Global Note and the Institutional Accredited Investor Global Notes shall bear the following legend (the "Private Placement Legend") on the face thereof: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH SECURITIES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. The Regulation S Global Note shall bear the following legend on the face thereof: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS 25 ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH SECURITIES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. The Global Notes, whether or not an Initial Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF 26 THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. SECTION 203. OID Legend. ---------- The Senior Subordinated Discount Notes shall also bear the following legend on the face thereof: THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR THE PURPOSES OF SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS DEPARTMENTS, TELEPHONE NO. (___) ________. SECTION 204. Form of Senior Subordinated Note. -------------------------------- No. [___] Principal Amount $[______________] CUSIP NO. ____________ 9 1/2% [Series B]/1/ Senior Subordinated Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to [___________], or registered assigns, the principal sum of [__________________] Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. Additional provisions of this Note are set forth on the other side of this Note. Dated: PARAGON HEALTH NETWORK, INC. By:_________________________________ [Title] By:_________________________________ [Title] __________________________________ /1/ Include only for the Exchange Notes 27 TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By________________________________ Authorized Signatory November 4, 1997 28 [FORM OF REVERSE SIDE OF SENIOR SUBORDINATED NOTE] 9 1/2% [Series B]/2/ Senior Subordinated Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semiannually in cash and in arrears to Holders of record at the close of business on the April 15 and October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 1998. Interest on the Senior Subordinated Notes will accrue from the most recent date to which interest has been paid on the Senior Subordinated Notes or, if no interest has been paid, from November 4, 1997. The Company shall pay interest on overdue principal or premium, if any (plus interest on such interest to the extent lawful), at the rate borne by the Senior Subordinated Notes to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co- registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. __________________________________ /2// Include only for the Initial Notes - 29 The Notes are general unsecured senior subordinated obligations of the Company limited to $275 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of the [Initial]/3/ Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Senior Subordinated Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Redemption Price ---- ---------------- 2002.............................. 104.750% 2003.............................. 103.167% 2004.............................. 101.583% 2005 and thereafter............... 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem in the aggregate up to 33-% of the original aggregate principal amount of the Senior Subordinated Notes with the proceeds of one or more Equity Offerings by the Company at a redemption price (expressed as a percentage of principal amount thereof) of 109.5% plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 50% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Discount Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Discount Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the ___________________________________ /3/ Include only for the Initial Notes. 30 redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Discount Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Discount Notes. 31 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. However, no amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. The Notes and the Senior Subordinated Discount Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the 32 Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 33 [18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the Commission on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi-annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease.]/4// - 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. __________________________________ /4// Include only for the Initial Notes - 34 The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel 35 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:_____________________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule 17Ad-15. [In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1 [_] acquired for the undersigned's own account, without transfer; or 2 [_] transferred to the Company; or 3 [_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4 [_] transferred pursuant to an effective registration statement under the Securities Act; or 5 [_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6 [_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears as Exhibit E to the Indenture); or 36 7 [_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. _____________________________ Signature Signature Guarantee: ____________________________________ _____________________________ (Signature must be guaranteed) Signature _________________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15]./5// - ___________________________________ /5// Include only for the Initial Notes - 37 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of this Global Signature of authorized Principal Amount of Principal Amount of Note following such decrease signatory of Trustee or this Global Note this Global Note or increase Notes Custodian
38 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, check the box: [__] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ____________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. 39 SECTION 205. Form of Senior Subordinated Discount Note. ----------------------------------------- No. [___] Principal Amount $[______________] CUSIP NO. ____________ 101/2% [Series B]/6// Senior Subordinated Discount Note due 2007 - Paragon Health Network, Inc., a Delaware corporation promises to pay to [___________], or registered assigns, the principal sum of [__________________] Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. This Note shall not bear interest prior to November 1, 2002. From November 4, 1997 through November 1, 2002, the Accreted Value of this Note will increase as specified on the reverse side hereof. Additional provisions of this Note are set forth on the other side of this Note. Dated: PARAGON HEALTH NETWORK, INC. By:________________________________________ [Title] By:________________________________________ [Title] TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By_____________________________ Authorized Signatory November 4, 1997 _________________________ /6// Include only for the Exchange Notes - 40 [FORM OF REVERSE SIDE OF SENIOR SUBORDINATED DISCOUNT NOTE] 10 1/2% [Series B]/7/ Senior Subordinated Discount Note due 2007 - 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note as described below. The Senior Subordinated Discount Notes due 2007 (the "Notes") will accrete in value until November 1, 2002 at a rate of 10.57% per annum, compounded semiannually, to an aggregate principal amount of $294,000,000. Cash interest will not accrue on the Senior Subordinated Discount Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be payable semiannually in cash and in arrears to the Holders of record on each April 15 or October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 2003. Cash interest on the Senior Subordinated Discount Notes will accrue from the most recent interest payment date to which interest has been paid or, if no interest has been paid, from November 1, 2002. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co- registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. __________________________________ /7// Include only for the Exchange Notes - 41 The Notes are general unsecured senior subordinated obligations of the Company limited to $294 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of the Accreted value thereof), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record dated to receive interest due on the relevant interest payment date), if redeemed during the 12 month period beginning on November 1 of the years indicated below: Year Redemption Price ---- ---------------- 2002.............................. 105.250% 2003.............................. 103.500% 2004.............................. 101.750% 2005 and thereafter............... 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem up to 33% of the originally issued principal amount at maturity of Notes at a redemption price equal to 110.5% of the Accreted Value at the redemption date of the Notes so redeemed with the net proceeds of one or more Equity Offerings by the Company; provided, however, that at least 50% of the originally issued principal amount at maturity of Notes must remain outstanding immediately after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 42 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain 43 exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. However, no amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. The Notes and the Senior Subordinated Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- 44 Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. [18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the Commission on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi-annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease.]/8// - 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). ___________________________ /8// Include only for Initial Notes. - 45 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel 46 ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:______________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule -15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1[_] acquired for the undersigned's own account, without transfer; or 2[_] transferred to the Company; or 3[_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4[_] transferred pursuant to an effective registration statement under the Securities Act; or 5[_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6[_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears as Exhibit E to the Indenture); or 47 7[_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. ______________________________ Signature Signature Guarantee: __________________________________ ______________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made: Principal Amount of this Global Signature of authorized Date of Amount of decrease in Principal Amount of increase in Principal Note following such decrease or signatory of Trustee or Exchange Amount of this Global Note Amount of this Global Note increase Notes Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ___________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. 50 [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL 144A CERTIFICATES] In connection with any transfer of this Note occurring prior to the date that is the earlier of the date of an effective Registration Statement (as defined in the Registration Rights Agreement dated as of November 4, 1997) or November 4, 1999, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] --------- [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or -- [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished that comply with the conditions of transfer set forth in this Note and the Indenture. If neither of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 307 of the Indenture shall have been satisfied. Date: ________________ _______________________________________________________ NOTICE: The signature must correspond with the name as written upon the face of the within- mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee:_________________________________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ________________ _______________________________________________ NOTICE: To be executed by an executive officer. 51 SECTION 206. Form of Trustee's Certificate of Authentication. ----------------------------------------------- The Trustee's certificate of authentication shall be in substantially the following form: TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Notes referred to in the within-mentioned Indenture. IBJ Schroder Bank & Trust Company, as Trustee By _____________________________ Authorized Signatory Dated: __________________ ARTICLE THREE. THE NOTES 300. SECTION 301. Title and Terms. --------------- The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $275 million, in the case of the Senior Subordinated Notes, and $294 million, in the case of Senior Subordinated Discount Notes, except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes pursuant to Section 304, 305, 306, 307, 310, 906, 1016, 1017 or 1108 or pursuant to an Exchange Offer. The Initial Notes shall be known and designated as the "9 1/2% Senior Subordinated Notes due 2007" and "10 1/2% Senior Subordinated Discount Notes due 2007," as applicable, and the Exchange Notes shall be known and designated as the "9 1/2% Series B Senior Subordinated Notes due 2007" and "10 1/2% Series B Senior Subordinated Discount Notes," as applicable, in each case, of the Company. The Stated Maturity of the Senior Subordinated Notes shall be November 1, 2007, and they shall bear interest at the rate of 9 1/2% per annum from November 4, 1997, or from the most recent interest payment date to which interest has been paid or duly provided for, payable semiannually in cash and in arrears to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the April 15 and October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 1998. The Stated Maturity of the Senior Subordinated Discount Notes shall be November 1, 2007, and they will accrete until November 1, 2002 at a rate of 10.57% per annum, compounded semiannually. Cash interest will not accrue on the Senior Subordinated Discount Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be payable semiannually in cash and in arrears to the Person in whose name the Note (or any predecessor Note) is registered at the close of business on the April 15 or October 15 next preceding such interest payment date, commencing May 1, 2003. Cash interest on the Senior Subordinated Discount Notes will accrue from the most recent interest payment date to which interest has been paid or, if no interest has been paid, from November 1, 2002. All references to the principal amount of the Senior Subordinated Discount Notes herein are references to the principal amount at final maturity. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months, until the principal thereof is paid or duly provided for. Interest on any overdue principal, interest (to the extent lawful) or premium, if any, shall be payable on demand. 52 The principal of (and premium, if any) and interest on the Notes shall be payable at the office or agency of the Company maintained for such purpose in The City of New York, or at such other office or agency of the Company as may be maintained for such purpose; provided, however, that, at the option of the Company, interest may be paid by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Note Register. Holders shall have the right to require the Company to purchase their Notes, in whole or in part, in the event of a Change of Control pursuant to Section 1016. The Notes shall be subject to repurchase by the Company pursuant to an Asset Disposition as provided in Section 1017. The Notes shall be redeemable as provided in Article Eleven and in the Notes. The Indebtedness evidenced by the Notes shall be subordinated in right of payment to Senior Indebtedness as provided in Article Thirteen. SECTION 302. Denominations. ------------- The Notes shall be issuable only in fully registered form, without coupons, and only in denominations of $1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Notes shall be executed on behalf of the Company by two Officers, of which at least one Officer shall be the President or the Chief Financial Officer of the Company. The signature of any Officer on the Notes may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Notes. Notes bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Initial Notes executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Notes, and the Trustee in accordance with such Company Order shall authenticate and deliver such Initial Notes directing the Trustee to authenticate the Notes and certifying that all conditions precedent to the issuance of Notes contained herein have been fully complied with, and the Trustee in accordance with such Company Order shall authenticate and deliver such Initial Notes. On Company Order, the Trustee shall authenticate for original issue Exchange Notes in an aggregate principal amount not to exceed $275,000,000, in the case of the Senior Subordinated Notes, and $294,000,000, in the case of Senior Subordinated Discount Notes; provided that such Exchange Notes shall be issuable only upon the valid surrender for cancellation of Initial Notes of a like aggregate principal amount in accordance with an Exchange Offer pursuant to the Registration Rights Agreement. In each case, the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company that it may reasonably request in connection with such authentication of Notes. Such order shall specify the amount of Notes to be authenticated and the date on which the original issue of Initial Notes or Exchange Notes is to be authenticated. Each Note shall be dated the date of its authentication. 53 No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. In case the Company or any Guarantor (if applicable), pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company or such Guarantor shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Notes authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Notes executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Notes surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Notes as specified in such request for the purpose of such exchange. If Notes shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section 303 in exchange or substitution for or upon registration of transfer of any Notes, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Notes at the time Outstanding for Notes authenticated and delivered in such new name. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as any Note Registrar or Paying Agent to deal with the Company and its Affiliates. SECTION 304. Temporary Notes. --------------- Pending the preparation of definitive Notes, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination. Temporary Notes shall be substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Notes may determine, as conclusively evidenced by their execution of such Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 305. Registration, Registration of Transfer and Exchange. --------------------------------------------------- The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Note Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The 54 Note Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Note Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the Trustee in such capacity, together with any successor of the Trustee in such capacity, the "Note Registrar") for the purpose of registering Notes and transfers of Notes as herein provided. Upon surrender for registration of transfer of any Note at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interest in such Global Note may be effected only through a book-entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. At the option of the Holder, Notes may be exchanged for other Notes of any authorized denomination and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange (including an exchange of Initial Notes for Exchange Notes), the Company shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive; provided that no exchange of Initial Notes for Exchange Notes shall occur until an Exchange Offer Registration Statement shall have been declared effective by the Commission, the Trustee shall have received an Officers' Certificate confirming that the Exchange Offer Registration Statement has been declared effective by the Commission and the Initial Notes to be exchanged for the Exchange Notes shall be cancelled by the Trustee. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Note Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Note Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 304, 906, 1016, 1017 or 1108, not involving any transfer. The Register shall be in written form in the English language or in any other form including computerized records, capable of being converted into such form within a reasonable time. SECTION 306. Book-Entry Provisions for Global Notes. -------------------------------------- (a) Each Global Note initially shall (i) be registered in the name of the Depositary for such global Note or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 202. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes 55 whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 307. If required to do so pursuant to any applicable law or regulation, beneficial owners may obtain Notes in definitive form ("Physical Notes") in exchange for their beneficial interests in a Global Note upon written request in accordance with the Depositary's and the Registrar's procedures. In addition, Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Note if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Note or the Depositary ceases to be a clearing agency registered under the Exchange Act, at a time when the Depositary is required to be so registered in order to act as Depositary, and in each case a successor depositary is not appointed by the Company within 90 days of such notice or, (ii) the Company executes and delivers to the Trustee and Note Registrar an Officers' Certificate stating that such Global Note shall be so exchangeable or (iii) an Event of Default has occurred and is continuing and the Note Registrar has received a request from the Depositary. (c) In connection with any transfer of a portion of the beneficial interest in a Global Note pursuant to subsection (b) of this Section to beneficial owners who are required to hold Physical Notes, the Note Registrar shall reflect on its books and records the date and a decrease in the principal amount of such Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Notes of like tenor and amount. (d) In connection with the transfer of an entire Global Note to beneficial owners pursuant to subsection (b) of this Section, such Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in such Global Note, an equal aggregate principal amount of Physical Notes of authorized denominations. (e) Any Physical Note delivered in exchange for an interest in a Global Note pursuant to subsection (c) or subsection (d) of this Section shall, except as otherwise provided by paragraph (a)(i)(x) and paragraph (f) of Section 307, bear the applicable legend regarding transfer restrictions applicable to the Physical Note set forth in Section 202. (f) The registered holder of a Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. SECTION 307. Special Transfer Provisions. --------------------------- (a) The following provisions shall apply with respect to any proposed transfer of a Rule 144A Note or an Institutional Accredited Investor Note prior to the expiration of the Resale Restriction Termination Date (as defined in Section 202 hereof): (i) a transfer of a Rule 144A Note or an Institutional Accredited Investor Note or a beneficial interest therein to a QIB shall be made upon the representation of the transferee that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to 56 it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a Rule 144A Note or an Institutional Accredited Investor Note or a beneficial interest therein to an institutional accredited investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 308 hereof from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them; and (iii) a transfer of a Rule 144A Note or an Institutional Accredited Investor Note or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 309 hereof from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them. (b) The following provisions shall apply with respect to any proposed transfer of a Regulation S Note prior to the expiration of the Restricted Period: (i) a transfer of a Regulation S Note or a beneficial interest therein to a QIB shall be made upon the representation of the transferee that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a Regulation S Note or a beneficial interest therein to an institutional accredited investor shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 308 hereof from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them; and (iii) a transfer of a Regulation S Note or a beneficial interest therein to a Non-U.S. Person shall be made upon, if requested by the Company or the Trustee, receipt by the Trustee or its agent of an opinion of counsel, certification and/or other information satisfactory to each of them. After the expiration of the Restricted Period, interests in the Regulation S Note may be transferred without requiring certification set forth in Section 308 or any additional certification. (c) Private Placement Legend. Upon the transfer, exchange or ------------------------ replacement of Notes not bearing the Private Placement Legend, the Note Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Note Registrar shall deliver only Notes that bear the Private Placement Legend unless there is delivered to the Note Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. 57 (d) General. By its acceptance of any Note bearing the Private ------- Placement Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. (e) The Company shall deliver to the Trustee an Officer's Certificate setting forth the dates on which the Restricted Period terminates (the "Resale Restriction Termination Date"). The Note Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Note Registrar. (f) No Obligation of the Trustee: (i) The Trustee shall have no ---------------------------- responsibility or obligation to any beneficial owner of a Global Note, a member of, or a participant in the Depository or other Person with respect to any ownership interest in the Notes, with respect to the accuracy of the records of the Depository or its nominee or of any participant or member thereof or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Notes. All notices and communications to be given to the Holders and all payments to be made to Holders under the Notes shall be given or made only to the registered Holders (which shall be the Depository or its nominee in the case of a Global Note). The rights of beneficial owners in any Global Note in global form shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected and indemnified pursuant to Section 607 in relying upon information furnished by the Depository with respect to any beneficial owners, its members and participants. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note (including without limitation any transfers between or among Depository participants, members or beneficial owners in any Global Note) other than to require delivery of such certificates and other documentation of evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 308. Form of Certificate to Be Delivered in Connection with ------------------------------------------------------ Transfers to Institutional Accredited Investors. - ----------------------------------------------- [date] PARAGON HEALTH NETWORK, INC. c/o IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Ladies and Gentlemen: This certificate is delivered to request a transfer of $______ principal amount of the [9 1/2% Senior Subordinated Notes due 2007] [10 1/2% Senior Subordinated Discount Notes due 2007] (the "Notes") of Paragon Health Network, Inc. (the "Company"). 58 Upon transfer, the Notes would be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: The undersigned represents and warrants to you that: (1) We are an institutional "accredited investor" (as defined in Rules 501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of an institutional "accredited investor" at least $250,000 principal amount of the Notes, and we are acquiring the Notes not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes and invest in or purchase securities similar to the Notes in the normal course of our business. We and any accounts for which we are acting are each able to bear the economic risk of our or its investment. (2) We understand that the Notes have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Notes to offer, sell or otherwise transfer such Notes prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Notes (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor", in each case in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company and the Trustee reserve the right prior to any offer, sale or other transfer prior to the Resale Termination Date of the Notes pursuant to clauses (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. TRANSFEREE: BY: Upon transfer the Notes would be registered in the name of the new beneficial owner as follows: 59 TAXPAYER ID NAME ADDRESS NUMBER: ------ ------- ------ Very truly yours, [Name of Transferor] By:______________________________ _________________________________ Name: Signature Medallion Guaranteed Title: SECTION 309. Form of Certificate to Be Delivered in Connection with ------------------------------------------------------ Transfers Pursuant to Regulation S. - ---------------------------------- [date] IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Re: PARAGON HEALTH NETWORK, INC. (the "Company") [9 1/2% Senior Subordinated Notes due 2007] [10 1/2% Senior Subordinated Discount Notes] (the "Notes") ----------------------------------------------------------- Ladies and Gentlemen: In connection with our proposed sale of $________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (a) the offer of the Notes was not made to a person in the United States; (b) either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre- arranged with a buyer in the United States; (c) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (d) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. 60 In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:____________________________ _______________________________ Authorized Signature Signature Medallion Guaranteed SECTION 310. Mutilated, Destroyed, Lost and Stolen Notes. ------------------------------------------- If (i) any mutilated Note is surrendered to the Trustee, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note, and there is delivered to the Company, any Guarantor (if applicable) and the Trustee such security or indemnity, in each case, as may be required by them to save each of them harmless, then, in the absence of notice to the Company any Guarantor or the Trustee that such Note has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Note or in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Note, pay such Note. Upon the issuance of any new Note under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) in connection therewith. Every new Note issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Company, any Guarantor and any other obligor upon the Notes, whether or not the mutilated, destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 311. Payment of Interest; Interest Rights Preserved. ---------------------------------------------- Interest on any Note which is payable, and is punctually paid or duly provided for, on any interest payment date shall be paid to the Person in whose name such Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest may at the Company's option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 312, to the address 61 of such Person as it appears in the Note Register or (ii) wire transfer to an account located in the United States maintained by the payee. Any interest on any Note which is payable, but is not paid when the same becomes due and payable and such nonpayment continues for a period of 30 days shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Notes (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date (not less than 30 days after such notice) of the proposed payment (the "Special Interest Payment Date"), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a record date (the "Special Record Date") for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the Special Interest Payment Date and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date and Special Interest Payment Date therefor to be given in the manner provided for in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date and Special Interest Payment Date therefor having been so given, such Defaulted Interest shall be paid on the Special Interest Payment Date to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. SECTION 312. Persons Deemed Owners. --------------------- Prior to the due presentment of a Note for registration of transfer, the Company, the Trustee and any agent of the Company, any Guarantor or the Trustee may treat the Person in whose name such Note is registered as the owner of such Note for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 311) interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and none of the Company, any Guarantor, the Trustee nor any agent of the Company, any Guarantor or the Trustee shall be affected by notice to the contrary. 62 SECTION 313. Cancellation. ------------ All Notes surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. If the Company shall acquire any of the Notes other than as set forth in the preceding sentence, the acquisition shall not operate as a redemption or satisfaction of the Indebtedness represented by such Notes unless and until the same are surrendered to the Trustee for cancellation pursuant to this Section 313. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Notes held by the Trustee shall be destroyed by the Trustee and the Trustee shall send a certificate of such destruction to the Company. SECTION 314. Computation of Interest. ----------------------- Interest on the Notes shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 315. CUSIP Numbers. ------------- The Company in issuing Notes may use "CUSIP" numbers (if then generally in use) in addition to serial numbers; if so, the Trustee shall use such "CUSIP" numbers in addition to serial numbers in notices of redemption and repurchase as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such CUSIP numbers, either as printed on the Notes or as contained in any notice of a redemption or repurchase and that reliance may be placed only on the serial or other identification numbers printed on the Notes, and any such redemption or repurchase shall not be affected by any defect in or omission of such CUSIP numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE FOUR. SATISFACTION AND DISCHARGE 400. SECTION 401. Satisfaction and Discharge of Indenture. --------------------------------------- This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Notes expressly provided for herein or pursuant hereto) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (i) either (A) all Notes theretofore authenticated and delivered (other than (1) Notes which have been lost, stolen or destroyed and which have been replaced or paid as provided in Section 310 and (2) Notes for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or (B) all Notes not theretofore delivered to the Trustee for cancellation (1) have become due and payable by reason of the making of a notice of redemption or otherwise; or 63 (2) will become due and payable at their Stated Maturity within one year; or (3) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company in the case of (1), (2) or (3) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount in cash or Government Obligations sufficient to pay and discharge the entire indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal of (and premium, if any) and interest to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (ii) no Default or Event of Default with respect to this Indenture or the Notes shall have occurred and be continuing on the date of such deposit or shall occur as a result of such deposit and such deposit will not result in a breach or violation of, or constitute a default under, any other instrument or agreement to which the Company or any Guarantor of the Notes is a party or by which it is bound; (iii) the Company or any Guarantor has paid or caused to be paid all sums payable hereunder by the Company or any Guarantor in connection with all the Notes including all fees and expenses of the Trustee; (iv) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of such Notes at maturity or the Redemption Date, as the case may be; and (v) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture and the termination of the Company's obligation hereunder have been satisfied. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (i) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive any such satisfaction and discharge. SECTION 402. Application of Trust Money. -------------------------- Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. If the Trustee or Paying Agent is unable to apply any money or Government Obligations in accordance with Section 401 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's and any Guarantor's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 401; provided that if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement 64 of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or Government Obligations held by the Trustee or Paying Agent. ARTICLE FIVE. REMEDIES 500. SECTION 501. Events of Default. ----------------- "Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Thirteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (i) default in any payment of interest on any Note when the same becomes due and such default continues for a period of 30 days whether or not such payment shall be prohibited by Article Thirteen; (ii) default in the payment of the principal of any Note when the same becomes due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment shall be prohibited by Article Thirteen; (iii) the Company fails to comply with Section 801; (iv) the Company fails to comply with Section 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1016, 1017, 1019 or 1020 (other than a failure to purchase Notes when required under Section 1016 or 1017) and such failure continues for 30 days after the notice specified below; (v) the Company fails to comply with any of its agreements in the Notes or this Indenture (other than those referred to in (i), (ii), (iii) or (iv) above) and such failure continues for 60 days after the notice specified below; (vi) Indebtedness of the Company or any Significant Subsidiary is not paid within any applicable grace period after final maturity or the acceleration by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $20 million; (vii) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) consents to the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; (D) makes a general assignment for the benefit of its creditors; or takes any comparable action under any foreign laws relating to insolvency; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: 65 (A) is for relief against the Company or any Significant Subsidiary in an involuntary case; (B) appoints a Custodian of the Company or any Significant Subsidiary or for any substantial part of its property; or (C) orders the winding up or liquidation of the Company or any Significant Subsidiary; or any similar relief is granted under any foreign laws and the order or decree remains unstayed and in effect for 90 days; (ix) any judgment or decree for the payment of money in excess of $20 million (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) is rendered against the Company or any Significant Subsidiary that is not discharged, or bonded or insured by a third Person and either (A) an enforcement proceeding has been commenced upon such judgment or decree or (B) such judgment or decree remains outstanding for a period of 90 days following the entry of such judgment or decree and is not discharged, waived or stayed; or (x) the failure of any Notes Guarantee by a Guarantor made pursuant to Section 1020 to be in full force and effect (except as contemplated by the terms thereof or of this Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under this Indenture or any such Guarantee of the Notes if such Default continues for 10 days. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. A Default under clause (iv) or (v) above shall not constitute an Event of Default until the Trustee or the Holders of at least 25% in principal amount of the outstanding Notes notify the Company of the Default and the Company does not cure such Default within the time specified in clause (iv) or (v), as the case may be, after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default". The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officer's Certificate of any event which with the giving of notice or the lapse of time would become an Event of Default under clause (iv), (v) or (viii) above, its status and what action the Company is taking or proposes to take with respect thereto. If a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each Holder notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of, premium, if any, or interest on any Note, the Trustee may withhold such notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is in the interests of the Holders. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. 66 SECTION 502. Acceleration of Maturity; Rescission and Annulment. -------------------------------------------------- If an Event of Default (other than by reason of an Event of Default specified in Section 501(vii) or 501(viii)) occurs and is continuing, the Trustee by notice to the Company or the Holders of at least a majority in principal amount of the applicable Notes Outstanding may declare the principal (and premium, if any), accrued and unpaid interest and any other monetary obligations on all such then outstanding Notes to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders). Upon the effectiveness of such declaration, such principal (and premium, if any) and interest will be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default specified in Section 501(vii) or 501(viii) occurs and is continuing, then the principal amount of all the Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the outstanding Notes by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration. The Trustee may rely upon such notice of rescission without nay independent investigation as to the satisfaction of the conditions in the preceding sentence. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 503. Collection of Indebtedness and Suits for Enforcement by ------------------------------------------------------- Trustee. - ------- If an Event of Default specified in Section 501(i) or 501(ii) occurs and is continuing, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any Guarantor (in accordance with the applicable Guarantee of the Notes) or any other obligor upon the Notes and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, any Guarantor or any other obligor upon the Notes, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders under this Indenture or any Guarantee of the Notes by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, including, seeking recourse against any Guarantor pursuant to the terms of any Guarantee of the Notes, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy including, without limitation, seeking recourse against any Guarantor pursuant to the terms of a Guarantee of the Notes, or to enforce any other proper remedy, subject however to Section 513. No recovery of any such judgment upon any property of the Company or any Guarantor shall affect or impair any rights, powers or remedies of the Trustee or the Holders. SECTION 504. Trustee May File Proofs of Claim. -------------------------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor, including any Guarantor, upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, 67 (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Notes, to take such other actions (including participating as a member, voting or otherwise, of any official committee of creditors appointed in such matter) and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of such Holders, vote for the election of a trustee in bankruptcy or other similar official. SECTION 505. Trustee May Enforce Claims Without Possession of Notes. ------------------------------------------------------ All rights of action and claims under this Indenture, the Notes or the Guarantees of the Notes may be prosecuted and enforced by the Trustee without the possession of any of the Notes or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Notes in respect of which such judgment has been recovered. SECTION 506. Application of Money Collected. ------------------------------ Subject to Article Thirteen, any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To holders of Senior Indebtedness to the extent required by Article Thirteen; THIRD: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and FOURTH: The balance, if any, to the Person or Persons entitled thereto, including the Company or any other obligor on the Notes, as their interests may appear or as a court of competent jurisdiction may direct, provided that all sums due and owing to the Holders and the Trustee have been paid in full as required by this Indenture. 68 SECTION 507. Limitation on Suits. ------------------- No Holder of any Notes shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (i) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (ii) the Holders of at least 25% in principal amount of the outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (v) the Holders of a majority in principal amount of the outstanding Notes do not give the Trustee a direction inconsistent with the request during such 60-day period. it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture, any Note or any Guarantee of the Notes to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, any Note or any Guarantee of the Notes, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, ---------------------------------------------------- Premium and Interest. - -------------------- Notwithstanding any other provision in this Indenture (other than Article XIII), the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Eleven) and in such Note of the principal of (and premium, if any) and (subject to Section 311) interest on such Note on the respective Stated Maturities expressed in such Note (or, in the case of redemption or repurchase, on the Redemption Date or repurchase) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Guarantee of the Notes and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, any Guarantor, any other obligor on the Notes, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. ------------------------------ Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 310, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other 69 right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 511. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. ------------------ The Holders of not less than a majority in principal amount of the Outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (i) such direction shall not be in conflict with any rule of law or with this Indenture or any Guarantee of the Notes, (ii) the Trustee need not take any action which might involve it in personal liability or be unduly prejudicial to the Holders not consenting, it being understood that (subject to Section 601) the Trustee shall have no duty to ascertain whether or not such actions or forbearance are unduly prejudicial to such Holders; and (iii) subject to the provisions of Section 315 of the Trust Indenture Act, the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Prior to taking any action hereunder, the Trustee shall be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. SECTION 513. Waiver of Past Defaults. ----------------------- Subject to Sections 508 and 902, the Holders of a majority in aggregate principal amount of the Outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes) may on behalf of the Holders of all the Notes, by written notice to the Trustee, waive any existing Default or Event of Default and its consequences under this Indenture or any Guarantee of the Notes except a continuing Default or Event of Default in the payment of interest on, premium, if any, or the principal of, any such Note held by a non-consenting Holder, or in respect of a covenant or a provision which cannot be amended or modified without the consent of all Holders. In the event that any Event of Default specified in Section 501(vi) shall have occurred and be continuing, such Event of Default and all consequences thereof (including without limitation any acceleration or resulting payment default) shall be annulled, waived and rescinded, automatically and without any action by the Trustee or the Holders of the Notes, if within 30 days after such Event of Default arose (i) the Indebtedness that is the basis for such Event of Default has been discharged, or (ii) the holders thereof have rescinded or waived the acceleration, notice or action (as the case may be) giving rise to such Event of Default, or (iii) if the Default that is the basis for such Event of Default has been cured. 70 Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. SECTION 514. Waiver of Stay or Extension Laws. -------------------------------- The Company, the Guarantors and any other obligors upon the Notes, covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company, any Guarantor or any such obligor from paying all or any portion of the principal of, premium, if any, or interest on the Notes contemplated herein or in the Notes or which may affect the covenants or the performance of this Indenture; and each of the Company, any Guarantor and any such obligor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 515. Undertaking for Costs. --------------------- All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Notes, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Note on or after the respective Stated Maturities expressed in such Note (or, in the case of redemption, on or after the Redemption Date). ARTICLE SIX. THE TRUSTEE 600. SECTION 601. Certain Duties and Responsibilities. ----------------------------------- (a) Except during the continuance of a Default or an Event of Default, (i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and the Trustee should not be liable except for the performance of such duties as specifically set forth in the Indenture and no others; and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith or willful misconduct on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture, but not to verify the contents thereof. (b) In case a Default or an Event of Default has occurred and is continuing of which a Trust Officer of the Trustee has actual knowledge or of which written notice of such Default or Event of 71 Default shall have been given to the Trustee by the Company, any other obligor of the Notes or by any Holder, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (i) this paragraph (c) shall not be construed to limit the effect of paragraph (a) of this Section; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in aggregate principal amount of the Outstanding Notes relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section and to the TIA. SECTION 602. Notice of Defaults. ------------------ Within 90 days after the occurrence of any Default hereunder, the Trustee shall transmit in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder actually known to a Trust Officer of the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any) or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Trust Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders; and provided further that in the case of any Default of the character specified in Section 501(iii) no such notice to Holders shall be given until at least 30 days after the occurrence thereof. Notwithstanding anything to the contrary expressed in this Indenture, the Trustee shall not be deemed to have knowledge of any Default or Event of Default hereunder unless and until the Trustee shall have received written notice thereof from the Company at its principal Corporate Trust Office as specified in Section 105, except in the case of an Event of Default under Sections 501(i) or 501(ii) (provided that the Trustee is the Paying Agent). SECTION 603. Certain Rights of Trustee. ------------------------- (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (b) Subject to the provisions of TIA Sections 315(a) through 315(d): (i) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon (whether in its original or facsimile form) any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other 72 evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties and the Trustee need not investigate any fact or matter stated in the documents; (ii) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (iii) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith or willful misconduct on its part, request and rely upon an Officers' Certificate or an Opinion of Counsel and shall not liable for any action it takes or omits to take in good faith reliance on such Officer's Certificate or Opinion of Counsel; (iv) the Trustee may consult with counsel of its selection and any advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (v) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses, losses and liabilities which might be incurred by it in compliance with such request or direction; (vi) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (vii) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (viii) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; provided, however, that the Trustee's conduct does not constitute willful misconduct or negligence. (c) The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 73 SECTION 604. Trustee Not Responsible for Recitals or Issuance of --------------------------------------------------- Notes. - ----- The recitals contained herein and in the Notes, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness and it shall not be responsible for the Company's use of the proceeds from the Notes. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Notes and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility on Form T-1 supplied to the Company are true and accurate, subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of the proceeds of the Notes. SECTION 605. May Hold Notes. -------------- The Trustee, any Paying Agent, any Note Registrar, any Authenticating Agent or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Note Registrar, Authenticating Agent or such other agent. SECTION 606. Money Held in Trust. ------------------- All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust hereunder for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 607. Compensation and Reimbursement. ------------------------------ The Company agrees: (i) to pay to the Trustee from time to time such compensation as shall be agreed to in writing between the Company and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (ii) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents, consultants and counsel and costs and expenses of collection), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (iii) to indemnify each of the Trustee or any predecessor Trustee (and their respective directors, officers, stockholders, employees and agents) for, and to hold them harmless against, any and all loss, damage, claim, liability or expense, including taxes (other than taxes based on the income of the Trustee) incurred without negligence, willful misconduct or bad faith on their part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending themselves against any claim or liability in connection with the exercise or performance of any of the Trustee's powers or duties hereunder. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless 74 the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a lien prior to the Holders of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Notes. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(vii) or (viii), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 608. Corporate Trustee Required; Eligibility. --------------------------------------- There shall be at all times a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1), and which shall have an office in The City of New York and shall have a combined capital and surplus of at least $50,000,000. If the Trustee does not have an office in The City of New York, the Trustee may appoint an agent in The City of New York reasonably acceptable to the Company to conduct any activities which the Trustee may be required under this Indenture to conduct in The City of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 608, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 608, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 609. Resignation and Removal; Appointment of Successor. ------------------------------------------------- (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of this Section. (b) The Trustee may resign at any time by giving written notice thereof to the Company. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors, a copy of which shall be delivered to the resigning Trustee and a copy to the successor trustee. If an instrument of acceptance required by this Section shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Notes, delivered to the Trustee and to the Company. The Trustee so removed may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee if no successor Trustee is appointed within 30 days of such removal. (d) If at any time: (i) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or 75 (ii) the Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Note for at least six months, or (iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a Custodian of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Company, by a Board Resolution, may remove the Trustee, or (B) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Notes delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Note for at least six months may, at the expense of the Company on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Notes in the manner provided for in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 610. Acceptance of Appointment by Successor. -------------------------------------- Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Notwithstanding the replacement of the Trustee pursuant to this Section 610, the Company's obligations under Section 607 shall continue for the benefit of the retiring Trustee with regard to expenses and liabilities incurred by it and compensation earned by it prior to such replacement or otherwise under the Indenture. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. 76 SECTION 611. Merger, Conversion, Consolidation or Succession to -------------------------------------------------- Business. - -------- Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. In case at that time any of the Notes shall not have been authenticated, any successor Trustee may authenticate such Notes either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such cases such certificates shall have the full force and effect which this Indenture provides for the certificate of authentication of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 612. Trustee's Application for Instructions from the Company. ------------------------------------------------------- Any application by the Trustee for written instructions from the Company may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. Subject to Section 610, the Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than three Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted. ARTICLE SEVEN. HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY 700. SECTION 701. Company to Furnish Trustee Names and Addresses. ---------------------------------------------- The Company will furnish or cause to be furnished to the Trustee (a) semiannually, not more than 10 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (b) at such other times as the Trustee may reasonably request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content to that in Subsection (a) hereof as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Note Registrar, no such list need be furnished. SECTION 702. Disclosure of Names and Addresses of Holders. -------------------------------------------- Every Holder of Notes, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the 77 Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 703. Reports by Trustee. ------------------ Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Notes, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such May 15 if required by TIA Section 313(a).Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to conclusively rely exclusively on Officer's Certificates). The Trustee also shall comply with TIA (S) 313(b). A copy of each report at the time of its mailing to Holders shall be filed by the Trustee with the Commission and each stock exchange (if any) on which the Notes are listed. The Company agrees to notify promptly the Trustee whenever the Notes become listed on any stock exchange and of any delisting thereof. ARTICLE EIGHT. MERGER, CONSOLIDATION, OR SALE OF ASSETS 800. SECTION 801. Company May Consolidate, Etc., Only on Certain Terms. ---------------------------------------------------- The Company will not in a single transaction or series of transactions consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") shall be a corporation, partnership, trust or limited liability company organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) shall expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and hereunder; (ii) immediately after giving effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company or any Subsidiary of the Successor Company as a result of such transaction as having been incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately before and after giving effect to such transaction, the Company or the Successor Company if the Company is not the continuing obligor under this Indenture would at the time of such transaction or series of transactions, after giving pro forma effect to such transaction as if such transaction had occurred on the first day of the four quarter period ending on or immediately prior to the date of such transaction, be able to Incur at least $1.00 of Indebtedness pursuant to clause (a) of Section 1010; and (iv) the Company shall have delivered to the Trustee (A) an Officers' Certificate, stating that (1) such Officers are not aware of any Default or Event of Default that shall have happened and be continuing and (2) such consolidation, merger or transfer and such supplemental indenture comply with this Indenture; provided that no Officers' Certificate will be required as to matters described in clause (A)(1) of this clause (iv) for a consolidation, merger or transfer described in the last paragraph of this Section 801, and (B) an Opinion of Counsel, stating that such consolidation, merger or transfer and such supplemental indenture comply with this Indenture, both in the form 78 required by this Indenture; provided that (1) in giving such opinion such counsel may rely on such officer's certificate as to any matters of fact (including without limitation as to compliance with the foregoing clauses (ii) and (iii)), and (2) no Opinion of Counsel will be required for a consolidation, merger or transfer described in the last paragraph of this Section 801. Notwithstanding the foregoing clauses (ii) and (iii), (x) any Restricted Subsidiary may consolidate with, merge into or transfer all or part of its properties and assets to the Company and (y) the Company may merge with an Affiliate incorporated solely for the purpose of reincorporating the Company in another jurisdiction to realize tax or other benefits. SECTION 802. Successor Substituted. --------------------- Upon any consolidation of the Company with or merger of the Company with or into any other corporation or any conveyance, transfer, lease or other disposition of all or substantially all of the assets of the Company to any Person in accordance with Section 801, the Successor Company will succeed to, and be substituted for, and may exercise every right and power of, the Company hereunder and thereafter the predecessor Company shall be released from all obligations and covenants hereunder, but, in the case of conveyance, transfer or lease of all or substantially all its assets, the predecessor Company will not be released from the obligation to pay the principal of and interest on the Notes. ARTICLE NINE. SUPPLEMENTS AND AMENDMENTS TO INDENTURE 900. SECTION 901. Supplemental Indentures Without Consent of Holders. -------------------------------------------------- Without the consent of any Holders, the Company, the Guarantors, if any (with respect to a Guarantee of the Notes to which it is a party), and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (i) to cure any ambiguity, defect or inconsistency; or (ii) to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code); or (iii) to add Guarantees with respect to the Notes; or (iv) to provide for the assumption by a successor corporation, partnership, trust or limited liability company of the obligations of the Company hereunder; or (v) to secure the Notes; or (vi) to confirm and evidence the release and discharge of any Guarantee of the Notes or Lien with respect to or securing the Notes when such release and discharge is permitted by and provided for hereunder; or (vii) to provide that any Indebtedness that becomes or will become an obligation of the Successor Company pursuant to a transaction governed by Section 801 (and that is not a Subordinated Obligation) is Senior Subordinated Indebtedness for purposes of this Indenture; or 79 (viii) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power conferred upon the Company; or (ix) to make any other change that does not adversely affect the rights of any Holder; or (x) to comply with any requirement of the Commission in connection with the qualification of this Indenture under the Trust Indenture Act. However, no amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Indebtedness then outstanding unless the holders of such Senior Indebtedness (or any group or representative thereof authorized to give a consent) consent to such change. SECTION 902. Supplemental Indentures with Consent of Holders. ----------------------------------------------- With the consent of the Holders of at least a majority in principal amount of the Outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes), the Company, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Note affected thereby (with respect to any Notes held by a nonconsenting Holder of the Notes): (i) reduce the amount of Notes whose Holders must consent to an amendment; or (ii) reduce the stated rate of or extend the stated time for payment of interest on any Note or amend the rate of accretion on the Senior Subordinated Discount Notes or amend the definition of Accreted Value; or (iii) reduce the principal of or Accreted Value of or extend the Stated Maturity of any Note; or (iv) reduce the premium payable upon the redemption or repurchase of any Note or change the time at which any Note may be redeemed as described in Section 1101; or (v) make any Note payable in money other than that stated in the Note; or (vi) impair the right of any Holder to receive payment of principal of and interest on such Holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Notes; or (vii) make any change in the amendment provisions which require each Holder's consent or in the waiver provisions; or (viii) make any change to the subordination provisions of this Indenture that adversely affects the rights of any Holder. 80 The consent of the Holders is not necessary under this Indenture to approve the particular form of any proposed supplemental indenture. It is sufficient if such consent approves the substance of the proposed supplemental indenture. The Senior Subordinated Notes and the Senior Subordinated Discount Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. SECTION 903. Execution of Supplemental Indentures. ------------------------------------ The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities, as determined by the Trustee in its sole discretion under this Indenture or otherwise. In signing or refusing to sign any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. SECTION 904. Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby (except as provided in Section 902). SECTION 905. Conformity with Trust Indenture Act. ----------------------------------- Every supplemental indenture executed pursuant to the Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Notes to Supplemental Indentures. --------------------------------------------- Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform to any such supplemental indenture may be prepared and executed by the Company, and the Company shall issue and the Trustee shall authenticate a new Note that reflects the changed terms, the cost and expense of which will be borne by the Company in exchange for Outstanding Notes. SECTION 907. Notice of Supplemental Indentures. --------------------------------- Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Note affected, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. The failure to give such notice to all the Holders, or any defect therein, will not impair or affect the validity of the supplemental indenture. 81 SECTION 908. Effect on Senior Indebtedness. ----------------------------- No supplemental indenture shall adversely affect the rights of any holders of Senior Indebtedness under Article Thirteen unless the requisite holders of each issue of Senior Indebtedness affected thereby shall have consented to such supplemental indenture. ARTICLE TEN. COVENANTS 1000. SECTION 1001. Payment of Principal, Premium, if any, and Interest. --------------------------------------------------- The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms of the Notes and this Indenture. SECTION 1002. Maintenance of Office or Agency. ------------------------------- The Company will maintain in The City of New York, an office or agency where the Notes may be presented or surrendered for payment, where, if applicable, the Notes may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Corporate Trust Office of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Note Payments to Be Held in Trust. ------------------------------------------- If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of (or premium, if any) or interest on any of the Notes, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure to so act. Whenever the Company shall have one or more Paying Agents for the Notes, it will, on or before each due date of the principal of (or premium, if any) or interest on any Notes, deposit with a Paying Agent a sum in same day funds (or New York Clearing House funds if such deposit is made prior to the date on which such deposit is required to be made) that shall be available to the Trustee by 11:00 a.m. Eastern Standard Time on such due date sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, 82 and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure to so act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (i) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (ii) give the Trustee notice of any default by the Company (or any other obligor upon the Notes) in the making of any payment of principal (and premium, if any) or interest; and (iii) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (or premium, if any) or interest on any Note and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment to the Company, may at the expense of the Company cause to be published once, in a leading daily newspaper (if practicable, The Wall Street Journal (Eastern Edition)) printed in the English language and of general circulation in New York City, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Corporate Existence. ------------------- Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence and that of each Restricted Subsidiary and the corporate rights (charter and statutory) licenses and franchises of the Company and each Restricted Subsidiary; provided, however, that the Company shall not be required to preserve any such existence (except the Company) right, license or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and each of its Restricted Subsidiaries, taken as a whole, and that the loss thereof is not, and will not be, disadvantageous in any material respect to the Holders. 83 SECTION 1005. Payment of Taxes and Other Claims. --------------------------------- The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary and (ii) all lawful claims for labor, materials and supplies, which, if unpaid, might by law become a material liability or lien upon the property of the Company or any Restricted Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which appropriate reserves, if necessary (in the good faith judgment of management of the Company) are being maintained in accordance with GAAP. SECTION 1006. Maintenance of Properties. ------------------------- The Company will cause all material properties owned by the Company or any Restricted Subsidiary or used or held for use in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in normal condition, repair and working order and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly conducted at all times; provided, however, that nothing in this Section shall prevent the Company or any of its Restricted Subsidiaries from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Restricted Subsidiary and not adverse in any material respect to the Holders. SECTION 1007. Insurance. --------- To the extent available at commercially reasonable rates, the Company will maintain, and will cause its Restricted Subsidiaries to maintain, insurance with responsible carriers against such risks and in such amounts, and with such deductibles, retentions, self-insured amounts and co-insurance provisions, as are customarily carried by similar businesses, of similar size in their country of organization, including professional and general liability, property and casualty loss, workers' compensation and interruption of business insurance. In the event the Company determines that insurance satisfying the first sentence of this Section 1007 is not available at commercially available rates, it shall provide an Officer's Certificate to such effect to the Trustee and the Trustee may conclusively rely on the determinations set forth therein. SECTION 1008. Compliance with Laws. -------------------- The Company shall comply, and shall cause each of its Restricted Subsidiaries to comply, with all applicable statutes, rules, regulations, orders and restrictions of the United States of America, all states and municipalities thereof, and of any governmental regulatory authority, in respect of the conduct of their respective businesses and the ownership of their respective properties, except for such noncompliances as would not in the aggregate have a material adverse effect on the financial condition or results of operations of the Company and its Restricted Subsidiaries, taken as a whole. SECTION 1009. Limitation on Restricted Payments. --------------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay any dividend or make any distribution on or in respect of its Capital Stock (including any payment to its stockholders in connection with any merger or consolidation involving the Company) except (A) dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and (B) dividends or distributions payable to the Company or any Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to its other shareholders on no more than a pro rata basis, measured by value), (ii) purchase, redeem, retire or otherwise acquire for value any Capital Stock of 84 the Company or any Restricted Subsidiary held by Persons other than the Company or another Restricted Subsidiary), (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment, any Subordinated Obligations (other than the purchase, repurchase, redemption or other acquisition of Subordinated Obligations in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition) or (iv) make any Investment (other than a Permitted Investment) in any Person (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement or Investment being herein referred to as a "Restricted Payment") if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (A) a Default shall have occurred and be continuing (or would result therefrom); (B) the Company could not incur at least an additional $1.00 of Indebtedness under the first paragraph (a) of the covenant contained in Section 1010; or (C) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Company's Board of Directors, whose determination shall be conclusive and evidenced by a resolution of the Company's Board of Directors) declared or made subsequent to the date of this Indenture would exceed the sum of: (1) 50% of the Consolidated Net Income accrued during the period (treated as one accounting period) from the end of the most recent fiscal quarter ending prior to the Issue Date to the end of the most recent fiscal quarter ending prior to the date of such Restricted Payment for which consolidated financial statements of the Company are available (or, in case such Consolidated Net Income shall be a deficit, minus 100% of such deficit); (2) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Capital Stock (other than Disqualified Stock) plus the principal amount of convertible securities which have been converted into or exchanged for Capital Stock (other than Disqualified Stock), in each case, subsequent to the Issue Date (other than an issuance or sale to a Restricted Subsidiary of the Company); provided that in the event such issuance or sale is to an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries for the benefit of their employees, to the extent the purchase by such plan or trust is financed by Indebtedness of such plan or trust and for which the Company is liable as Guarantor or otherwise, such aggregate amount of Net Cash Proceeds shall be limited to the aggregate amount of principal payments made by such plan or trust with respect to such Indebtedness); and (3) in the case of the disposition or repayment of any Investment constituting a Restricted Payment (without duplication of any amount deducted in calculating the amount of Investments at any time outstanding included in the amount of Restricted Payments), an amount equal to the lesser of (x) the return of capital or similar repayment with respect to such Investment and (y) the initial amount of such Investment, in either case, less the cost of the disposition of such Investment. (b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Capital Stock of the Company or Subordinated Obligations made by exchange (including any such exchange pursuant to the exercise of a conversion right or privilege in connection with which cash is paid in lieu of the issuance of fractional shares) for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary or an employee stock ownership plan or other trust established by the Company or any of its Subsidiaries); provided, however, that (A) such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments and (B) the Net Cash Proceeds or reduction of Indebtedness from such sale shall be excluded in calculations under clauses (B) and (C) of the previous paragraph; (ii) any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Subordinated Obligations made by exchange for, or out of the proceeds of the substantially concurrent sale of, Subordinated Obligations of the Company that is permitted to be Incurred pursuant to the covenant contained in Section 1010; provided, however, that such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments; (iii) any purchase, redemption, repurchase, defeasance, retirement or other acquisition of Subordinated Obligations from Net Available Cash to the extent permitted by the covenant contained in Section 1017; provided, however, that such purchase, redemption, repurchase, defeasance, retirement or other acquisition shall be excluded in subsequent calculations of the amount of Restricted Payments; (iv) 85 dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with paragraph (a); provided, however, that such dividend shall be included in subsequent calculations of the amount of Restricted Payments; (v) any purchase or redemption of any shares of Capital Stock of the Company from employees of the Company and its Subsidiaries pursuant to the repurchase provisions under employee stock option or stock purchase agreements or other agreements to compensate management employees in an aggregate amount after the date of this Indenture not in excess of $1.0 million in any fiscal year (excluding repurchases and redemptions in connection with the Mergers), plus any unused amounts under this clause (v) from prior fiscal years; provided, however, that such purchases or redemptions shall be excluded in subsequent calculations of the amount of Restricted Payments; (vi) Investments in Permitted Business Ventures that in the aggregate do not exceed at any one time outstanding 10% of Consolidated Tangible Assets less any amounts invested under clause (iv) of the definition of "Additional Assets" (exclusive of those Permitted Business Ventures in existence on the Issue Date); provided, however, that any such Investments in Permitted Business Ventures shall be included in subsequent calculations of the amount of Restricted Payments; (vii) any purchase, redemption or repurchase of any shares of Capital Stock of the Company in connection with the Mergers and as described in or contemplated by the Offering Memorandum; provided, however, that any such purchases or redemptions shall be excluded in subsequent calculations of the amount of Restricted Payments; or (viii) other Restricted payments not to exceed $10.0 million in the aggregate. (c) Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by this Section 1009 were computed, which calculations may be based upon the Company's latest available financial statements. The Trustee shall have no duty to recompute or recalculate or verify the accuracy of the information set forth in such Officers' Certificate. (d) The Company will not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the second to last sentence of the definition of "Unrestricted Subsidiary." SECTION 1010. Limitation on Indebtedness. -------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Indebtedness; provided, however, that the Company or any Restricted Subsidiary may Incur Indebtedness if on the date of the Incurrence of such Indebtedness the Consolidated Coverage Ratio would be greater than (i) 1.75 to 1.00, if such Indebtedness is Incurred on or prior to the second anniversary of the Issue Date and (ii) 2.00 to 1.00 if such Indebtedness is Incurred thereafter. (b) Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness Incurred pursuant to the Senior Credit Facility (or any refinancing thereof) in a maximum principal amount not to exceed at any time (A) an aggregate principal amount of $740.0 million under the Term Loan Facility, plus (in the case of any refinancing thereof) the aggregate amount of fees, underwriting discounts, premiums and other costs and expenses incurred in connection with such refinancing, less (1) the aggregate amount of all scheduled repayments of principal applied to permanently reduce the Indebtedness outstanding under the Term Loan Facility and (2) the excess of (a) the aggregate amount of all mandatory prepayments of principal with Net Available Cash from Asset Dispositions applied to permanently reduce the Indebtedness outstanding under the Term Loan Facility over (b) $75.0 million and (B) an aggregate principal amount outstanding at any time under the Revolving Credit Facility (or any refinancing thereof) not to exceed $175.0 million; (ii) Indebtedness (A) of the Company to any Restricted Subsidiary and (B) of any Wholly Owned Subsidiary to the Company or any Restricted Subsidiary; provided, however, that any subsequent issuance or transfer of any Capital Stock or any other event that results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Company or a Wholly Owned Subsidiary) will be deemed, in each case, an Incurrence of Indebtedness by the Company or such Restricted Subsidiary, as the case may be, in the amount that remains outstanding following such issuance or transfer 86 of such securities; (iii) Indebtedness represented by the Notes, any Indebtedness (other than the Indebtedness described in clauses (i) or (ii) above) outstanding on the date of this Indenture and any Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (iii) or the previous paragraph; (iv) Indebtedness of the Company or any Restricted Subsidiary in the form of Capitalized Lease Obligations, Purchase Money Obligations or Attributable Debt, and any Refinancing Indebtedness with respect thereto, in an aggregate amount not in excess of 7.5% of Consolidated Tangible Assets at any one time outstanding; (v) Indebtedness represented by Guarantees of Indebtedness Incurred pursuant to the covenant contained in this section; (vi) Indebtedness under Hedging Obligations; provided, however, that such Hedging Obligations are entered into for bona fide hedging purposes of the Company or any Restricted Subsidiary and are in the ordinary course of business; (vii) Indebtedness evidenced by letters of credit issued in the ordinary course of business of the Company to secure workers' compensation and other insurance coverages; and (viii) Indebtedness (which may comprise Bank Indebtedness) in an aggregate principal amount at any one time outstanding not in excess of the greater of (A) $75.0 million and (B) an amount equal to 5.0% of Consolidated Tangible Assets. (c) Notwithstanding the foregoing, the Company shall not Incur any Indebtedness pursuant to the foregoing paragraph that permits Refinancing Indebtedness in respect of Indebtedness constituting Subordinated Obligations if the proceeds of such Refinancing Indebtedness are used, directly or indirectly, to Refinance such Subordinated Obligations, unless such Refinancing Indebtedness will be subordinated to the Notes at least to the same extent as such Subordinated Obligations. (d) For purposes of determining compliance with, and the outstanding principal amount of any particular Indebtedness Incurred pursuant to and in compliance with, this covenant, (i) in the event that Indebtedness meets the criteria of more than one of the types of Indebtedness described in paragraph (b) of this Section, the Company, in its sole discretion, shall classify such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses; and (ii) the amount of Indebtedness issued at a price that is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in accordance with GAAP. (e) The Company will not permit any Unrestricted Subsidiary to Incur any Indebtedness other than Non-Recourse Debt and Guarantees of Indebtedness Incurred in accordance with paragraphs (a) and (b) of the covenant contained in this section; provided, however, if any such Indebtedness ceases to be Non- Recourse Debt, such event shall be deemed to constitute an incurrence of Indebtedness by the Company or a Restricted Subsidiary. SECTION 1011. Limitation on Layering. ---------------------- The Company shall not incur any Indebtedness that is expressly subordinate in right of payment to any Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness or is contractually subordinated in right of payment to Senior Subordinated Indebtedness. Unsecured Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness merely because it is unsecured, and Indebtedness that is not guaranteed by a particular person is not deemed to be subordinate or junior to Indebtedness that is so guaranteed merely because it is not so guaranteed. SECTION 1012. Limitation on Affiliate Transactions. ------------------------------------ (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction or series of transactions (including the purchase, sale, lease or exchange of any property or the rendering of any service with any Affiliate of the Company (an "Affiliate Transaction") on terms (i) that taken as a whole are less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate and (ii) that, in the event such Affiliate Transaction involves an aggregate amount in excess of $10.0 million, are not in writing and have not been approved by 87 a majority of the members of the Board of Directors having no material personal financial interest in such Affiliate Transaction or, in the event there are no such members, as to which the Company has not obtained a Fairness Opinion (as hereinafter defined). In addition, any transaction involving aggregate payments or other transfers by the Company and its Restricted Subsidiaries in excess of $20.0 million will also require an opinion (a "Fairness Opinion") from an independent investment banking firm or appraiser, as appropriate, of national prominence, to the effect that the terms of such transaction are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not an Affiliate. (b) The provisions of the foregoing paragraph (a) shall not prohibit (i) any Restricted Payment permitted by Section 1009, any Permitted Investment, or any other transaction specifically excluded from the definition of "Restricted Payment", (ii) the performance of the Company's or Restricted Subsidiary's obligations under any employment contract, collective bargaining agreement, agreement for the provision of services, employee benefit plan, related trust agreement or any other similar arrangement heretofore or hereafter entered into in the ordinary course of business, (iii) payment of compensation, performance of indemnification or contribution obligations, or any issuance, grant or award of stock, options or other securities, to employees, officers or directors in the ordinary course of business, (iv) any transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, (v) the Transactions and the incurrence and payment of all fees and expenses payable in connection therewith as described in or contemplated by the Offering Memorandum, (vi) any other transaction arising out of agreements in existence on the Issue Date, including, without limitation, the Stockholders Agreement and the Registration Rights Agreement (each as described in the Offering Memorandum under "Certain Related Transactions and Agreements"), and (vii) transactions with suppliers or other purchasers or sellers of goods or services, in each case in the ordinary course of business and on terms no less favorable to the Company or the Restricted Subsidiary, as the case may be, than those that could be obtained at such time in arm's-length dealings with a Person which is not an Affiliate. SECTION 1013. Limitation on Restrictions on Distributions from ------------------------------------------------ Restricted Subsidiaries. - ----------------------- The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligations owed to the Company, (ii) make any loans or advances to the Company or (iii) transfer any of its property or assets to the Company, except (A) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the date of the Indenture (including, without limitation, the Senior Credit Facility); (B) any encumbrance or restriction with respect to a Restricted Subsidiary (1) pursuant to an agreement relating to any Indebtedness Incurred by a Restricted Subsidiary prior to the date on which such Restricted Subsidiary was acquired by the Company, or of another Person that is assumed by the Company or a Restricted Subsidiary in connection with the acquisition of assets from, or merger or consolidation with, such Person (other than Indebtedness Incurred as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company, or such acquisition of assets, merger or consolidation) and outstanding on the date of such acquisition, merger or consolidation or (2) pursuant to any agreement (not relating to any Indebtedness) in existence when a Person becomes a Subsidiary of the Company or when such agreement is acquired by the Company or any Subsidiary thereof, that is not created in contemplation of such Person becoming such a Subsidiary or such acquisition (for purposes of this clause (B), if another Person is the Successor Company, any Subsidiary or agreement thereof shall be deemed acquired or assumed, as the case may be, by the Company when such Person becomes the Successor Company); (C) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement (a "Refinancing Agreement") effecting a refinancing of Indebtedness Incurred pursuant to, or that otherwise extends, renews, refinances or replaces, an agreement referred to in clause (A) or (B) of this covenant or this clause (C) or contained in any amendment to an agreement referred to in clause (A) or (B) of this covenant or this clause (C) (an "Initial 88 Agreement") or contained in any amendment to an Initial Agreement; provided, however, that the encumbrances and restrictions contained in any such Refinancing Agreement or amendment are no less favorable to the Holders of the Notes taken as a whole than encumbrances and restrictions contained in the Initial Agreement or Agreements to which such Refinancing Agreement or amendment relates; (D) any encumbrance or restriction (1) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, or the assignment or transfer of any lease, license or other contract, (2) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture, (3) contained in mortgages, pledges or other security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restrictions restrict the transfer of the property subject to such mortgages, pledges or other security agreements or (4) pursuant to customary provisions restricting dispositions of real property interests set forth in any reciprocal easement agreements of the Company or any Restricted Subsidiary; (E) any restriction with respect to a Restricted Subsidiary (or any of its property or assets) imposed pursuant to an agreement entered into for the direct or indirect sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary (or the property or assets that are subject to such restriction) pending the closing of such sale or disposition; and (F) any encumbrance or restriction on the transfer of property or assets required by any regulatory authority having jurisdiction over the Company or any Restricted Subsidiary or any of their businesses. SECTION 1014. Limitation on Sale or Issuance of Preferred Stock of ---------------------------------------------------- Restricted Subsidiaries. - ----------------------- The Company shall not sell any shares of Preferred Stock of a Restricted Subsidiary, and shall not permit any Restricted Subsidiary, directly or indirectly, to issue or sell any shares of its Preferred Stock to any Person (other than to the Company or a Restricted Subsidiary). SECTION 1015. Limitation on Liens. ------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or permit to exist any Lien (other than Permitted Liens) on any of its property or assets (including Capital Stock), whether owned on the date of this Indenture or thereafter acquired, securing any Indebtedness that is not Senior Indebtedness (the "Initial Lien"), unless contemporaneously therewith effective provision is made to secure the obligations due under this Indenture and the Notes or, in respect of Liens on any Restricted Subsidiary's property or assets, equally and ratably with such obligation for so long as such obligation is secured by such Initial Lien. Any such Lien thereby created in favor of the Notes will be automatically and unconditionally released and discharged upon (i) the release and discharge of the Initial Lien to which it relates, or (ii) any sale, exchange or transfer to any Person not an Affiliate of the Company of the property or assets secured by such Initial Lien, or of all of the Capital Stock held by the Company or any Restricted Subsidiary in, or all or substantially all the assets of, any Restricted Subsidiary creating such Lien. SECTION 1016. Change of Control. ----------------- (a) Upon the occurrence of a Change of Control, each Holder will have the right to require the Company to repurchase all or any part of such Holder's Notes at a purchase price in cash equal to 101% of the principal amount (or Accreted Value, as the case may be) thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date) (the "Change of Control Offer"); provided, however, that notwithstanding the occurrence of a Change of Control, the Company shall not be obligated to purchase the Notes pursuant to this covenant in the event that it has exercised its right to redeem all of the Notes pursuant to Section 1101. 89 (b) Within 30 days following any Change of Control, unless the Company has mailed a redemption notice in connection with such Change of Control as described in Section 1105, the Company shall mail a notice to each holder with a copy to the Trustee stating: (i) that a Change of Control has occurred or will occur and that such Holder has (or upon such occurrence will have) the right to require the Company to purchase such Holder's Notes at a purchase price in cash equal to (i) 101% of the principal amount thereof, in the case of Senior Subordinated Notes, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Holders of record on a record date to receive interest on the relevant interest payment date) and (ii) prior to November 1, 2002, 101% of the Accreted Value on the purchase date, in the case of the Senior Subordinated Discount Notes, and thereafter, 101% of the principal amount, plus accrued and unpaid interest, if any, thereon, to the purchase date; (ii) the circumstances and relevant facts and financial information regarding such Change of Control; (iii) the date of purchase (which shall be no earlier than 30 days nor later than 90 days from the date such notice is mailed); (iv) the instructions determined by the Company, consistent with this covenant, that a Holder must follow in order to have its Notes purchased; and (v) that, if such offer is made prior to such Change of Control, payment is conditioned on the occurrence of such Change of Control. (c) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. SECTION 1017. Limitation on Sales of Assets. ----------------------------- (a) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless (i) at least 75% of the consideration therefor (excluding, in the case of an Asset Disposition of assets, any consideration by way of relief from, or by any other person assuming responsibility for, any liabilities, contingent or otherwise, which are not Indebtedness) received by the Company or such Restricted Subsidiary is in the form of cash and (ii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be) (A) first, to the extent the Company elects (or is required by the terms of any Senior Indebtedness or Indebtedness (other than Preferred Stock) of a Restricted Subsidiary), to prepay, repay or purchase Senior Indebtedness or such Indebtedness of a Restricted Subsidiary (in each case other than Indebtedness owed to the Company or a Restricted Subsidiary of the Company) within 365 days after the date of such Asset Disposition; (B) second, to the ------ extent of the balance of Net Available Cash after application in accordance with clause (A), to the extent the Company or such Restricted Subsidiary elects, to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary) within 365 days from the date of such Asset Disposition or, if such reinvestment in Additional Assets is a project authorized by the Board of Directors that will take longer than 365 days to complete, the period of time necessary to complete such project; (C) third, to ----- the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B) (such balance, the "Excess Proceeds"), to make an offer to purchase Notes at a price in cash equal to (i) in the case of the Senior Subordinated Notes, 100% of the principal amount thereof, plus 90 accrued and unpaid interest, if any, to the purchase date and (ii) in the case of the Senior Subordinated Discount Notes, prior to November 1, 2002, 100% of the Accreted Value thereof on the purchase date and thereafter, 100% of the Accreted Value thereof, plus accrued and unpaid interest, if any, thereon to the purchase date, and (to the extent required by the terms thereof) any other Senior Subordinated Indebtedness pursuant and subject to the conditions of the agreements governing such other Indebtedness at a purchase price of 100% of the principal amount thereof plus accrued and unpaid interest to the purchase date and (D) fourth, to the extent of the balance of such Excess Proceeds after application in accordance with clauses (A), (B) and (C) above, to fund (to the extent consistent with any other applicable provision of this Indenture) any general corporate purpose (including the repayment of Subordinated Obligations); provided, however, that in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or such Restricted Subsidiary will retire such Indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions of this covenant, the Company and the Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance with this covenant except to the extent that the aggregate Net Available Cash from all Asset Dispositions that is not applied in accordance with this covenant exceeds $10.0 million. To the extent that the aggregate principal amount (or Accreted Value, as the case may be) of the Notes and other Senior Subordinated Indebtedness tendered pursuant to an offer to purchase made in accordance with clause (C) above exceeds the amount of Excess Proceeds, the Trustee shall select the Notes and Senior Subordinated Indebtedness to be purchased on a pro rata basis, based on the aggregate principal amount (or Accreted Value, as applicable) thereof surrendered in such offer to purchase. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset to zero. For the purposes of this covenant, the following are deemed to be cash: (v) Cash Equivalents, (w) the assumption of Indebtedness of the Company (other than Disqualified Stock of the Company) or any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, (x) Indebtedness of any Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset Disposition, to the extent that the Company and each other Restricted Subsidiary is released from any Guarantee (or is the beneficiary of any indemnity with respect thereto which is secured by any letter of credit or cash equivalents) of such Indebtedness in connection with such Asset Disposition, (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash, and (z) consideration consisting of Indebtedness of the Company or any Restricted Subsidiary. (b) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. (c) In the event of an Asset Disposition that requires the purchase of Notes pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes tendered pursuant to an offer by the Company for the Notes at a purchase price of 100% of their principal amount plus accrued and unpaid interest, if any, to the purchase date in accordance with the procedures (including prorating in the event of oversubscription) set forth in this Indenture. SECTION 1018. Statement by Officers as to Default. ----------------------------------- (a) The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Restricted Subsidiaries during the preceding fiscal year has been made under the supervision of the signing officers 91 with a view to determining whether it has kept, observed, performed and fulfilled, and has caused each of its Restricted Subsidiaries to keep, observe, perform and fulfill its obligations under this Indenture and further stating, as to each such officer signing such certificate, that, to the best of his or her knowledge, the Company during such preceding fiscal year has kept, observed, performed and fulfilled, and has caused each of its Restricted Subsidiaries to keep, observe, perform and fulfill each and every such covenant contained in this Indenture and no Default or Event of Default occurred during such year and at the date of such certificate there is no Default or Event of Default which has occurred and is continuing or, if such signers do know of such Default or Event of Default, the certificate shall describe its status, with particularity and that, to the best of his or her knowledge, no event has occurred and remains by reason of which payments on the account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto. The Officers' Certificate shall also notify the Trustee should the Company elect to change the manner in which it fixes its fiscal year end. For purposes of this Section 1018(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) When any Default has occurred and is continuing under this Indenture, or if the trustee for or the holder of any other evidence of Indebtedness of the Company or any Significant Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness in the principal amount of less than $20 million), the Company shall deliver to the Trustee by registered or certified mail or facsimile transmission an Officers' Certificate specifying such event, notice or other action within five Business Days of its occurrence. SECTION 1019. Reporting Requirements. ---------------------- As long as any of the Notes is outstanding, the Company will file with the Commission the annual reports, quarterly reports and other documents required to be filed with the Commission pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company is then obligated to file reports pursuant to such sections. The Company will be required to file with the Trustee and provide to each holder of Notes within 15 days after filing with the Commission (or if any such filing is not required under the Exchange Act, 15 days after the Company would have been required to make such filing) copies of such reports and documents. SECTION 1020. Limitations on Issuances of Guarantees of Indebtedness ------------------------------------------------------ by Restricted Subsidiaries. - -------------------------- The Company will not permit any Restricted Subsidiary, directly or indirectly, to Guarantee the payment of any Senior Subordinated Indebtedness (or other Indebtedness ranking junior thereto) of the Company or any of its Restricted Subsidiaries unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for the Guarantee of the payment of the Notes by such Restricted Subsidiary, which Guarantee shall be senior to or pari passu with such Restricted Subsidiary's Guarantee of such Indebtedness. Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary of the Notes shall provide by its terms that it shall be automatically and unconditionally released and discharged upon a sale or other disposition, by way of merger or otherwise, to any Person not an Affiliate of the Company, of the Company's stock in, or the assets of, such Restricted Subsidiary, which sale or other disposition results in such Restricted Subsidiary ceasing to be a Restricted Subsidiary and such sale or other disposition is made in compliance with, and the net proceeds therefrom are applied in accordance with, the applicable provisions of this Indenture. The foregoing provisions will not be applicable to (i) Guarantees by Restricted Subsidiaries of the Company's Indebtedness under the Senior Credit Agreement and with respect to Hedging Obligations related to the Senior Credit Agreement and (ii) Guarantees of Indebtedness of a Person by its subsidiaries in effect prior to the time such Person is merged with or into or become a Restricted Subsidiary, provided that such Guarantees do not extend to any other Indebtedness of such Person or any other Person. 92 SECTION 1021. Designation of Unrestricted Subsidiaries. ---------------------------------------- The Board of Directors of the Company may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a default. For purposes of making such determination, all outstanding Investments by the Company and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and would otherwise be permitted under Section 1009 (including pursuant to clause (vi) thereof relating to Permitted Business Ventures). All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of the fair market value or the book value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to any of the restrictive covenants set forth in this Indenture. 1100. ARTICLE ELEVEN. REDEMPTION OF NOTES SECTION 1101. Optional Redemption. ------------------- The Notes may or shall, as the case may be, be redeemed, as a whole or from time to time in part, subject to the conditions and at the Redemption Prices specified in the form of Note, together with accrued interest to the redemption date. The aggregate principal amount of the Senior Subordinated Notes and the Senior Subordinated Discount Notes to be redeemed shall be allocated by the Company between the Senior Subordinated Notes and the Senior Subordinated Discount Notes in the Company's sole discretion. SECTION 1102. Applicability of Article. ------------------------ Redemption of Notes at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. ------------------------------------- The election of the Company to redeem any Notes pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 90 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Notes to be redeemed and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Notes to be redeemed pursuant to Section 1104. SECTION 1104. Selection by Trustee of Notes to Be Redeemed. -------------------------------------------- If less than all the Notes are to be redeemed at any time pursuant to an optional redemption, the particular Notes to be redeemed shall be selected not more than 90 days prior to the Redemption Date by the Trustee, from the Outstanding Notes not previously called for redemption, in compliance with the requirements of the principal securities exchange, if any, on which such Notes are listed, or, if such Notes are not so listed, on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate (and in such manner as complies with applicable legal requirements) and which may provide for the selection for redemption of portions of the principal of the Notes; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Note not redeemed to less than $1,000. 93 The Trustee shall promptly notify the Company in writing of the Notes selected for redemption and, in the case of any Notes selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Notes shall relate, in the case of any Note redeemed or to be redeemed only in part, to the portion of the principal amount of such Note which has been or is to be redeemed. SECTION 1105. Notice of Redemption. -------------------- Notice of redemption shall be given in the manner provided for in Section 106 not less than 30 nor more than 90 days prior to the Redemption Date, to each Holder of Notes to be redeemed. The Trustee shall give notice of redemption in the Company's name and at the Company's expense; provided, however, that the Company shall deliver to the Trustee, at least 45 days prior to the Redemption Date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the following items. All notices of redemption shall state: (i) the Redemption Date, (ii) the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 1107, if any, (iii) if less than all Outstanding Notes are to be redeemed, the identification of the particular Notes (or portion thereof) to be redeemed, as well as the aggregate principal amount of Notes to be redeemed and the aggregate principal amount of Notes to be Outstanding after such partial redemption, (iv) in case any Note is to be redeemed in part only, the notice which relates to such Note shall state that on and after the Redemption Date, upon surrender of such Note, the holder will receive, without charge, a new Note or Notes of authorized denominations for the principal amount thereof remaining unredeemed, (v) that on the Redemption Date the Redemption Price (and accrued interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon each such Note, or the portion thereof, to be redeemed, and, unless the Company defaults in making the redemption payment, that interest on Notes called for redemption (or the portion thereof) will cease to accrue on and after said date, (vi) the place or places where such Notes are to be surrendered for payment of the Redemption Price and accrued interest, if any, (vii) the name and address of the Paying Agent, (viii) that Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price, (ix) the CUSIP number, and that no representation is made as to the accuracy or correctness of the CUSIP number, if any, listed in such notice or printed on the Notes, and (x) the paragraph of the Notes or Section of the Indenture pursuant to which the Notes are to be redeemed. 94 SECTION 1106. Deposit of Redemption Price. --------------------------- Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Notes which are to be redeemed on that date. SECTION 1107. Notes Payable on Redemption Date. -------------------------------- Notice of redemption having been given as aforesaid, the Notes so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Notes shall cease to bear interest. Upon surrender of any such Note for redemption in accordance with said notice, such Note shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Notes, or one or more Predecessor Notes, registered as such at the close of business on the relevant Regular Record Date or Special Record Date, as the case may be, according to their terms and the provisions of Section 311. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Notes. SECTION 1108. Notes Redeemed in Part. ---------------------- Any Note which is to be redeemed only in part (pursuant to the provisions of this Article) shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Note at the expense of the Company, a new Note or Notes, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Note so surrendered, provided, that each such new Note will be in a principal amount of $1,000 or integral multiple thereof. 1200. ARTICLE TWELVE. LEGAL DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company's Option to Effect Legal Defeasance or Covenant ------------------------------------------------------- Defeasance. - ---------- The Company and the Guarantors may, at their option, at any time, with respect to the Notes, elect to have either Section 1202 or Section 1203 be applied to all Outstanding Notes upon compliance with the conditions set forth in this Article Twelve. The Company in its sole discretion can defease either or both of the Senior Subordinated Notes and the Senior Subordinated Discount Notes. SECTION 1202. Legal Defeasance and Discharge. ------------------------------ Upon the Company's exercise under Section 1201 of the option applicable to this Section 1202, the Company and any Guarantor shall be deemed to have been discharged from its obligations with respect to all Outstanding Notes on the date the conditions set forth in Section 1204 are satisfied (hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means that the Company and any such Guarantor shall be deemed to have paid and discharged the entire Indebtedness 95 represented by the Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1205 and the other Sections of this Indenture referred to in (i) and (ii) below, and to have satisfied all its other obligations under such Notes and this Indenture insofar as such Notes are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of Outstanding Notes to receive, solely from the trust fund described in Section 1204 and as more fully set forth in such Section, payments in respect of the principal of (and premium, if any, on) and interest on such Notes when such payments are due, (ii) the Company's obligations with respect to such Notes under Sections 304, 305, 310, 1002 and 1003, (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder, and the Company's obligations in connection therewith and (iv) this Article Twelve. If the Company exercises its Legal Defeasance Option, payment of the Notes may not be accelerated because of an Event of Default. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of its option under Section 1203 with respect to the Notes. SECTION 1203. Covenant Defeasance. ------------------- Upon the Company's exercise under Section 1201 of the option applicable to this Section 1203, the Company may terminate (i) its obligations under any covenant contained in Sections 1004 through 1021, (ii) the operation of Section 501(vi), Section 501(vii) (with respect only to Significant Subsidiaries), Section 501(viii) (with respect only to Significant Subsidiaries) and Section 501(ix) and (iii) the limitations contained in Sections 801(a)(iii) and (iv) with respect to the Outstanding Notes on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder (it being understood that such Notes will not be outstanding for accounting purposes). If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified under Section 501(iv), (vi), (vii) (with respect only to Significant Subsidiaries), (viii) (with respect only to Significant Subsidiaries) and (ix) or because of the failure of the Company to comply with Sections 801(a)(iii) and (iv). For this purpose, such Covenant Defeasance means that, with respect to the Outstanding Notes, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(iv), but, except as specified above, the remainder of this Indenture and such Notes shall be unaffected thereby. SECTION 1204. Conditions to Legal Defeasance or Covenant Defeasance. ----------------------------------------------------- The following shall be the conditions to application of either Section 1202 or Section 1203 to the Outstanding Notes: (i) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of this Indenture who shall agree to comply with the provisions of this Article Twelve applicable to it) as trust funds in trust money or Government Obligations, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants selected by the Company, to pay the principal of, premium, if any, 96 and interest due on the Outstanding Notes on the Stated Maturity or on the applicable Redemption Date as the case may be, of such principal, premium, if any, or interest on the Outstanding Notes; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee (which opinion may be subject to customary assumptions and exclusions) confirming that (A) the Company has received from, or there has been published by, the United States Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel in the United States (which opinion may be subject to customary assumptions and exclusions) shall confirm that the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Legal Defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an Opinion of Counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such Covenant Defeasance and will be subject to such tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 123rd day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any Guarantor is a party or by which the Company or any Guarantor is bound; (vi) the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, as of the date of such opinion and subject to customary assumptions and exclusions following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally under any applicable U.S. federal or state law, and that the Trustee has a perfected security interest in such trust funds for the ratable benefit of the Holders; (vii) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of defeating, hindering, delaying or defrauding any creditors of the Company or any Guarantor or others; (viii) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel in the United States (which Opinion of Counsel may be subject to customary assumptions and exclusions) each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance, as the case may be, have been complied with; and (ix) the Company shall have delivered to the Trustee the opinion of a nationally recognized firm of independent public accountants stating the matters set forth in paragraph (i) above. 97 SECTION 1205. Deposited Money and Government Obligations to Be Held ----------------------------------------------------- in Trust; Other Miscellaneous Provisions. - ---------------------------------------- Subject to the provisions of the last paragraph of Section 1003, all money and Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law. Money and Government Obligations so held in trust are not subject to Article Thirteen. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 1204 or the principal and interest received in respect thereof. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations held by it as provided in Section 1204 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent legal defeasance or covenant defeasance, as applicable, in accordance with this Article. SECTION 1206. Reinstatement. ------------- If the Trustee or any Paying Agent is unable to apply any money or Government Obligations in accordance with Section 1205 by reason of any legal proceeding or by any reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 1202 or 1203, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1205; provided, however, that if the Company makes any payment of principal of (or premium, if any) or interest on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money and Government Obligations held by the Trustee or Paying Agent. 1300. ARTICLE THIRTEEN. SUBORDINATION OF NOTES SECTION 1301. Notes Subordinate to Senior Indebtedness. ---------------------------------------- The Company covenants and agrees, and each Holder of a Note, by his acceptance thereof, likewise covenants and agrees, for the benefit of the holders, from time to time, of Senior Indebtedness that, to the extent and in the manner hereinafter set forth in this Article, the Indebtedness represented by the Notes and the payment of the principal of (and premium, if any) and interest on each and all of the Notes and all other Subordinated Obligations are hereby expressly made subordinate and subject in right of payment as provided in this Article to the prior payment in full in cash or Cash Equivalents of all Senior Indebtedness, whether outstanding on the Issue Date or thereafter incurred, created, assumed or, except as set forth in Section 1014, guaranteed. The Senior Subordinated Notes and the Senior Subordinated Discount Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 98 SECTION 1302. Payment over of Proceeds upon Dissolution, Etc. ---------------------------------------------- Upon any payment or distribution of the assets of the Company upon a total or partial liquidation or dissolution or reorganization or bankruptcy of or similar proceeding relating to the Company or its property: (i) the holders of Senior Indebtedness will be entitled to receive payment in full in cash or Cash Equivalents of the Senior Indebtedness (including interest after, or which would accrue but for, the commencement of any proceeding at the rate specified in the applicable Senior Indebtedness, whether or not a claim for such interest would be allowed in a proceeding) before the holders of the Notes are entitled to receive any payment, and (ii) until the Senior Indebtedness is paid in full in cash or Cash Equivalents, any payment or distribution to which holders of the Notes would be entitled but for the subordination provisions of this Indenture will be made to holders of the Senior Indebtedness as their interests may appear (except that holders of Notes may receive securities that are subordinated at least to the same extent as the Notes to the Senior Indebtedness and any securities issued in exchange for any Senior Indebtedness). SECTION 1303. Suspension of Payment When Senior Indebtedness in ------------------------------------------------- Default. - ------- (a) The Company may not pay principal of, premium, if any, or interest on, the Notes or make any deposit pursuant to the provisions described under "Defeasance" and may not otherwise purchase or retire any Notes (collectively, "pay the Notes") if: (i) any Senior Indebtedness is not paid when due in cash or Cash Equivalents; or (ii) any other default on Senior Indebtedness occurs and the maturity of such Senior Indebtedness is accelerated in accordance with its terms unless, in either case, the default has been cured or waived and any such acceleration has been rescinded or such Senior Indebtedness has been paid in full in cash or Cash Equivalents; provided, however, the Company may pay the Notes without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of the Senior Indebtedness with respect to which either of the events set forth in clause (i) or (ii) above has occurred and is continuing. (b) During the continuance of any default (other than a default described in clause (a) (i) or (a) (ii) above) with respect to any Designated Senior Indebtedness pursuant to which the maturity thereof may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration) or the expiration of any applicable grace periods, the Company may not pay the Notes for a period (a "Payment Blockage Period") commencing upon the receipt by the Trustee (with a copy to the Company) of written notice (a "Blockage Notice") of such default from the Representative of the holders of such Designated Senior Indebtedness specifying an election to effect a Payment Blockage Period and ending 179 days thereafter (or earlier if such Payment Blockage Period is terminated (i) by written notice to the Trustee and the Company from the Person or Persons who gave such Blockage Notice, (ii) because the default giving rise to such Blockage Notice is no longer continuing or (iii) because such Designated Senior Indebtedness has been repaid in full (or such payment has been duly provided for in a manner acceptable to the holders of such Designated Senior Indebtedness). Notwithstanding the provisions described in the immediately preceding sentence (but subject to Section 1303(a)), unless the holders of such Designated Senior Indebtedness or the Representative of such holders have accelerated the maturity of such Designated Senior Indebtedness, the Company may resume payments on the Notes after the end of such Payment Blockage Period. Not more than one Blockage Notice may be given in any consecutive 360- 99 day period, irrespective of the number of defaults with respect to Designated Senior Indebtedness during such period. However, if any Blockage Notice within such 360-day period is given by or on behalf of any holders of Designated Senior Indebtedness other than Bank Indebtedness, a Representative of Bank Indebtedness may give one additional Blockage Notice within such period. In no event, however, may the total number of days during which any Payment Blockage Period or Periods is in effect exceed 179 days in the aggregate during any 360 consecutive day period. SECTION 1304. Acceleration of Notes. --------------------- If payment of the Notes is accelerated because of an Event of Default, the Company or the Trustee shall promptly notify the holders of the Designated Senior Indebtedness or the Representative of such holders of the acceleration. The Company may not pay the Notes until five Business Days after such holders or the Representative of the Designated Senior Indebtedness receive notice of such acceleration and, thereafter, may pay the Notes only if the subordination provisions of this Indenture otherwise permit payment at that time. SECTION 1305. When Distribution Must Be Paid Over. ----------------------------------- If a distribution is made to Holders of the Notes that, due to the provisions of this Article Thirteen, should not have been made to them, such Holders are required to hold it in trust for the Holders of Senior Indebtedness and pay it over to them as their interests may appear. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article Thirteen, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders or the Company or any other Person money or assets to which any holders of Senior Indebtedness shall be entitled by virtue of this Article Thirteen, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. SECTION 1306. Notice by Company. ----------------- The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes that violate this Article, but failure to give such notice shall not affect the subordination of the Notes to the Senior Indebtedness as provided in this Article Thirteen. SECTION 1307. Payment Permitted If No Default. ------------------------------- Nothing contained in this Article or elsewhere in this Indenture or in any of the Notes shall prevent the Company, at any time except during the pendency of any case, proceeding, dissolution, liquidation or other winding up, assignment for the benefit of creditors or other marshalling of assets and liabilities of the Company referred to in Section 1302 or under the conditions described in Section 1303, from making payments at any time of principal of (and premium, if any, on) or interest on the Notes. SECTION 1308. Subrogation to Rights of Holders of Senior ------------------------------------------ Indebtedness. Subject to the payment in full of all Senior Indebtedness in cash or Cash Equivalents, the Holders shall be subrogated (equally and ratably with the holders of all Pari Passu Indebtedness of the Company) to the rights of the holders of such Senior Indebtedness to receive payments and distributions of cash, property and securities applicable to the Senior Indebtedness until the Subordinated Obligations shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of Senior 100 Indebtedness of any cash, property or securities to which the Holders of the Notes or the Trustee would be entitled except for the provisions of this Article, and no payments over pursuant to the provisions of this Article to the holders of Senior Indebtedness by Holders of the Notes or on their behalf or by the Trustee, shall, as among the Company, its creditors other than holders of Senior Indebtedness, and the Holders of the Notes, be deemed to be a payment or distribution by the Company to or on account of the Senior Indebtedness; it being understood that the provisions of this Article are intended solely for the purpose of determining the relative rights of the Holders of the Notes, on the one hand, and the holders of Senior Indebtedness, on the other hand. SECTION 1309. Provisions Solely to Define Relative Rights. ------------------------------------------- The provisions of this Article are and are intended solely for the purpose of defining the relative rights of the Holders on the one hand and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in this Indenture or in the Notes is intended to or shall (a) impair, as between the Company and the Holders, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of (and premium, if any) and interest on the Notes as and when the same shall become due and payable in accordance with their terms; or (b) affect the relative rights against the Company of the Holders and creditors of the Company other than their rights in relation to holders of Senior Indebtedness; or (c) prevent the Trustee or any Holder from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article of the holders of Senior Indebtedness. If the Company fails because of this Article to pay principal (or premium, if any) or interest on a Note on the due date, the failure is still a Default or Event of Default. SECTION 1310. Trustee to Effectuate Subordination. ----------------------------------- Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on such Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee his attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 504 hereof at least 30 days before the expiration of the time to file such claim, the agent bank under the Senior Credit Facility (if the such facility is still outstanding) is hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. SECTION 1311. Subordination May Not Be Impaired by Company. -------------------------------------------- No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any non-compliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. SECTION 1312. Distribution or Notice to Representative. ---------------------------------------- Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of the Company referred to in this Article Thirteen, the Trustee and the Holders shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other 101 Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other acts pertinent thereto or to this Article Thirteen. SECTION 1313. Notice to Trustee. ----------------- (a) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment to or by the Trustee in respect of the Notes. Notwithstanding the provisions of this Article or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee in respect of the Notes, unless and until the Trustee shall have received written notice thereof from the Company, agent bank under the Senior Credit Facility or a holder of Senior Indebtedness or from any trustee, fiduciary or agent therefor; and, prior to the receipt of any such written notice, the Trustee, subject to TIA Sections 315(a) through 315(d), shall be entitled in all respects to assume that no such facts exist; provided, however, that, if the Trustee shall not have received the notice provided for in this Section at least three Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (and premium, if any) or interest on any Note), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purpose for which such money was received and shall not be affected by any notice to the contrary which may be received by it within three Business Days prior to such date. (b) Subject to TIA Sections 315(a) through 315(d), the Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor) to establish that such notice has been given by a holder of Senior Indebtedness (or a trustee, fiduciary or agent therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 1314. Reliance on Judicial Order or Certificate of -------------------------------------------- Liquidating Agent. - ----------------- Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to TIA Sections 315(a) through 315(d), and the Holders of the Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Notes, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article; provided that such court, trustee, receiver, custodian, assignee, agent or other Person has been apprised of, or the order, decree or certificate makes reference to, the provisions of this Article. 102 SECTION 1315. Rights of Trustee as a Holder of Senior Indebtedness; ----------------------------------------------------- Preservation of Trustee's Rights. - -------------------------------- The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. Nothing in this Article shall apply to claims of, or payments to, the Trustee under or pursuant to Section 607. SECTION 1316. Article Applicable to Paying Agents. ----------------------------------- In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article in addition to or in place of the Trustee; provided, however, that Section 1315 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as Paying Agent. SECTION 1317. No Suspension of Remedies. ------------------------- Nothing contained in this Article shall limit the right of the Trustee or the Holders of Notes to take any action to accelerate the maturity of the Notes pursuant to Article Five or to pursue any rights or remedies hereunder or under applicable law, except as provided in Article Five. SECTION 1318. Modification of Terms of Senior Indebtedness. -------------------------------------------- Any renewal or extension of the time of payment of any Senior Indebtedness or the exercise by the holders of Senior Indebtedness of any of their rights under any instrument creating or evidencing Senior Indebtedness, including, without limitation, the waiver of default thereunder, may be made or done all without notice to or assent from the Holders or the Trustee. No compromise, alteration, amendment, modification, extension, renewal or other change of, or waiver, consent or other action in respect of, any liability or obligation under or in respect of, or of any of the terms, covenants or conditions of any indenture or other instrument under which any Senior Indebtedness is outstanding or of such Senior Indebtedness, whether or not such release is in accordance with the provisions of any applicable document, shall in any way alter or affect any of the provisions of this Article Thirteen or of the Notes relating to the subordination thereof. SECTION 1319. [Intentionally Omitted]. ----------------------- SECTION 1320. Trust Moneys Not Subordinated. ----------------------------- Notwithstanding anything contained herein to the contrary, payments from cash or the proceeds of Government Obligations held in trust under Article Twelve hereof by the Trustee (or other qualifying trustee) and which were deposited in accordance with the terms of Article Twelve hereof and not in violation of Section 1303 hereof for the payment of principal of (and premium, if any) and interest on the Notes shall not be subordinated to the prior payment of any Senior Indebtedness or subject to the restrictions set forth in this Article Thirteen, and none of the Holders shall be obligated to pay over any such amount to the Company or any holder of Senior Indebtedness or any other creditor of the Company. 103 This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By /s/ Charles B. Carden --------------------------- Name: Charles B. Carden Title: Chief Financial Officer IBJ SCHRODER BANK & TRUST COMPANY, as Trustee By /s/ Terrence Rawlins --------------------------- Name: Terrence Rawlins Title: Assistant Vice President EX-4.6 3 EXCHANGE AND REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.6 PARAGON HEALTH NETWORK, INC. $275,000,000 9 1/2% Senior Subordinated Notes due 2007 $294,000,000 10 1/2% Senior Subordinated Discount Notes due 2007 EXCHANGE AND REGISTRATION RIGHTS AGREEMENT ------------------------------------------ November 4, 1997 CHASE SECURITIES INC. SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON CORPORATION c/o Chase Securities Inc. 270 Park Avenue, 4th floor New York, New York 10017 Ladies and Gentlemen: PARAGON HEALTH NETWORK, INC., a Delaware corporation (after giving effect to the Mergers, the "Company"), proposes to issue and sell to Chase ------- Securities Inc. ("CSI"), Smith Barney Inc. ("Smith Barney") and Credit Suisse --- ------------ First Boston Corporation ("CFSB," and together with CSI and Smith Barney, the ---- "Initial Purchasers"), upon the terms and subject to the conditions set forth in ------------------ a purchase agreement dated October 28, 1997 (the "Purchase Agreement"), ------------------ $275,000,000 aggregate principal amount of its 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and $294,000,000 aggregate principal ------------------------- amount of its 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior ------ Subordinated Discount Notes," and together with the Senior Subordinated Notes, - --------------------------- the "Securities." Capitalized terms used but not defined herein shall have the ---------- meanings given to such terms in the Purchase Agreement. As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to the obligations of the Initial Purchasers thereunder, the Company agrees with the Initial Purchasers, for the benefit of the holders (including the Initial Purchasers) of the Securities, the Exchange Securities (as defined herein) and the Private Exchange Securities (as defined herein) (collectively, the "Holders"), as follows: ------- 1. Registered Exchange Offer. The Company shall (i) use its ------------------------- commercially reasonable efforts to prepare and, not later than 60 days following the date of original issuance of the Securities (the "Issue Date"), to file with ---------- the Commission a registration statement (the "Exchange Offer Registration --------------------------- Statement") on an appropriate form under the Securities Act with respect to a - --------- proposed offer to the Holders of the Securities (the "Registered Exchange ------------------- Offer") to issue and deliver to such Holders, in exchange for the Securities, a - ----- like aggregate principal amount of debt securities of the Company (the "Exchange -------- Securities") that are identical in all material respects to the Securities - ---------- (except that the Exchange Securities will not contain terms with respect to transfer restrictions or additional interest upon certain failures to comply with this Agreement), (ii) use its commercially reasonable efforts to cause the 2 Exchange Offer Registration Statement to become effective under the Securities Act no later than 180 days after the Issue Date and the Registered Exchange Offer to be consummated no later than 180 days after the Issue Date and (iii) keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the Registered Exchange Offer is mailed to the Holders (such period being called the "Exchange Offer Registration Period"). The Exchange Securities will ---------------------------------- be issued under the Indenture or an indenture (the "Exchange Securities ------------------- Indenture") between the Company and the Trustee or such other bank or trust - --------- company that is reasonably satisfactory to the Initial Purchasers, as trustee (the "Exchange Securities Trustee"), such indenture to be identical in all --------------------------- material respects to the Indenture, except for the transfer restrictions relating to the Securities (as described above). Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for Exchange Securities (assuming that such Holder (a) is not an affiliate of the Company or an Exchanging Dealer (as defined herein) not complying with the requirements of the next sentence, (b) is not an Initial Purchaser holding Securities that have, or that are reasonably likely to have, the status of an unsold allotment in an initial distribution, (c) acquires the Exchange Securities in the ordinary course of such Holder's business and (d) has no arrangements or understandings with any person to participate in the distribution of the Exchange Securities) and to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. The Company, the Initial Purchasers and each Exchanging Dealer acknowledge that, pursuant to current interpretations by the Commission's staff of Section 5 of the Securities Act, each Holder that is a broker-dealer electing to exchange Securities, acquired for its own account as a result of market-making activities or other trading activities, for Exchange Securities (an "Exchanging Dealer"), is required to deliver a ----------------- prospectus containing substantially the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of such prospectus in connection with a sale of any such Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer. If, prior to the consummation of the Registered Exchange Offer, any Holder holds any Securities acquired by it that have, or that are reasonably likely to be determined to have, the status of an unsold allotment in an initial distribution, or any Holder is not entitled to participate in the Registered Exchange Offer, the Company shall, upon the request of any such Holder, simultaneously with the delivery of the Exchange Securities in the Registered Exchange Offer, issue and deliver to any such Holder, in exchange for the Securities held by such Holder (the "Private Exchange"), a like aggregate ---------------- principal amount of debt securities of the Company (the "Private Exchange ---------------- Securities") that are identical in all material respects to the Exchange - ---------- Securities, except for the transfer restrictions relating to such Private Exchange Securities. The Private Exchange Securities will be issued under the same indenture as the Exchange Securities, and the Company shall use its commercially reasonable efforts to cause the Private Exchange Securities to bear the same CUSIP numbers as the Exchange Securities. In connection with the Registered Exchange Offer, the Company shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the Registered Exchange Offer is first mailed to the Holders; 3 (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; (d) permit Holders to withdraw tendered Securities at any time prior to 5:00 p.m., New York City time, on the last business day on which the Registered Exchange Offer shall remain open; and (e) otherwise comply in all respects with all laws that are applicable to the Registered Exchange Offer. As soon as practicable after the close of the Registered Exchange Offer and any Private Exchange, as the case may be, the Company shall: (a) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer and the Private Exchange; (b) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (c) cause the Trustee or the Exchange Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder, Exchange Securities or Private Exchange Securities, as the case may be, equal in principal amount to the Securities of such Holder so accepted for exchange. The Company shall use its commercially reasonable efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein in order to permit such prospectus to be used by all persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such persons must comply with such requirements in order to resell the Exchange Securities; provided that (i) in the case where -------- such prospectus and any amendment or supplement thereto must be delivered by an Exchanging Dealer, such period shall be the lesser of 180 days after the commencement of the Exchange Offer and the date on which all Exchanging Dealers have sold all Exchange Securities held by them and (ii) the Company shall make such prospectus and any amendment or supplement thereto available to any broker- dealer for use in connection with any resale of any Exchange Securities for a period of 90 days after the consummation of the Registered Exchange Offer. The Indenture or the Exchange Securities Indenture, as the case may be, shall provide that the Securities, the Exchange Securities and the Private Exchange Securities shall vote and consent together on all matters as one class and that none of the Securities, the Exchange Securities or the Private Exchange Securities will have the right to vote or consent as a separate class on any matter. Interest on each Exchange Security and Private Exchange Security issued pursuant to the Registered Exchange Offer and in the Private Exchange will accrue from the last interest payment date on which interest was paid on the Securities surrendered in exchange therefor or, if no interest has been paid on the Securities, from the Issue Date. Each Holder participating in the Registered Exchange Offer shall be required to represent to the Company that at the time of the consummation of the Registered Exchange Offer (i) any Exchange Securities received by such Holder will be acquired in the ordinary course of business, (ii) such Holder will have no arrangements or understandings with any person to participate in the distribution of the Securities or the Exchange Securities within the meaning of the Securities Act and (iii) such Holder is not an affiliate of the Company or, if it is such an affiliate, such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. 4 Notwithstanding any other provisions hereof, the Company will ensure that (i) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies as to form in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit 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 and (iii) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to such prospectus, does not, as of the consummation of the Registered Exchange Offer, include an 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. 2. Shelf Registration. If (i) because of any change in law or ------------------ applicable interpretations thereof by the Commission's staff the Company is not permitted to effect the Registered Exchange Offer as contemplated by Section 1 hereof, or (ii) any Securities validly tendered pursuant to the Registered Exchange Offer are not exchanged for Exchange Securities within 180 days after the Issue Date, or (iii) any Initial Purchaser so requests with respect to Securities or Private Exchange Securities not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer and held by it following the consummation of the Registered Exchange Offer, or (iv) any applicable law or interpretations do not permit any Holder to participate in the Registered Exchange Offer, or (v) any Holder that participates in the Registered Exchange Offer does not receive freely transferable Exchange Securities in exchange for tendered Securities, or (vi) the Company so elects, then the following provisions shall apply: (a) The Company shall use its commercially reasonable efforts to file as promptly as practicable (but in no event more than 60 days after so required or requested pursuant to this Section 2) with the Commission, and thereafter shall use its commercially reasonable efforts to cause to be declared effective, a shelf registration statement on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Securities (as defined below) by the Holders thereof from time to time in accordance with the methods of distribution set forth in such registration statement (hereafter, a "Shelf ----- Registration Statement" and, together with any Exchange Offer Registration - ---------------------- Statement, a "Registration Statement"). ---------------------- (b) The Company shall use its commercially reasonable efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus forming part thereof to be used by Holders of Transfer Restricted Securities for a period ending on the earlier of (i) two years from the Issue Date or such shorter period that will terminate when all the Transfer Restricted Securities covered by the Shelf Registration Statement have been sold pursuant thereto and (ii) the date on which the Securities become eligible for resale without volume restrictions pursuant to Rule 144(k) under the Securities Act (in any such case, such period being called the "Shelf Registration Period"). The ------------------------- Company shall be deemed not to have used its commercially reasonable efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of Transfer Restricted Securities covered thereby not being able to offer and sell such Transfer Restricted Securities during that period, unless such action is required by applicable law. (c) Notwithstanding any other provisions hereof, the Company will ensure that (i) any Shelf Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies as to form in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (ii) any Shelf Registration Statement and any amendment thereto (in either case, other than with respect to information included therein in reliance upon or in conformity with written information furnished to the Company by or on behalf of any Holder specifically for use therein (the "Holders' Information")) does not contain an untrue -------------------- statement of a material fact or omit 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 and 5 (iii) any prospectus forming part of any Shelf Registration Statement, and any supplement to such prospectus (in either case, other than with respect to Holders' Information), does not include an 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. 3. Liquidated Damages. (a) The parties hereto agree that the ------------------ Holders of Transfer Restricted Securities will suffer damages if the Company fails to fulfill its obligations under Section 1 or Section 2, as applicable, and that it would not be feasible to ascertain the extent of such damages. Accordingly, if (i) the applicable Registration Statement is not filed with the Commission on or prior to 60 days after the Issue Date, (ii) the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, is not declared effective within 150 days after the Issue Date (or in the case of a Shelf Registration Statement required to be filed in response to a change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation), (iii) the Registered Exchange Offer is not consummated on or prior to 180 days after the Issue Date, or (iv) the Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date (or in the case of a Shelf Registration Statement required to be filed in response to a change in law or the applicable interpretations of Commission's staff, if later, within 45 days after publication of the change in law or interpretation) but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (i) through (iv), a "Registration Default"), the Company will be -------------------- obligated to pay liquidated damages to each Holder of Transfer Restricted Securities, during the period of one or more such Registration Defaults, in an amount equal to $ 0.192 per week per $1,000 principal amount (or Accreted Value, as the case may be) of Transfer Restricted Securities held by such Holder until (i) the applicable Registration Statement is filed, (ii) the Exchange Offer Registration Statement is declared effective and the Registered Exchange Offer is consummated, (iii) the Shelf Registration Statement is declared effective or (iv) the Shelf Registration Statement again becomes effective, as the case may be. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. As used herein, the term "Transfer Restricted Securities" ------------------------------ means (i) each Security until the date on which such Security has been exchanged for a freely transferable Exchange Security in the Registered Exchange Offer, (ii) each Security or Private Exchange Security until the date on which it has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iii) each Security or Private Exchange Security until the date on which it is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. Notwithstanding anything to the contrary in this Section 3(a), the Company shall not be required to pay liquidated damages to a Holder of Transfer Restricted Securities if such Holder failed to comply with its obligations to make the representations set forth in the second to last paragraph of Section 1 or failed to provide the information required to be provided by it, if any, pursuant to Section 4(n). (b) The Company shall notify the Trustee and the Paying Agent (as defined in the Indenture) immediately upon the happening of each and every Registration Default. The Company shall pay the liquidated damages due on the Transfer Restricted Securities by depositing with the Paying Agent (which may not be the Company for these purposes), in trust, for the benefit of the Holders thereof, prior to 10:00 a.m., New York City time, on the next interest payment dates specified by the Indenture and the Securities, sums sufficient to pay the liquidated damages then due. The liquidated damages due shall be payable semi- annually on dates which correspond to interest payment dates specified by the Indenture and the Securities to the record holder entitled to receive the interest payment to be made on such date. Each obligation to pay liquidated damages shall be deemed to accrue from and including the date of the applicable Registration Default. (c) The parties hereto agree that the liquidated damages provided for in this Section 3 constitute a reasonable estimate of and are intended to constitute the sole damages that will be suffered by Holders of Transfer Restricted Securities by reason of the failure of (i) the Shelf Registration 6 Statement or the Exchange Offer Registration Statement to be filed, (ii) the Shelf Registration Statement to remain effective or (iii) the Exchange Offer Registration Statement to be declared effective and the Registered Exchange Offer to be consummated, in each case to the extent required by this Agreement. 4. Registration Procedures. In connection with any Registration ----------------------- Statement, the following provisions shall apply: (a) The Company shall (i) furnish to each Initial Purchaser, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and shall use its commercially reasonable efforts to reflect in each such document, when so filed with the Commission, such comments as any Initial Purchaser may reasonably propose; (ii) include the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section and in Annex C hereto in the "Plan of Distribution" section of the prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (iii) if requested by any Initial Purchaser, include the information required by Items 507 or 508 of Regulation S-K, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement. (b) The Company shall advise each Initial Purchaser, each Exchanging Dealer and each of the Holders (if applicable) and, if requested by any such person, confirm such advice in writing (which advice pursuant to clauses (ii)- (v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made): (i) when any Registration Statement and any amendment thereto has been filed with the Commission and when such Registration Statement or any post-effective amendment thereto has become effective; (ii) of any request by the Commission for amendments or supplements to any Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of any Registration Statement or the initiation of any proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities, the Exchange Securities or the Private Exchange Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (v) of the happening of any event that requires the making of any changes in any Registration Statement or the prospectus included therein in order that the statements therein are not misleading and do not omit 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. (c) The Company will use its commercially reasonable efforts to obtain the withdrawal at the earliest possible time of any order suspending the effectiveness of any Registration Statement. (d) The Company will furnish to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, without charge, at least one conformed copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). 7 (e) The Company will, during the Shelf Registration Period, promptly deliver to each Holder of Transfer Restricted Securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the prospectus (including each preliminary prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of such prospectus or any amendment or supplement thereto by each of the selling Holders of Transfer Restricted Securities in connection with the offer and sale of the Transfer Restricted Securities covered by such prospectus or any amendment or supplement thereto. (f) The Company will furnish to each Initial Purchaser and each Exchanging Dealer, and to any other Holder who so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules and, if any Initial Purchaser or Exchanging Dealer or any such Holder so requests in writing, all exhibits thereto (including those, if any, incorporated by reference). (g) The Company will, during the Exchange Offer Registration Period or the Shelf Registration Period, as applicable, promptly deliver to each Initial Purchaser, each Exchanging Dealer and such other persons that are required to deliver a prospectus following the Registered Exchange Offer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement or the Shelf Registration Statement and any amendment or supplement thereto as such Initial Purchaser, Exchanging Dealer or other persons may reasonably request; and the Company consents to the use of such prospectus or any amendment or supplement thereto by any such Initial Purchaser, Exchanging Dealer or other persons, as applicable, as aforesaid. (h) Prior to the effective date of any Registration Statement, the Company will use its commercially reasonable efforts to register or qualify, or cooperate with the Holders of Securities, Exchange Securities or Private Exchange Securities included therein and their respective counsel in connection with the registration or qualification of, such Securities, Exchange Securities or Private Exchange Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holder reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the Securities, Exchange Securities or Private Exchange Securities covered by such Registration Statement; provided -------- that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (i) The Company will cooperate with the Holders of Securities, Exchange Securities or Private Exchange Securities to facilitate the timely preparation and delivery of certificates representing Securities, Exchange Securities or Private Exchange Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as the Holders thereof may request in writing prior to sales of Securities, Exchange Securities or Private Exchange Securities pursuant to such Registration Statement. (j) If any event contemplated by Section 4(b)(ii) through (v) occurs during the period for which the Company is required to maintain an effective Registration Statement, the Company will use its commercially reasonable efforts to promptly prepare and file with the Commission a post-effective amendment to the Registration Statement or a supplement to the related prospectus or file any other required document so that, as thereafter delivered to purchasers of the Securities, Exchange Securities or Private Exchange Securities from a Holder, the prospectus will not include an 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. 8 (k) Not later than the effective date of the applicable Registration Statement, the Company will provide CUSIP numbers for the Securities, the Exchange Securities and the Private Exchange Securities, as the case may be, and provide the applicable trustee with printed certificates for the Securities, the Exchange Securities or the Private Exchange Securities, as the case may be, in a form eligible for deposit with The Depository Trust Company. (l) The Company will comply with all applicable rules and regulations of the Commission and will make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earning statement satisfying the provisions of Section 11(a) of the Securities Act; provided that in no event shall such earning statement be -------- delivered later than 45 days after the end of a 12-month period (or 90 days, if such period is a fiscal year) beginning with the first month of the Company's first fiscal quarter commencing after the effective date of the applicable Registration Statement, which statement shall cover such 12-month period. (m) The Company will cause the Indenture or the Exchange Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act as required by applicable law in a timely manner. (n) The Company may require each Holder of Transfer Restricted Securities to be registered pursuant to any Shelf Registration Statement to furnish to the Company such information concerning the Holder and the distribution of such Transfer Restricted Securities as the Company may from time to time reasonably require for inclusion in such Shelf Registration Statement, and the Company may exclude from such registration the Transfer Restricted Securities of any Holder that fails to furnish such information within a reasonable time after receiving such request. (o) In the case of a Shelf Registration Statement, each Holder of Transfer Restricted Securities to be registered pursuant thereto agrees by acquisition of such Transfer Restricted Securities that, upon receipt of any notice from the Company pursuant to Section 4(b)(ii) through (v), such Holder will discontinue disposition of such Transfer Restricted Securities until such Holder's receipt of copies of the supplemental or amended prospectus contemplated by Section 4(j) or until advised in writing (the "Advice") by the ------ Company that the use of the applicable prospectus may be resumed. If the Company shall give any notice under Section 4(b)(ii) through (v) during the period that the Company is required to maintain an effective Registration Statement (the "Effectiveness Period"), such Effectiveness Period shall be -------------------- extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each seller of Transfer Restricted Securities covered by such Registration Statement shall have received (x) the copies of the supplemental or amended prospectus contemplated by Section 4(j) (if an amended or supplemental prospectus is required) or (y) the Advice (if no amended or supplemental prospectus is required). (p) In the case of a Shelf Registration Statement, the Company shall enter into such customary agreements (including, if requested, an underwriting agreement in customary form) and take all such other action, if any, as Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold or the managing underwriters (if any) shall reasonably request in order to facilitate any disposition of Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement. (q) In the case of a Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by a representative of, and Special Counsel (as defined below) acting for, Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold and any underwriter participating in any disposition of Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries and (ii) use its commercially reasonable efforts to have its officers, 9 directors, employees, accountants and counsel supply all relevant information reasonably requested by such representative, Special Counsel or any such underwriter (an "Inspector") in connection with such Shelf Registration --------- Statement. (r) In the case of a Shelf Registration Statement, the Company shall, if requested by Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) in connection with such Shelf Registration Statement, use its commercially reasonable efforts to cause (i) its counsel to deliver an opinion relating to the Shelf Registration Statement and the Securities, Exchange Securities or Private Exchange Securities, as applicable, in customary form, (ii) its officers to execute and deliver all customary documents and certificates requested by Holders of a majority in aggregate principal amount of the Securities, Exchange Securities and Private Exchange Securities being sold, their Special Counsel or the managing underwriters (if any) and (iii) its independent public accountants to provide a comfort letter or letters in customary form, subject to receipt of appropriate documentation as contemplated, and only if permitted, by Statement of Auditing Standards No. 72. 5. Registration Expenses. Except as provided in Section 9 hereof, --------------------- the Company will bear all expenses incurred in connection with the performance of its obligations under Sections 1, 2, 3 and 4, and the Company will reimburse the Initial Purchasers and the Holders for the reasonable fees and disbursements of one firm of attorneys (in addition to any local counsel) chosen by the Holders of a majority in aggregate principal amount of the Securities, the Exchange Securities and the Private Exchange Securities to be sold pursuant to each Registration Statement (the "Special Counsel") acting for the Initial --------------- Purchasers or Holders in connection therewith. 6. Indemnification. (a) In the event of a Shelf Registration --------------- Statement or in connection with any prospectus delivery pursuant to an Exchange Offer Registration Statement by an Initial Purchaser or Exchanging Dealer, as applicable, the Company shall indemnify and hold harmless each Holder (including, without limitation, any such Initial Purchaser or Exchanging Dealer), its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6 and Section 7 as a Holder) from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of Securities, Exchange Securities or Private Exchange Securities), to which that Holder may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse each Holder promptly upon demand for any reasonable legal or other expenses reasonably incurred by that Holder in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable -------- ------- in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Holders' Information; and provided, -------- further, that with respect to any such untrue statement in or omission from any - ------- related preliminary prospectus, the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of any Holder from whom the person asserting any such loss, claim, damage, liability or action received Securities, Exchange Securities or Private Exchange Securities to the extent that such loss, claim, damage, liability or action of or with respect to such Holder results from the fact that both (A) a copy of the final prospectus was not sent or given to such person at or prior to the written confirmation 10 of the sale of such Securities, Exchange Securities or Private Exchange Securities to such person and (B) the untrue statement in or omission from the related preliminary prospectus was corrected in the final prospectus unless such failure to deliver the final prospectus was a result of non-compliance by the Company with Section 4(d), 4(e), 4(f) or 4(g). (b) In the event of a Shelf Registration Statement, each Holder shall indemnify and hold harmless the Company, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6(b) and Section 7 as the Company), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in any such Registration Statement or any prospectus forming part thereof or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Holders' Information furnished to the Company by such Holder, and shall reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending or preparing to defend against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that no such Holder -------- ------- shall be liable for any indemnity claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Securities, Exchange Securities or Private Exchange Securities pursuant to such Shelf Registration Statement. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying party in writing of the claim or the commencement of that action; provided, -------- however, that the failure to notify the indemnifying party shall not relieve the - ------- indemnifying party from any liability which it may have under this Section 6 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and provided, -------- further, that the failure to notify the indemnifying party shall not relieve it - ------- from any liability which it may have to an indemnified party otherwise than under this Section 6. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than the reasonable costs of investigation; provided, however, that an indemnified party -------- ------- shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based upon written advice of counsel to the indemnified party, a copy of which has been provided to the indemnifying party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based upon written advice of counsel to the indemnified party, a copy of which has been provided to the indemnifying party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the 11 indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. 7. Contribution. If the indemnification provided for in Section 6 is ------------ unavailable or insufficient to hold harmless an indemnified party under Section 6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company from the offering and sale of the Securities, on the one hand, and a Holder with respect to the sale by such Holder of Securities, Exchange Securities or Private Exchange Securities, on the other, or (ii) if the allocation provided by clause (i) above 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 Company on the one hand and such Holder on the other with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and a Holder on the other with respect to such offering and such sale shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) received by or on behalf of the Company as set forth in the table on the cover of the Offering Memorandum, on the one hand, bear to the total proceeds received by such Holder with respect to its sale of Securities, Exchange Securities or Private Exchange Securities, on the other. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company or information supplied by the Company on the one hand or to any Holders' Information supplied by such Holder on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties hereto agree that it would not be just and equitable if contributions pursuant to this Section 7 were to be determined by pro rata allocation or by any other method of allocation that 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 loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7 shall be deemed to include, for purposes of this Section 7, any reasonable legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 7, an indemnifying party that is a Holder of Securities, Exchange Securities or Private Exchange Securities shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities, Exchange Securities or Private Exchange Securities sold by such indemnifying party to any purchaser exceeds the amount of any damages which such indemnifying party has otherwise paid or become liable 12 to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 8. Rules 144 and 144A. The Company shall use its commercially ------------------ reasonable efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the written request of any Holder of Transfer Restricted Securities, make publicly available other information so long as necessary to permit sales of such Holder's securities pursuant to Rules 144 and 144A. The Company covenants that it will take such further action as any Holder of Transfer Restricted Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Transfer Restricted Securities without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including, without limitation, the requirements of Rule 144A(d)(4)). Upon the written request of any Holder of Transfer Restricted Securities, the Company shall deliver to such Holder a written statement as to whether it has complied with such requirements. Notwithstanding the foregoing, nothing in this Section 8 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. 9. Underwritten Registrations. If any of the Transfer Restricted -------------------------- Securities covered by any Shelf Registration Statement are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Securities included in such offering, subject to the consent of the Company (which shall not be unreasonably withheld or delayed), and such Holders shall be responsible for all underwriting commissions and discounts in connection therewith. No person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's Transfer Restricted Securities on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 10. Miscellaneous. (a) Amendments and Waivers. The provisions of ------------- ---------------------- this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of Holders of a majority in aggregate principal amount of the Securities, the Exchange Securities and the Private Exchange Securities, taken as a single class. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose Securities, Exchange Securities or Private Exchange Securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by Holders of a majority in aggregate principal amount of the Securities, the Exchange Securities and the Private Exchange Securities being sold by such Holders pursuant to such Registration Statement. (b) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand delivery, first-class mail, telecopier or air courier guaranteeing next-day delivery: (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 10(b), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to the Initial Purchasers; 13 (2) if to an Initial Purchaser, initially at its address set forth in the Purchase Agreement; and (3) if to the Company, initially at the address of the Company set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one business day after being delivered to a next-day air courier; five business days after being deposited in the mail; and when receipt is acknowledged by the recipient's telecopier machine, if sent by telecopier. (c) Successors And Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns. (d) Counterparts. This Agreement may be executed in any number of ------------ counterparts (which may be delivered in original form or by telecopier) and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (e) Definition of Terms. For purposes of this Agreement, (a) the term ------------------- "business day" means any day on which the New York Stock Exchange, Inc. is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405 under the Securities Act and (c) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act. (f) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of New York. (h) Remedies. In the event of a breach by the Company or by any -------- Holder of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law, including recovery of damages (other than the recovery of damages for a breach by the Company of its obligations under Sections 1 or 2 hereof for which liquidated damages have been paid pursuant to Section 3 hereof, the sole and exclusive remedy for any such breach), will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement (other than a breach by the Company of its obligations under Sections 1 or 2 hereof for which liquidated damages shall have been paid pursuant to Section 3 hereof) and hereby further agree that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (i) No Inconsistent Agreements. The Company represents, warrants and -------------------------- agrees that (i) it has not entered into and shall not, on or after the date of this Agreement, enter into any agreement that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof, (ii) it has not previously entered into any agreement which remains in effect granting any registration rights with respect to any of its debt securities to any person and (iii) without limiting the generality of the foregoing, without the written consent of the Holders of a majority in aggregate principal amount of the then outstanding Transfer Restricted Securities, it shall not grant to any person the right to request the Company to register any debt securities of the Company under the 14 Securities Act unless the rights so granted are not in conflict or inconsistent with the provisions of this Agreement. (j) No Piggyback on Registrations. Neither the Company nor any of its ----------------------------- security holders (other than the Holders of Transfer Restricted Securities in such capacity) shall have the right to include any securities of the Company in any Shelf Registration or Registered Exchange Offer other than Transfer Restricted Securities. (k) Severability. The remedies provided herein are cumulative and not ------------ exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. Please confirm that the foregoing correctly sets forth the agreement among the Company and the Initial Purchasers. Very truly yours, PARAGON HEALTH NETWORK, INC. By /s/ Charles B. Carden --------------------------- Name: Charles B. Carden Title: Executive Vice President and Chief Financial Officer Accepted: CHASE SECURITIES INC. By /s/ David Fass ----------------------- Authorized Signatory SMITH BARNEY INC. By /s/ John K. Hudson ------------------------ Authorized Signatory CREDIT SUISSE FIRST BOSTON CORPORATION By /s/ Joseph D. Fashano ------------------------- Authorized Signatory Joseph D. Fashano Director ANNEX C [Form of Initial Comfort Letter] The Company and GranCare shall have furnished to the Initial Purchasers a letter of Ernst & Young LLP, addressed to the Initial Purchasers and dated the date of the Purchase Agreement, in form and substance satisfactory to the Initial Purchasers, substantially to the effect set forth below: (i) they are independent certified public accountants with respect to the Company and GranCare within the meaning of Rule 101 of the Code of Professional Conduct of the AICPA and its interpretations and rulings; (ii) in their opinion, the audited financial statements and pro forma financial information included in the Offering Memorandum and reported on by them comply in form in all material respects with the accounting requirements of the Exchange Act and the related published rules and regulations of the Commission thereunder that would apply to the Offering Memorandum if the Offering Memorandum were a prospectus included in a registration statement on Form S-1 under the Securities Act (except that certain supporting schedules are omitted); (iii) based upon a reading of the latest unaudited financial statements made available by the Company and GranCare, the procedures of the AICPA for a review of interim financial information as described in Statement of Auditing Standards No. 71, reading of minutes and inquiries of certain officials of the Company and GranCare who have responsibility for financial and accounting matters and certain other limited procedures requested by the Initial Purchasers and described in detail in such letter, nothing has come to their attention that causes them to believe that (A) any unaudited financial statements included in the Offering Memorandum do not comply as to form in all material respects with applicable accounting requirements, (B) any material modifications should be made to the unaudited financial statements included in the Offering Memorandum for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Offering Memorandum or (C) the information included under the headings "Summary--Summary Unaudited Pro Forma Financial and Other Data", "Summary--Summary Historical Consolidated Financial and Other Data--Living Centers of America, Inc.", "Summary Historical Consolidated Financial and Other Data--GranCare, Inc.", "Capitalization", "Unaudited Pro Forma Condensed Consolidated Financial Statements", "Selected Historical Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" is not in conformity with the disclosure requirements of Regulation S-K that would apply to the Offering Memorandum if the Offering Memorandum were a prospectus included in a registration statement on Form S-1 under the Securities Act; (iv) based upon the procedures detailed in such letter with respect to the period subsequent to the date of the last available balance sheet, including reading of minutes and inquiries of certain officials of the Company and GranCare who have responsibility for financial and accounting matters, nothing has come to their attention that causes them to believe that (A) at a specified date not more than three business days prior to the date of such letter, there was any change in capital stock, increase in long-term debt or decrease in net current assets as compared with the amounts shown in the June 30, 1997 unaudited balance sheet included in the Offering Memorandum or (B) for the period from July 1, 1997 to a specified date not more than three business days prior to the date of such letter, there were any decreases, as compared with the corresponding period in the preceding year, in net sales, income from operations, EBITDA or net income, except in all instances for changes, increases or decreases that the Offering Memorandum discloses have occurred or which are set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company or GranCare as to the significance thereof unless said explanation is not deemed necessary by the Initial Purchasers; 2 (v) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company) set forth in the Offering Memorandum agrees with the accounting records of the Company and GranCare, excluding any questions of legal interpretation; and (vi) on the basis of a reading of the unaudited pro forma financial information included in the Offering Memorandum, carrying out certain specified procedures, reading of minutes and inquiries of certain officials of the Company and GranCare who have responsibility for financial and accounting matters and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial information, nothing came to their attention which caused them to believe that the pro forma financial information does not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such information. EX-4.7 4 FORM OF COMMON STOCK CERTIFICATE EXHIBIT 4.7 TEMPORARY CERTIFICATE--EXCHANGEABLE FOR ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY COMMON STOCK COMMON STOCK Number Shares PHN ------- ------------ Paragon Health Network, Inc. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE PAR VALUE SEE REVERSE FOR $.01 PER SHARE CERTAIN DEFINITIONS CUSIP 698940 10 3 This is to Certify that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF - -------------------------Paragon Health Network, Inc.--------------------------- transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. In Witness Whereof the Corporation has caused this certificate to be signed in facsimile by its duly authorized officers and sealed with a facsimile of its corporate seal. Dated PARAGON HEALTH NETWORK, INC. CORPORATE /s/ Susan Thomas Whittle /s/ Keith B. Pitts Executive Vice President, 1997 Chairman of the Board, Secretary and DELAWARE Chief Executive Officer General Counsel and President Countersigned and Registered: AMERICAN STOCK TRANSFER & TRUST COMPANY (New York, N.Y.) Transfer Agent and Registrar By: Authorized Signature Paragon Health Network, Inc. will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the transfer agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT TEN -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -- ____________ Custodian ________________ (Cust) (Minor) under Uniform Gifts to Minors Act ___________ (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, __________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------------ | | - ------------------------------------------ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ______________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ________________ X _____________________________________ X _____________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION ON ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By _________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. ______________________________________________ | AMERICAN BANKNOTE COMPANY | | 680 BLAIR MILL ROAD | | HONSHAM, PA 19044 | | 215-657-3480 | | SALESPERSON--J. NAPOLITANO--212-557-9100A. | | HOBBS: 404-525-1455. | ______________________________________________ | /Net/Banknote/Home46/ParagonHealth53224/bk | ______________________________________________ ________________________________________________________ | PRODUCTION COORDINATOR - BELINDA BECK - 215-830-2198 | | PROOF OF OCTOBER 16, 1997 | | PARAGON HEALTH NETWORK, INC. | | H 53224bk | ________________________________________________________ | Opr. Koshy NEW | ________________________________________________________ | /net/banknote/home46/p | ________________________________________________________ EX-4.8 5 10 1/2% SENIOR SUBORDINATED DISCOUNT NOTE EXHIBIT 4.8 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS DEPARTMENT, TELEPHONE NO. (770) 393-0199. [Remainder of Page Intentionally Left Blank] No. 1 Principal Amount $292,700,000 CUSIP NO. 698940 AB 9 ISIN: US 698940 AB 92 10 1/2% Senior Subordinated Discount Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Ninety Two Million Seven Hundred Thousand Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. This Note shall not bear interest prior to November 1, 2002. From November 4, 1997 through November 1, 2002, the Accreted Value of this Note will increase as specified on the reverse side hereof. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By: /s/ Keith B. Pitts --------------------------------- Keith B. Pitts Chairman, President and Chief Executive Officer By: /s/ Charles B. Carden --------------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins ----------------------------- Authorized Signatory November 4, 1997 2 10 1/2% Senior Subordinated Discount Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note as described below. The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes") will accrete in value until November 1, 2002 at a rate of 10.57% per annum, compounded semi-annually, to an aggregate principal amount of $294,000,000. Cash interest will not accrue on the Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be payable semi-annually in cash and in arrears to the Holders of record on each April 15 or October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes will accrue from the most recent interest payment date to which interest has been paid or, if no interest has been paid, from November 1, 2002. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $275,000,000 aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $294 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of 3 the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of the Accreted Value thereof), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12 month period beginning on November 1 of the years indicated below: Year Redemption Price ---- ---------------- 2002 ............................... 105.250% 2003................................ 103.500% 2004................................ 101.750% 2005 and thereafter................. 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem up to 33-1/3% of the originally issued principal amount at maturity of Notes at a redemption price equal to 110.5% of the Accreted Value at the redemption date of the Notes so redeemed with the net proceeds of one or more Equity Offerings by the Company; provided, however, that at least 50% of the originally issued principal amount at maturity of Notes must remain outstanding immediately after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal 4 amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in 5 connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indentures, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 6 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:______________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1[_] acquired for the undersigned's own account, without transfer; or 2[_] transferred to the Company; or 3[_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4[_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5[_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6[_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 308 of the Indenture); or 2 7[_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. ______________________________ Signature Signature Guarantee: ______________________________ ______________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ___________________ _______________________________________ NOTICE: To be executed by an executive officer. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Date of Amount of decrease in Principal Amount of increase in Principal Principal Amount of this Global Signature of Exchange Amount of this Global Note Amount of this Global Note Note following such decrease or authorized signatory increase of Trustee or Notes Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ___________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. EX-4.9 6 10 1/2% SENIOR SUBORDINATED DISCOUNT NOTE EXHIBIT 4.9 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE NOTES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS DEPARTMENT, TELEPHONE NO. (770) 393-0199. [Remainder of Page Intentionally Left Blank] No. 1 Principal Amount $1,300,000 CUSIP NO. U69879 AB 7 ISIN: USU 69879 AB 78 10 1/2% Senior Subordinated Discount Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of One Million Three Hundred Thousand Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. This Note shall not bear interest prior to November 1, 2002. From November 4, 1997 through November 1, 2002, the Accreted Value of this Note will increase as specified on the reverse side hereof. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By: /s/ Keith B. Pitts -------------------------------------- Keith B. Pitts Executive Vice President and Chief Financial Officer By: /s/ Charles B. Carden -------------------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins ------------------------------ Authorized Signatory November 4, 1997 2 10 1/2% Senior Subordinated Discount Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note as described below. The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes") will accrete in value until November 1, 2002 at a rate of 10.57% per annum, compounded semi-annually, to an aggregate principal amount of $294,000,000. Cash interest will not accrue on the Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be payable semi-annually in cash and in arrears to the Holders of record on each April 15 or October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes will accrue from the most recent interest payment date to which interest has been paid or, if no interest has been paid, from November 1, 2002. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $275,000,000 aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $294 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of 3 the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of the Accreted Value thereof), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12 month period beginning on November 1 of the years indicated below: Year Redemption Price ---- ---------------- 2002............................... 105.250% 2003............................... 103.500% 2004............................... 101.750% 2005 and thereafter................ 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem up to 33-1/3% of the originally issued principal amount at maturity of Notes at a redemption price equal to 110.5% of the Accreted Value at the redemption date of the Notes so redeemed with the net proceeds of one or more Equity Offerings by the Company; provided, however, that at least 50% of the originally issued principal amount at maturity of Notes must remain outstanding immediately after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal 4 amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in 5 connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indentures, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 6 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:____________________________________ Signature Guarantee:____________________________________________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1 [_] acquired for the undersigned's own account, without transfer; or 2 [_] transferred to the Company; or 3 [_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4 [_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5 [_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6 [_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 308 of the Indenture); or 2 7 [_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. __________________________ Signature Signature Guarantee: ___________________________________ __________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of Signature of authorized Principal Amount of Principal Amount of this Global Note signatory of Trustee or this Global Note this Global Note following such decrease or increase Notes Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ______________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. Form of Certificate To Be Delivered in Connection with Transfers under Regulation S [date] IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Re: PARAGON HEALTH NETWORK, INC. (the "Company") 10 1/2% Senior Subordinated Discount Notes (the "Notes") Ladies and Gentlemen: In connection with our proposed sale of $________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: A. the offer of the Notes was not made to a person in the United States; B. either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; C. no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and D. the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:____________________________ __________________________________ Authorized Signature Signature Medallion Guaranteed EX-4.10 7 10 1/2% SENIOR SUBORDINATED DISCOUNT NOTE EXHIBIT 4.10 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. THIS NOTE HAS BEEN ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1271-1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE ISSUE PRICE, AMOUNT OF ORIGINAL ISSUE DISCOUNT, ISSUE DATE AND YIELD TO MATURITY OF THE NOTES MAY BE OBTAINED BY CONTACTING THE ISSUER'S INVESTORS RELATIONS DEPARTMENT, TELEPHONE NO. (770) 393-0199. [Remainder of Page Intentionally Left Blank] Principal Amount $0 No. 1 CUSIP NO. 698940 AD 5 10 1/2% Senior Subordinated Discount Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of Zero Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. This Note shall not bear interest prior to November 1, 2002. From November 4, 1997 through November 1, 2002, the Accreted Value of this Note will increase as specified on the reverse side hereof. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By: /s/ Keith B. Pitts ---------------------------------- Keith B. Pitts Chairman, President and Chief Executive Officer By: /s/ Charles B. Carden ----------------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins - ---------------------------------- Authorized Signatory November 4, 1997 2 10 1/2% Senior Subordinated Discount Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note as described below. The 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes") will accrete in value until November 1, 2002 at a rate of 10.57% per annum, compounded semi-annually, to an aggregate principal amount of $294,000,000. Cash interest will not accrue on the Notes prior to November 1, 2002. Thereafter, interest will accrue at the rate of 10 1/2% per annum and will be payable semi-annually in cash and in arrears to the Holders of record on each April 15 or October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 2003. Cash interest on the Notes will accrue from the most recent interest payment date to which interest has been paid or, if no interest has been paid, from November 1, 2002. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation ("Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $275,000,000 aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $294 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of 3 the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of the Accreted Value thereof), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12 month period beginning on November 1 of the years indicated below: Year Redemption Price ---- ---------------- 2002............................... 105.250% 2003............................... 103.500% 2004............................... 101.750% 2005 and thereafter................ 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem up to 33-1/3% of the originally issued principal amount at maturity of Notes at a redemption price equal to 110.5% of the Accreted Value at the redemption date of the Notes so redeemed with the net proceeds of one or more Equity Offerings by the Company; provided, however, that at least 50% of the originally issued principal amount at maturity of Notes must remain outstanding immediately after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal 4 amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indentures, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 6 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 Accreted Value of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:______________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1[_] acquired for the undersigned's own account, without transfer; or 2[_] transferred to the Company; or 3[_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4[_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5[_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6[_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears on the reverse side of this Note); or 2 7[_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. ______________________________ Signature Signature Guarantee: _________________________________ ______________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Principal Amount of this Signature of authorized Date of Amount of decrease in Principal Amount of increase in Principal Global Note following signatory of Trustee or Exchange Amount of this Global Note Amount of this Global Note such decrease or increase Notes Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 4.6 or 4.8 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature ______________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. Form of Certificate To Be Delivered in Connection with Transfers to Institutional Accredited Investors [date] PARAGON HEALTH NETWORK, INC. c/o IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Ladies and Gentlemen: This certificate is delivered to request a transfer of $__________ principal amount of the 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Notes") of Paragon Health Network, Inc. (the "Company"). Upon transfer, the Notes would be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: The undersigned represents and warrants to you that: (1) We are an institutional "accredited investor" (as defined in Rules 501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of an institutional "accredited investor" at least $250,000 principal amount of the Notes, and we are acquiring the Notes not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes and invest in or purchase securities similar to the Notes in the normal course of our business. We and any accounts for which we are acting are each able to bear the economic risk of our or its investment. (2) We understand that the Notes have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Notes to offer, sell or otherwise transfer such Notes prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Notes (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor", in each case in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property 2 of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company and the Trustee reserve the right prior to any offer, sale or other transfer prior to the Resale Termination Date of the Notes pursuant to clauses (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. TRANSFEREE: BY: Upon transfer the Notes would be registered in the name of the new beneficial owner as follows: TAXPAYER ID NAME ADDRESS NUMBER: ---- ------- ------- Very truly yours, [Name of Transferor] By:______________________________ _________________________________ Name: Signature Medallion Guaranteed Title: EX-4.11 8 9 1/2% SENIOR SUBORDINATED NOTE EXHIBIT 4.11 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEES RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. No. 1 Principal Amount $271,550,000 CUSIP NO. 698940 AA 1 ISIN: US 698940 AA 10 9 1/2% Senior Subordinated Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Seventy One Million Five Hundred Fifty Thousand Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By:/s/ Keith B. Pitts ------------------------------ Keith B. Pitts Chairman, President and Chief Executive Officer By:/s/ Charles B. Carden ------------------------------ Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins - --------------------------------- Authorized Signatory November 4, 1997 2 9 1/2% Senior Subordinated Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in cash and in arrears to Holders of record at the close of business on the April 15 and October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") will accrue from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from November 4, 1997. The Company shall pay interest on overdue principal or premium, if any (plus interest on such interest to the extent lawful), at the rate borne by the Notes to the extent lawful. Interest will be computed on the basis of 360-day year of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $294,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) ----- 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $275 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Redemption Price ---- ---------------- 2002................................. 104.750% 2003................................. 103.167% 2004................................. 101.583% 2005 and thereafter.................. 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem in the aggregate up to 33-1/3% of the original aggregate principal amount of the Notes with the proceeds of one or more Equity Offerings by the Company at a redemption price (expressed as a percentage of principal amount thereof) of 109.5% plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 50% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Discount Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Discount Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 4 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the Subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Discount Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Discount Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee 5 may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Discount Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay any indebtedness within any applicable grace period after final maturity or the acceleration of any such indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc.sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: ___________________ Your Signature: __________________ Signature Guarantee: ____________________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1 [_] acquired for the undersigned's own account, without transfer; or 2 [_] transferred to the Company; or 3 [_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4 [_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5 [_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6 [_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 308 of the Indenture); or 2 7 [_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. __________________________ Signature Signature Guarantee: ___________________________________ __________________________ (Signature must be guaranteed) Signature ______________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: ________________ ________________________________ NOTICE: To be executed by and executive officer. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Principal Amount of this Global Signature of authorized Date of Amount of decrease in Principal Amount of Increase in Principal Note following such signatory of Trustee or Exchange Amount of this Global Note Amount of this Global Note decrease or increase Notee Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date:__________ Your Signature______________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee:___________________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings, and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. EX-4.12 9 9 1/2% SENIOR SUBORDINATED NOTE EXHIBIT 4.12 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION, (2) BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTE FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE NOTES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. [Remainder of Page Intentionally Left Blank] No. 1 Principal Amount $3,450,000 CUSIP NO. U69879 AA 9 ISIN: USU 69879 AA 95 9 1/2% Senior Subordinated Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of Three Million Four Hundred Fifty Thousand Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By:/s/ Keith B. Pitts -------------------------------- Keith B. Pitts Chairman, President and Chief Executive Officer By:/s/ Charles B. Carden --------------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins ----------------------------- Authorized Signatory November 4, 1997 2 9 1/2% Senior Subordinated Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in cash and in arrears to Holders of record at the close of business on the April 15 and October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") will accrue from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from November 4, 1997. The Company shall pay interest on overdue principal or premium, if any (plus interest on such interest to the extent lawful), at the rate borne by the Notes to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $294,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $275 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. 3 The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Redemption Price ---- ---------------- 2002................................ 104.750% 2003................................ 103.167% 2004................................ 101.583% 2005 and thereafter................. 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem in the aggregate up to 33-1/3% of the original aggregate principal amount of the Notes with the proceeds of one or more Equity Offerings by the Company at a redemption price (expressed as a percentage of principal amount thereof) of 109.5% plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 50% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Discount Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Discount Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 4 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Discount Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Discount Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee 5 may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Discount Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 6 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the SEC on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi- annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:_____________________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1[_] acquired for the undersigned's own account, without transfer; or 2[_] transferred to the Company; or 3[_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4[_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5[_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6[_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears in Section 308 of the Indenture); or 2 7[_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. _________________________________ Signature Signature Guarantee: __________________________________ _____________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Principal Amount of this Signature of authorized Date of Amount of decrease in Principal Amount of increase in Principal Global Note following such signatory or Trustee or Exchange Amount of this Global Note Amount of this Global Note decrease or increase Notes Custodian
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature_____________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. Form of Certificate To Be Delivered in Connection with Transfers under Regulation S [date] IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Re: PARAGON HEALTH NETWORK, INC. (the "Company") 9 1/2% Senior Subordinated Notes due 2007 Ladies and Gentlemen: In connection with our proposed sale of $________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: A. the offer of the Notes was not made to a person in the United States; B. either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre- arranged with a buyer in the United States; C. no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and D. the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:_________________________ __________________________________ Authorized Signature Signature Medallion Guaranteed EX-4.13 10 9 1/2% SENIOR SUBORDINATED NOTE EXHIBIT 4.13 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH NOTE, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY PREDECESSOR OF SUCH NOTE), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SECTION 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE NOTES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, IN EACH CASE IN A TRANSACTION INVOLVING A MINIMUM PRINCIPAL AMOUNT OF $250,000 OF SUCH NOTES, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) ABOVE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN THE CASE OF THE FOREGOING CLAUSE (E), A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER REPRESENTATIVE OF DTC AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. No. 1 Principal Amount $0 CUSIP NO. 698940 AC 7 9 1/2% Senior Subordinated Note due 2007 Paragon Health Network, Inc., a Delaware corporation promises to pay to Cede & Co., or registered assigns, the principal sum of Zero Dollars on November 1, 2007. Interest Payment Dates: May 1 and November 1. Record Dates: April 15 and October 15. Additional provisions of this Note are set forth on the other side of this Note. Dated: November 4, 1997 PARAGON HEALTH NETWORK, INC. By:/s/ Keith B. Pitts ------------------------------- Keith B. Pitts Chairman, President and Chief Executive Officer By:/s/ Charles B. Carden -------------------------------- Charles B. Carden Executive Vice President and Chief Financial Officer TRUSTEE'S CERTIFICATE OF AUTHENTICATION IBJ SCHRODER BANK & TRUST COMPANY as Trustee, certifies that this is one of the Notes referred to in the Indenture. By /s/ Terrence Rawlins -------------------------- Authorized Signatory November 4, 1997 2 9 1/2% Senior Subordinated Note due 2007 1. Interest -------- Paragon Health Network, Inc., a Delaware corporation (such corporation, and its successors and assigns under the Indenture hereinafter referred to, being herein called the "Company")) promises to pay interest on the principal amount of this Note at the rate per annum shown above. The Company will pay interest semi-annually in cash and in arrears to Holders of record at the close of business on the April 15 and October 15 immediately preceding the interest payment date on May 1 and November 1 of each year, commencing May 1, 1998. Interest on the 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") will accrue from the most recent date to which interest has been paid on the Notes or, if no interest has been paid, from November 4, 1997. The Company shall pay interest on overdue principal or premium, if any (plus interest on such interest to the extent lawful), at the rate borne by the Notes to the extent lawful. Interest will be computed on the basis of a 360-day year of twelve 30-day months. 2. Method of Payment ----------------- By at least 10:00 a.m. (New York City time) on the date on which any principal of or interest on the Notes is due and payable, the Company shall irrevocably deposit with the Trustee or the Paying Agent money sufficient to pay such principal, premium, if any, and/or interest. The Company will pay interest (except defaulted interest) to the Persons who are registered Holders of Notes at the close of business on the April 15 or October 15 next preceding the interest payment date even if the Notes are cancelled, repurchased or redeemed after the record date and on or before the interest payment date. Holders must surrender Notes to a Paying Agent to collect principal payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay interest by check payable in such money. It may mail an interest check to a Holder's registered address. 3. Trustee, Paying Agent and Registrar ----------------------------------- Initially, IBJ Schroder Bank & Trust Company, a New York banking corporation (the "Trustee"), will act as Trustee, Paying Agent and Registrar. IBJ Schroder Bank & Trust Company will also act as the Trustee for $294,000,000 aggregate principal amount of 10 1/2% Senior Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes"). The Company may appoint and change any Paying Agent, Registrar or co-registrar without notice to any Noteholder. The Company or any of its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent, Registrar or co-registrar. 4. Indenture --------- The Company issued the Notes under an Indenture dated as of November 4, 1997 (as it may be amended or supplemented from time to time in accordance with the terms thereof, the "Indenture"), among the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C. ------ (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the Act for a statement of those terms. The Notes are general unsecured senior subordinated obligations of the Company limited to $275 million aggregate principal amount (subject to Section 310 of the Indenture). This Note is one of the Initial Notes referred to in the Indenture. The Notes include the Initial Notes and any Exchange Notes issued in exchange for the Initial Notes pursuant to the Indenture and the Registration Rights Agreement. 3 The Initial Notes and the Exchange Notes are treated as a single class of securities under the Indenture. The Indenture imposes certain limitations on the Incurrence of Indebtedness by the Company and its Restricted Subsidiaries, the payment of dividends on, and the purchase or redemption of, Capital Stock of the Company and its Restricted Subsidiaries, certain purchases or redemptions of Subordinated Indebtedness, the sale or transfer of assets and Capital Stock of Restricted Subsidiaries, investments of the Company and its Restricted Subsidiaries and transactions with Affiliates. In addition, the Indenture limits the ability of the Company and its Subsidiaries to restrict distributions and dividends from Restricted Subsidiaries. 5. Optional Redemption ------------------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time and from time to time on and after November 1, 2002 and prior to maturity, upon not less than 30 nor more than 90 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on November 1 of the years set forth below: Year Redemption Price ---- ---------------- 2002.................................. 104.750% 2003.................................. 103.167% 2004.................................. 101.583% 2005 and thereafter................... 100.000% In addition, at any time and from time to time prior to November 1, 2000, the Company may redeem in the aggregate up to 33-1/3% of the original aggregate principal amount of the Notes with the proceeds of one or more Equity Offerings by the Company at a redemption price (expressed as a percentage of principal amount thereof) of 109.5% plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least 50% of the original aggregate principal amount of the Notes must remain outstanding after each such redemption and that any such redemption occurs within 90 days following the closing of any such Equity Offering. The aggregate principal amount of the Notes and the Senior Subordinated Discount Notes to be redeemed shall be allocated by the Company between the Notes and the Senior Subordinated Discount Notes in the Company's sole discretion. 6. Notice of Redemption -------------------- Notice of redemption will be mailed at least 30 days but not more than 90 days before the redemption date to each Holder of Notes to be redeemed at his registered address. Notes in denominations of principal amount larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. If money sufficient to pay the redemption price of and accrued and unpaid interest on all Notes (or portions thereof) to be redeemed on the redemption date is deposited with the Paying Agent on or before the redemption date and certain other conditions are satisfied, on and after such date interest ceases to accrue on such Notes (or such portions thereof) called for redemption. 4 7. Put Provisions -------------- Upon a Change of Control, any Holder of Notes will have the right to cause the Company to repurchase all or any part of the Notes of such Holder at a repurchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of repurchase as provided in, and subject to the terms of, the Indenture. 8. Subordination and Ranking ------------------------- The Notes are subordinated to Senior Indebtedness, as defined in the Indenture. To the extent provided in the Indenture, Senior Indebtedness must be paid before the Notes may be paid. The Company agrees, and each Noteholder by accepting a Note agrees, to the subordination provisions contained in the Indenture and authorizes the Trustee to give them effect and appoints the Trustee as attorney-in-fact for such purpose. The Notes and the Senior Subordinated Discount Notes will in all respects rank pari passu with each other and with all other Senior Subordinated Indebtedness of the Company. 9. Denominations; Transfer; Exchange --------------------------------- The Notes are in registered form without coupons in denominations of principal amount of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements or transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer of or exchange of (i) any Note selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) for a period beginning 15 days before a selection of Notes to be redeemed and ending on the date of such selection or (ii) any Notes for a period beginning 15 days before an interest payment date and ending on such interest payment date. 10. Persons Deemed Owners --------------------- The registered holder of this Note may be treated as the owner of it for all purposes. 11. Unclaimed Money --------------- If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Company at its request unless an abandoned property law designates another Person. After any such payment, Holders entitled to the money must look only to the Company and not to the Trustee for payment. 12. Defeasance ---------- Subject to certain conditions set forth in the Indenture, the Company at any time may terminate some or all of its obligations under the Notes and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the Notes to redemption or maturity, as the case may be. The Company in its sole discretion can defease either or both of the Notes and the Senior Subordinated Discount Notes. 13. Amendment, Waiver ----------------- Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in principal amount of the outstanding Notes and (ii) any default or noncompliance with any provision may be waived with the written consent of the Holders of a majority in principal amount of the outstanding Notes. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee 5 may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with Article 5 of the Indenture, or to provide for uncertificated Notes in addition to or in place of certificated Notes, or to add guarantees with respect to the Notes or to secure the Notes, or to add additional covenants or surrender rights and powers conferred on the Company, or to comply with any request of the SEC in connection with qualifying the Indenture under the Act, or to make any change that does not adversely affect the rights of any Noteholder, or to provide for the issuance of Exchange Notes. The Notes and the Senior Subordinated Discount Notes will vote together as a single class of securities under the Indenture with respect to matters on which Holders are required or permitted to vote. 14. Defaults and Remedies --------------------- Under the Indenture, Events of Default include (i) a default in any payment of interest on any Note when due (whether or not such payment is prohibited by Article 13 of the Indenture), continued for 30 days, (ii) a default in the payment of principal of any Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, whether or not such payment is prohibited by Article 13 of the Indenture, (iii) the failure by the Company to comply with its obligations under Section 801 of the Indenture, (iv) the failure by the Company to comply for 30 days after written notice with any of its obligations under Section 1016 of the Indenture or Sections 1003, 1009, 1010, 1011, 1012, 1013, 1014, 1015, 1017, 1019 or 1020 of the Indenture (in each case, other than a failure to purchase Notes when required under Sections 1016 or 1017 of the Indenture), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Notes or the Indenture, (vi) the failure by the Company or any Significant Subsidiary to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default if the total amount of such Indebtedness unpaid or accelerated exceeds $20.0 million, (vii) certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary, (viii) the rendering of any judgment or decree for the payment of money in an amount (net of any insurance or indemnity payments actually received in respect thereof prior to or within 90 days from the entry thereof, or to be received in respect thereof in the event any appeal thereof shall be unsuccessful) in excess of $20.0 million against the Company or a Significant Subsidiary that is not discharged, bonded or insured by a third Person if (A) an enforcement proceeding thereon is commenced or (B) such judgment or decree remains outstanding for a period of 90 days following such judgment or decree and is not discharged, waived or stayed or (ix) the failure of any Guarantee of the Notes by a Guarantor made pursuant to Section 1020 of the Indenture to be in full force and effect (except as contemplated by the terms thereof or of the Indenture) or the denial or disaffirmation in writing by any such Guarantor of its obligations under the Indenture or any such Guarantee if such Default continues for 10 days. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least a majority in principal amount of the outstanding applicable Notes may declare all such Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in principal amount of the Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default or Event of Default (except a Default or Event of Default in payment of principal or interest) if it determines that withholding notice is in their interest. 15. Trustee Dealings with the Company --------------------------------- Subject to certain limitations set forth in the Indenture, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its affiliates and may otherwise deal with the Company or its affiliates with the same rights it would have if it were not Trustee. 6 16. No Recourse Against Others -------------------------- A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 17. Authentication -------------- This Note shall not be valid until an authorized signatory of the Trustee (or an authenticating agent acting on its behalf) manually signs the certificate of authentication on the other side of this Note. 18. Registration Rights ------------------- The Holder of this Note is entitled to the benefits of the Registration Rights Agreement, dated as of November 4, 1997 (the "Registration Rights Agreement"), between the Company and the Initial Purchasers named therein. In the event that either (i) an Exchange Offer Registration Statement is not filed with the Commission on or prior to 60 days after the Issue Date, (A) an Exchange Offer Registration Statement or a Shelf Registration Statement is not declared effective within 150 days after the Issue Date, or (B) the Exchange Offer is not consummated on or prior to 180 days after the Issue Date in respect of tendered Notes and a Shelf Registration Statement has not been declared effective or a Shelf Registration Statement is filed and declared effective within 150 days after the Issue Date but shall thereafter cease to be effective (at any time that the Company is obligated to maintain the effectiveness thereof) without being succeeded within 45 days by an additional Registration Statement filed and declared effective (each such event referred to in clauses (A) and (B), a "Registration Default"), the Company will pay liquidated damages to each holder of Transfer Restricted Securities (as defined in the Registration Rights Agreement), during the period of one or more such Registration Defaults, in an amount equal to $.192 per week per $1,000 principal amount of the Notes constituting Transfer Restricted Securities held by such holder until the applicable Registration Statement is filed or declared effective, the Exchange Offer is consummated or the Shelf Registration Statement again becomes effective, as the case may be, provided that, except in certain limited circumstances, the Company's obligation to pay liquidated damages will terminate upon consummation of the Exchange Offer. All accrued liquidated damages shall be paid to holders in the same manner as interest payments on the Notes on semi-annual payment dates which correspond to interest payment dates for the Notes. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease. 19. Abbreviations ------------- Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entirety), JT TEN (=joint tenants with rights of survivorship and not as tenants in common), CUST (=custodian) and U/G/M/A (=Uniform Gift to Minors Act). 20. CUSIP Numbers ------------- Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Noteholders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 7 21. Governing Law ------------- THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK EXCLUDING (TO THE GREATEST EXTENT PERMISSIBLE BY LAW) ANY RULE OF LAW THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge to the Noteholder a copy of the Indenture. Requests may be made to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention of General Counsel [Remainder of Page Intentionally Left Blank] ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to (Print or type assignee's name, address and zip code) (Insert assignee's soc. sec. or tax I.D. No.) and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:____________________ Your Signature:___________________ Signature Guarantee:_____________________________________ (Signature must be guaranteed) ________________________________________________________________________________ Sign exactly as your name appears on the other side of this Note. The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for, STAMP), pursuant to S.E.C. Rule 17Ad-15. In connection with any transfer or exchange of any of the Notes evidenced by this certificate occurring prior to the date that is two years after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Company or any Affiliate of the Company, the undersigned confirms that such Notes are being: CHECK ONE BOX BELOW: 1[_] acquired for the undersigned's own account, without transfer; or 2[_] transferred to the Company; or 3[_] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or 4[_] transferred pursuant to an effective registration statement under the Securities Act of 1933; or 5[_] transferred pursuant to and in compliance with Regulation S under the Securities Act of 1933; or 6[_] transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act of 1933), that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter appears on the reverse side of this Note); or 2 7[_] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933. Unless one of the boxes is checked, the Trustee may refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; provided, however, that if box (5), (6) or (7) is checked, the Trustee or the Company may require, prior to registering any such transfer of the Notes, in their sole discretion, such legal opinions, certifications and other information as the Trustee or the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. _________________________________ Signature Signature Guarantee: ________________________________ _________________________________ (Signature must be guaranteed) Signature ____________________________________________________________ The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Date of Exchange Amount of decrease in Amount of increase in Principal Amount of Signature of authorized Principal Amount of Principal Amount of this Global Note signatory of Trustee or this Global Note this Global Note following such decrease Notes Custodian or increase
OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, check the box: [_] If you want to elect to have only part of this Note purchased by the Company pursuant to Section 1016 or 1017 of the Indenture, state the amount in principal amount (must be integral multiple of $1,000): $ Date: __________ Your Signature_____________________________________________ (Sign exactly as your name appears on the other side of the Note) Signature Guarantee: _______________________________________ (Signature must be guaranteed) The signature(s) should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions) with membership in the Securities Transfer Agents Medallion Program ("STAMP") or such other signature guarantee medallion program as may be approved by the Note Registrar in addition to or substitution for STAMP, pursuant to S.E.C. Rule 17Ad-15. Form of Certificate To Be Delivered in Connection with Transfers to Institutional Accredited Investors [date] PARAGON HEALTH NETWORK, INC. c/o IBJ Schroder Bank & Trust Company, as Trustee 1 State Street, 11th Floor New York, New York 10004 Attention: Corporate Trust Administration Ladies and Gentlemen: This certificate is delivered to request a transfer of $__________ principal amount of the 9 1/2% Senior Subordinated Notes due 2007 (the "Notes") of Paragon Health Network, Inc. (the "Company"). Upon transfer, the Notes would be registered in the name of the new beneficial owner as follows: Name: Address: Taxpayer ID Number: The undersigned represents and warrants to you that: (1) We are an institutional "accredited investor" (as defined in Rules 501(a)(1), (2), (3) and (7) under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of an institutional "accredited investor" at least $250,000 principal amount of the Notes, and we are acquiring the Notes not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes and invest in or purchase securities similar to the Notes in the normal course of our business. We and any accounts for which we are acting are each able to bear the economic risk of our or its investment. (2) We understand that the Notes have not been registered under the Securities Act and, unless so registered, may not be sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing Notes to offer, sell or otherwise transfer such Notes prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Notes (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) in a transaction complying with the requirements of Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act that is purchasing for its own account or for the account of such an institutional "accredited investor", in each case in a minimum principal amount of Notes of $250,000 or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale 2 Restriction Termination Date. If any resale or other transfer of the Notes is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Company and the Trustee, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act and that it is acquiring such Notes for investment purposes and not for distribution in violation of the Securities Act. Each purchaser acknowledges that the Company and the Trustee reserve the right prior to any offer, sale or other transfer prior to the Resale Termination Date of the Notes pursuant to clauses (d), (e) or (f) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. TRANSFEREE: BY: Upon transfer the Notes would be registered in the name of the new beneficial owner as follows: TAXPAYER ID NAME ADDRESS NUMBER: - ------ ------- ------- Very truly yours, [Name of Transferor] By:______________________________ _________________________________ Name: Signature Medallion Guaranteed Title: EX-10.1 11 KEITH PITTS - EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between KEITH B. PITTS (the "Executive") and PARAGON HEALTH NETWORK, INC., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as its Chairman of the Board and Chief Executive Officer, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company. NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein . 2. Term. This Agreement shall become effective on the date of the ---- consummation of the transactions contemplated by the Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997 among Apollo Management, L.P., on behalf of one or more managed investment funds, Apollo LCA Acquisition Corp. and Living Centers of America, Inc. and the Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997 among Living Centers of America, Inc., GranCare, Inc. and Apollo Management, L.P., on behalf of one or more funds under management (the "Effective Date"). This Agreement is for the four-year period (the "Term") commencing on the Effective Date and terminating on the fourth anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the fourth anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Chairman -------- of the Board and Chief Executive Officer of the Company or in such other senior executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the --------------------------------- Executive shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. Notwithstanding the preceding sentence, nothing contained herein shall prevent the Executive from (a) serving as a director of any company, provided, that, the Executive is not required to devote a material -------- ---- amount of his time to such service or (b) except as provided in Section 15(c), acquiring an investment in any entity, provided, that, the Executive -------- does not participate in the management or operation of such entity. The Executive shall report to the Board and, subject to the powers, authorities and responsibilities vested in the Company's Board under the General Corporation Law of the State of Delaware and in duly constituted committees of the Board, the Executive shall have responsibility and authority for the overall strategic policies, management and leadership of the Company. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Chairman of the Board and Chief Executive Officer) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the principal executive offices of the Company, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Execution Bonus. On the Effective Date, the Company --------------- shall pay to the Executive $200,000 (subject to any applicable payroll or other taxes required to be withheld). (b) Base Salary. The Executive's base salary hereunder ----------- shall be $700,000 a year, payable monthly. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $700,000 a year. (c) Annual Bonus. The Company shall provide the Executive ------------ with an annual bonus plan providing the Executive with an opportunity to earn an annual bonus equal to between fifty percent (50%) and one hundred fifty percent (150%) of his base salary if the Company achieves for the relevant year certain financial targets established pursuant to such plan. 7. Vacation, Holidays and Sick Leave. During the Term, the --------------------------------- Executive shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior executive officers. 8. Business Expenses. The Executive shall be reimbursed for all ----------------- ordinary and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive ---------------------------- shall be eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to senior officers of the Company generally. 2 10. Stock Options. The Company, pursuant to the terms of its stock ------------- option plan (and as approved by the Compensation Committee of the Board of Director), shall grant to the Executive as of the Effective Date, stock options to purchase 488,500 shares of common stock of the Company, which represents approximately three and three tenths percent (3.3%) of the fully diluted common shares of the Company. Such stock options shall, in accordance with the Company's stock option plan (i) expire ten (10) years from the Effective Date or ninety (90) days after the Executive's Date of Termination, if earlier, (ii) vest and become exercisable on each of the four anniversaries of the Effective Date in the amount equal to one-fourth (1/4) of the stock options granted, (iii) be exercisable, in the event of the Executive's termination of employment, for a period of ninety (90) days following his Date of Termination; (iv) in the event that the Executive's employment is terminated for any reason other than by the Company following a Change in Control or by the Executive for Good Reason, be forfeited to the extent not vested on the Date of Termination; and (v) have an exercise price per share equal to the fair market value of a share of common stock of the Company as of the Effective Date, which shall equal the closing price of a share of GranCare, Inc. on the Effective Date, divided by .23457. The Executive shall be eligible for additional stock option awards under the stock option plan of the Company and, in this regard, the compensation committee of the Board may consider whether, but not be obligated, to award the Executive additional stock options under such plan. 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be ------- terminated without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any twelve (12) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate -------------------------- the Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct described in Section 15) or (iii) the conviction of the Executive of, or the entering of a 3 plea of nolo contendere by, the Executive with respect to, a felony. Notwithstanding the foregoing, the Executive's employment hereunder shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, other than the Executive, at a meeting of the Board at which the Executive recuses himself (after written notice to the Executive and a reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive should be terminated for Cause. (d) Termination by the Executive. The Executive shall be ---------------------------- entitled to terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence (without the Executive's express written consent), following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any change in the Executive's title, authorities, responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents an adverse change from his status, title, position or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce -------- the Executive's base salary below $700,000; 4 (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) the adverse and substantial alteration of the nature and quality of the office space within which the Executive performed his duties prior to a Change in Control, as well as in the secretarial and administrative support provided to the Executive, provided, however, that a reasonable alteration of the nature and quality of the office space or the secretarial or administrative support provided to the Executive as a result of reasonable measures implemented by the Company to effectuate a cost-reduction or consolidation program shall not constitute Good Reason hereunder; or (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. The Executive's continued employment for 6 months shall constitute consent to, and a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) Voluntary Resignation. Should the Executive wish to --------------------- resign from his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as 5 may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(b) and, to the extent applicable, Section 6(c) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the $250,000 that he received prior to the Effective Date for relocation and related expenses. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean ------------------- (i) if the Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Good Reason shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given, and in the case of a termination for any other reason shall not be less than thirty (30) days (sixty (60) days in the case of a termination under Subsection (e) hereof) from the date such Notice of Termination is given). (h) Change in Control. For purposes of this Agreement, a ----------------- Change in Control of the Company shall have occurred if: (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, L.P., any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; 6 (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement dated as of November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Resignation as Member of Board. If the Executive's ------------------------------ employment by the Company is terminated for any reason, the Executive hereby agrees that he shall simultaneously submit his resignation as a member of the Board in writing on or before the Date of Termination. If the Executive fails to submit such required resignation in writing, the provisions of this Section 1 l(i) may be deemed by the Company to constitute the Executive's written resignation as a member of the Board effective as of the Date of Termination. (j) Return of Property. When the Executive shall cease to ------------------ be employed by the Company, the Executive shall promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain -------- ------- copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 7 12. Compensation During Disability. Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1 l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any amounts due to the Executive under Section 6(b) through the date of such termination and (ii) an amount equal to the bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(c), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment shall be terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If (A) following a Change in Control the Company shall terminate the Executive's employment in breach of this Agreement, or (B) following a Change in Control the Executive shall terminate his employment for Good Reason, then (i) the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's annual salary rate in effect as of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two fiscal years which immediately precede the year of the Term in which the Date of Termination occurs provided if there was a bonus or bonuses -------- paid to the Executive with 8 respect only to one fiscal year which immediately precedes the year of the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of this Agreement, if the Date of -------- ------- Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be $700,000 and (B) the number three (3); (iii) the Company shall (x) continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health, disability and similar welfare benefit plans for a period equal to the greater of the remainder of the Term and eighteen (18) months, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the remainder of the Term. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Section 12(d)(iii) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (iv) the payments provided for in this Section 12(d) (other than Section 12(d)(iii)) shall be made not later than the thirtieth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 9 (e) If prior to any Change of Control the Company shall terminate the Executive's employment without Cause or the Executive terminates his employment under clause (C) of Section 11(d) hereof, then (i) the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's annual salary rate in effect as of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two fiscal years which immediately precede the year of the Term in which the Date of Termination occurs provided if there was a bonus -------- or bonuses paid to the Executive with respect only to one fiscal year which immediately precedes the year of the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for -------- ------- purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be $700,000 and (B) the lesser of (x) the number three (3) and (y) the greater of (aa) the number of years (including partial years) remaining in the Term and (bb) the number two (2); such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs and ending with the month corresponding to the end of the Term hereunder; and (iii) the Company shall (x) continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, disability and similar welfare benefit plans for a period equal to the greater of the remainder of the Term and eighteen (18) months, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the remainder of the Term. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Section 12(e)(iii) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company. 10 (f) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (g) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(d) and 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (h) Release. Prior to making any payment pursuant to ------- Sections 12(d)(ii) and 12(d)(iii) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), other than claims for payments or benefits hereunder or claims for indemnification for director or officer liability, in connection with the termination of the Executive's employment with the Company and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. The Company agrees and covenants that it will (i) provide the Executive with customary director and officer indemnification; and (ii) maintain director and officer liability insurance which is of a type customarily maintained by companies of similar size and with a similar business as the Company. (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 11 (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period of five (5) years after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants containeed in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a 12 period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of a center or facility operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, in the event that at any time on or after the first anniversary of the Effective Date any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does 13 not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this --------------------------------- Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: 14 To Executive at: Keith B. Pitts _____________________________ _____________________________ _____________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the ------------ application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not ------------------ initiate legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing 15 injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the Mediator. 24. Headings. All descriptive headings of sections and paragraphs in -------- this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle ------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel THE EXECUTIVE /s/ Keith B. Pitts ---------------------------------- Keith B. Pitts 16 EX-10.2 12 JOHN LEE - EMPLOYMENT AGREEMENT EXHIBIT 10.2 EMPLOYMENT AGREEMENT Employment Agreement dated as of ____________, 1997 between John D. Lee (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Senior Vice President, Post-Acute Care Division, East and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the ---- "Effective Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Senior Vice -------- President, Post-Acute Care Division, East of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Senior Vice President, Post-Acute Care Division, East) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the offices of the Company in Hickory, North Carolina, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $225,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $225,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $200,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options. The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $225,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated October 31, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: John D. Lee ______________________________ ______________________________ ______________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY:__________________________________ NAME:________________________________ TITLE:_______________________________ EXECUTIVE --------------------------------------- John D. Lee 16 EX-10.3 13 SUSAN THOMAS WHITTLE - EMPLOYMENT AGREEMENT EXHIBIT 10.3 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between Susan Thomas Whittle (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Senior Vice President, General Counsel and Secretary and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the ---- "Effective Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Senior Vice -------- President, General Counsel and Secretary of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Senior Vice President, General Counsel and Secretary) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the principal executive offices of the Company, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $290,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $290,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $350,000. 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $290,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated October 31, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of -------- ------- this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2.0); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Susan Thomas Whittle ____________________________ ____________________________ ____________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Keith B. Pitts --------------------------------- NAME: Keith B. Pitts TITLE: Chief Executive Officer EXECUTIVE /s/ Susan Thomas Whittle ----------------------------------- Susan Thomas Whittle 16 EX-10.4 14 WILLIAM KORSLIN - EMPLOYMENT AGREEMENT EXHIBIT 10.4 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between William R. Korslin (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as President, Pharmaceutical Services Division, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the three-year period (the "Term") terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as President, -------- Pharmaceutical Services Division of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of President, Pharmaceutical Services Division) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the offices of the Company in Napersville, Illinois, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $300,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $300,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to sixty percent (60%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $300,000 (subject to any applicable payroll or other taxes required to be withheld) and, if the Executive has, on the first anniversary of the date of this Agreement, met certain performance goals established by the Company, the Company shall pay to the Executive an additional amount of $100,000 (subject to any applicable payroll or other taxes, required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its executive vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $300,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo; or (v) the approval of a sale, spin off, merger liquidation or other transaction which results in a disposition of or transfer of substantially all of the assets of the Pharmaceutical Services Division (the "Division") or one or more subsidiaries which hold substantially all of the assets of the Division. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or 6 entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the 7 sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was bonus or bonuses paid -------- to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that ----------------- for purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two and one- half (2.5); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of thirty-six (36) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the 8 Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) twelve (12) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twenty-four (24) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity of which either (A) (i) the principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or (B) (i) whose principal business is operating or managing an institutional pharmaceutical business and (ii) which derives at least 10% of its institutional pharmaceutical revenue from facilities which are located within 35 miles of the centers or facilities operated by the Company or its subsidiaries. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants 12 contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate 13 provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may ------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: William R. Korslin _________________________ _________________________ _________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 14 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement shall ------------ be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the 15 Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle ---------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ William R. Korslin --------------------------------- William R. Korslin 16 EX-10.5 15 DENNIS JOHNSTON - EMPLOYMENT AGREEMENT EXHIBIT 10.5 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between Dennis G. Johnston (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as President, Hospital Services Division, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the three-year period (the "Term") terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as President, -------- Hospital Services Division of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of President, Hospital Services Division) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at offices of the Company located in Dallas, Texas, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $325,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $325,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to sixty percent (60%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $500,000 (subject to any applicable payroll or other taxes required to be withheld) and, if the Executive is still employed by the Company on the third anniversary of the date of this Agreement, the Company shall pay to the Executive an additional amount of $250,000 (subject to any applicable payroll or other taxes, required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its executive vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause ; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $325,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign --------------------- from his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) ------------------- if the Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a ----------------- Change in Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo; or . (v) the approval of a sale, spin off, merger, liquidation or other transaction which results in a disposition of or transfer of substantially all of the assets of the Hospital Services Division (the "Division") or one or more subsidiaries which hold substantially all of the Division's assets. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or 6 provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the 7 sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was bonus or bonuses paid -------- to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that -------- ------- for purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two and one- half (2.5); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of thirty-six (36) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the 8 Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) twelve (12) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twenty-four (24) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity of which either (A) (i) the principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or (B) (i) whose principal business is operating or managing long term, acute hospital care facilities or (ii) which operates a long term, acute hospital care facility that is material in relation to the Company's or its subsidiaries' comparable business and (iii) in either case, which derives at least 10% of its long term, acute care facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or its subsidiaries. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly 12 unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion 13 of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may ------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Dennis G. Johnston 17321 Earthwind Drive Dallas, Texas 75248 To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 14 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles . (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement shall ------------ be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under the employment agreement entered into by the Executive and GranCare, Inc. dated February 12, 1997, including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release 15 affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle -------------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ Dennis G. Johnston --------------------------------------- Dennis G. Johnston 16 EX-10.6 16 DAVID BUDKE - EMPLOYMENT AGREEMENT EXHIBIT 10.6 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between David W. Budke (the "executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Senior Vice President, Home Health Division and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Senior Vice -------- President, Home Health Division of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Senior Vice President, Home Health Division) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the Company's offices in Houston, Texas, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $200,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $200,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $275,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $200,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo; or (v) the approval of a sale, spin off, merger, liquidation or other transaction which results in a disposition of or transfer of substantially all the assets of the Home Health Division (the "Division") or one or more subsidiaries which hold substantially all of the Division's assets. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or 6 entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the 7 sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was bonus or bonuses paid -------- to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that -------- ------- for purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the 8 Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity of which either (A) (i) the principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or (B) (i) whose principal business is operating or managing home health or hospice facilities or (ii) which operates a home health or hospice facility that is material in relation to the Company's or its subsidiaries' comparable business and (iii) derives at least 10% of its home health or hospice facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or its subsidiaries. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified 12 to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the 13 Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: David W. Budke ___________________________ ___________________________ ___________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 14 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement shall ------------ be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the 15 Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle ------------------------------------ NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ David W. Budke ----------------------------------- David W. Budke 16 EX-10.7 17 DAVID WARD - EMPLOYMENT AGREEMENT EXHIBIT 10.7 EMPLOYMENT AGREEMENT Employment Agreement dated as of ____________, 1997 between David Ward (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as President, Rehabilitation Services Division, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as President, -------- Rehabilitation Services Division of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of President, Rehabilitation Services Division) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the offices of the Company located in Nashville, Tennessee, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $250,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $250,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Additional Bonus. If the Executive has, on the first anniversary ---------------- of the date of this Agreement, met certain performance goals established by the Company, the Company shall pay to the Executive an additional amount of $200,000 (subject to any applicable payroll or other taxes, required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $250,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo; or. (v) the approval of a sale, spin off , merger, liquidation or other transaction which results in a disposition of or transfer of substantially all of the assets of the Rehabilitation Services Division (the "Division") one or more subsidiaries which hold substantially all of the Division's assets. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or 6 entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the 7 sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was bonus or bonuses paid -------- to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that -------- ------- for purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the 8 Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity of which either (A) (i) the principal business which is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or (B) (i) whose principal business is operating or managing rehabilitative centers and/or providing contract rehabilitative therapists to hospitals, nursing homes or similar facilities or (ii) which operates a rehabilitative service business that is material in relation to the Company's or subsidiaries' comparable business and (iii) in either case, which derives at least 10% of its rehabilitative service revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or its subsidiaries. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, 12 covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute 13 payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may ------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: David Ward ______________________________ ______________________________ ______________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 14 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement shall ------------ be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no 15 further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY:_________________________________________ NAME:_______________________________________ TITLE:______________________________________ EXECUTIVE -------------------------------------------- David Ward 16 EX-10.8 18 CHARLES CARDEN - EMPLOYMENT AGREEMENT EXHIBIT 10.8 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between Charles B. Carden (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Executive Vice President and Chief Financial Officer, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the ---- "Effective Date") and continue for the three-year period (the "Term") terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Executive Vice -------- President and Chief Financial Officer of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Executive Vice President and Chief Financial Officer) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the principal executive offices of the Company, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $345,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $345,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to sixty percent (60%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $350,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its executive vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $345,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated October 31, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of -------- ------- this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two and one-half (2.5); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of thirty-six (36) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) twelve (12) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twenty-four (24) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Charles B. Carden _________________________ _________________________ _________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application ------------ of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle --------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ Charles B. Carden ----------------------------------- Charles B. Carden 16 EX-10.9 19 ARUNA PODDATOORI - EMPLOYMENT AGREEMENT EXHIBIT 10.9 EMPLOYMENT AGREEMENT Employment Agreement dated as of ____________, 1997 between Aruna Poddatoori (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Senior Vice President, Post-Acute Care Division, West, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the ---- "Effective Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Senior Vice -------- President, Post-Acute Care Division, West of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Senior Vice President, Post-Acute Care Division, West) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the offices of the Company located in Los Angeles, California, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $225,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $225,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $200,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $225,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated October 31,1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of -------- ------- this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Aruna Poddatoori 28126 Peacock Ridge Rancho Palos Verdes, California 90274 To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application ------------ of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under the employment agreement entered into by the Executive and GranCare, Inc. dated February 12, 1997, including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY:__________________________________ NAME:________________________________ TITLE:_______________________________ EXECUTIVE ------------------------------------- Aruna Poddatoori 16 EX-10.10 20 LEROY WILLIAMS - EMPLOYMENT AGREEMENT EXHIBIT 10.10 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 4, 1997 between Leroy D. Williams (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as President, Post- Acute Care Division, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the ---- "Effective Date") and continue for the three-year period (the "Term") terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as President, -------- Post-Acute Care Division of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of President, Post- Acute Care Division as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the offices of the Company located in Houston, Texas, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $450,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $450,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to sixty percent (60%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company will honor --------------- the direction of the Board of Directors of Living Centers of America, Inc. and shall pay to the Executive in recognition for past services to Living Centers of America, Inc. an amount of $500,000 (subject to any applicable payroll or other taxes required to be withheld) and, if the Executive is still employed by the Company on the third month after the date of this Agreement, the Company shall pay to the Executive an additional amount of $250,000 (subject to any applicable payroll or other taxes, required to be withheld) and, if the Executive is still employed by the Company on the sixth month after the date of this Agreement, the Company shall pay to the Executive an additional amount of $250,000 (subject to any applicable payroll or other taxes, required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its executive vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 2 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this 3 Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause ; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $450,000; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an 5 employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated October 31, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which 7 immediately precede the year of the Term which the Date of Termination occurs provided if there was bonus or bonuses paid to the Executive -------- with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for -------- ------- purposes of this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two and one-half (2.5); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of thirty-six (36) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) twelve (12) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twenty-four (24) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. In exchange for --------------------------------------------- payment of $1,100,000 by the Company and other valuable consideration: (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists 11 and accounts, supplier information, accounting forms and procedures, personnel policies, information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) If the Executive violates any covenant contained in Section 15, the Executive agrees to repay any sums paid under Section 15 as consideration for such covenants. In addition, without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. 12 The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate 13 provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Leroy D. Williams ___________________________ ___________________________ ___________________________ To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 14 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under any employment agreement entered into by the Executive and Living Centers of America, Inc., including any obligation to pay severance or 15 other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle ----------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ Leroy D. Williams ----------------------------------- Leroy D. Williams 16 EX-10.11 21 JEFFREY TAYLOR - EMPLOYMENT AGREEMENT EXHIBIT 10.11 EMPLOYMENT AGREEMENT Employment Agreement dated as of November 19, 1997 between R. Jeffrey Taylor (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as Senior Vice President, Development, Mergers and Acquisitions, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment The Company hereby employs the Executive, and the Executive ---------- hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Senior Vice -------- President, Development, Mergers and Acquisitions of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Senior Vice President, Development, Merger and Acquisitions) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at corporate offices located in Los Angeles, California except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- $290,000 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $290,000 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive $250,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause ; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $290,000. (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 5, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of -------- ------- this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement --------------------------------- may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: R. Jeffrey Taylor 877 South Bundy Los Angeles, California 90049 To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the ------------ application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not ------------------ initiate legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in -------- this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby ------------------------------------- releases the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under the employment agreements entered into by the Executive and GranCare, Inc. dated February 12, 1997, including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY: /s/ Susan Thomas Whittle ----------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ R. Jeffrey Taylor ------------------------------------- R. Jeffrey Taylor 16 EX-10.12 22 VICE PRESIDENTS - EMPLOYMENT AGREEMENT EXHIBIT 10.12 [VICE PRESIDENT FORM] EMPLOYMENT AGREEMENT Employment Agreement dated as of ____________, 19__ between __________ (the "Executive") and Paragon Health Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as a [VICE PRESIDENT], and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as [VICE -------- PRESIDENT] of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of [VICE PRESIDENT]) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at [THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY] OR [SPECIFY OTHER LOCATION], except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be [$_______] a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than [$__________] a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to forty percent (40%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. (c) Execution Bonus. On the Effective Date, the Company shall pay to the Executive [$______] (subject to any applicable payroll or other taxes required to be withheld) [AND, IF THE EXECUTIVE IS STILL EMPLOYED BY THE COMPANY ON THE THIRD ANNIVERSARY OF THE DATE OF THIS AGREEMENT, THE COMPANY SHALL PAY TO THE EXECUTIVE AN ADDITIONAL AMOUNT OF [$______] (SUBJECT TO ANY APPLICABLE PAYROLL OR OTHER TAXES, REQUIRED TO BE WITHHELD)]. 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ----------------- ordinary and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 2 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described 3 below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below [$_________] ; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. 4 The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an 5 underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated [__FILL IN DATE___] or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 6 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs 7 provided if there was bonus or bonuses paid to the Executive with -------- respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of -------- ------- this Agreement, if the Date of Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number one and one-half (1.5); (iii) the Company shall pay the Executive an amount equal to the prorated Target Bonus that would have been paid for the period beginning on the first day of the fiscal year in which the Date of Termination occurs; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of eighteen (18) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) six (6) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twelve (12) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; 9 (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. 10 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors: Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, 11 information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 12 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 13 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: [FILL IN ADDRESS] To the Company at: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 14 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in -------- this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 27. Release of Prior Employment Agreement. The Executive hereby releases ------------------------------------- the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.) from all obligations under the employment agreement entered into by the Executive and [GranCare, Inc. or Living Centers of America, Inc.] dated ___________, 19__, including any obligation to pay severance or other post-termination benefits, which shall be upon the execution hereof terminated and of no further force or effect; provided, however, that in no event shall this release affect the Executive's rights under any grant or award under any stock option or stock award plans of the Company and any predecessor company (including GranCare, Inc. and Living Centers of America, Inc.). 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. BY:________________________________ NAME:______________________________ TITLE:_____________________________ EXECUTIVE ___________________________________ 16 EX-10.17 23 LONG-TERM INCENTIVE PLAN EXHIBIT 10.17 PARAGON HEALTH NETWORK, INC. 1997 LONG-TERM INCENTIVE PLAN I. INTRODUCTION 1.1 PURPOSES. The purposes of the Paragon Health Network, Inc. 1997 -------- Long-Term Incentive Plan (the "Plan") are (i) to align the interests of the ---- stockholders of Living Centers of America, Inc. (the "Company") and the ------- recipients of awards under this Plan by increasing the proprietary interest of such recipients in the Company's growth and success, (ii) to advance the interests of the Company by attracting and retaining officers, other employees, directors (including Non-Employee Directors), and consultants and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders. 1.2 CERTAIN DEFINITIONS. "AGREEMENT" shall mean the written agreement evidencing an award hereunder --------- between the Company and the recipient of such award. "BOARD" shall mean the Board of Directors of the Company. ----- "BONUS STOCK" shall mean shares of Common Stock which are not subject to a ----------- Restriction Period or Performance Measures. "BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan. ----------------- "CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b). ----------------- "CAUSE" shall mean (i) the failure or refusal by the participant to perform ----- his or her normal job duties (other than any such failure resulting from the participant's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the participant by the Chief Executive Officer of the Company or by the Board, which demand identifies the manner in which the Company believes that the participant has not performed such duties, (ii) the engaging by the participant in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise or (iii) the conviction of the participant of, or the entering of a plea of nolo contendre by, the participant with respect to, a felony. "CODE" shall mean the Internal Revenue Code of 1986, as amended. ---- "COMMITTEE" shall mean the Committee designated by the Board, consisting of --------- two or more members of the Board, each of whom shall be (i) Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act and (ii) an "outside director" within the meaning of Section 162(m) of the Code. "COMMON STOCK" shall mean the common stock, $.01 par value, of the Company. ------------ "DISABILITY" shall mean the inability of the holder of an award to perform ---------- substantially such holder's duties and responsibilities for a continuous period of at least six months, as determined solely by the Committee. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. ------------ "FAIR MARKET VALUE" shall mean the closing transaction price of a share of ----------------- Common Stock as reported in the New York Stock Exchange Composite Transactions on the date as of which such value is being determined or, if there shall be no reported transaction[s] for such date, on the next preceding date for which transactions were reported; provided, however, that Fair Market Value may be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. "FREE-STANDING SAR" shall mean an SAR which is not issued in tandem with, ----------------- or by reference to, an option, which entitles the holder thereof to receive, upon exercise, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of such SARs which are exercised. "INCENTIVE STOCK OPTION" shall mean an option to purchase shares of Common ---------------------- Stock that meets the requirements of Section 422 of the Code, or any successor provision, which is intended by the Committee to constitute an Incentive Stock Option. "MATURE SHARES" shall mean previously-acquired shares of Common Stock for ------------- which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder has either (i) held for at least six months or (ii) purchased on the open market. "NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who is not --------------------- an officer or employee of the Company or any Subsidiary. "NON-STATUTORY STOCK OPTION" shall mean an option to purchase shares of -------------------------- Common Stock that is not an Incentive Stock Option. "PERFORMANCE MEASURES" shall mean the criteria and objectives, established -------------------- by the Committee, which shall be satisfied or met (i) as a condition to the exercisability of all or a portion of an option or SAR, (ii) as a condition to the grant of a Stock Award or (iii) during the applicable Restriction Period or Performance Period as a condition to the holder's receipt, in the case of a Restricted Stock Award, of the shares of Common Stock subject to such award, or, in the case of a Performance Share Award, of the shares of Common Stock subject to such award and/or of payment with respect to such award. The Committee may amend or adjust the Performance Measures or other terms and conditions of an outstanding award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting, but only to the extent such adjustment would not cause any portion of the award, upon payment, or the option, upon exercise, to be nondeductible pursuant to section 162(m) of the Code. Such criteria and objectives may include one or more of the following: the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time, earnings per share, return to stockholders (including dividends), return on equity, earnings of the Company, revenues, EBITDA, EBITDAR, operating income; net income; return on assets; economic value added; cash flows market share, census, payor mix cash flow or cost reduction goals, or any combination of the foregoing. If the Committee desires that compensation payable pursuant to any award subject to Performance Measures be "qualified performance-based compensation" within the meaning of Section 162(m) of the Code, the Performance Measures (i) shall be established by the Committee no later than the end of the first quarter of the Performance Period or Restriction Period, as applicable (or such other time designated by the Internal Revenue Service) and (ii) shall satisfy all other applicable requirements imposed under Treasury Regulations promulgated under Section 162(m) of the Code, including the requirement that such Performance Measures be stated in terms of an objective formula or standard. Before any cash or shares of Common Stock are paid to any holder of an award subject to Performance Measures under this Plan, the Committee shall certify in writing that the applicable Performance Measures were in fact satisfied. "PERFORMANCE PERIOD" shall mean any period designated by the Committee ------------------ during which the Performance Measures applicable to a Performance Share Award shall be measured. "PERFORMANCE SHARE" shall mean a right, contingent upon the attainment of ----------------- specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu of all or a portion thereof, the Fair Market Value of such Performance Share in cash. "PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares under ----------------------- this Plan. "PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in ------------------------------ Section 22(e)(3) of the Code or any successor thereto. "RESTRICTED STOCK" shall mean shares of Common Stock which are subject to a ---------------- Restriction Period and shall include Directors Restricted Stock. "RESTRICTION PERIOD" shall mean any period designated by the Committee ------------------ during which the Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in this Plan or the Agreement relating to such award. "SAR" shall mean a stock appreciation right which may be a Free-Standing --- SAR or a Tandem SAR. "STOCK AWARD" shall mean an award of Restricted Stock or a Bonus Stock. ----------- "SUBSIDIARY" shall have the meaning set forth in Section 1.4. ---------- "TANDEM SAR" shall mean an SAR which is granted in tandem with, or by ---------- reference to, an option (including a Non-Statutory Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered. 1.3 ADMINISTRATION. This Plan shall be administered by the Committee. The -------------- Committee shall have the authority to determine eligibility for awards hereunder and to determine the form, amount and timing of each award to such persons and, if applicable, the number of shares of Common Stock, the number of SARs and the number of Performance Shares subject to such an award, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Committee may, in its sole discretion and for any reason at any time, subject to the requirements imposed under Section 162(m) of the Code and regulations promulgated thereunder in the case of an award intended to be qualified performance-based compensation, take action such that (i) any or all outstanding options and SARs shall become exercisable in part or in full, (ii) all or a portion of the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse, (iii) all or a portion of the Performance Period applicable to any outstanding Performance Share Award shall lapse, and (iv) the Performance Measures applicable to any outstanding Restricted Stock Award (if any) and to any outstanding Performance Share Award shall be deemed to be satisfied at the maximum or any other level. The Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be final, binding and conclusive. The Committee shall keep minutes of its meetings and of action taken by it without a meeting. A majority of the Committee shall constitute a quorum. The acts of the Committee shall be either (i) acts of a majority of the members of the Committee present at any meeting at which a quorum is present or (ii) acts approved in writing by all of the members of the Committee without a meeting. 1.4 ELIGIBILITY. Participants in this Plan shall consist of such ----------- directors (including Non-Employee Directors), officers, other employees or persons expected to become employees, and consultants of the Company or its subsidiaries from time to time (individually a "Subsidiary" ---------- and collectively the "Subsidiaries") as the Committee in its sole discretion may ------------ select from time to time. For purposes of this Plan, references to employment shall also mean an agency or independent contractor relationship and references to employment by the Company shall also mean employment by a Subsidiary. Non- Employee Directors of the Company shall be eligible to participate in this Plan in accordance with Section V. 1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7, ---------------- 2,000,000 shares of Common Stock shall be available under this Plan, reduced by the sum of the aggregate number of shares of Common Stock which become subject to outstanding options, including Directors Options, outstanding Free-Standing SARs, outstanding Stock Awards and outstanding Performance Shares. To the extent that shares of Common Stock subject to an outstanding option (except to the extent shares of Common Stock are issued or delivered by the Company in connection with the exercise of a Tandem SAR), Free-Standing SAR, Stock Award or Performance Share are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the delivery or withholding of shares of Common Stock to pay all or a portion of the exercise price of an award, if any, or to satisfy all or a portion of the tax withholding obligations relating to an award, then such shares of Common Stock shall again be available under this Plan. To the extent necessary to qualify an award hereunder as "qualified performance-based compensation" under Section 162(m) of the Code and the rules and regulations thereunder, the maximum number of shares of Common Stock with respect to which options or SARs, Stock Awards or Performance Share Awards or a combination thereof may be granted during any calendar year to any person shall be 1,000,000, subject to adjustment as provided in Section 6.7. Grants of options, SARs, Stock Awards or Performance Share Awards under this Plan that are canceled shall count toward the maximum stated in the preceding sentence. II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 2.1 STOCK OPTIONS. The Committee may, in its discretion, grant Incentive ------------- Stock Options or Non-Statutory Stock Options. An Incentive Stock Option may not be granted to any person who is not an employee of the Company or any parent or subsidiary (as defined in Section 424 of the Code). Each Incentive Stock Option shall be granted within ten years of the date this Plan was adopted by the Board. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which options designated as Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Company, or any parent or subsidiary as defined in Section 424 of the Code) exceeds the amount ($100,000 as of the date hereof) established by the Code, such options shall constitute Non-Statutory Stock Options. Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Shares and Purchase Price. The number of shares of Common ----------------------------------- Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of Common Stock purchasable upon exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shall be granted to any person who, at the time such option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or subsidiary as defined in Section 424 of the Code) (a "Ten Percent Holder"), the purchase price per share of Common Stock ------------------ shall be the price (currently 110% of Fair Market Value) required by the Code in order to constitute an Incentive Stock Option. (b) Option Period and Exercisability. The period during which an option -------------------------------- may be exercised shall be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercised later than ten years after its date of grant; provided further, that if an Incentive Stock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than five years after its date of grant. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in full at the time of grant or be subject to a vesting schedule determined by the Committee. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock. (c) Method of Exercise. An option may be exercised (i) by giving written ------------------ notice to the Company specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) by delivery (either actual delivery or by attestation procedures established by the Company) of Mature Shares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, (C) by authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered upon exercise of the option having an aggregate Fair Market Value, determined as of the date of exercise, equal to the purchase price (D) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) a combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the option, (ii) if applicable, by surrendering to the Company any Tandem SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E) in subsection (i) hereof. Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing Common Stock shall be delivered until the full purchase price therefor has been paid (or arrangement made for such payment to the Company's satisfaction). 2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, ------------------------- grant SARs to such eligible persons as may be selected by the Committee. The Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a Free-Standing SAR. SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of SARs and Base Price. The number of SARs subject to an award ----------------------------- shall be determined by the Committee. Any Tandem SAR related to an Incentive Stock Option shall be granted at the same time that such Incentive Stock Option is granted. The base price of a Tandem SAR shall be the purchase price per share of Common Stock of the related option. The base price of a Free-Standing SAR shall be determined by the Committee; provided, however, that such base price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such SAR. (b) Exercise Period and Exercisability. The Agreement relating to an award ---------------------------------- of SARs shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof. The period for the exercise of an SAR shall be determined by the Committee; provided, however, that no Tandem SAR shall be exercised later than the expiration, cancellation, forfeiture or other termination of the related option. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in full at the time of grant or be subject to a vesting schedule determined by the Committee. An exercisable SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only with respect to whole shares of Common Stock and, in the case of a Free-Standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the exercise of an SAR for shares of Common Stock, including Restricted Stock, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such SAR and shall have rights as a stockholder of the Company in accordance with Section 6.10. (c) Method of Exercise. A Tandem SAR may be exercised (i) by giving ------------------ written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are canceled by reason of the exercise of the Tandem SAR and (iii) by executing such documents as the Company may reasonably request. A Free-Standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 2.3 TERMINATION OF EMPLOYMENT OR SERVICE. (a) Non-Statutory Stock Options ------------------------------------ --------------------------- and SARs. All of the terms relating to the exercise, cancellation or other - -------- disposition of a Non-Statutory Stock Option or SAR upon a termination of employment with or service to the Company of the holder of such Non-Statutory Stock Option or SAR, as the case may be, whether by reason of Disability, retirement, death, Cause or other termination, shall be determined by the Committee. Such determination shall be made at the time of the grant of such Non-Statutory Stock Option or SAR, as the case may be, and shall be specified in the Agreement relating to such Non-Statutory Stock Option or SAR. (a) Termination of Employment - Incentive Stock Options. Unless otherwise --------------------------------------------------- specified in the Agreement evidencing an option, but subject to Section 2.1(b), if the employment with the Company of a holder of an Incentive Stock Option terminates by reason of Permanent and Total Disability or death, each Incentive Stock Option held by such optionee shall be exercisable only to the extent that such option was exercisable on the effective date of such optionee's termination of employment by reason of Permanent and Total Disability and may thereafter be exercised by such optionee (or such optionee's legal representative or similar person) until the date which is one year after the effective date of such optionee's termination of employment by reason of Permanent and Total Disability. If the employment of a holder of an Incentive Stock Option is terminated by the Company for Cause, each Incentive Stock Option held by such optionee shall terminate automatically on the effective date of such optionee's termination of employment. Unless otherwise specified in the Agreement evidencing an option, but subject to Section 2.1(b), if the employment with the Company of a holder of an Incentive Stock Option terminates for any reason other than Permanent and Total Disability or death, or Cause, each Incentive Stock Option held by such optionee shall be excisable only to the extent such option was exercisable on the effective date of such optionee's termination of employment, and may thereafter be exercised by such holder (or such holder's legal representative or similar person) until the date which is three months after the effective date of such optionee's termination of employment. If the holder of an Incentive Stock Option dies during the period set forth in the first paragraph of this Subsection (b) following termination of employment by reason of Permanent and Total Disability, each Incentive Stock Option held by such optionee shall be exercisable only to the extent such option was exercisable on the date of the optionee's death and may thereafter be exercised by the optionee's executor, administrator, legal representative, beneficiary or similar person until the date which is one (1) year after the date of death. III. STOCK AWARDS 3.1 STOCK AWARDS. The Agreement relating to a Stock Award shall specify ------------ whether the Stock Award is an award of Restricted Stock or Bonus Stock. 3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following --------------------- terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) Number of Shares and Other Terms. The number of shares of Common Stock -------------------------------- subject to a Restricted Stock Award or Bonus Stock Award and the Performance Measures (if any) and Restriction Period applicable to a Restricted Stock Award shall be determined by the Committee. (b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock ---------------------- Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of the shares of Common Stock subject to such award (i) if specified Performance Measures are satisfied or met during the specified Restriction Period or (ii) if the holder of such award remains continuously in the employment of or service to the Company during the specified Restriction Period and for the forfeiture of the shares of Common Stock subject to such award (x) if specified Performance Measures are not satisfied or met during the specified Restriction Period or (y) if the holder of such award does not remain continuously in the employment of or service to the Company during the specified Restriction Period. Bonus Stock Awards shall not be subject to any Performance Measures or Restriction Periods. (c) Share Certificates. During the Restriction Period, a certificate or ------------------ certificates representing a Restricted Stock Award may be registered in the holder's name and may bear a legend, in addition to any legend which may be required pursuant to Section 6.6, indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of this Plan and the Agreement relating to the Restricted Stock Award. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate by the Company, which would permit transfer to the Company of all or a portion of the shares of Common Stock subject to the Restricted Stock Award in the event such award is forfeited in whole or in part. Upon termination of any applicable Restriction Period (and the satisfaction or attainment of applicable Performance Measures), or upon the grant of a Bonus Stock Award, in each case subject to the Company's right to require payment of any taxes in accordance with Section 6.5, a certificate or certificates evidencing ownership of the requisite number of shares of Common Stock shall be delivered to the holder of such award. (d) Rights with Respect to Restricted Stock Awards. Unless otherwise set ---------------------------------------------- forth in the Agreement relating to a Restricted Stock Award, and subject to the terms and conditions of a Restricted Stock Award, the holder of such award shall have all rights as a stockholder of the Company, including, but not limited to, voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of Common Stock; provided, however, that a distribution with respect to shares of Common Stock, other than a regular cash dividend, shall be deposited with the Company and shall be subject to the same restrictions as the shares of Common Stock with respect to which such distribution was made. 3.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to ------------------------------------ the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or any cancellation or forfeiture of such Restricted Stock Award upon a termination of employment with or service to the Company of the holder of such Restricted Stock Award, whether by reason of Disability, retirement, death, Cause or other termination, shall be set forth in the Agreement relating to such Restricted Stock Award. IV. PERFORMANCE SHARE AWARDS 4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant ------------------------ Performance Share Awards to such eligible persons as may be selected by the Committee. 4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be --------------------------------- subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) Number of Performance Shares and Performance Measures. The number of ----------------------------------------------------- Performance Shares subject to any award and the Performance Measures and Performance Period applicable to such award shall be determined by the Committee. (b) Vesting and Forfeiture. The Agreement relating to a Performance Share ---------------------- Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of such award, if specified Performance Measures are to be satisfied or met during the specified Performance Period, and for the forfeiture of such award if specified Performance Measures are not satisfied or met during the specified Performance Period. (c) Settlement of Vested Performance Share Awards. The Agreement relating --------------------------------------------- to a Performance Share Award (i) shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof and (ii) may specify whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, and, if determined by the Committee, interest on or the deemed reinvestment of any deferred dividend equivalents, with respect to the number of shares of Common Stock subject to such award. If a Performance Share Award is settled in shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holder of such award shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such award and shall have rights as a stockholder of the Company in accordance with Section 6.10. 4.3 TERMINATION OF EMPLOYMENT. All of the terms relating to the ------------------------- satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or any cancellation or forfeiture of such Performance Share Award upon a termination of employment with the Company of the holder of such Performance Share Award, whether by reason of Disability, retirement, death or other termination, shall be determined by the Committee in its sole discretion and set forth in the Agreement relating to such Performance Share Award. V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS 5.1 ELIGIBILITY. Each Non-Employee Director shall be granted options to ----------- purchase shares of Common Stock in accordance with this Article V. All options granted under this Article V shall constitute Non-Statutory Stock Options. 5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director shall be granted ----------------------- Non-Statutory Stock Options as follows: (a) Time of Grant. As of the date on which a Non-Employee Director is ------------- first elected to or begins to serve as a Non-Employee Director, the Non-Employee Director shall receive an option to purchase 5,000 shares of Common Stock at a purchase price per share equal to the Fair Market Value of a share of Common Stock on the date of grant of such option. Thereafter, at each subsequent annual meeting of the stockholders of the Company beginning with the 1999 annual meeting, each Non-Employee Director stockholders (other than those who are first elected or begin to serve at or within six (6) months of such annual meeting), shall receive an option to purchase 2,000 shares of Common Stock at a purchase price per share equal to the Fair Market Value of a share of Common Stock on the date of grant of such option. (b) Option Period and Exercisability. Except as otherwise provided herein, -------------------------------- each option granted under this Article V shall not be fully exercisable during the first year following its date of grant. Thereafter, such option may be exercised: (i) on or after the first anniversary of its date of grant, for up to one-quarter of the shares of Common Stock subject to such option on its date of grant, (ii) on or after the second anniversary of its date of grant, for up to an additional one-quarter (one-half on a cumulative basis) of the shares of Common Stock subject to such option on its date of grant, (iii) on or after the third anniversary of its date of grant, for up to an additional one-quarter (three-fourths on a cumulative basis) of the shares of Common Stock subject to such option on its date of grant and (iv) on or after the forth anniversary of its date of grant, for up to the remaining one-quarter (all shares on a cumulative basis ) of the shares of Common Stock subject to such option on its date of grant. Each option granted under this Article V shall expire ten (10) years after its date of grant. An exercisable option, or portion thereof, may be exercised in whole or in part only with respect to whole shares of Common Stock. Options granted under this Article V shall be exercisable in accordance with Section 2.1(c). 5.3 TERMINATION OF DIRECTORSHIP. If a Non-Employee Director ceases to be --------------------------- a director, the options granted to such Non-Employee Director under this Article V that have become exercisable pursuant to Section 5.2(b), to the extent not theretofore exercised, shall terminate on the date which is three (3) months after the first date on which the Non-Employee Director is no longer a member of the Board or the Board of Directors of a Subsidiary, but in no event after the date the option would otherwise expire; provided, however, that if a Non- Employee Director shall cease to serve as such a director by reason of Disability or death, each option held by such Non-Employee Director shall be fully exercisable and may be exercised for a period of one (1) year after the date on which the Non-Employee Director ceased serving as such a director. If the Non-Employee Director shall die within such period following the date on which the Non-Employee Director ceased serving as such a director, such option, to the extent not theretofore exercised, may be exercised at any time within the one (1) year period following the date of death, but, in either case, not later than the date the option would otherwise expire. Notwithstanding the foregoing if a Non- Employee Director is reelected to the Board or again begins to serve prior to the expiration of an option held by the Non-Employee Director, the option shall be reinstated and exercisable in accordance with its original terms as if the Non-Employee Director had not ceased to be a member of the Board. VI. GENERAL 6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the ------------------------------- stockholders of the Company for approval and, if approved by the affirmative vote of a majority of the shares of Common Stock present in person or represented by proxy at the 1998 annual meeting of stockholders, shall become effective as of the date of approval by the Board. This Plan shall terminate when shares of Common Stock are no longer available for the grant of awards, unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any award granted prior to termination. In the event that this Plan is not approved by the stockholders of the Company at the 1998 annual meeting of stockholders, this Plan and any awards granted hereunder shall be null and void. 6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, ---------- subject to any requirement of stockholder approval required by applicable law, rule or regulation, including Section 162(m) and Section 422 of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would (a) increase the maximum number of shares of Common Stock available under this Plan (subject to Section 6.7), (b) effect any change inconsistent with Section 422 of the Code or (c) extend the term of this Plan. No amendment may adversely affect any material rights of a holder of an outstanding award without the consent of such holder. 6.3 AGREEMENT. Each award under this Plan shall be evidenced by an --------- Agreement setting forth the terms and conditions applicable to such award. No award shall be valid until an Agreement is executed by the Company and the recipient of such award and, upon execution by each party and delivery of the Agreement to the Company, such award shall be effective as of the effective date set forth in the Agreement. 6.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the ----------------------------- Agreement relating to an award, no award shall be transferable other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the foregoing sentence or the Agreement relating to an award, each award may be exercised or settled during the holder's lifetime only by the holder or the holder's legal representative or similar person. Except to the extent permitted by the second preceding sentence or the Agreement relating to an award, no award may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any such award, such award and all rights thereunder shall immediately become null and void. 6.5 TAX WITHHOLDING. The Company shall have the right to require, prior --------------- to the issuance or delivery of any shares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by the holder of such award of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. An Agreement may provide that (i) the Company shall withhold whole shares of Common Stock which would otherwise be delivered to a holder, having an aggregate Fair Market Value determined as of the date the obligation to withhold or pay taxes arises in connection with an award (the "Tax Date"), or withhold an amount of cash which would otherwise be -------- payable to a holder, in the amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery (either actual delivery or by attestation procedures established by the Company) to the Company of Mature Shares having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amount necessary to satisfy any such obligation, (C) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having an aggregate Fair Market Value, determined as of the Tax Date, or withhold an amount of cash which would otherwise be payable to a holder, equal to the amount necessary to satisfy any such obligation, (D) in the case of the exercise of an option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B) and (C), in each case to the extent set forth in the Agreement relating to the award; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E). Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to ---------------------- the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the exercise or settlement of such award or the delivery of shares thereunder, such award shall not be exercised or settled and such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 6.7 ADJUSTMENT. In the event of any stock split, stock dividend, ---------- recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities available under this Plan, the maximum number of shares which may be granted in any calendar year to any person, the number and class of securities subject to each outstanding option and the purchase price per security, the number and class of securities subject to each option to be granted to Non-Employee Directors pursuant to Article V, the terms of each outstanding SAR, the number and class of securities subject to each outstanding Stock Award, and the terms of each outstanding Performance Share shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding options and SARs without an increase in the aggregate purchase price or base price. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being (a) available under this Plan, such fractional security shall be disregarded, or (b) subject to an award under this Plan, the Company shall pay the holder of such award, in connection with the first vesting, exercise or settlement of such award in whole or in part occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such award. 6.8 CHANGE IN CONTROL. ----------------- (a) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control, (i) all outstanding Incentive Stock Options, Non-Statutory Stock Options and SARs shall vest and become immediately exercisable, all restrictions on Restricted Stock shall be waived and such shares shall become fully vested and all Performance Measures relating to Performance Share Awards shall be deemed satisfied, and. (ii) in a Change in Control involving the merger, consolidation or share exchange involving the Company, the sale of substantially all the Company's assets or any other similar transaction or any other Change in Control in which, immediately after such Change in Control, the securities underlying grants under the Plan will no longer be publicly-traded, each outstanding award shall be surrendered to the Company by the holder thereof, and each such award shall immediately be canceled by the Company, and the holder shall receive, within ten days of the occurrence of a Change in Control, a cash payment from the Company in (i)the amount set forth in the immediately following sentence, unless the acquirer or surviving company in the Change in Control agrees to assume each outstanding award or substitute replacement awards with substantially identical terms. The amount of payment upon a surrender of an award shall be equal to (A) in the case of an option, the number of shares of Common Stock then subject to such option, multiplied by the excess, if any, of (I) the highest per share price received by stockholders of the Company in the transaction whereby the Change in Control takes place or (II) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, if the Change in Control occurs other than pursuant to an acquisition of shares of Common Stock, over the purchase price per share of Common Stock subject to the option, (B) in the case of aFree- Free-Standing SAR, the number of shares of Common Stock then subject to such SAR, multiplied by the excess, if any, of (I) the highest per share price received by stockholders of the Company in the transaction whereby the Change in Control takes place or (II) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, if the Change in Control occurs other than pursuant to an acquisition of shares of Common Stock, over the base price of the SAR, (C) in the case of a Restricted Stock Award or Performance Share Award, the number of shares of Common Stock or the number of Performance Shares, as the case may be, then subject to such award, multiplied by (I) the highest per share price received by stockholders of the Company in the transaction whereby the Change in Control takes place or (II) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, if the Change in Control occurs other than pursuant to an acquisition of shares of Common Stock. Each Tandem SAR shall be surrendered by the holder thereof and shall be canceled simultaneously with the cancellation of the related option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 and the rules and regulations thereunder. (b) "Change in Control" shall mean: (1) any "Person" (as defined in Section 3(a)(9) of the Exchange Act) as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, L.P., any of its affiliates and any investments funds managed by it or any of its affiliates (collectively, "Apollo")), is or becomes the "beneficial owner" (as defined in Rule 13d-3 ------ under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (2) during any period of not more than two consecutive years, not including any period prior to the effective date of this Plan, individuals who at the beginning of such period constituted the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (1), (3), or (4) of this Section 6.8(b)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement dated as of November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (3) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (4) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (c) (1) With respect to any optionee who is subject to Section 16 of the Exchange Act, (i) notwithstanding the exercise periods set forth in subsections (a) and (b) of Section 2.3 and Section 5.3 or as set forth pursuant to any Agreement to which such optionee is a party and (ii) notwithstanding the expiration date of the term of such option, in the event the Company is involved in a business combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") or pursuant to which such optionee receives a ------------------- substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Company, then each option (or option in substitution thereof) held by such optionee shall be exercisable to the extent set forth in the Agreement evidencing such option until and including the latest of (x) the expiration date of the term of the option or, in the event of such optionee's termination of employment or service, the date determined pursuant to the then applicable paragraph of Section 2.3 or 5.3, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such optionee may not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests; and (2) With respect to any holder of an SAR (other than an SAR which may be settled only for cash) who is subject to Section 16 of the Exchange Act, (i) notwithstanding the exercise periods set forth in subsection (a) of Section 2.3, or as set forth pursuant to any Agreement to which such holder is a party and (ii) notwithstanding the expiration date of the term of such SAR (or related option in the case of a Tandem SAR), in the event the Company is involved in a Pooling Transaction or pursuant to which such holder receives a substitute SAR relating to any entity, including an entity directly or indirectly acquiring the Company, then each such SAR (or SAR in substitution thereof) held by such holder shall be exercisable to the extent set forth in the Agreement evidencing such SAR until and including the latest of (x) the expiration date of the term of such SAR (or related option in the case of a Tandem SAR), as the case may be, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such holder may not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests. 6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any --------------------------------------- right to participate in this Plan. Neither this Plan nor any award made hereunder shall confer upon any person any right to continued employment by the Company, any Subsidiary or any affiliate of the Company or affect in any manner the right of the Company, any Subsidiary or any affiliate of the Company to terminate the employment of any person at any time without liability hereunder. 6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a --------------------- stockholder of the Company with respect to any shares of Common Stock or other equity security of the Company which is subject to an award hereunder unless and until such person becomes a stockholder of record with respect to such shares of Common Stock or equity security. 6.11 GOVERNING LAW. This Plan, each award hereunder and the related ------------- Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to principles of conflicts of laws. PARAGON HEALTH NETWORK, INC. By: /s/ Susan Thomas Whittle ---------------------------------- Print Name: Susan Thomas Whittle Title: Senior Vice President and General Counsel EX-10.18 24 INCENTIVE COMPENSATION PLAN EXHIBIT 10.18 PARAGON HEALTH NETWORK, INC. INCENTIVE COMPENSATION PLAN I.INTRODUCTION 1.1. Purpose. The purpose of this Plan is to recruit and retain highly ------- qualified executives and other employees, to provide incentives to such individuals to attain the goals of Paragon Health Network, Inc. (the "Company") and its Affiliates (as defined below) and to provide the employees of the Company with incentive compensation based on the performance of the Company in order to enhance shareholder value. The Plan is designed to ensure that the bonuses paid hereunder to eligible participants, are deductible under Section 162(m) of the Internal Revenue Code of 1986,s amended, and the regulations and interpretations promulgated thereunder. 1.2. Description. This Plan is the means by which the Committee shall ----------- determine incentive bonuses and effect and implement awards for participating employees hereunder. II. DEFINITIONS As used in this Plan, the following terms shall have the following meanings: "Affiliate" means (a) an entity that directly or through one or more --------- intermediaries is controlled by the Company, and (b) any entity in which the Company has a significant equity interest, as determined by the Company. "Annual Incentive Bonus" means the bonus payable with respect to a fiscal ---------------------- year of the Company determined in accordance with Article 5 hereof. "Base Compensation" means the base rate of salary payable to a Participant ----------------- as most recently reflected on the books and records of the Company, exclusive of bonus, commission, fringe benefits, employee benefits, expense allowances and other nonrecurring forms of remuneration. "Board" means the Board of Directors of the Company. ----- "Cause" means (i) the failure or refusal by the Participant to perform his ----- or her normal duties (other than any such failure resulting from the Participant's incapacity due to physical or mental illness), which has not ceased within (10) ten days after a written demand for substantial performance is delivered to the participant by the Company, which demand identifies the manner in which the Company believes that the Participant has not performed such duties, (ii) the engaging by the Participant in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise or (iii) the conviction of the Participant of, or the entering of a plea of nolo contendere by, the Participant with respect to, a felony. "Change in Control" means: ----------------- (1) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act) as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, L.P., any of its affiliates and any investments funds managed by it or any of its affiliates (collectively, "Apollo")), is or becomes the "beneficial owner" (as defined ------ in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (2) during any period of not more than two consecutive years, not including any period prior to the effective date of this Plan, individuals who at the beginning of such period constituted the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (1), (3), or (4) of this definition) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement dated as of November 4, 1997, or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (3) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (4) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similiar effect) other than such a sale or disposition to Apollo. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Committee" means the Compensation Committee of the Board of Directors of --------- the Company, which shall consist of two or more members of the Board of Directors of the Company, each of whom shall be an "outside director" within the meaning of Section 162(m) of the Code. -2- "Participant" means an employee of the Company or any Affiliate meeting the ----------- requirements of Article 2 hereof, who is selected to participate in the Plan by the Committee. "Performance Measures" means the criteria and objectives, established by -------------------- the Committee. The Committee may amend or adjust the Performance Measures or other terms and conditions of an outstanding award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting, but only to the extent such adjustment would not cause any portion of the award, upon payment, to be nondeductible pursuant to Section 162(m) of the Code. Such criteria and objectives may include one or more of the following: the attainment by a share of Company common stock of a specified fair market value for a specified period of time, earnings per share, return to stockholders (including dividends), return on equity, earnings of the Company, revenues, EBITDA, EBITDAR, operating income, net income, return on assets, economic value added, cash flows market share, census, payor mix, cash flow or cost reduction goals, or any combination of the foregoing. If the Committee desires that compensation payable pursuant to any award subject to Performance Measures be "qualified performance-based compensation" within the meaning of Section 162(m) of the Code, the Performance Measures (i) shall be established by the Committee no later than the end of the first quarter of the applicable period (or such other time designated by the Internal Revenue Service) and (ii) shall satisfy all other applicable requirements imposed under Treasury Regulations promulgated under Section 162(m) of the Code, including the requirement that such Performance Measures be stated in terms of an objective formula or standard. Before any award is paid to any holder or an award subject to Performance Measures under this Plan, the Committee shall certify in writing that the applicable Performance Measures were in fact satisfied. "Performance Period" means a period specified by the Committee during which ------------------ specified Performance Measures must be attained in order for incentive compensation to be payable for that period. A Performance Period may be expressed in three or more fiscal years of the Company. "Performance Period Bonus" means the bonus payable to a participant with ------------------------ respect to a Performance Period as determined pursuant to Article 6. "Plan" means the Paragon Health Network, Inc. Incentive Compensation Plan, ---- as in effect and as amended from time to time. III. ADMINISTRATION The administration and operation of the Plan shall be supervised by the Committee with respect to all matters. The Committee may delegate responsibility for the day-to-day administration and operation of the Plan to such employees of the Company as it shall designate from time-to-time. The Committee shall interpret and construe any and all provisions of the Plan and any determination made by the Committee under the Plan shall be final and conclusive. Neither the Board of Directors nor the Committee, nor any member of the Board of Directors, nor any employee of the Company shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan (other than acts of willful misconduct) and the members of the Board of Directors and the Committee and the employees of the Company shall be entitled to indemnification and reimbursement by the Company to the maximum extent permitted at law in respect of any claim, loss, damage or expense (including counsel's fees) arising from their acts, omissions and -3- conduct in their official capacity with respect to the Plan. The Plan shall be interpreted in view of the intention that any grant of compensation pursuant to the Plan is intended to qualify as performance-based compensation with the meaning of Code Section 162(m) and the regulations and interpretations promulgated thereunder. IV. PARTICIPATION Each employee of the Company holding a position of Chief Executive Officer, Senior Vice President, Executive Vice President, Vice President, or any other employee of the Company or its Affiliates who the Committee selects for participation in the Plan, shall be eligible to receive awards under the Plan. V. ANNUAL INCENTIVE PROGRAM 5.1. Establishment of Performance Goals. Within the first ninety (90) days ---------------------------------- of each fiscal year of the Company, the Committee shall establish the Performance Measures for the payment of Annual Incentive Bonuses under the Plan. 5.2. Annual Incentive Bonus. Within the first ninety (90) days of each ---------------------- fiscal year, the Committee may establish percentages of each eligible Participant's Base Compensation to be paid as an Annual Incentive Bonus under this Article 5 upon the attainment of the Performance Measures. After establishing the percentages of Base Compensation to be paid as an Annual Incentive Bonus under this Article 5 for a fiscal year, the Committee may reduce, but not increase, the Annual Incentive Bonus payable to a Participant based upon the Committee's determination of the individual performance of such Participant for such fiscal year. In no event shall the amount of the Annual Incentive Bonus payable to any Participant attributable to a fiscal year exceed $2,000,000. 5.3. Determination of Achievement of Performance Measures. The Committee ---------------------------------------------------- shall certify the level of achievement of the Performance Measures as soon as practical after the end of the fiscal year for which the determination is being made. 5.4. Payment of Annual Incentive Bonus. --------------------------------- (a) As soon as practical after the expiration of each fiscal year of the Company, Participants who remained employed until the last day of the fiscal year, shall be entitled to receive the Annual Incentive Bonus determined in accordance with this Article 5 except to the extent a Participant elects to defer the receipt of a portion of his or her Annual Incentive Bonus in accordance with the procedures adopted by the Committee pursuant to Subsection 5.4(b). A Participant who during the year died, became disabled or terminated without Cause shall be entitled to a prorated Annual Incentive Bonus based on the number of months and partial months elapsed during such fiscal year. Payment of Annual Incentive Bonuses shall be made in cash or in shares of Restricted Stock issued pursuant to the Company's 1997 Long-Term Incentive Plan as set forth in Subsection (d) of this Section, or a combination thereof, as determined by the Committee. -4- Notwithstanding any provision in this Plan, in the event of a Change in Control, all Performance Measures relating to any Annual Incentive Bonus will be deemed satisfied and any such award shall be paid out as soon as practicable after such Change in Control. (b) The Committee may, in its discretion, institute a program allowing Participants to defer the receipt of all or a portion of their Annual Incentive Bonus otherwise payable under Subsection (a) of this Section. Any such deferred Annual Incentive Bonus shall be credited with interest until paid. Such interest shall accrue at the prime rate as reported in the Wall Street Journal as of the date any election to defer a portion of the Annual Incentive Bonus is made. (c) In lieu of the payment otherwise payable under this Section 5.4, the Committee may authorize the payment of all or a portion of the Annual Incentive Bonus in the form of Restricted Stock under the 1997 Long- Term Incentive Plan based upon a price for the shares of Restricted Stock equal to 75% of Fair Market Value (as defined in the 1997 Long- Term Incentive Plan). Any such shares of Restricted Stock will be subject to such terms and conditions as the Committee may from time to time determine. (d) The Committee may condition the payment of any or all payments of a Participant's Annual Incentive Bonus based on the Participant's providing of future services to the Company or its Affiliates. 5.5. Participants Rights Unsecured. The right of any Participant to receive ----------------------------- Annual Incentive Bonus under the Plan shall constitute an unsecured claim against the general assets of the Company. 5.6. Withholding Taxes. The Company shall have the right to deduct from ----------------- each bonus payment any federal, state and local taxes required by such laws to be withheld with respect to the payment. VI. PERFORMANCE PERIOD BONUS 6.1. Establishment of Performance Goals. Within the first ninety (90) days ---------------------------------- of each Performance Period, the Committee shall establish the Performance Measures and the Performance Period for the payment of Performance Period Bonuses under the Plan. 6.2. Performance Period Bonus. Within the first ninety (90) days of each ------------------------ Performance Period, the Committee may establish percentages of each eligible Participant's Base Compensation to be paid as a Performance Period Bonus under this Article 6 upon the attainment of the Performance Measures during the Performance Period. After establishing the percentages of Base Compensation to be paid as a Performance Period Bonus under this Article 6 for a Performance Period, the Committee may reduce, but not increase, the Performance Period Bonus payable to a Participant based upon the Committee's determination of the individual performance of such Participant for such Performance Period. In no event shall the amount of the Performance Period Bonus payable to any Participant attributable to a Performance Period exceed $10,000,000. -5- 6.3. Determination of Achievement of Performance Measures. The Committee ---------------------------------------------------- shall certify the level of achievement of the Performance Measures as soon as practical after the end of the Performance Period for which the determination is being made. 6.4. Payment of Performance Period Bonus. ----------------------------------- (a) As soon as practical after the expiration of each Performance Period, Participants who remained employed until the last day of the Performance Period, shall be entitled to receive the Performance Period Bonus determined in accordance with this Article 6 except to the extent a Participant elects to defer the receipt of a portion of his or her Performance Period Bonus in accordance with the procedures adopted by the Committee pursuant to Subsection 6.4(b). A participant who during the Performance Period died, became disabled or terminated without Cause shall be entitled to a prorated Performance Period Bonus based on the number of months and partial months elapsed during such Performance Period. Payment of Performance Period Bonuses shall be made in cash or in shares of Restricted Stock issued pursuant to the Company's 1997 Long-Term Incentive Plan as set forth in Subsection (d) hereof, or a combination thereof, as determined by the Committee (b) Notwithstanding any provision in this Plan, in the event of a Change in Control, all Performance Measures relating to any Performance Period Bonus will be deemed satisfied and any such award shall be paid out as soon as practicable after the date of such Change in Control. (c) The Committee may, in its discretion, institute a program allowing Participants to defer the receipt of all or a portion of their Performance Period Bonus otherwise payable under Subsection (a) of this Section. Any such deferred Performance Period Bonus shall be credited with interest until paid. Such interest shall accrue at the prime rate as reported in the Wall Street Journal as of the date any election to defer a portion of the Performance Period Bonus is made. (d) In lieu of the payment otherwise payable under this Section 6.4, the Committee may authorize the payment of all or a portion of the Performance Period Bonus with Restricted Stock under the 1997 Long- Term Incentive Plan based upon a price for the shares of Restricted Stock equal to 75% of Fair Market Value (as defined in the 1997 Long- Term Incentive Plan.) Any such shares of Restricted Stock will be subject to such terms and conditions as the Committee may from time to time determine. (e) The Committee may condition the payment of any or all payments of a Participant's Performance Period Bonus based on the Participant's providing of future services to the Company or its Affiliates. 6.5. Participants Rights Unsecured. The right of any Participant to ----------------------------- receive Performance Period Bonuses under the Plan shall constitute an unsecured claim against the general assets of the Company. -6- 6.6. Withholding Taxes. The Company shall have the right to deduct from ----------------- each bonus payment any federal, state and local taxes required by such laws to be withheld with respect to the payment. VII. GENERAL PROVISIONS 7.1. Amendment and Termination. The Committee may at any time amend, ------------------------- suspend, discontinue or terminate the Plan; provided, however, that no such amendment, suspension, discontinuance or termination shall adversely affect the rights of any Participant with respect to any outstanding award without his consent. All determinations concerning the interpretation and application of this Section 7.1 shall be made by the Committee. 7.2. Designation of Beneficiary. Each Participant who defers receipt of all -------------------------- or a portion of any Annual Bonus under the Plan may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to receive any payments to be made following the Participant's death. Such designation may be changed or cancelled at any time without the consent of any such beneficiary. Any such designation, change or cancellation must be made on a form provided for that purpose by the plan administrator and shall not be effective until received by the plan administrator. If no beneficiary has been named, or the designated beneficiary or beneficiaries shall have predeceased the Participant, the beneficiary shall be the Participant's spouse or, if no such spouse shall survive the Participant, the Participant's estate. If a Participant designates more than one beneficiary, the rights of such beneficiaries shall be made in equal shares, unless the Participant has designated otherwise. 7.3. Excess Parachute Payments. Notwithstanding any other provision of this ------------------------- Plan, in the event that any payment or benefit received or to be received by a Participant in connection with a Change in Control would not be deductible (in whole or part) by the Company, as a result of Section 280G of the Code, then to the extent necessary to make such portion of any payments deductible by the Company when taking into account such other payments made to a Participant in connection with such Change in Control, the Committee shall reduce the amount of any Performance Period Bonuses or Annual Incentive Bonuses payable to such Participant under the Plan. 7.4. Miscellaneous. ------------- (a) No Right of Continued Employment. Nothing in this Plan shall be -------------------------------- construed as conferring upon any Participant any right to continue in the employment of the Company or any of its subsidiaries or Affiliates. (b) No Limitation on Corporate Actions. Nothing contained in the Plan ---------------------------------- shall be construed to prevent the Company or any Affiliate from taking any corporate action which is deemed by it to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any awards made under the Plan. No employee, Participant or other person shall have any claim against the Company or any of its subsidiaries or Affiliates as a result of any such action. -7- (c) Nonalienation of Benefits. Except as expressly provided herein, ------------------------- no Participant or his beneficiaries shall have the power or right to transfer, anticipate, or otherwise encumber the Participant's interest under the Plan. The Company's obligations under this Plan are not assignable or transferable except to a corporation which acquires all or substantially all of the assets of the Company or any corporation into which the Company may be merged or consolidated. The provisions of the Plan shall inure to the benefit of each Participant and his beneficiaries, heirs, executors, administrators or successors in interest. (d) Severability. If any provision of this Plan is held ------------ unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan. (e) Governing Law. The Plan shall be construed in accordance with and ------------- governed by the laws of the State of Delaware, without reference to the principles of conflict of laws. (f) Headings. Headings are inserted in this Plan for convenience of -------- reference only and are to be ignored in a construction of the provisions of the Plan. PARAGON HEALTH NETWORK, INC. Dated: November 4, 1997 By: /s/ Susan Thomas Whittle ----------------------- --------------------------------- Title: Senior Vice President and General Counsel --------------------------------- Attest:_______________________ Title:________________________ -8- EX-10.27 25 PURCHASE AGREEMENT EXHIBIT 10.27 EXECUTION COPY LIVING CENTERS OF AMERICA, INC. (to be renamed Paragon Health Network, Inc.) $275,000,000 9 1/2% Senior Subordinated Notes due 2007 $294,000,000 10 1/2% Senior Subordinated Discount Notes due 2007 PURCHASE AGREEMENT ------------------ October 30, 1997 CHASE SECURITIES INC. SMITH BARNEY INC. CREDIT SUISSE FIRST BOSTON CORPORATION c/o Chase Securities Inc. 270 Park Avenue, 4th floor New York, New York 10017 Ladies and Gentlemen: LIVING CENTERS OF AMERICA, INC., a Delaware corporation (the "Company"), proposes to issue and sell $275,000,000 aggregate principal amount ------- of its 9 1/2% Senior Subordinated Notes due 2007 (the "Senior Subordinated ------------------- Notes") and $294,000,000 aggregate principal amount of its 10 1/2% Senior - ----- Subordinated Discount Notes due 2007 (the "Senior Subordinated Discount Notes," ---------------------------------- and together with the Senior Subordinated Notes, the "Securities"). The ---------- Securities will be issued pursuant to an Indenture to be dated as of November 1, 1997 (the "Indenture") among the Company and IBJ Schroder Bank & Trust Company, --------- as trustee (the "Trustee"). The Company hereby confirms its agreement with ------- Chase Securities Inc. ("CSI"), Smith Barney Inc. ("Smith Barney") and Credit --- ------------ Suisse First Boston Corporation ("CSFB", and together with CSI and Smith Barney, ---- the "Initial Purchasers") concerning the purchase of the Securities from the ------------------ Company by the Initial Purchasers. The Securities will be offered and sold to the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon an exemption therefrom. The Company has -------------- prepared a preliminary offering memorandum dated October 10, 1997 (the "Preliminary Offering Memorandum") and will prepare an offering memorandum dated ------------------------------- the date hereof (the "Offering Memorandum") setting forth information concerning ------------------- the Company and the Securities. Copies of the Preliminary Offering Memorandum have been, and copies of the Offering Memorandum will be, delivered by the Company to the Initial Purchasers pursuant to the terms of this Agreement. Any references herein to the Preliminary Offering Memorandum and the Offering Memorandum shall be deemed to include all amendments and supplements thereto, unless otherwise noted. The Company hereby confirms that it has authorized the use of the Preliminary Offering Memorandum and the Offering Memorandum in connection with the offering and resale of the Securities by the Initial Purchasers in accordance with Section 2. 2 Holders of the Securities (including the Initial Purchasers and their direct and indirect transferees) will be entitled to the benefits of an Exchange and Registration Rights Agreement, substantially in the form attached hereto as Annex A (the "Registration Rights Agreement"), pursuant to which the Company ----------------------------- will agree to file with the Securities and Exchange Commission (the "Commission") (i) a registration statement under the Securities Act (the ---------- "Exchange Offer Registration Statement") registering (a) an issue of senior ------------------------------------- subordinated notes of the Company (the "Senior Subordinated Exchange Notes") ---------------------------------- which are identical in all material respects to the Senior Subordinated Notes (except as indicated below) and (b) an issue of senior subordinated discount notes of the Company (the "Senior Subordinated Exchange Discount Notes", and ------------------------------------------- together with the Senior Subordinated Exchange Notes, the "Exchange Securities") ------------------- which are identical in all material respects to the Senior Subordinated Discount Notes (except that the Exchange Securities will not contain terms with respect to transfer restrictions or additional interest upon certain failures to comply with the Registration Rights Agreement) and (ii) under certain circumstances, a shelf registration statement pursuant to Rule 415 under the Securities Act (the "Shelf Registration Statement"). ---------------------------- In connection with the offering and sale of the Securities, the Company intends to borrow up to $890 million under the Senior Credit Facility. The proceeds of the initial borrowing under the Senior Credit Facility, together with the Apollo Investment and the proceeds from the offering of the Securities, will be applied by the Company to finance the cash paid in the Recapitalization Merger, the refinancing of a portion of the existing indebtedness of the Company and GranCare, Inc. ("GranCare") and fees and expenses relating to the -------- Transactions (as defined below). On the Closing Date, (i) pursuant to an Agreement and Plan of Merger dated as of May 7, 1997, which was subsequently amended and restated as of September 17, 1997 (the "Recapitalization Merger ----------------------- Agreement") among Living Centers of America, Inc. ("LCA"), Apollo Management, - --------- --- L.P. ("Apollo"), on behalf of one or more managed investment funds and Apollo LCA Acquisition Corp. ("Apollo Sub"), a subsidiary of Apollo, Apollo Sub will be ---------- merged with and into LCA (the "Recapitalization Merger"), with LCA as the ----------------------- surviving corporation and (ii) pursuant to an Agreement and Plan of Merger dated as of May 7, 1997, as amended and restated as of September 17, 1997 (the "GranCare Merger Agreement") among LCA, GranCare, Apollo and LCA Acquisition ------------------------- Sub, Inc. ("LCA Sub"), GranCare will merge with LCA Sub (the "GranCare Merger"), --------------- with GranCare being the surviving corporation in the merger. The Recapitalization Merger and the GranCare Merger are herein referred to as the "Mergers" and, together with the other transactions in connection therewith, are ------- collectively referred to herein as the "Transactions." Following completion of ------------ the Transactions, GranCare will become a wholly-owned subsidiary of LCA and LCA will be renamed Paragon Health Network, Inc. ("Paragon"). ------- Capitalized terms used but not defined herein shall have the meanings given to such terms in the Offering Memorandum. As used in this Agreement, unless the context otherwise requires: (i) the "Company" refers to LCA and its subsidiaries, and the related business and operations thereof, prior to the Mergers and to Paragon (formerly LCA) and its subsidiaries (including GranCare), and the related business and operations thereof (including the GranCare operations), after the Mergers and (ii) "GranCare" refers to GranCare, Inc., a California corporation, and its subsidiaries for periods on or prior to February 12, 1997 and to GranCare, Inc., a Delaware corporation, and its subsidiaries for periods subsequent to February 12, 1997. 1. Representations, Warranties and Agreements of the Company. The --------------------------------------------------------- Company and GranCare represent and warrant to the several Initial Purchasers on and as of the date hereof and the Closing Date (as defined in Section 3 and after giving effect to the Mergers) that: (a) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its respective date, did not, and on the Closing Date the Offering Memorandum will 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 the light of the circumstances under which they were made, not misleading; provided that no -------- representation or warranty is 3 made as to information contained in or omitted from the Preliminary Offering Memorandum or the Offering Memorandum in reliance upon and in conformity with written information relating to the Initial Purchasers furnished to the Company by or on behalf of any Initial Purchaser specifically for use therein (collectively, the "Initial Purchasers' ------------------ Information"). ----------- (b) Each of the Preliminary Offering Memorandum and the Offering Memorandum, as of its respective date, contains all of the information that, if requested by a prospective purchaser of the Securities, would be required to be provided to such prospective purchaser pursuant to Rule 144A(d)(4) under the Securities Act. (c) Assuming the accuracy of the representations and warranties of the Initial Purchasers contained in Section 2 and their compliance with the agreements set forth therein, it is not necessary, in connection with the issuance and sale of the Securities to the Initial Purchasers and the offer, resale and delivery of the Securities by the Initial Purchasers in the manner contemplated by this Agreement and the Offering Memorandum, to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust ----- Indenture Act"). ------------- (d) The Company, GranCare and each of their respective subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or hold their respective properties and to conduct the businesses in which they are engaged, except where the failure to so qualify or have such power or authority would not, singularly or in the aggregate, have a material adverse effect on the condition (financial or otherwise), results of operations, business or prospects of the Company, GranCare and their respective subsidiaries taken as a whole (a "Material -------- Adverse Effect"). -------------- (e) The Company will, on the Closing Date, have capitalization as set forth in the Offering Memorandum under the heading "Capitalization"; and all of the outstanding shares of capital stock of the Company have been duly and validly authorized and issued and are fully paid and non- assessable. All of the outstanding shares of capital stock of each subsidiary of the Company and GranCare have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company and GranCare, respectively, free and clear of any lien, charge, encumbrance, security interest, restriction upon voting or transfer or any other claim of any third party, except as otherwise disclosed in the Offering Memorandum. (f) The Company has full right, power and authority to execute and deliver this Agreement, the Indenture, the Registration Rights Agreement, the Securities and the Merger Documents (as defined in Section 15) (collectively, the "Transaction Documents") to which it is a party and to --------------------- perform its obligations hereunder and thereunder; and all corporate action required to be taken for the due and proper authorization, execution and delivery of each of the Transaction Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly and validly taken. (g) GranCare has full right, power and authority to execute and deliver this Agreement and the Merger Documents to which it is a party and to perform its obligations hereunder and thereunder; all corporate action required to be taken for the due and proper authorization, execution and delivery of each of the Merger Documents to which it is a party and the consummation of the transactions contemplated thereby have been duly and validly taken; and 4 this Agreement has been duly authorized, executed and delivered by GranCare and constitutes a valid and binding agreement of GranCare. (h) This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company. (i) The Registration Rights Agreement has been duly authorized by the Company and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (j) The Indenture has been duly authorized by the Company and, when duly executed and delivered in accordance with its terms by each of the parties thereto, will constitute a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). On the Closing Date, the Indenture will conform in all material respects to the requirements of the Trust Indenture Act and the rules and regulations of the Commission applicable to an indenture which is qualified thereunder. (k) The Securities and the Exchange Securities have been duly authorized by the Company and, when duly executed, authenticated, issued and delivered as provided in the Indenture and paid for as provided herein, will be duly and validly issued and outstanding and will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (l) The Recapitalization Merger Agreement and the GranCare Merger Agreement have been duly authorized, executed and delivered by the Company, and each constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (m) The GranCare Merger Agreement has been duly authorized, executed and delivered by GranCare, and constitutes a valid and binding agreement of GranCare enforceable against GranCare in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (n) Each Transaction Document conforms in all material respects to the description thereof contained in the Offering Memorandum. 5 (o) The execution, delivery and performance by the Company of each of the Transaction Documents to which it is a party, the issuance, authentication, sale and delivery of the Securities and compliance by the Company with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents to which it is a party will not conflict with or result in a 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 lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any statute or any judgment, order, decree, rule or regulation of any court or arbitrator or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets; and no consent, approval, authorization or order of, or filing or registration with, any such court or arbitrator or governmental agency or body under any such statute, judgment, order, decree, rule or regulation is required for the execution, delivery and performance by the Company of each of the Transaction Documents to which it is a party, the issuance, authentication, sale and delivery of the Securities and compliance by the Company with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents to which it is a party, except for such consents, approvals, authorizations, filings, registrations or qualifications (i) which shall have been obtained or made prior to the Closing Date, (ii) as may be required to be obtained or made under the Securities Act and applicable state securities laws as provided in the Registration Rights Agreement and (iii) which shall not adversely affect the ability of the Company to consummate the transactions contemplated by the Transaction Documents. (p) The execution, delivery and performance by GranCare of each of the Merger Documents to which it is a party and the consummation of the transactions contemplated by the Merger Documents to which it is a party will not conflict with or result in a 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 lien, charge or encumbrance upon any property or assets of GranCare or any of its subsidiaries pursuant to, any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which GranCare or any of its subsidiaries is a party or by which GranCare or any of its subsidiaries is bound or to which any of the property or assets of GranCare or any of its subsidiaries is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of GranCare or any of its subsidiaries or any statute or any judgment, order, decree, rule or regulation of any court or arbitrator or governmental agency or body having jurisdiction over GranCare or any of its subsidiaries or any of their properties or assets; and no consent, approval, authorization or order of, or filing or registration with, any such court or arbitrator or governmental agency or body under any such statute, judgment, order, decree, rule or regulation is required for the execution, delivery and performance by GranCare of each of the Merger Documents to which it is a party and the consummation of the transactions contemplated therein, except for such consents, approvals, authorizations, filings, registrations or qualifications (i) which shall have been obtained or made prior to the Closing Date, (ii) as may be required to be obtained or made under the Securities Act and applicable state securities laws and (iii) which shall not adversely affect the ability of GranCare to consummate the transactions contemplated by the Merger Documents. (q) Ernst & Young LLP are independent certified public accountants with respect to the Company, GranCare and their respective subsidiaries within the meaning of Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants ("AICPA") and its ----- interpretations and rulings thereunder. The historical financial statements (including the related notes) contained in the Offering Memorandum comply in all material 6 respects with the requirements applicable to a registration statement on Form S-1 under the Securities Act (except to the extent that certain earnings per share data has been omitted from the "Selected Historical Consolidated Financial and Other Data" section of the Offering Memorandum, certain pro forma tax disclosure has been omitted from the "Unaudited Pro Forma Condensed Consolidated Financial Statements" contained in the Offering Memorandum and to the extent that the "Summary Unaudited Pro Forma Financial and Other Data" and the "Unaudited Pro Forma Condensed Consolidated Financial Statements" contain certain non-GAAP disclosure without supporting footnotes); such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby and fairly present the financial position of the entities purported to be covered thereby at the respective dates indicated and the results of their operations and their cash flows for the respective periods indicated; and the financial information contained in the Offering Memorandum under the headings "Summary--Summary Unaudited Pro Forma Financial and Other Data", "Summary-- Summary Historical Consolidated Financial and Other Data", "Capitalization", "Unaudited Pro Forma Condensed Consolidated Financial Statements", "Selected Historical Consolidated Financial and Other Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" is derived from the accounting records of the Company, GranCare and their respective subsidiaries, as the case may be, and such sections of the Offering Memorandum fairly present the information purported to be shown thereby in all material respects. The pro forma financial information contained in the Offering Memorandum has been prepared on a basis consistent with the historical financial statements contained in the Offering Memorandum (except for the pro forma adjustments specified therein), includes all material adjustments to the historical financial information required by Rule 11-02 of Regulation S-X under the Securities Act and the Exchange Act to reflect the transactions described in the Offering Memorandum, gives effect to assumptions made on a reasonable basis and fairly presents the historical and proposed transactions contemplated by the Offering Memorandum and the Transaction Documents in all material respects. The other historical financial and statistical information and data included in the Offering Memorandum are, in all material respects, fairly presented. (r) Except as otherwise stated in the Offering Memorandum, there are no legal or governmental proceedings pending to which the Company, GranCare or any of their respective subsidiaries is a party or of which any property or assets of the Company, GranCare or any of their respective subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries, could reasonably be expected to have a Material Adverse Effect; and to the best knowledge of the Company and GranCare, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (s) No action has been taken and no statute, rule, regulation or order has been en acted, adopted or issued by any governmental agency or body which prevents the issuance of the Securities or suspends the sale of the Securities in any jurisdiction; no injunction, restraining order or order of any nature by any federal or state court of competent jurisdiction has been issued with respect to the Company, GranCare or any of their respective subsidiaries which would prevent or suspend the issuance or sale of the Securities or the use of the Offering Memorandum in any jurisdiction; no action, suit or proceeding is pending against or, to the knowledge of the Company and GranCare after reasonable due inquiry, threatened against or affecting the Company, GranCare or any of their respective subsidiaries before any court or arbitrator or any governmental agency, body or official, domestic or foreign, which could reasonably be expected to interfere with or adversely affect the issuance of the Securities or in any manner draw into question the validity or enforceability of any of the Transaction Documents or any action taken or to be taken pursuant thereto; and the Company and GranCare have complied with any and all requests by any securities authority in any jurisdiction for additional 7 information to be included in the Preliminary Offering Memorandum and the Offering Memorandum. (t) Neither the Company nor GranCare nor any of their respective subsidiaries is (i) in violation of its charter or by-laws, (ii) in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (iii) in violation in any material respect of any material law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject. (u) The Company, GranCare and each of their respective subsidiaries possess all material licenses, certificates, authorizations and permits issued by, and have made all declarations and filings with, the appropriate federal, state or foreign regulatory agencies or bodies which are necessary or desirable for the ownership of their respective properties or the conduct of their respective businesses as described in the Offering Memorandum, except where the failure to possess or make the same would not, singularly or in the aggregate, have a Material Adverse Effect, and neither the Company nor GranCare nor any of their respective subsidiaries has received notification of any revocation or modification of any such license, certificate, authorization or permit or has any reason to believe that any such license, certificate, authorization or permit will not be renewed in the ordinary course. (v) The Company, GranCare and their respective subsidiaries have filed all federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and have paid all taxes due thereon, except such returns, which individually or in the aggregate, do not involve material amounts or where the failure to file such returns by the Company, GranCare and their respective Significant Subsidiaries (as defined in Regulation S-X under the Securities Act), as the case may be, would not, individually or in the aggregate, materially adversely affect the business, operations or prospects of such entity, and no tax deficiency has been determined adversely to the Company, GranCare or any of their respective subsidiaries, as the case may be, which has had (nor does the Company, GranCare or any of their respective subsidiaries have any knowledge of any tax deficiency which, if determined adversely to the Company, GranCare or any of their respective subsidiaries, as the case may be, could reasonably be expected to have) a Material Adverse Effect, except to the extent that the validity thereof is being contested in good faith pursuant to appropriate proceedings. (w) Neither the Company nor GranCare nor any of their respective subsidiaries is (i) an "investment company" or a company "controlled by" an investment company within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and the rules and ---------------------- regulations of the Commission thereunder or (ii) a "holding company" or a "subsidiary company" of a holding company or an "affiliate" thereof within the meaning of the Public Utility Holding Company Act of 1935, as amended. (x) The Company, GranCare and each of their respective subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (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 the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 8 (y) The Company, GranCare and their respective subsidiaries maintain insurance of the types and in the amounts generally deemed adequate for their businesses and consistent with insurance coverage maintained by similar companies and businesses, all of which insurance is in full force and effect. (z) The Company, GranCare and each of their respective subsidiaries own or possess adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses and know- how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses; and the Company, GranCare and their respective subsidiaries have not received any notice of any claim of conflict with, any such rights of others, except for such notices of conflicts, which, if individually or in the aggregate determined adversely to the Company, GranCare or their respective subsidiaries, as the case may be, would not have a Material Adverse Effect. (aa) The Company, GranCare and each of their respective subsidiaries have good and marketable title to, or have valid rights to lease or otherwise use, all items of real and personal property which are material to the business of the Company, GranCare and their respective subsidiaries, in each case free and clear of all liens, encumbrances, claims and defects and imperfections of title except such as (i) do not materially interfere with the use made and proposed to be made of such property by the Company, GranCare and their respective subsidiaries or (ii) could not reasonably be expected to have a Material Adverse Effect. (bb) No strike or work stoppages by the employees of the Company, GranCare or any of their respective subsidiaries exists or, to the Company's or GranCare's knowledge after reasonable due inquiry, is contemplated or threatened. (cc) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section ----- 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "Code")) or "accumulated funding deficiency" (as defined in Section ---- 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan of the Company, GranCare or any of their respective subsidiaries which could reasonably be expected to have a Material Adverse Effect; each such employee benefit plan is in compliance in all material respects with applicable law, including ERISA and the Code; the Company, GranCare and each of their respective subsidiaries have not incurred and do not expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any pension plan for which the Company, GranCare or any of their respective subsidiaries would have any liability; and each such pension plan that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could reasonably be expected to cause the loss of such qualification. (dd) There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission or other release of any kind of toxic or other wastes or other hazardous substances by, due to or caused by the Company, GranCare or any of their respective subsidiaries upon any of the property now or, to the knowledge of the Company or GranCare, as the case may be, previously owned or leased by the Company, GranCare or any of their respective subsidiaries, in violation of any statute or any ordinance, rule, regulation, order, judgment, decree or permit or which would, under any statute or any ordinance, rule (including rule of common law), regulation, order, judgment, decree or permit, give rise to any liability, except for any violation or liability which could not reasonably be expected to have, 9 singularly or in the aggregate with all such violations and liabilities, a Material Adverse Effect; and there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or GranCare has knowledge, except for any such disposal, discharge, emission or other release of any kind which could not reasonably be expected to have, singularly or in the aggregate with all such discharges and other releases, a Material Adverse Effect. (ee) Neither the Company nor GranCare nor any of their respective subsidiaries nor, to the Company's or GranCare's knowledge after reasonable due inquiry, any employee or agent of the Company, GranCare or any of their respective subsidiaries has intentionally made any payment of funds of the Company, GranCare or any of their respective subsidiaries, as the case may be, or used, received or retained any funds in violation of the Foreign Corrupt Practices Act of 1977. (ff) On and immediately after the Closing Date, the Company (after giving effect to the issuance of the Securities and to the other transactions related thereto as described in the Offering Memorandum) will be Solvent. As used in this paragraph, the term "Solvent" means, with respect to a particular date, that on such date (i) the present fair market value (or present fair saleable value) of the assets of the Company is not less than the total amount required to pay the probable liabilities of the Company on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured, (ii) the Company is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business, (iii) assuming the sale of the Securities as contemplated by this Agreement and the Offering Memorandum, the Company is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature and (iv) the Company is not engaged in any business or transaction, and is not about to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Company is engaged. In computing the amount of such contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. (gg) Neither the Company nor GranCare nor any of their respective subsidiaries owns any "margin securities" as that term is defined in Regulations G and U of the Board of Gover nors of the Federal Reserve System (the "Federal Reserve Board"), and none of the proceeds of the sale --------------------- of the Securities will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security, for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Securities to be considered a "purpose credit" within the meanings of Regulation G, T, U or X of the Federal Reserve Board. (hh) Neither the Company nor GranCare nor any of their respective subsidiaries is a party to any contract, agreement or understanding with any person that would give rise to a valid claim against the Company, GranCare or the Initial Purchasers for a brokerage commission, finder's fee or like payment in connection with the offering and sale of the Securities. (ii) The Securities (i) will not, when issued, be of the same class as securities listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in an automated inter-dealer quotation system; provided, that securities that are convertible or exchangeable into securities so listed or quoted at the time of issuance and that had an effective conversion premium of less than 10%, shall be treated as securities of the class into which they 10 are convertible or exchangeable; and that warrants that may be exercised for securities so listed or quoted at the time of issuance, or that had an effective exercise premium of less than 10%, shall be treated as securities of the class to be issued upon exercise; and provided further that the Commission may from time to time, taking into account then-existing market practices, designate additional securities and classes of securities that will not be deemed of the same class as securities listed on a national securities exchange or quoted in a U.S. automated inter-dealer quotation system, and (ii) are not securities of an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act. (jj) Assuming the accuracy of the representations and warranties of the Initial Purchasers set forth in Section 2 hereof, none of the Company, GranCare, any of their respective affiliates or any person acting on its or their behalf has engaged or will engage in any directed selling efforts (as such term is defined in Regulation S under the Securities Act ("Regulation ---------- S")), and all such persons have complied and will comply with the offering - restrictions requirement of Regulation S to the extent applicable. (kk) Assuming the accuracy of the representations and warranties of the Initial Purchasers set forth in Section 2 hereof, neither the Company nor GranCare nor any of their affiliates has, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as such term is defined in the Securities Act) which is or will be integrated with the sale of the Securities in a manner that would require registration of the Securities under the Securities Act. (ll) Assuming the accuracy of the representations and warranties of the Initial Purchasers set forth in Section 2 hereof, none of the Company, GranCare, or any of their respective affiliates or any other person acting on its or their behalf has engaged, in connection with the offering of the Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act. (mm) Assuming the accuracy of the representations and warranties of the Initial Purchasers set forth in Section 2 hereof, the Company has not taken and will not take, directly or indirectly, any action prohibited by Regulation M under the Exchange Act in connection with the offering of the Securities. (nn) No forward-looking statement (within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act) contained in the Preliminary Offering Memorandum or the Offering Memorandum has been made or reaffirmed without, in light of the circumstances under which such statements were made, a reasonable basis or has been disclosed other than in good faith. (oo) None of the Company, GranCare or any of their respective subsidiaries does business with the government of Cuba or with any person or affiliate located in Cuba within the meaning of Florida Statutes Section 517.075. (pp) Since the date as of which information is given in the Offering Memorandum, except as otherwise stated therein, (i) there has been no material adverse change or any development involving a prospective material adverse change in the condition, financial or otherwise, or in the earnings, business affairs, management or business prospects of the Company or GranCare, whether or not arising in the ordinary course of business, (ii) the Company and GranCare have not incurred any material liability or obligation, direct or contingent, other than in the ordinary course of business, (iii) the Company and GranCare have not entered into any material transaction other than in the ordinary course of business and (iv) 11 there has not been any change in the capital stock or long-term debt of the Company or GranCare, or any dividend or distribution of any kind declared, paid or made by the Company or GranCare on any class of its capital stock. 2. Purchase and Resale of the Securities. (a) On the basis of the ------------------------------------- representations, warranties and agreements contained herein, and subject to the terms and conditions set forth herein, the Company agrees to issue and sell to each of the Initial Purchasers, severally and not jointly, and each of the Initial Purchasers, severally and not jointly, agrees to purchase from the Company, the principal amount of Securities set forth opposite the name of such Initial Purchaser on Schedule 1 hereto at a purchase price equal to, in the case of the Senior Subordinated Notes, 96.804% of the principal amount thereof and, in the case of the Senior Subordinated Discount Notes, 57.919% of the principal amount thereof. The Company shall not be obligated to deliver any of the Securities except upon payment for all of the Securities to be purchased as provided herein. (b) The Initial Purchasers have advised the Company that they propose to offer the Securities for resale upon the terms and subject to the conditions set forth herein and in the Offering Memorandum. Each Initial Purchaser, severally and not jointly, represents, warrants and agrees that (i) it is purchasing the Securities pursuant to a private sale exempt from registration under the Securities Act, (ii) it has not solicited offers for, or offered or sold, and will not solicit offers for, or offer or sell, the Securities by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D under the Securities Act ("Regulation D") or in any ------------ manner involving a public offering within the meaning of Section 4(2) of the Securities Act and (iii) it has solicited and will solicit offers for the Securities only from, and has offered or sold and will offer, sell or deliver the Securities, as part of their initial offering, only (A) within the United States to persons whom it reasonably believes to be qualified institutional buyers ("Qualified Institutional Buyers"), as defined in Rule 144A under the ------------------------------ Securities Act ("Rule 144A"), or if any such person is buying for one or more --------- institutional accounts for which such person is acting as fiduciary or agent, only when such person has represented to it that each such account is a Qualified Institutional Buyer to whom notice has been given that such sale or delivery is being made in reliance on Rule 144A and in each case, in transactions in accordance with Rule 144A and (B) outside the United States to persons other than U.S. persons in reliance on Regulation S under the Securities Act ("Regulation S"). ------------ (c) In connection with the offer and sale of Securities in reliance on Regulation S, each Initial Purchaser, severally and not jointly, represents, warrants and agrees that: (i) the Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in transactions not subject to, the registration requirements of the Securities Act. (ii) such Initial Purchaser has offered and sold the Securities, and will offer and sell the Securities, (A) as part of their distribution at any time and (B) otherwise until 40 days after the later of the commencement of the offering of the Securities and the Closing Date, only in accordance with Regulation S or Rule 144A or any other available exemption from registration under the Securities Act. (iii) none of such Initial Purchaser or any of its affiliates or any other person acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Securities, and all such persons have complied and will comply with the offering restrictions requirement of Regulation S. (iv) at or prior to the confirmation of sale of any Securities sold in reliance on Regulation S, it will have sent to each distributor, dealer or other person receiving a selling concession, fee 12 or other remuneration that purchases Securities from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering of the Securities and the date of original issuance of the Securities, except in accordance with Regulation S or Rule 144A or any other available exemption from registration under the Securities Act. Terms used above have the meanings given to them by Regulation S." (v) it has not and will not enter into any contractual arrangement with any distributor with respect to the distribution of the Securities, except with its affiliates or with the prior written consent of the Company. Terms used in this Section 2(c) have the meanings given to them by Regulation S. (d) Each Initial Purchaser, severally and not jointly, represents, warrants and agrees that (i) it has not offered or sold and prior to the date six months after the Closing Date will not offer or sell any Securities 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 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; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 and the Public Offers of Securities Regulations 1995 with respect to anything done by it in relation to the Securities 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 received by it in connection with the issue of the Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. (e) Each Initial Purchaser, severally and not jointly, agrees that, prior to or simultaneously with the confirmation of sale by such Initial Purchaser to any purchaser of any of the Securities purchased by such Initial Purchaser from the Company pursuant hereto, such Initial Purchaser shall furnish to that purchaser a copy of the Offering Memorandum (and any amendment or supplement thereto that the Company shall have furnished to such Initial Purchaser prior to the date of such confirmation of sale). In addition to the foregoing, each Initial Purchaser acknowledges and agrees that the Company and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Sections 5(d) and (e), counsel for the Company and for the Initial Purchasers, respectively, may rely upon the accuracy of the representations and warranties of the Initial Purchasers and their compliance with their agreements contained in this Section 2, and each Initial Purchaser hereby consents to such reliance. (f) The Company acknowledges and agrees that the Initial Purchasers may sell Securities to any affiliate of an Initial Purchaser and that any such affiliate may sell Securities purchased by it to an Initial Purchaser. 3. Delivery of and Payment for the Securities. (a) Delivery of and ------------------------------------------ payment for the Securities shall be made at the offices of Simpson Thacher & Bartlett, New York, New York, or at such other place as shall be agreed upon by the Initial Purchasers and the Company, at 9:30 A.M., New York City time, on November 4, 1997, or at such other time or date, not later than seven full business days 13 thereafter, as shall be agreed upon by the Initial Purchasers and the Company (such date and time of payment and delivery being referred to herein as the "Closing Date"). ------------ (b) On the Closing Date, payment of the purchase price for the Securities shall be made to the Company by wire or book-entry transfer of same- day funds to such account or accounts as the Company shall specify prior to the Closing Date or by such other means as the parties hereto shall agree prior to the Closing Date against delivery to the Initial Purchasers of the certificates evidencing the Securities. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of the Initial Purchasers hereunder. Upon delivery, the Securities shall be in global form, registered in such names and in such denominations as CSI on behalf of the Initial Purchasers shall have requested in writing not less than two full business days prior to the Closing Date. The Company agrees to make one or more global certificates evidencing the Securities available for inspection by CSI on behalf of the Initial Purchasers in New York, New York at least 24 hours prior to the Closing Date. 4. Further Agreements of the Company and GranCare. The Company and ---------------------------------------------- GranCare agree with each of the Initial Purchasers: (a) to advise the Initial Purchasers promptly and, if requested, confirm such advice in writing, of the happening of any event which makes any statement of a material fact made in the Offering Memorandum untrue or which requires the making of any additions to or changes in the Offering Memorandum (as amended or supplemented from time to time) in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; to advise the Initial Purchasers promptly of any order preventing or suspending the use of the Offering Memorandum, of any suspension of the qualification of the Securities for offering or sale in any jurisdiction and of the initiation or threatening of any proceeding for any such purpose; and to use its best efforts to prevent the issuance of any such order preventing or suspending the use of the Offering Memorandum or suspending any such qualification and, if any such suspension is issued, to obtain the lifting thereof at the earliest possible time; (b) to furnish promptly to each of the Initial Purchasers and counsel for the Initial Purchasers, without charge, as many copies of the Offering Memorandum (and any amend ments or supplements thereto) as may be reasonably requested; (c) prior to making any amendment or supplement to the Offering Memorandum, to furnish a copy thereof to each of the Initial Purchasers and counsel for the Initial Purchasers and not to effect any such amendment or supplement to which the Initial Purchasers shall reasonably object by notice to the Company after a reasonable period to review; (d) if, at any time prior to completion of the resale of the Securities by the Initial Purchasers, any event shall occur or condition exist as a result of which it is necessary, in the opinion of counsel for the Initial Purchasers or counsel for the Company, to amend or supplement the Offering Memorandum in order that the Offering Memorandum will not include an 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 existing at the time it is delivered to a purchaser, not misleading, or if it is necessary to amend or supplement the Offering Memorandum to comply with applicable law, to promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission or so that the Offering Memorandum, as so amended or supplemented, will comply with applicable law; (e) for so long as the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, to furnish to holders of the Securities and prospective purchasers of the Securities designated by such holders, upon request of such 14 holders or such prospective purchasers, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Exchange Act (the foregoing agreement being for the benefit of the holders from time to time of the Securities and prospective purchasers of the Securities designated by such holders); (f) for a three-year period ending on the third anniversary of the Closing Date, to furnish to the Initial Purchasers copies of any annual reports, quarterly reports and current reports filed by the Company with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar forms as may be designated by the Commission, and such other documents, reports and information as shall be furnished by the Company to the Trustee or to the holders of the Securities pursuant to the Indenture or the Exchange Act or any rule or regulation of the Commission thereunder; (g) to promptly take from time to time such actions as the Initial Purchasers may reasonably request to qualify the Securities for offering and sale under the securities or Blue Sky laws of such jurisdictions in the United States as the Initial Purchasers may reasonably designate and to continue such qualifications in effect for so long as required for the resale of the Securities; and to arrange for the determination of the eligibility for investment of the Securities under the laws of such jurisdictions as the Initial Purchasers may reasonably request; provided -------- that the Company and its subsidiaries will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject; (h) to assist the Initial Purchasers in arranging for the Securities to be designated Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") Market securities in accordance with the rules and ------ regulations adopted by the National Association of Securities Dealers, Inc. ("NASD") relating to trading in the PORTAL Market and for the Securities to ---- be eligible for clearance and settlement through The Depository Trust Company ("DTC"); --- (i) not to, and to cause its affiliates not to, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as such term is defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require registration of the Securities under the Securities Act; (j) except following the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, not to, and to cause its affiliates not to, and not to authorize or knowingly permit any person acting on their behalf to, solicit any offer to buy or offer to sell the Securities by means of any form of general solicitation or general advertising within the meaning of Regulation D or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; and not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act to cease to be applicable to the offering and sale of the Securities as contemplated by this Agreement and the Offering Memorandum; (k) from the date hereof and until the earlier of (i) 180 days after the date of the Offering Memorandum or (ii) the consummation of the Exchange Offer, not to offer for sale, sell, contract to sell or otherwise dispose of, directly or indirectly, or file a registration statement for, or announce any offer, sale, contract for sale of or other disposition of any debt securities issued or guaranteed by the Company or any of its subsidiaries (other than the Securities) without the prior written consent of the Initial Purchasers; 15 (l) during the period from the Closing Date until two years after the Closing Date, without the prior written consent of the Initial Purchasers, not to, and not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Securities that have been reacquired by them, except for Securities purchased by the Company or any of its affiliates and resold in a transaction registered under the Securities Act; (m) not to, for so long as the Securities are outstanding, be or become, or be or become owned by, an open-end investment company, unit investment trust or face-amount cer tificate company that is or is required to be registered under Section 8 of the Investment Com-pany Act, and to not be or become, or be or become owned by, a closed-end investment company required to be registered, but not registered thereunder; (n) in connection with the offering of the Securities, until CSI on behalf of the Initial Purchasers shall have notified the Company of the completion of the resale of the Securities, not to, and to cause its affiliated purchasers (as defined in Regulation M under the Exchange Act) not to, either alone or with one or more other persons, bid for or purchase, for any account in which it or any of its affiliated purchasers has a beneficial interest, any Securities, or attempt to induce any person to purchase any Securities; and not to, and to cause its affiliated purchasers not to, make bids or purchase for the purpose of creating actual, or apparent, active trading in or of raising the price of the Securities; (o) to furnish to each of the Initial Purchasers on the date hereof a copy of the independent accountants' report included in the Offering Memorandum signed by the accountants rendering such report; (p) to do and perform all things required to be done and performed by it under this Agreement that are within its control prior to or after the Closing Date, and to use its reasonable best efforts to satisfy all conditions precedent on its part to the delivery of the Securities; (q) prior to the Closing Date, not to issue any press release or other communication directly or indirectly or hold any press conference with respect to the Company or GranCare, its condition, financial or otherwise, or earnings, business affairs or business prospects (except for routine oral marketing communications in the ordinary course of business and consistent with the past practices of the Company and of which the Initial Purchasers are notified), without prior consultation with the Initial Purchasers, unless in the judgment of the Company or GranCare and their respective counsel, and after notification to the Initial Purchasers, such press release or communication is required by law; and (r) to apply the net proceeds from the sale of the Securities as set forth in the Offering Memorandum under the heading "Use of Proceeds". 5. Conditions of Initial Purchasers' Obligations. The respective --------------------------------------------- obligations of the several Initial Purchasers hereunder are subject to the accuracy, on and as of the date hereof and the Closing Date, of the representations and warranties of the Company and GranCare contained herein, to the accuracy of the statements of the Company, GranCare and their respective officers made in any certificates delivered pursuant hereto, to the performance by the Company and GranCare of their respective obligations hereunder, and to each of the following additional terms and conditions: (a) The Offering Memorandum (and any amendments or supplements thereto) shall have been printed and copies distributed to the Initial Purchasers as promptly as practicable on or following the date of this Agreement or at such other date and time as to which the Initial Purchasers may agree; and no stop order suspending the sale of the Securities in any jurisdic 16 tion shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (b) None of the Initial Purchasers shall have discovered and disclosed to the Company on or prior to the Closing Date that the Offering Memorandum or any amendment or supplement thereto contains an untrue statement of a fact which, in the written advice of counsel for the Initial Purchasers, is material or omits to state any fact which, in the written advice of such counsel (a copy of which shall be supplied to GranCare and the Company), is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other matters required for due authorization and validity of each of the Transaction Documents and the transactions contemplated thereby and the Offering Memorandum shall be satisfactory in all material respects to the Initial Purchasers, and the Company and GranCare shall have furnished to the Initial Purchasers copies of such documents and information that they or their counsel may reasonably request to enable them to pass upon such matters. (d) Powell, Goldstein, Frazer & Murphy LLP shall have furnished to the Initial Purchasers their written opinion, as counsel to the Company following the Mergers and GranCare, addressed to the Initial Purchasers and dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, substantially to the effect set forth in Annex B hereto. (e) The Initial Purchasers shall have received from Simpson Thacher & Bartlett, counsel for the Initial Purchasers, such opinion or opinions, dated the Closing Date, with respect to such matters as the Initial Purchasers may reasonably require, and the Company and GranCare shall have furnished to such counsel such documents and information as they request for the purpose of enabling them to pass upon such matters. (f) The Company and GranCare shall have furnished to the Initial Purchasers a letter (the "Initial Letter") of Ernst & Young LLP, addressed -------------- to the Initial Purchasers and dated the date hereof, in form and substance satisfactory to the Initial Purchasers, substantially to the effect set forth in Annex C hereto. (g) The Company and GranCare shall have furnished to the Initial Purchasers a letter (the "Bring-Down Letter") of Ernst & Young LLP, ----------------- addressed to the Initial Purchasers and dated the Closing Date (i) confirming that they are independent public accountants with respect to the Company and its subsidiaries and GranCare and its subsidiaries, respectively, within the meaning of Rule 101 of the Code of Professional Conduct of the AICPA and its interpretations and rulings thereunder, (ii) stating, as of the date of the Bring-Down Letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Offering Memorandum, as of a date not more than three business days prior to the date of the Bring-Down Letter), that the conclusions and findings of such accountants with respect to the financial information and other matters covered by the Initial Letter are accurate and (iii) confirming in all material respects the conclusions and findings set forth in the Initial Letter. (h) The Company shall have furnished to the Initial Purchasers a certificate, dated the Closing Date, of its Executive Vice President and Chief Financial Officer and Vice President and Associate General Counsel, solely in their capacity as officers and not in their individual capacity, stating that (A) such officers have examined the Offering Memorandum, (B) in their opinion, the Offering Memorandum, as of its date, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary in 17 order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and since the date of the Offering Memorandum, no event has occurred which should have been set forth in a supplement or amendment to the Offering Memorandum so that the Offering Memorandum (as so amended or supplemented) would not include any untrue statement of a material fact and would not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and (C) to his knowledge after reasonable due inquiry, as of the Closing Date, the representations and warranties of the Company in this Agreement are true and correct, the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date in all material respects, and subsequent to the date of the most recent financial statements contained in the Offering Memorandum, there has been no material adverse change in the financial position or results of operation of the Company and its subsidiaries taken as a whole, or any change, or any development including a prospective change, in or affecting the condition (financial or otherwise), results of operations, business or prospects of the Company and its subsidiaries taken as a whole, except as set forth in the Offering Memorandum. Such officers may also state that (i) they were the Executive Vice President and Chief Financial Officer of LCA (prior to the Mergers) and the Vice President, Assistant General Counsel and Assistant Secretary of GranCare (prior to the Mergers), (ii) they participated in the preparation of the Offering Memorandum, and (iii) they are generally familiar with the operations and business of the respective corporations of which they were officers, have made such inquiries as they deemed appropriate in connection with making this certificate and have conferred amongst themselves in its preparation. (i) GranCare shall have furnished to the Initial Purchasers a certificate, dated the Closing Date, of its general counsel and its chief financial officer, solely in their capacity as officers and not in their individual capacity, stating that (A) such officers have examined the Offering Memorandum, (B) in their opinion, the GranCare Information contained in the Offering Memorandum, as of its date, did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and since the date of the Offering Memorandum, no event has occurred in respect of GranCare which should have been set forth in a supplement or amendment to the Offering Memorandum so that the Offering Memorandum (as so amended or supplemented) would not include any untrue statement of a material fact and would not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading and (C) to their knowledge after reasonable due inquiry, as of the Closing Date, the representations and warranties of GranCare in this Agreement are true and correct, GranCare has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date in all material respects, and subsequent to the date of the most recent financial statements contained in the Offering Memorandum, there has been no material adverse change in the financial position or results of operations of GranCare and its subsidiaries taken as a whole, or any change, or any development including a prospective change, in or affecting the condition (financial or otherwise), results of operations, business or prospects of GranCare and its subsidiaries taken as a whole, except as set forth in the Offering Memorandum. (j) The Initial Purchasers shall have received a counterpart of the Registration Rights Agreement which shall have been executed and delivered by a duly authorized officer of the Company. 18 (k) The Indenture shall have been duly executed and delivered by the Company and the Trustee, and the Securities shall have been duly executed and delivered by the Company and duly authenticated by the Trustee. (l) The Securities shall have been approved by the NASD for trading in the PORTAL Market. (m) If any event shall have occurred that requires the Company under Section 4(d) to prepare an amendment or supplement to the Offering Memorandum, such amendment or supplement shall have been prepared, the Initial Purchasers shall have been given a reasonable opportunity to comment thereon, and copies thereof shall have been delivered to the Initial Purchasers reasonably in advance of the Closing Date. (n) There shall not have occurred any invalidation of Rule 144A under the Securities Act by any court or any withdrawal or proposed withdrawal of any rule or regulation under the Securities Act or the Exchange Act by the Commission or any amendment or proposed amendment thereof by the Commission which, in the case of a proposed withdrawal, in the written advice of counsel to the Initial Purchasers, a copy of which will be delivered to GranCare and the Company, is reasonably likely to occur and would materially impair the ability of the Initial Purchasers to purchase, hold or effect resales of the Securities as contemplated hereby. (o) Except as otherwise disclosed in the Offering Memorandum (exclusive of any amendment or supplement thereto), subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Offering Memorandum (exclusive of any amendment or supplement thereto), there shall not have been any change in the capital stock or long-term debt or any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), results of operations, business or prospects of the Company and its subsidiaries taken as a whole (including GranCare prior to the consummation of the Mergers), the effect of which, in any such case described above, is, in the judgment of the Initial Purchasers, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement and the Offering Memorandum, which change or development shall be specified in writing by the Initial Purchasers to the Company and GranCare (exclusive of any amendment or supplement thereto). (p) No action shall have been taken and no statute, rule, regulation or order shall have been enacted, adopted or issued by any governmental agency or body which would, as of the Closing Date, prevent the issuance or sale of the Securities; and no injunction, restraining order or order of any other nature by any federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance or sale of the Securities. (q) Subsequent to the execution and delivery of this Agreement (i) no downgrading shall have occurred in the rating accorded the Securities or any of the Company's or GranCare's other debt securities or preferred stock by any "nationally recognized statistical rating organization", as such term is defined by the Commission for purposes of Rule 436(g)(2) of the rules and regulations of the Commission under the Securities Act and (ii) no such organization shall have publicly announced that it has under surveillance or review (other than an announcement with positive implications of a possible upgrading), its rating of the Securities or any of the Company's or GranCare's other debt securities or preferred stock. (r) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the over-the-counter market shall have been suspended or limited, or minimum prices shall 19 have been established on any such exchange or market by the Commission, by any such exchange or by any other regulatory body or governmental authority having jurisdiction, or trading in any securities of the Company on any exchange or in the over-the-counter market shall have been suspended or (ii) any moratorium on commercial banking activities shall have been declared by federal or New York state authorities or (iii) an outbreak or escalation of hostilities or a declaration by the United States of a national emergency or war shall have occurred or (iv) a material adverse change in general economic, political or financial conditions (or in the effect of international conditions on the financial markets in the United States) shall have occurred, the effect of which, in the case of this clause (iv), is, in the judgment of the Initial Purchasers, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or the delivery of the Securities on the terms and in the manner contemplated by this Agreement and in the Offering Memorandum (exclusive of any amendment or supplement thereto). (s) The Initial Purchasers shall have received (i) copies of each of the Merger Documents, and the documentation evidencing the Senior Credit Facility (the "Bank Documents"), in each case certified by the secretary of -------------- the Company as being true, complete and correct and (ii) evidence, reasonably satisfactory to them, that (A) each of the Transactions shall have been or is being consummated in accordance with the terms of the Merger Documents (and without waiver or amendment of any material condition contained therein) and (B) the initial funding shall have occurred or is occurring under the Bank Documents and the Company shall have received at least $690 million in gross cash proceeds therefrom. The Bank Documents and the Merger Documents shall be in form and substance reasonably satisfactory to the Initial Purchasers; provided, however, the condition set forth in clause (ii)(A) of this paragraph relating to the consummation of the Transactions may not be waived by the Initial Purchasers. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Initial Purchasers. 6. Termination. The obligations of the Initial Purchasers hereunder ----------- may be terminated by the Initial Purchasers, in their absolute discretion, by notice given to and received by the Company prior to delivery of and payment for the Securities if, prior to that time, any of the events described in Section 5(n), (o), (p), (q) or (r) shall have occurred and be continuing. 7. Defaulting Initial Purchasers. (a) If, on the Closing Date, any ----------------------------- Initial Purchaser defaults in the performance of its obligations under this Agreement, the non-defaulting Initial Purchasers may make arrangements for the purchase of the Securities which such defaulting Initial Purchaser agreed but failed to purchase by other persons satisfactory to the Company and the non- defaulting Initial Purchasers, but if no such arrangements are made within 48 hours after such default, this Agreement shall terminate without liability on the part of the non-defaulting Initial Purchasers or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 8 and 12 and except that the provisions of Sections 9 and 10 shall not terminate and shall remain in effect. As used in this Agreement, the term "Initial Purchasers" includes, for all purposes of this Agreement unless the context otherwise requires, any party not listed in Schedule 1 hereto that, pursuant to this Section 7, purchases Securities which a defaulting Initial Purchaser agreed but failed to purchase. (b) Nothing contained herein shall relieve a defaulting Initial Purchaser of any liability it may have to the Company or any non-defaulting Initial Purchaser for damages caused by its default. If other persons are obligated or agree to purchase the Securities of a defaulting Initial Purchaser, either the non-defaulting Initial Purchasers or the Company may postpone the Closing Date for up to seven full 20 business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Initial Purchasers may be necessary in the Offering Memorandum or in any other document or arrangement, and the Company agrees to promptly prepare any amendment or supplement to the Offering Memorandum that effects any such changes. 8. Reimbursement of Initial Purchasers' Expenses. If (a) this --------------------------------------------- Agreement shall have been terminated pursuant to Section 6 or 7, (b) the Company shall fail to tender the Securities for delivery to the Initial Purchasers for any reason or (c) the Initial Purchasers shall decline to purchase the Securities for any reason permitted under this Agreement, the Company shall reimburse the Initial Purchasers for such out-of-pocket expenses (including reasonable fees and disbursements of counsel) as shall have been reasonably incurred by the Initial Purchasers in connection with this Agreement and the proposed purchase and resale of the Securities. If this Agreement is terminated pursuant to Section 7 by reason of the default of one or more of the Initial Purchasers, the Company shall not be obligated to reimburse any defaulting Initial Purchaser on account of such expenses. 9. Indemnification. (a) The Company shall indemnify and hold --------------- harmless each Initial Purchaser, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls any Initial Purchaser within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 9(a) and Section 10 as an Initial Purchaser), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of the Securities), to which that Initial Purchaser may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, solely insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum or in any amendment or supplement thereto or in any information provided by the Company pursuant to Section 4(e) or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse each Initial Purchaser promptly upon demand for any legal or other expenses reasonably incurred by that Initial Purchaser in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company -------- ------- shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Initial Purchasers' Information furnished by such Initial Purchaser; and provided, further, that -------- ------- with respect to any such untrue statement in or omission from the Preliminary Offering Memorandum, the indemnity agreement contained in this Section 9(a) shall not inure to the benefit of any such Initial Purchaser to the extent that the sale to the person asserting any such loss, claim, damage, liability or action was an initial resale by such Initial Purchaser and any such loss, claim, damage, liability or action of or with respect to such Initial Purchaser results from the fact that both (A) to the extent required by applicable law, a copy of the Offering Memorandum was not sent or given to such person at or prior to the written confirmation of the sale of such Securities to such person and (B) the untrue statement in or omission from the Preliminary Offering Memorandum was corrected in the Offering Memorandum unless such failure to deliver the Offering Memorandum was a result of non-compliance by the Company with Section 4(b). (b) Each Initial Purchaser, severally and not jointly, shall indemnify and hold harmless the Company, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 9(b) and Section 10 as the Company), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company may become subject, whether commenced or threatened, under the Securities Act, 21 the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, solely insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Offering Memorandum or the Offering Memorandum or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with any Initial Purchasers' Information furnished by such Initial Purchaser, and shall reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 9(a) or 9(b), notify the indemnifying party in writing of the claim or the commencement of that action; provided, -------- however, that the failure to notify the indemnifying party shall not relieve it - ------- from any liability which it may have under this Section 9 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and, provided, further, that the failure to -------- ------- notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 9. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 9 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that an -------- ------- indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based upon written advice of counsel to the indemnified party, a copy of which shall be provided to the indemnifying party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict or potential conflict exists (based upon written advice of counsel to the indemnified party, a copy of which shall be provided to the indemnifying party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 9(a) and 9(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified 22 party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. The obligations of the Company and the Initial Purchasers in this Section 9 and in Section 10 are in addition to any other liability that the Company or the Initial Purchasers, as the case may be, may otherwise have, including in respect of any breaches of representations, warranties and agreements made herein by any such party. 10. Contribution. If the indemnification provided for in Section 9 ------------ is unavailable or insufficient to hold harmless an indemnified party under Section 9(a) or 9(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above 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 Company on the one hand and the Initial Purchasers on the other with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities purchased under this Agreement (before deducting expenses) received by or on behalf of the Company, on the one hand, and the total discounts and commissions received by the Initial Purchasers with respect to the Securities purchased under this Agreement, on the other, bear to the total gross proceeds from the sale of the Securities under this Agreement, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company or information supplied by the Company on the one hand or to any Initial Purchasers' Information on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Initial Purchasers agree that it would not be just and equitable if contributions pursuant to this Section 10 were to be determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation that 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 loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 10 shall be deemed to include, for purposes of this Section 10, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 10, no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total discounts and commissions received by such Initial Purchaser with respect to the Securities purchased by it under this Agreement exceeds the amount of any damages which such Initial Purchaser has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute as provided in this Section 10 are several in proportion to their respective purchase obligations and not joint. 11. Persons Entitled to Benefit of Agreement. This Agreement shall ---------------------------------------- inure to the benefit of and be binding upon the Initial Purchasers, the Company and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except as 23 provided in Sections 9 and 10 with respect to affiliates, officers, directors, employees, representatives, agents and controlling persons of the Company and the Initial Purchasers and in Section 4(e) with respect to holders and prospective purchasers of the Securities. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 11, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 12. Expenses. The Company agrees with the Initial Purchasers to pay -------- (a) the costs incident to the authorization, issuance, sale, preparation and delivery of the Securities and any taxes payable in that connection; (b) the costs incident to the preparation, printing and distribution of the Preliminary Offering Memorandum, the Offering Memorandum and any amendments or supplements thereto; (c) the costs of reproducing and distributing each of the Transaction Documents; (d) the costs incident to the preparation, printing and delivery of the certificates evidencing the Securities, including stamp duties and transfer taxes, if any, payable upon issuance of the Securities; (e) the fees and expenses of the Company's counsel (including, without limitation, the fees and expenses of counsel to the Company prior to completion of the Mergers), GranCare's counsel and their respective independent accountants; (f) the fees and expenses of qualifying the Securities under the securities laws of the several jurisdictions as provided in Section 4(g) and of preparing, printing and distributing Blue Sky Memoranda (including related fees and expenses of counsel for the Initial Purchasers); (g) any fees charged by rating agencies for rating the Securities; (h) the fees and expenses of the Trustee and any paying agent (including related fees and expenses of any counsel to such parties); (i) all expenses and application fees incurred in connection with the application for the inclusion of the Securities on the PORTAL Market and the approval of the Securities for book-entry transfer by DTC; and (j) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement which are not otherwise specifically provided for in this Section 12; provided, however, that except as provided in this Section 12 and Section 8, the - -------- ------- Initial Purchasers shall pay their own costs and expenses. 13. Survival. The respective indemnities, rights of contribution, -------- representations, warranties and agreements of the Company and the Initial Purchasers contained in this Agreement or made by or on behalf of the Company or the Initial Purchasers pursuant to this Agreement or any certificate delivered pursuant hereto shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any of them or any of their respective affiliates, officers, directors, employees, representatives, agents or controlling persons, until such time as the applicable statute of limitations has expired. 14. Notices, etc.. All statements, requests, notices and agreements ------------- hereunder shall be in writing, and: (a) if to the Initial Purchasers, shall be delivered or sent by mail or telecopy transmission to Chase Securities Inc., 270 Park Avenue, New York, New York 10017, Attention: David Fass (telecopier no.: (212) 270- 0994); (b) if to the Company, shall be delivered or sent by mail or telecopy transmission to the address of the Company set forth in the Offering Memorandum, Attention: General Counsel (telecopier no.: (770) 698-8199); or (c) if to GranCare, shall be delivered or sent by mail or telecopy transmission to GranCare, Inc., One Ravinia Drive, Suite 1500, Atlanta Georgia 30346, Attention: General Counsel (telecopier no.: (770) 698- 8199). provided that any notice to an Initial Purchaser pursuant to Section 9(c) shall - -------- also be delivered or sent by mail to such Initial Purchaser at its address set forth on the signature page hereof. Any such statements, 24 requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Initial Purchasers by CSI. 15. Definition of Terms. For purposes of this Agreement, (a) the ------------------- term "business day" means any day on which the New York Stock Exchange, Inc. is open for trading, (b) the term "subsidiary" has the meaning set forth in Rule 405 under the Securities Act, (c) except where otherwise expressly provided, the term "affiliate" has the meaning set forth in Rule 405 under the Securities Act and (d) the term "Merger Documents" means the collective reference to the Recapitalization Merger Agreement, the GranCare Merger Agreement and each of the other related agreements to which either LCA or GranCare is a party to be executed and delivered on or prior to the Closing Date pursuant thereto or in connection therewith. 16. Initial Purchasers' Information. The parties hereto acknowledge ------------------------------- and agree that, for all purposes of this Agreement, the Initial Purchasers' Information consists solely of the following information in the Preliminary Offering Memorandum and the Offering Memorandum: (i) the last paragraph on the front cover page concerning the terms of the offering by the Initial Purchasers; (ii) the first paragraph on page (i); and (iii) the information contained in the first sentence of the third paragraph, the second sentence of the fourth paragraph, the fifth paragraph, the seventh paragraph, the second sentence of the ninth paragraph, the twelfth paragraph and the thirteenth paragraph under the heading "Plan of Distribution". 17. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED ------------- IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 18. Counterparts. This Agreement may be executed in one or more ------------ counterparts (which may include counterparts delivered by telecopier) and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 19. Amendments. No amendment or waiver of any provision of this ---------- Agreement, nor any consent or approval to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by the parties hereto. 20. Headings. The headings herein are inserted for convenience of -------- reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement among the parties hereto in accordance with its terms. Very truly yours, LIVING CENTERS OF AMERICA, INC. By /s/ Charles B. Carden -------------------------------- Name: Charles B. Carden Title: Chief Financial Officer GRANCARE, INC. (solely as to its representations, warranties and agreements contained in Sections 1 and 4 that pertain to GranCare) By /s/ Keith J. Yoder ---------------------------------- Name: Keith J. Yoder Title: Chief Financial Officer Accepted: CHASE SECURITIES INC. By /s/ David Fass ---------------------------- Authorized Signatory Address for notices pursuant to Section 9(c): 1 Chase Plaza, 25th floor New York, New York 10081 Attention: Legal Department SMITH BARNEY INC. By /s/ John K. Hudson --------------------------- Authorized Signatory Address for notices pursuant to Section 9(c): 388 Greenwich Street New York, New York 10003 Attention: Legal Department CREDIT SUISSE FIRST BOSTON CORPORATION By /s/ M.W. Kennelly -------------------------- Authorized Signatory Address for notices pursuant to Section 9(c): Eleven Madison Avenue, 24th Floor New York, New York 10010 Attention: Investment Banking Department/Transactions Advisory Group SCHEDULE 1 SENIOR SUBORDINATED NOTES
Principal Amount of Senior Initial Purchasers Subordinated Notes to be Purchased - ------------------ ---------------------------------- Chase Securities Inc. $ 176,000,000 Smith Barney Inc. $ 74,250,000 Credit Suisse First Boston Corporation $ 24,750,000 ------------------------ Total $ 275,000,000 ==========================
SENIOR SUBORDINATED DISCOUNT NOTES
Principal Amount of Senior Initial Purchasers Subordinated Discount Notes to Be Purchased - ------------------ ------------------------------------------- Chase Securities Inc. $ 188,160,000 Smith Barney Inc. $ 79,380,000 Credit Suisse First Boston Corporation $ 26,460,000 ------------------------ Total $ 294,000,000 ==========================
EX-10.28 26 TERMINATION RELEASE AGREEMENT EXHIBIT 10.28 FOR SETTLEMENT PURPOSES ONLY TERMINATION AND RELEASE AGREEMENT --------------------------------- THIS TERMINATION AND RELEASE AGREEMENT (the "Agreement") dated as of September 3, 1997, by and among GranCare, Inc., a Delaware corporation ("GranCare"), Manor Care, Inc., a Delaware corporation ("Manor Care"), Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink;" together with Manor Care and GranCare, referred to collectively herein as the "Transaction Parties"), and, solely for the purpose of making the representations and warranties set forth in Section 7 hereof and obtaining and granting the release contained in Section 8 hereof, Apollo Management, L.P., a Delaware limited partnership ("Apollo") and Living Centers of America, Inc., a Delaware corporation ("LCA"). W I T N E S S E T H: ------------------- WHEREAS, in connection with the consummation of the transactions contemplated by that certain Amended and Restated Agreement and Plan of Distribution dated as of September 3, 1996 (the "Distribution Agreement") and that certain Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996 (the "Vitalink Merger Agreement"), GranCare, Vitalink and Manor Care executed and delivered a Non-Competition Agreement, dated as of February 12, 1997 (the "Non-Competition Agreement"); WHEREAS, GranCare desires to obtain the flexibility to pursue such strategic initiatives as it may determine from time to time to present the best alternatives then available to GranCare free from the limitations that Vitalink has asserted are imposed by the Non-Competition Agreement; and WHEREAS, the Transaction Parties desire to terminate the Non-Competition Agreement on the terms and subject to the conditions contemplated by this Agreement. NOW THEREFORE, in consideration of the premises and covenants set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows: Section 1. As of the Closing Date (as defined below), the Non-Competition ---------- Agreement shall be terminated and have no further force and effect with respect to any of the Transaction Parties. Section 2. At the Closing (as defined below) of the transactions ---------- contemplated by this Agreement, GranCare shall pay to Vitalink and Manor Care, in cash by wire transfer of immediately available funds, the sums of $18,500,000 and $500,000, respectively (collectively, the "Termination Fee") in consideration of the cancellation and termination of the Non-Competition Agreement. Section 3. In recognition of the intention of the Transaction Parties to ---------- terminate the Non-Competition Agreement as of the Closing Date, the Transaction Parties will, concurrently with the execution of this document, execute stipulations and proposed orders in the forms attached hereto as Schedule 3.1 which orders will, inter alia, vacate the preliminary injunction issued in the Litigation (as defined in Section 8 hereof), and the stipulation and order to be filed in the Court of Chancery for the State of Delaware (the "Chancery Court Stipulation") will provide that GranCare will not consummate the LCA Transactions (as defined in the Chancery Court Stipulation) in their present or any alternative form except contemporaneously with or subsequent to the payment of the Termination Fee as contemplated by this Agreement. The Transaction Parties shall use commercially reasonable efforts to secure the entry of such orders. -2- Nothing in this Agreement or the proposed Chancery Court Stipulation shall constitute a waiver by LCA or Apollo of any rights with respect to GranCare conferred upon them by the GranCare Merger Agreement (as defined in the Proxy Statement/Prospectus (as defined below)). Section 4. In furtherance of the reciprocal obligations of GranCare and ---------- Vitalink pursuant to Article IV of the Distribution Agreement, following the Closing, GranCare and Vitalink will cooperate fully with each other in completing any audits and/or the preparation of any necessary filings regarding prior financial or fiscal periods. Such cooperation shall include, but is not limited to, GranCare requesting (if so requested by Vitalink) Ernst & Young to perform audit work for Vitalink at Vitalink's expense. The foregoing agreement shall be subject at times to the other provisions of the Distribution Agreement. Section 5. The consummation of the transactions contemplated hereby (the ---------- "Closing") shall occur at the offices of Powell, Goldstein, Frazer & Murphy LLP, or at such other location as the Transaction Parties may agree, on such date as GranCare shall select following the fulfillment or waiver of all conditions to such Closing; provided, however, that in no event shall the Closing be effective (the "Closing Date") later than the first to occur of either the Effective Time of the Mergers (as defined in Amendment No. 2 to the Joint Proxy Statement/Prospectus of GranCare and LCA (the "Proxy Statement/Prospectus")) or July 31, 1998. Section 6. The obligation of the Transaction Parties to consummate the ---------- transactions contemplated by this Agreement is subject only to the fulfillment or waiver of the following conditions: (i) The waiver or fulfillment of all of the conditions to the consummation of the LCA Transactions in the form described in the Proxy Statement/Prospectus or any alternative form. This condition may be waived by GranCare in its sole discretion. -3- (ii) The waiver or fulfillment of all of the conditions to the termination of that certain Shareholders Agreement, dated as of February 12, 1997, by and between Manor Care and Vitalink. This condition may be waived by Manor Care in its sole discretion. Section 7. The parties hereto do hereby represent and warrant as follows: ---------- (i) Manor Care is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Manor Care has the requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Manor Care and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Manor Care. This Agreement has been duly executed and delivered by Manor Care and constitutes a valid and binding obligations of Manor Care enforceable against Manor Care in accordance with its terms. (ii) Vitalink is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. Vitalink has the requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Vitalink and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Vitalink. This Agreement has been duly executed and delivered by Vitalink and constitutes a valid and binding obligation of Vitalink enforceable against Vitalink in accordance with its terms. (iii) GranCare is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. GranCare has the requisite corporate power and authority to enter into this Agreement and consummate the transactions contemplated hereby. The execution and delivery of this Agreement by GranCare and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of GranCare. This Agreement has been duly executed and delivered by GranCare and constitutes a valid and binding obligation of GranCare enforceable against GranCare in accordance with its terms. (iv) Apollo is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite power and authority -4- under its organizational documents to carry on its business as now being conducted. Apollo has the requisite power and authority to enter into this Agreement solely for the purpose of granting and obtaining the release contained in Section 8 hereof. The execution and delivery of this Agreement by Apollo and the granting of the release contemplated hereby have been duly authorized by all necessary action on the part of Apollo. This Agreement has been duly executed and delivered by Apollo and constitutes a valid and binding obligation of Apollo enforceable against Apollo in accordance with its terms. (v) LCA is duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to carry on its business as now being conducted. LCA has the requisite corporate power and authority to enter into this Agreement solely for the purpose of granting and obtaining the release contained in Section 8 hereof. The execution and delivery of this Agreement by LCA and the granting of the release contemplated hereby have been duly authorized by all necessary corporate action on the part of LCA. This Agreement has been duly executed and delivered by LCA enforceable against LCA in accordance with its terms. Section 8. Effective as of the Closing Date, and simultaneously with the ---------- payment of the Termination Fee, each of GranCare, Apollo and LCA, as one party, and Manor Care and Vitalink, as the other party, do hereby settle, release and discharge the other party; the other party's past or present officers, directors, employees, partners, principals, counsel, investment bankers, agents, controlling persons, if any; the other party's past or present affiliates; and the other party's past and present affiliates' respective past or present officers, directors, employees, partners, principals, counsel, investment bankers, agents, controlling persons, if any, (but nothing herein shall constitute a release or waiver of any claims by GranCare, Apollo and LCA against one another) of and from any and all manner of claims, actions or proceedings of any nature which have been, could have been, or could be brought in any local, state or federal court, administrative agency or other tribunal, including but not limited to, those arising under common law, federal law, or state statutory law, including the state and federal securities laws, in law or in equity, suits, debts, liens, contracts, agreements, promises, liability, claims, demands, -5- damages, loss, cost or expense, of any nature whatsoever, known or unknown, fixed or contingent, including all claims for incidental, consequential, punitive or exemplary damages or other equitable relief (including injunctive relief) arising out of any of the foregoing, which each now has or may hereafter have against any of the foregoing, by reason of any matter, cause or thing whatsoever from the beginning of time to the date hereof, arising out of or relating to the Non-Competition Agreement, including, without limitation, in the case of the Transaction Parties, any claims and causes of action that were or could have been asserted by any or all of them against any or all of the other Transaction Parties directly related to or arising out of the Non-Competition Agreement, including claims or causes of action that were or could have been asserted in that certain litigation commenced by Manor Care and Vitalink in the Court of Chancery in and for the County of New Castle, State of Delaware, entitled Vitalink Pharmacy Services, Inc. and Manor Care, Inc. v. GranCare, Inc. ----------------------------------------------------------------------- f/k/a New GranCare, Inc., Civil Action No. 15744, and all proceedings before the - ------------------------- Court of Chancery of the State of Delaware and the Supreme Court of the State of Delaware (collectively, the "Litigation"), and, in the case of Apollo and LCA, any claims that could have been asserted by either or both of them against Manor Care and/or Vitalink, or by Manor Care and/or Vitalink against Apollo or LCA arising out of or relating to the Litigation or the actions of any released party in connection therewith or the actions of Apollo or LCA in connection with the various proposed transactions described in the Proxy Statement/Prospectus, except claims and causes of action arising out of or relating to any breach of - ------ or failure to perform any obligation under this Agreement or any document or instrument delivered pursuant to or in connection with this Agreement. For purposes of this Agreement, the term "affiliates" shall have the meaning as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Nothing herein shall constitute a release or termination of any -6- written contract among the parties hereto other than the Non-Competition Agreement or a release by any party of any claims by such party against such party's own employees, officers and directors. Section 9. At the Closing, the Transaction Parties shall execute and ---------- deliver any agreements and other documents contemplated by this Agreement necessary to give effect to the consummation of the transactions contemplated hereby and GranCare shall pay to Vitalink and Manor Care the Termination Fee. Effective as of the Closing Date, Manor Care, Vitalink and GranCare, in recognition of the termination and discharge of the Non-Competition Agreement, shall take action as shall be necessary to dismiss with prejudice the Litigation. Section 10. This Agreement shall be governed by the laws of the State of ----------- Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. Section 11. This Agreement shall be binding on and inure to the benefit of ----------- the parties hereto and their respective legal representatives, successors and assigns including, without limitation, any successor by operation of law to any of such parties. Nothing in this Agreement, expressed or implied, is intended to confer on any persons other than the parties hereto or their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. Section 12. In case any one or more of the provisions contained in this ----------- Agreement should be invalid, illegal or unenforceable in any respect against a party hereto, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be -7- affected or impaired thereby and such invalidity, illegality or unenforceability shall only apply as to such party in the specific jurisdiction where such judgment shall be made. Section 13. All notices and other communications hereunder shall be in ----------- writing and shall be deemed to have been duly given when delivered in person, by facsimile transmission with confirmation of receipt, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: If to GranCare: GranCare, Inc. One Ravina Drive, Suite 1500 Atlanta, Georgia 30346 Attention: General Counsel If to Manor Care: Manor Care, Inc. 11555 Darnestown Road Gaithersburg, Maryland 20878 Attention: General Counsel If to Vitalink: Vitalink Pharmacy Services, Inc. 1250 E. Diehl Road Naperville, Illinois 60563 Attention: General Counsel If to Apollo: c/o Apollo Management, L.P. 1999 Avenue of the Stars, Suite 1900 Los Angeles, California 90067 Attention: Peter P. Copses If to LCA: Living Centers of America, Inc. 15415 Katy Freeway, Suite 800 Houston, Texas 77094 Attention: General Counsel -8- or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above (provided that notice of any change of address shall be effective only upon receipt thereof). Section 14. 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. Section 15. This Agreement may be amended, modified or supplemented only ----------- with the written agreement of GranCare, Vitalink and Manor Care and, with respect to any amendments to Section 7 or Section 8 hereof, the written agreement of Apollo and LCA. [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] -9- IN WITNESS WHEREOF, the parties hereto have executed this Termination and Release Agreement as of the date first written above. MANOR CARE, INC. By: /s/ Stewart Bainum, Jr. ------------------------------ Stewart Bainum, Jr. Chief Executive Officer VITALINK PHARMACY SERVICES, INC. By: /s/ Donna L. DeNardo ------------------------------ Donna L. DeNardo President GRANCARE, INC. By: /s/ M. Scott Athans -------------------------------- M. Scott Athans Chief Executive Officer The undersigned has executed this Termination and Release Agreement solely for the purpose of making the representations and warranties set forth in Section 7 and obtaining and granting the release contained in Section 8 hereinabove. APOLLO MANAGEMENT, L.P. By: AIF Management, Inc. Its: General Partner By:/s/ Peter P. Copses ---------------------------- Name: Peter P. Copses Title: Vice President -10- IN WITNESS WHEREOF, the parties hereto have executed this Termination and Release Agreement as of the date first written above. MANOR CARE, INC. By:_____________________________ Stewart Bainum, Jr. Chief Executive Officer VITALINK PHARMACY SERVICES, INC. By:_____________________________ Donna L. DeNardo President GRANCARE, INC. By:_____________________________ M. Scott Athans Chief Executive Officer The undersigned has executed this Termination and Release Agreement solely for the purpose of making the representations and warranties set forth in Section 7 and obtaining and granting the release contained in Section 8 hereinabove. APOLLO MANAGEMENT, L.P. By: AIF Management, Inc. Its: General Partner By:_____________________________ Name: Title: -11- IN WITNESS WHEREOF, the parties hereto have executed this Termination and Release Agreement as of the date first written above. MANOR CARE, INC. By:_________________________________________ Stewart Bainum, Jr. Chief Executive Officer VITALINK PHARMACY SERVICES, INC. By:_________________________________________ Donna L. DeNardo President GRANCARE, INC. By:_________________________________________ M. Scott Athans Chief Executive Officer The undersigned has executed this Termination and Release Agreement solely for the purpose of making the representations and warranties set forth in Section 7 and obtaining and granting the release contained in Section 8 hereinabove. APOLLO MANAGEMENT, L.P. By: AIF Management, Inc. Its: General Partner By:_________________________________________ Name: Title: -12- The undersigned has executed this Termination and Release Agreement solely for the purpose of making the representations and warranties set forth in Section 7 and obtaining and granting the release contained in Section 8 hereinabove. LIVING CENTERS OF AMERICA, INC. By: /s/ Edward Kuntz ------------------------------ Edward Kuntz Chief Executive Officer -13- SCHEDULE 3.1 IN THE SUPREME COURT OF THE STATE OF DELAWARE GRANCARE, INC. ) ) Defendant Below- ) Appellant, ) ) v. ) No. 342, 1997 ) VITALINK PHARMACY SERVICES, ) INC. and MANOR CARE, INC. ) ) Plaintiffs Below- ) Appellees. ) STIPULATION AND ORDER --------------------- WHEREAS, on June 17, 1997, plaintiffs Manor Care, Inc. ("Manor Care") and Vitalink Pharmacy Services, Inc. ("Vitalink") initiated an action in the Court of Chancery seeking to enjoin certain transactions (the "LCA Transactions") among defendant GranCare, Inc. ("GranCare") and non-parties Living Centers of America, Inc. and Apollo Management, L.P. as set forth in the Joint Proxy Statement/Prospectus of GranCare and LCA, draft of August 27, 1997 (the "LCA Transactions"); WHEREAS, on August 8, 1997, the Court of Chancery entered an order (the "Preliminary Injunction Order") preliminarily enjoining GranCare from consummating the LCA Transactions in their present or any alternative form; WHEREAS, the Court of Chancery certified the Preliminary Injunction Order for interlocutory appeal by order dated August 8, 1997; WHEREAS, on August 15, 1997, this Court accepted GranCare's interlocutory appeal and set a schedule for briefing and oral argument; and WHEREAS, on August __, 1997, GranCare, Vitalink and Manor Care executed a termination and release agreement which provided for, among other things, (i) dismissal of GranCare's interlocutory appeal and (ii) vacatur of the Preliminary Injunction Order. IT IS HEREBY STIPULATED by the parties, subject to the approval of the Court, that GranCare's interlocutory appeal is dismissed. OF COUNSEL: __________________________________ James A. Laurenson Martin P. Tully Susan V. Belanger Morris, Nichols, Arsht & Tunnell Arter & Hadden 1201 North Market Street 925 Euclid Avenue P.O. Box 1347 Suite 1100 Wilmington, Delaware 19899 Cleveland, Ohio 44115 (302) 658-9200 (216) 696-1100 Attorneys for Vitalink Pharmacy Services, Inc. __________________________________ Laurence A. Silverman Bruce M. Stargatt Kevin J. Burke Bruce L. Silverstein Daniel L. Cantor James P. Hughes, Jr. Cahill Gordon & Reindel Young, Conaway, Stargatt & Taylor (a partnership including a P.O. Box 391 professional corporation Wilmington, Delaware 19899 80 Pine Street (302) 571-6600 New York, New York 10005 Attorneys for Manor Care, (212) 701-3000 Inc. -2- __________________________________ William W. Maycock Allen M. Terrell, Jr. Jason S. Bell Jesse A. Finkelstein Smith, Gambrell & Russell Raymond J. DiCamillo 1230 Peachtree Street, N.E. Richards, Layton & Finger Suite 3100, Promendade II One Rodney Square Atlanta, Georgia 30309-3592 P.O. Box 551 (404) 815-3500 Wilmington, Delaware 19899 (302) 658-6541 Attorneys for Defendant Below-Appellant SO ORDERED this ____ day Of _________________, 1997. _____________________________ Justice -3- IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY VITALINK PHARMACY SERVICES, ) INC., a Delaware corporation, and MANOR ) CARE, INC., a Delaware corporation, ) ) Plaintiffs, ) ) v. ) C.A. No. 15744 ) GRANCARE, INC., a Delaware ) corporation, f/k/a NEW GRANCARE, INC. ) ) Defendant. ) STIPULATION AND ORDER --------------------- WHEREAS, on June 17, 1997, plaintiffs Manor Care, Inc. ("Manor Care") and Vitalink Pharmacy Services, Inc. ("Vitalink") initiated this action seeking to enjoin certain transactions among defendant GranCare, Inc. ("GranCare") and non- parties Living Centers of America, Inc. ("LCA") and Apollo Management, L.P. as set forth in the Joint Proxy Statement/Prospectus of GranCare and LCA, draft of August 27, 1997 (the "LCA Transactions"); WHEREAS, on August 8, 1997, this Court entered an order (the "Preliminary Injunction Order") preliminarily enjoining GranCare from consummating the LCA Transactions in their present or any alternative form; WHEREAS, this Court certified the Preliminary Injunction Order for interlocutory appeal by order dated August 8, 1997; WHEREAS, on August 15, 1997, the Supreme Court accepted GranCare's interlocutory appeal and set a schedule for briefing and oral argument; WHEREAS, on August __, 1997, GranCare, Vitalink and Manor Care executed a termination and release agreement (the "Termination Agreement") which provided for, among other things, (i) dismissal of GranCare's interlocutory appeal and (ii) vacatur of the Preliminary Injunction Order; and WHEREAS, the Supreme Court dismissed GranCare's interlocutory appeal by order dated August __, 1997, pursuant to the stipulation of the parties. IT IS HEREBY STIPULATED by the parties, subject to the approval of the Court, that: 1. The Preliminary Injunction Order is vacated. 2. Manor Care and Vitalink are released from all obligations under the bond on preliminary injunction filed with the Court on August 11, 1997 (the "Bond"). 3. The security for the Bond held by the law firm of Morris, Nichols, Arsht & Tunnell in an interest-bearing escrow account at Wilmington Trust Company shall be returned forthwith in its entirety to Vitalink. 4. GranCare will not consummate the LCA Transactions in their present or any alternative form except contemporaneously with or subsequent to the completion of the transactions contemplated by the Termination Agreement. OF COUNSEL: __________________________________ James A. Laurenson Martin P. Tully Susan V. Belanger A. Gilchrist Sparks, III Arter & Hadden Morris, Nichols, Arsht & Tunnell 925 Euclid Avenue 1201 North Market Street Suite 1100 P.O. Box 1347 Cleveland, Ohio 44115 Wilmington, Delaware 19899 (216) 696-1100 (302) 658-9200 Attorneys for Plaintiff Vitalink Pharmacy Services, Inc. -2- __________________________________ Laurence A. Silverman Bruce M. Stargatt Kevin J. Burke Bruce L. Silverstein Daniel L. Cantor James P. Hughes, Jr. Cahill Gordon & Reindel Young, Conaway, Stargatt & Taylor (a partnership including a Rodney Square North, P.O. Box 391 professional corporation) Wilmington, Delaware 19899 80 Pine Street (302) 571-6600 New York, New York 10005 Attorneys for Plaintiff Manor Care, Inc. (212) 701-3000 __________________________________ William W. Maycock Allen M. Terrell, Jr. Jason S. Bell Jesse A. Finkelstein Smith, Gambrell & Russell Raymond J. DiCamillo 1230 Peachtree Street, N.E. Richards, Layton & Finger Suite 3100, Promenade II One Rodney Square Atlanta, Georgia 30309-3592 P.O. Box 551 (404) 815-3500 (302) 658-6541 Wilmington, Delaware 19899 Attorneys for Defendant SO ORDERED this ___ day Of _______________, 1997. ______________________________ Vice Chancellor -3- EX-10.29 27 LETTER AGREEMENT EXHIBIT 10.29 September 3, 1997 Vitalink Pharmacy Services, Inc. TeamCare, Inc. 1250 E. Diehl Road Naperville, IL 60563 ATTN: Donna L. DeNardo, President RE: Liquidated Damages Calculation in Pharmaceutical Supply Agreements Dear Ms. DeNardo: Pursuant to the requirements of Section 10 of the Pharmaceutical Supply Agreements (as that term is defined in the Omnibus Reconciliation Services Agreement, dated as of March 1, 1997, by and between GranCare, Inc. ("GranCare") and Vitalink Pharmacy Services, Inc. ("Vitalink")) this letter clarifies the calculation of damages that may become payable under said Section 10 in the event that ownership or control of a GranCare health care facility subject to a Pharmaceutical Supply Agreement (other than a Replacement Facility (as defined in paragraph 2 below)) is transferred (a "Transferred Facility"), the transferee ceases to obtain pharmaceutical supplies and services from Vitalink with respect to the Transferred Facility; and GranCare's obligation to pay "damages" under Section 10 of the Pharmaceutical Supply Agreement is thereby triggered (a "Supply Termination Event"). For purposes of this letter of clarification, the term "Vitalink" shall mean and include TeamCare, Inc. and any subsidiaries or affiliates (as defined in Rule 12b-2 under the Securities Act of 1934) of Vitalink and TeamCare. Upon the occurrence of a Supply Termination Event, the amount of such "damages" shall be calculated as follows: Vitalink Pharmacy Services September 3, 1997 Page 2 1. The net revenues realized by Vitalink from the provision of pharmacy services to the Transferred Facility pursuant to a Pharmaceutical Supply Agreement over the 12 calendar months (or if such Transferred Facility was served for less than 12 months, over the number of whole months actually served (or in the case of partial months, rounded to the nearest whole month based on the number of actual days elapsed in accordance with established mathematical convention)) immediately preceding the calendar month in which the Supply Termination Event occurs ("LTM Net Pharmaceutical Revenues") shall be multiplied by Vitalink's Percentage EBITDA Margin (as defined below), the product so obtained being hereinafter referred to as "EBITDA Earnings Amount". The "Percentage EBITDA Margin" shall be Vitalink's consolidated EBITDA divided by Vitalink's consolidated net revenue, in each case derived from Vitalink's most recent audited financial statements. The EBITDA Earnings Amount shall then be divided by 12 (or if such Transferred Facility was served for less than 12 months, over the number of whole months actually served (or in the case of partial months, rounded to the nearest whole month based on the number of actual days elapsed in accordance with established mathematical convention)), and the quotient so obtained (the "Monthly Liquidated Damages Payment") shall be the monthly amount paid by GranCare to Vitalink until the first to occur of (i) the expiration of the remaining term of the Pharmaceutical Supply Agreement or (ii) the month in which a Replacement Facility is substituted by GranCare. The Vitalink Pharmacy Services September 3, 1997 Page 3 Monthly Liquidated Damages Payment shall be payable commencing on the tenth business day of the month immediately succeeding the month during which Vitalink shall actually cease to provide pharmaceutical supplies to the Transferred Facility. 2. GranCare shall have the option at any time after the occurrence of a Supply Termination Event to substitute an alternative health care facility (a "Replacement Facility") for a Transferred Facility and suspend paying further Monthly Liquidated Damages Payments (except as provided elsewhere herein), and the provision of pharmaceutical supplies to any Replacement Facility shall be pursuant to the terms and conditions of a Pharmaceutical Supply Agreement except as otherwise provided herein. Within 30 calendar days following each annual anniversary of the actual commencement of service by Vitalink to any Replacement Facility, the parties shall calculate the EBITDA Earnings Amount derived by Vitalink from the provision of service to such Replacement Facility for such preceding 12 month period by multiplying the net revenues realized by Vitalink from the provision of pharmacy services to such Replacement Facility pursuant to a Pharmaceutical Supply Agreement for such 12-month period by the same Percentage EBITDA Margin utilized to calculate the amount of the Monthly Vitalink Pharmacy Services September 3, 1997 Page 4 Liquidated Damages Payments with respect to the Transferred Facility such Replacement Facility replaced (the "Replacement Earnings"). In the event that Replacement Earnings for any 12 month period are less than 90% of the EBITDA Earnings Amount calculated with respect to the subject Transferred Facility, then GranCare shall, within thirty days of receiving written notice from Vitalink setting forth in appropriate detail the calculation of the amount of the Replacement Earnings with respect to such Replacement Facility, pay to Vitalink an amount equal to the excess of (i) an amount equal to 90% of the EBITDA Earnings Amount attributable to the Transferred facility such Replacement Facility replaced over (ii) the actual amount of such Replacement Earnings ("Shortfall Payment"). On March 1/st/ of each year during the term of the Pharmaceutical Supply Agreements, Vitalink shall determine the aggregate amount of all Shortfall Payments made by GranCare during the immediately preceding 12 calendar months (i.e., March 1 of the prior year through February 28 of the then current year; the "LTM Shortfall Payment"). In the event that the Replacement Earnings of one or more Replacement Facilities, during such preceding 12 calendar month period exceed 110% of the EBITDA Earnings Amount attributable to the Transferred Facility any such Replacement Facility replaced (the "Excess Replacement Earnings"), then Vitalink shall pay to GranCare by March 10 of each year the sum of all Excess Replacement Earnings realized by Vitalink not to exceed the LTM Shortfall Payment. Each of the Vitalink Pharmacy Services September 3, 1997 Page 5 calculations required in this letter shall be provided to GranCare in reasonable detail and shall be certified by Vitalink's President, Chief Financial Officer or Treasurer. 3. In the event that a Replacement Facility is served for a period of less than 12 months, the calculation of the required Shortfall Payment, if any, shall be an amount equal to the excess, if any, of (i) the sum of the Monthly Liquidated Damages Payments for each month less than 12 that the Replacement Facility was served by Vitalink multiplied by 90% over (ii) the Replacement Earnings realized by Vitalink from the provision of pharmacy services to such Replacement Facility during such period. 4. The termination of the Pharmaceutical Supply Agreement with respect to any Replacement Facility or the transfer of any Replacement Facility shall not constitute a Supply Termination Event. However, upon the actual termination of the provision of services pursuant to a Pharmaceutical Supply Agreement with respect to any Replacement Facility, GranCare shall recommence the Monthly Liquidated Damages Payments in the immediately succeeding month based upon the EBITDA Earnings Amount of the Transferred Facility that such Replacement Facility replaced, subject to any subsequent suspension thereof Vitalink Pharmacy Services September 3, 1997 Page 6 which may thereafter result from GranCare substituting alternative Replacement Facilities. 5. In the event it is determined that a Facility (as defined in the Pharmaceutical Supply Agreements) has improperly terminated a Pharmaceutical Supply Agreement based on an incorrect assertion that Provider (as defined in the Pharmaceutical Supply Agreements) breached its obligations pursuant to Section 12 of the Pharmaceutical Supply Agreements, the amount of damages that GranCare shall be obligated to pay to Vitalink shall be calculated based on the same methodology set forth in paragraph 1 hereof with respect to the actual period of time during which such Facility shall have "covered" by obtaining pharmacy services from an alternative source and, in the case of partial months, rounded to the nearest whole month based on the number of actual days elapsed in accordance with established mathematical convention. The parties hereto expressly acknowledge that the foregoing provision is being included to provide internal consistency within the Pharmaceutical Supply Agreement, and as result (i) the final sentence of paragraph 12 will be ignored for all purposes and (ii) the phrase "net revenue lost by Provider" in the penultimate sentence of said paragraph 12 shall be deemed to have been replaced with a reference to "liquidated damages." Vitalink Pharmacy Services September 3, 1997 Page 7 6. GranCare shall be entitled to review during normal business hours Vitalink's financial records pertaining to its provision of services to any Transferred Facility or Replacement Facility pursuant to a Pharmaceutical Supply Agreement in connection with making any of the calculations contained in this letter. Notwithstand-ing the provisions of paragraph 13 of the Pharmaceutical Supply Agreements, in the event of a dispute between the parties hereto over any of the calculations set forth in this letter of clarification, the parties shall appoint a mutually acceptable "Big Six" accounting firm, or some other mutually acceptable arbitrator with appropriate finance and accounting expertise, to arbitrate the differences between the parties hereto. The decision of any such accounting firm or other arbitrator shall be final and binding, and the cost of such proceeding shall be equally split between the parties hereto. In the event the parties are unable to agree upon an accounting firm or other arbitrator, the provisions of paragraph 13 of the Pharmaceutical Supply Agreements shall be followed. 7. When references to "GranCare" and "Vitalink" are made herein, such references shall include each respective party's successors and assigns. Vitalink Pharmacy Services September 3, 1997 Page 8 8. Except as expressly set forth herein, no other terms or provisions of any Pharmaceutical Supply Agreement are being modified or amended by this letter of clarification and such Agreements are hereby ratified and confirmed. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK] Vitalink Pharmacy Services September 3, 1997 Page 9 GRANCARE, INC. By:/s/ Scott Athans ------------------------- M. Scott Athans, President ACKNOWLEDGED AND AGREED: VITALINK PHARMACY SERVICES, INC. By:/s/ Donna L. DeNardo ------------------------------- Donna L. DeNardo, President TEAMCARE, INC. By:/s/ Donna L. DeNardo ------------------------------- Donna L. DeNardo, President EX-10.30 28 LETTER AGREEMENT EXHIBIT 10.30 Final Draft [Vitalink letterhead] August 29, 1997 GranCare, Inc. One Ravinia Drive Suite 1500 Atlanta, Georgia 30346 Attention: M. Scott Athans, President and Chief Executive Officer Re: Preferred Provider Arrangement Dear Mr. Athans: As you know, pursuant to the terms of those certain Pharmaceutical Supply Agreements ("PSA's") described in that certain Omnibus Reconciliation Services Agreement, dated March 1, 1997 (the "ORSA"), Vitalink Pharmacy Services, Inc. and/or certain affiliates of Vitalink including, without limitation, TeamCare, Inc. (Vitalink and all such affiliates being referred to herein collectively as ("Vitalink") has the contractual right to provide to all of GranCare's "Facilities" (as defined in the ORSA) all of their pharmaceutical goods and services. In recognition of the fact that Vitalink has chosen not to provide such goods and services to a number of the Facilities at this time, and in anticipation of the closing of your announced merger with Living Centers of America, Inc., Vitalink hereby authorizes GranCare to contract with American Pharmaceutical Services, Inc. ("APS") to provide all pharmaceutical goods and services to such Facilities; provided, however, that if during the term of the PSA's Vitalink, either itself or through a joint venture, chooses to provide all or some of the pharmaceutical goods and services to any Facility then being serviced by APS, then Vitalink shall give GranCare 30 days prior written notice of Vitalink's intent to commence service to such Facility (a "Service Commencement Notice") which service shall be pursuant to the a PSAs to be executed by Vitalink and GranCare relating to such Facility and upon the end of such 30 day period GranCare shall cease obtaining such goods and services from APS for the applicable Facility and Vitalink, or the joint venture with which it is a joint venturer, shall begin providing the same, whereupon such Facility shall be a "Newly Served Facility" (as defined in the ORSA) for purposes of establishing the pricing applicable to such Facility's PSA. Furthermore, in the event that Vitalink has chosen not to provide all or some of the pharmaceutical goods and services to any Facility, and APS also chooses not to provide the same, then such Facility may contract with any other institutional pharmacy for the provision of those pharmaceutical goods and services not being provided by Vitalink or APS; provided, however, that all contracts between a Facility and any institutional pharmacy other than Vitalink must include a provision which gives such Facility the right to terminate such contracts, with or without cause, upon no more than 60 days prior written notice. Following receipt of a Service Commencement Notice from Vitalink, or the joint venture with which it is a joint venturer, of the desire by Vitalink, or the joint venture with which it is a joint venturer, to begin providing all or some of the pharmaceutical goods and services to a Facility (which goods and services shall be described in the Service Commencement Notice with particularity in the event that Vitalink elects to provide some but less than all of such Facility's pharmaceutical goods and services), such Facility shall promptly give the required termination notice to the institutional pharmacy then providing the such goods and services to the In the event that Vitalink provides GranCare a Service Commencement Notice as set forth herein and GranCare fails to give or cause the appropriate Facility to give APS or any other institutional pharmacy then providing such Facility with pharmaceutical supplies and services the termination notice required herein and/or APS or such other institutional pharmacy otherwise fails to terminate services as required herein, then the parties hereto acknowledge and agree that the failure to permit Vitalink to commence providing service to such Facility shall constitute a Supply Termination Event (as defined in that certain Letter of Clarification of even date herewith between Vitalink and GranCare and Vitalink shall be entitled to liquidated damages pursuant to the appropriate provisions contained in such letter. If you agree and accept the terms and provisions set forth above,please acknowledge in the space provided below. Vitalink Pharmacy Services, Inc. /s/ Donna L. DeNardo --------------------------------- Donna L. DeNardo, President ACKNOWLEDGED AND AGREED: GranCare, Inc. /s/ M. Scott Athans - ------------------------------------ M. Scott Athans, President and Chief Executive Officer EX-10.31 29 AMENDED LEASES EXHIBIT 10.31 AMENDMENT TO AMS PROPERTIES, INC. FACILITY LEASES AMENDMENT dated as of October 31, 1997 between HEALTH AND RETIREMENT PROPERTIES TRUST (known in Wisconsin as "Health and Rehabilitation Properties REIT"), a real estate investment trust formed under the laws of the State of Maryland ("HRP") and AMS PROPERTIES, INC., a Delaware corporation ("AMS --- --- Properties") - ---------- W I T N E S S E T H: WHEREAS, HRP, as landlord, and AMS Properties, as tenant, have entered into a Master Lease Document, General Terms and Conditions dated as of December 28, 1990, as amended (the "Master Lease"), and have also executed Facility Leases ------------ which incorporate by reference the Master Lease (collectively, the "Facility -------- Leases") relating to the health care facilities described on Exhibit A-2 to the - ------ Master Lease; WHEREAS, HRP and AMS Properties have agreed to amend the Facility Leases as hereinafter provided; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, HRP and AMS Properties agree as follows: SECTION 1. AMENDMENTS TO FACILITY LEASES 1.1 Paragraphs 4 and 5 of the Facility Lease for each Leased Property is hereby amended in full to read as follows: 4. Fixed Term. The Fixed Term of this Lease is twenty-two (22) years ---------- and thirty four (34) days, commencing on December 28, 1990 (the "Commencement Date"), and ending on January 31, 2013. ----------------- 5. Extended Terms. Subject to the provisions of Section 2.4 of the -------------- Master Lease, Tenant is hereby granted the right to renew the Lease for two (2) 10-year consecutive optional renewal terms for a maximum term if all such options are exercised of twenty (20) years after the expiration of the Fixed Term. 1.2 The first sentence of Paragraph 6 of the Facility Lease for each Leased Property listed on Schedule 1 hereto is hereby amended to provide that ---------- the annual amount of initial Minimum Rent and the amount of each monthly installment of initial Minimum Rent for such Leased Property are the respective amounts set forth on Schedule 1 hereto. ---------- -2- SECTION 2. EFFECT ON FACILITY LEASES 1.3 Except as specifically provided above, the Facility Leases shall remain in full force and effect and each is hereby ratified and confirmed. 1.4 The amendments set forth herein (i) do not constitute an amendment, waiver or modification of any term, condition or covenant of any Facility Lease, or any of the instruments or documents referred to therein, other than as specifically set forth herein, and (ii) shall not prejudice any rights which HRP or its successors and assigns may now or hereafter have under or in connection with Facility Leases, as amended hereby, or any of the instruments or documents referred to therein. SECTION 3. EFFECTIVENESS This Amendment shall become effective as of the date first above indicated when a counterpart to this Amendment shall have been executed by each of the parties hereto. SECTION 4. COSTS, EXPENSES AND TAXES AMS Properties agrees to pay all costs and expenses of HRP in connection with the preparation, reproduction, execution and delivery of this Amendment, including the reasonable fees and expenses of Sullivan & Worcester LLP, special counsel to HRP with respect thereto. SECTION 5. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. SECTION 6. NO LIABILITY OF TRUSTEES THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -3- IN WITNESS WHEREOF, the parties have executed this amendment as a sealed instrument as of the date first above written. LANDLORD: HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate investment trust By: /s/ David J. Hegarty ------------------------- Name: Title: TENANT: AMS PROPERTIES, INC. By: /s/ M. Henry Day, Jr. ---------------------------- Name: M. Henry Day, Jr. Title: Assistant Secretary SCHEDULE 1 TO AMENDMENT ----------------------- Schedule of Revised Minimum Rent Amounts ----------------------------------------
Amount of Aggregate Monthly Facility Name State Yearly Installment of - ------------- ----- Minimum Rent Minimum Rent ----------- -------------- Flagship CA $751,478 $62,623.17 Lancaster CA 606,825 50,568.75 Pacific Gardens CA 602,330 50,194.17 Tarzana CA 661,377 55,114.75 Thousand Oaks CA 666,301 55,525.08 Van Nuys CA 257,210 21,434.17 Ceders Health Care CO 822,093 68,507.75 Cherrelyn Manor CO 1,067,690 88,974.17 Greentree Health Care WI 332,343 27,695.25 Pine Manor WI 341,679 28,473.25 Sunny Hill Health Care WI 365,010 30,417.50 The Virginia WI 888,125 74,010.42 Woodland WI 1,587,861 132,321.75 Christopher East WI 821,109 68,425.75 $9,771,431.00 $814,285.92 ============= ===========
EX-10.32 30 COLLATERAL PLEDGE AGREEMENT EXHIBIT 10.32 COLLATERAL PLEDGE AGREEMENT THIS AGREEMENT is made as of this 31st day of October, 1997, by and between Paragon Health Network, Inc., a Delaware corporation ("Paragon") and Health and Retirement Properties Trust ("HRPT"). R E C I T A L S WHEREAS, GranCare, Inc. ("GranCare") has incurred certain obligations to HRPT pursuant to that Non-Binding Letter of Intent dated September 26, 1997 between GranCare and HRPT (the "Letter of Intent") including an obligation to cause to be executed an unconditional and unlimited guaranty of payment and performance of certain obligations of AMS Properties, Inc. ("AMS") GCI Health Care Centers, Inc. ("GCIHCC") and GranCare to HRPT by GranCare, Paragon and all subsidiaries of GranCare and Paragon having an ownership interest directly or through one or more subsidiaries in either AMS or GCIHCC (the "Paragon Guaranty"); WHEREAS, GranCare, Paragon and HRPT have agreed that Paragon shall secure its obligations under the Paragon Guaranty with $15,000,000 in cash (the "Cash Collateral"); and WHEREAS, the obligations of HRPT and the rights of Paragon with respect to the Cash Collateral are evidenced by this Agreement; and WHEREAS, Paragon and HRPT have agreed that HRPT shall return the Cash Collateral to Paragon upon the payment and performance in full of the obligations of Paragon under the Paragon Guaranty (the "Obligations") after the Termination Date (as defined in the Paragon Guaranty); NOW, THEREFORE, in consideration of the premises, the direct benefits to be realized by HRPT from the Cash Collateral, and the mutual covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Pledge of Cash Collateral. ------------------------- (1) Paragon hereby pledges, assigns, and grants to HRPT security title to and a continuing security interest in, the Cash Collateral at all times to secure the performance and payment of the Obligations. Paragon may not withdraw and shall not be entitled to receive any of the Cash Collateral prior to the payment in full of the Obligations after the Termination Date (as defined in the Paragon Guaranty) (such date being hereafter referred to as the "Termination Date") without the prior written consent of HRPT. Paragon shall not be entitled to the payment of interest on other investment proceeds in respect of the Cash Collateral. (2) Paragon hereby warrants and represents that on the date hereof and at all times prior to the termination of this Agreement, (i) Paragon had and will have the right and authority to transfer any interest in the Cash Collateral, subject only to the terms of this Agreement, and (ii) the Cash Collateral was not and will not be subject to any liens, claims, -2- encumbrances, security interests or other interest, however described, in favor of any third person or entity. (3) HRPT hereby acknowledges receipt of the Cash Collateral. HRPT further acknowledges and agrees that on the Business Day following the Termination Date it shall return the Cash Collateral (in United States Dollars)(net of any amount applied to the Obligations pursuant to Section 4 below), without interest or accretion, all of which may be retained by and shall be the property of HRPT, to Paragon or to such person or entity as Paragon shall direct in writing. 2. Obligations of Paragon and HRPT. ------------------------------- (1) Paragon shall pay to HRPT, upon demand, all costs of collection and enforcement incurred or paid by HRPT in exercising its rights and remedies under this Agreement. (2) Paragon shall, at its own expense, do, make, procure, execute, and deliver all acts, things, writings, and assurances and execute and deliver all assignments, endorsements, powers, hypothecations, and other documents as HRPT at any time, and from time to time, may request in writing to protect, evidence or assure its interests and rights in the Cash Collateral under this Agreement. (3) Paragon shall defend the Cash Collateral and the proceeds thereof and HRPT's interest therein at all times against the claims and demands of third parties claiming through or with respect to Paragon or Paragon's interest in the Cash Collateral. 3. Events of Default. The occurrence of any "Event of Default" as defined in ----------------- the Paragon Guaranty shall constitute an event of default ("Event of Default") hereunder. 4. Remedies. Upon the occurrence of an Event of Default, HRPT, at its -------- discretion, and without demand, may apply to the Obligations, to the extent due and payable, any or all of the Cash Collateral and shall be entitled to all rights and remedies of HRPT available under applicable state or federal law. 5. Obligations Absolute. The obligation of Paragon under this Agreement shall -------------------- be direct and immediate and not be conditional or contingent upon the pursuit of any other remedies against GranCare, AMS or GCIHCC or any other person or entity, nor against other security or liens available to HRPT, its successors, assigns, or agents. Paragon hereby waives any right to require that an action be brought against any other person or entity or to require that resort be had to any security or to any balance of any deposit account or credit on the books of HRPT in favor of any other person or entity. 6. Termination. This Agreement, and the security interest granted to HRPT in ----------- the Cash Collateral, shall terminate on the Termination Date. Effective on the Termination Date, the security interest hereunder and all rights of HRPT in and to the Cash Collateral shall terminate and cease to be of force and effect, and all obligations of Paragon hereunder shall terminate. -3- 7. Power of Attorney. Paragon hereby appoints HRPT as Paragon's true and ----------------- lawful attorney-in-fact to execute all documents and instruments and take all actions, in Paragon's name or otherwise, as HRPT shall reasonably deem necessary or expedient in connection with the Cash Collateral, and following the occurrence and during the continuance of an Event of Default to cause the proceeds of the Cash Collateral to be received by HRPT and/or to be made available to HRPT for the purpose of applying the same for the purposes herein specified. The power of attorney contained herein is irrevocable and is coupled with an interest. Said power of attorney shall terminate upon the termination of this Agreement as hereinabove provided. 8. Indemnity. Paragon hereby indemnifies HRPT and holds HRPT harmless from and --------- against all claims, losses, costs, damages, fees, and expenses whatsoever, including, without limitation, reasonable attorneys' fees if collected by an attorney or upon advice therefrom, with respect to the exercise of the foregoing power of attorney during the continuance of an Event of Default, or exercise of its rights against the Cash Collateral, or the proper exercise of the other rights and privileges granted to HRPT hereunder, including, without limitation, the right to realize upon, possess, or dispose of the Cash Collateral, and Paragon hereby releases HRPT from any and all claims and liability whatsoever associated with the proper exercise of the foregoing powers, including, without limitation, any claims that Paragon may have or may hereafter have arising under the Uniform Commercial Code of the Commonwealth of Massachusetts for impairment of collateral. Any funds reasonably expended by HRPT to maintain the priority or enforceability of the Cash Collateral shall be added to and become a part of the Obligations of Paragon secured hereby, and the amount thereof shall be immediately due and payable by Paragon to HRPT. 9. General. ------- (1) No waiver by HRPT of any power or right hereunder or of any Event of Default by Paragon hereunder shall be binding upon HRPT unless in writing signed by HRPT, and no failure or delay by HRPT to exercise any power or right hereunder or binding waiver of any Event of Default hereunder shall operate as a waiver of any other or further exercise of such power or any other Event of Default. This Agreement, together with all documents referred to herein, constitutes the entire agreement between Paragon and HRPT and may not be modified except by a writing executed by HRPT and delivered by HRPT to Paragon. (2) If any paragraph or part thereof shall for any reason be held or adjudged to be invalid, illegal, or unenforceable by any court of competent jurisdiction, such paragraph or part thereof so adjudicated invalid, illegal, or unenforceable shall be deemed separate, distinct, and independent, and the remainder of this agreement shall remain in full force and effect and shall not be affected by such holding or adjudication. (3) The rights and obligations of the parties hereunder shall inure to the benefit of and bind their respective heirs, executors, administrators, legal representatives, successors, and assigns. -4- (4) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (5) All notices and demands required or permitted hereunder or by law shall be in writing or by telegraph and shall be mailed or delivered to the party to whom notice is intended to be given at such address as is specified below, or such other address as shall be subsequently designated in writing by such party to the other party hereto for purposes of notice. If to HRPT: Health and Retirement Properties Trust 400 Centre Street Newton, MA 02158 Attention: David J. Hegarty If to Paragon: Paragon Health Network, Inc. One Ravinia Drive Suite 1500 Atlanta, GA 30346 Attention: General Counsel Each such notice or demand shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, first-class postage prepaid and addressed as provided above. (6) This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which shall constitute but one and the same document. (7) The pronouns used in this Agreement shall be construed as masculine, feminine, or neuter as the occasion may require. (8) Captions are for reference only and in no way limit the terms of this Agreement. (9) All references herein to any document, instrument, or agreement shall be deemed to refer to such document, instrument, or agreement as the same may be amended, modified, restated, supplemented, or replaced from time to time. 10. NO LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST OF HRPT, DATED OCTOBER ------------------------ 9, 1986, A COPY OF WHICH TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION") IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, -5- PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRPT SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRPT. ALL PERSONS DEALING WITH HRPT, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRPT FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, by and through their duly authorized officers as of the day and year first above written. PLEDGOR: PARAGON HEALTH NETWORK, INC. By: /s/ M. Henry Day, Jr. ----------------------------------------- Name: M. Henry Day Title: Vice President and Assistant Secretary PLEDGEE: HEALTH AND RETIREMENT PROPERTIES TRUST By: /s/ David Hegarty --------------------------------------- Name: David Hegarty Title: President EX-10.33 31 GUARANTY BY GRANCARE EXHIBIT 10.33 GUARANTY BY GRANCARE, INC. GUARANTY dated as of October 31, 1997 made by GRANCARE, INC., a Delaware corporation (the "Guarantor") and HEALTH AND RETIREMENT PROPERTIES --------- TRUST, a Maryland real estate investment trust (with its successor and assigns, "HRP"). --- W I T N E S S E T H : - - - - - - - - - - WHEREAS, pursuant to and subject to the terms and conditions of a Third Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997 among the Guarantor, LCA Acquisition Sub, Inc., a Delaware corporation ("LCA --- Acquisition") and a wholly-owned subsidiary of Paragon Health Network, Inc., a - ----------- Delaware corporation (f/k/a Living Centers of America, Inc.) ("Paragon"), ------- paragon and Apollo Management, L.P. on behalf of one or more of its managed investment funds, Guarantor shall become a wholly-owned subsidiary of Paragon through the merger of LCA Acquisition with and into the Guarantor and those certain other transactions defined as the "Transactions" in the Joint Proxy Statement dated September 26, 1997 by the Guarantor and GranCare (the "Transactions"); ------------ WHEREAS, the Guarantor has requested that HRP consent to the Transactions and to make certain modifications to the GranCare Documents in connection therewith; WHEREAS, HRP is willing to so consent and agree, subject to the terms and conditions of a certain Restructure and Asset Exchange Agreement dated as of even date herewith (the "Restructure Agreement") among Guarantor, and AMS --------------------- Properties, Inc. and GCI Health Care Centers, Inc., each a Delaware corporation and a wholly-owned subsidiary of the Guarantor ("AMS Properties"and "GCIHCC," -------------- ------ respectively), and HRP; WHEREAS, it is a condition to the effectiveness of the Restructure Agreement that, among other things, the Guarantor deliver this Guaranty in favor of HRP; WHEREAS, by virtue of the Transactions and the related modifications to the GranCare Documents contemplated by the Restructure Agreement, the GranCare Companies will benefit substantially from, among other things, increased access to capital; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantor hereby agrees with HRP as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in ------------- the Restructure Agreement and used herein are so used as so defined. In addition, the following terms shall have the meanings set forth below: "Applicable Law" shall mean any law of any governmental authority, -------------- whether domestic or foreign, including without limitation all federal and state laws, to which the -2- Person in question is subject or by which it or any of its property is bound, and including without limitation any: (a) administrative, executive, judicial, legislative or other action, code, consent decree, constitution, decree, directive, enactment, finding, guideline, injunction, interpretation, judgment, law, order, ordinance, policy statement, proclamation, promulgation, regulation, requirement, rule, rule of law, rule of public policy, settlement agreement, statute, or writ, of any governmental authority, domestic or foreign, whether or not having the force of law; (b) common law or other legal or quasi-legal precedent; or (c) arbitrator's, mediator's or referee's award, decision, finding or recommendation, or, in any case, any particular section, part or provision thereof "GranCare Documents" shall mean, collectively, any agreement, note, ------------------ lease, master lease, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument now or hereafter executed by one or more of the GranCare Companies with, in favor of or for the benefit of, HRP or any Affiliate thereof (including, without limitation, any and all other documents executed in connection with, relating to, evidencing or creating collateral or security in favor of or for the benefit of HRP or any Affiliate thereof), and any agreement, note, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument hereafter executed by one or both of the GranCare Companies in connection with any extension, renewal, refunding or refinancing thereof, as any of the same may hereafter from time to time be amended, modified or supplemented. "GranCare Companies" shall mean, collectively, AMS Properties and ------------------ GCIHCC, and their respective successors and assigns. "Default Rate" shall mean 4% per annum above the prime rate or base ------------ rate on corporate loans at large U.S. money center commercial banks as published in The Wall Street Journal or, if publication of such rate shall ----------------------- be suspended or terminated, the annual rate of interest, determined daily and expressed as a percentage, from time to time announced by one of the five largest national-chartered banking institutions having their principal office in New York, New York and selected by HRP at the time such publication is suspended or terminated. Each change in the Interest Rate shall take effect simultaneously with the date of publication or announcement, as applicable, of each corresponding change in such prime rate or base rate. "Event of Default" shall have the meaning set forth in any GranCare ---------------- Document. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- business, operations, property or condition (financial or otherwise) of the Guarantor, or of the Guarantor and its Subsidiaries taken as a whole, (b) the ability of the Guarantor to perform its obligations under this Guaranty, or (c) the validity or enforceability of this Guaranty, or the rights of HRP hereunder. "Obligations" shall mean the payment and performance of each and every ----------- obligation and liability of any GranCare Company to HRP under any GranCare -3- Document, whether now existing or hereafter arising or created, joint or several, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, liquidated or unliquidated, arising by contract, operation of law or otherwise, and including, without limitation, (i) all principal, premium or prepayment fee and interest under any promissory note payable to HRP by any GranCare Company, (ii) all rent under any lease with HRP as landlord, and (iii) all fees and charges, and all costs and expenses payable under any GranCare Document. "Subsidiary" shall mean any corporation of which more than fifty ---------- percent of the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by Guarantor, or Guarantor and one or more other Subsidiaries, or by one or more Subsidiaries. 2. Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees -------- to HRP the prompt and complete payment and performance by the GranCare Companies (and each of them), when due (whether at stated maturity, by acceleration or otherwise), of the Obligations. The Guarantor further agrees to pay any and all reasonable expenses (including, without limitation, all reasonable fees and disbursements of counsel to HRP) which may be paid or incurred by HRP in enforcing any of its rights under this Guaranty. This Guaranty is a guaranty of payment and not of collectibility and is absolute and in no way conditional or contingent. The Guarantor's liability hereunder is direct and unconditional and may be enforced after nonpayment or nonperformance by any GranCare Company of any Obligation without requiring HRP to resort to any other Person (including without limitation such GranCare Company) or any other right, remedy or collateral. This Guaranty shall remain in full force and effect until the Obligations are paid in full following the termination of all GranCare Documents (the "Termination Date"). ---------------- 3. Costs and Expenses of Collection. The Guarantor agrees, as principal -------------------------------- obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in immediately available funds, all costs and expenses (including, without limitation, all court costs and all fees and disbursements of counsel to HRP) incurred or expended by HRP in connection with the enforcement of this Guaranty, together with interest on such amounts from the time such amounts become due until payment at the Default Rate. It shall be a condition of the obligations of Guarantor to pay any fees and expenses payable by it under this Guaranty that HRP shall have, or shall have caused to have, provided the Guarantor with a writing describing such fees and/or expenses in reasonable detail. 4. Right of Setoff. Regardless of the adequacy of any collateral or other --------------- means of obtaining repayment of the Obligations, HRP is hereby authorized, without notice to the Guarantor or compliance with any other condition precedent now or hereafter imposed by Applicable Law (all of which are hereby expressly waived to the extent permitted by Applicable Law) and to the fullest extent permitted by Applicable Law, to set off and apply any securities, deposits or other property belonging to the Guarantor now or hereafter held by HRP against the obligations of the Guarantor under this Guaranty, whether or not HRP shall have made any demand under this -4- Guaranty, at any time and from time to time after the occurrence of a Event of Default under and as defined in any GranCare Document, in such manner as HRP in its sole discretion may determine, and the Guarantor hereby grants HRP a continuing security interest in such securities, deposits and property for the payment and performance of such obligations. 5. Subrogation and Contribution. Until the Obligations shall have been paid ---------------------------- and performed in full after the Termination Date, the Guarantor irrevocably and unconditionally suspends and subordinates any and all rights to which it may be entitled, by operation of law or otherwise, to be subrogated, with respect to any payment made by the Guarantor hereunder, to the rights of HRP against any GranCare Company, or otherwise to be reimbursed, indemnified or exonerated by any GranCare Company in respect thereof or to receive any payment, in the nature of contribution or for any other reason, from any other guarantor of the Obligations with respect to any payment made by the Guarantor hereunder. Until the Obligations shall have been paid and performed in full, the Guarantor waives any defense it may have based upon any election of remedies by HRP which impairs the Guarantor's subrogation rights or the Guarantor's rights to proceed against any GranCare Company for reimbursement (including without limitation any loss of rights the Guarantor may suffer by reason of any rights, powers or remedies of such GranCare Company in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging any indebtedness to HRP). Until the Obligations shall have been paid, performed and satisfied in full, the Guarantor further suspends and subordinates any right to enforce any remedy which HRP now has or may in the future have against any GranCare Company, any other guarantor or any other Person and any benefit of, or any right to participate in, any security whatsoever now or in the future held by HRP. 6. Effect of Bankruptcy Stay. If acceleration of the time for payment or ------------------------- performance of any of the Obligations is stayed upon the insolvency, bankruptcy or reorganization of any GranCare Company or any other Person or otherwise, all such amounts otherwise subject to acceleration shall nonetheless be payable by the Guarantor under this Guaranty forthwith upon demand. 7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents and ---------------------------------- warrants to HRP that (i) it has received true and complete copies of all existing GranCare Documents from the GranCare Companies (giving effect to the Closing under the Restructure Agreement), has read the contents thereof and reviewed the same with legal counsel of its choice; (ii) no representations or agreements of any kind have been made to the Guarantor which would limit or qualify in any way the terms of this Guaranty; (iii) this Guaranty is executed at the GranCare Companies' request and not at the request of HRP; (iv) HRP has made no representation to the Guarantor as to the creditworthiness of any GranCare Company; and (v) the Guarantor has established adequate means of obtaining from each GranCare Company on a continuing basis information regarding such GranCare Company's financial condition. The Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect the Guarantor's risks under this Guaranty, and the Guarantor further agrees that HRP shall have no obligation to disclose to the Guarantor any information or documents acquired by HRP in the course of its relationship with the GranCare Companies. -5- 8. Amendments, etc. with Respect to the Obligations. The obligations of the ------------------------------------------------ Guarantor under this Guaranty shall remain in full force and effect without regard to, and shall not be released, altered, exhausted, discharged or in any way affected by any circumstance or condition (whether or not any GranCare Company shall have any knowledge or notice thereof), including without limitation (a) any amendment or modification of or supplement to any GranCare Document, or any obligation, duty or agreement of the GranCare Companies or any other Person thereunder or in respect thereof; (b) any assignment or transfer in whole or in part of any of the Obligations; any furnishing, acceptance, release, nonperfection or invalidity of any direct or indirect security or guaranty for any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence, settlement, compromise or other action or inaction under or in respect of any GranCare Document, or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of any such instrument (whether by operation of law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to any GranCare Company or any other Person or any of their respective properties or creditors or any resulting release or discharge of any Obligation (including without limitation any rejection of any lease pursuant to Section 365 of the Federal Bankruptcy Code); (e) any new or additional financing arrangements entered into by any GranCare Company or by any other Person on behalf of or for the benefit of any GranCare Company; (f) the merger or consolidation of any GranCare Company with or into any other Person or of any other Person with or into any GranCare Company; (g) the voluntary or involuntary sale or other disposition of all or substantially all the assets of any GranCare Company or any other Person; (h) the voluntary or involuntary liquidation, dissolution or termination of any GranCare Company or any other Person; (i) any invalidity or unenforceability, in whole or in part, of any term hereof or of any GranCare Document, or any obligation, duty or agreement of any GranCare Company or any other Person thereunder or in respect thereof; (j) any provision of any applicable law or regulation purporting to prohibit the payment or performance by any GranCare Company or any other Person of any Obligation; (k) any failure on the part of any GranCare Company or any other Person for any reason to perform or comply with any term of any GranCare Document or any other agreement; or (l) any other act, omission or occurrence whatsoever, whether similar or dissimilar to the foregoing. The Guarantor authorizes each GranCare Company, each other guarantor in respect of the Obligations and HRP at any time in its discretion, as the case may be, to alter any of the terms of any of the Obligations. 9. Guarantor as Principal. If for any reason the GranCare Companies, or any of ---------------------- them, or any other Person is under no legal obligation to discharge any Obligation, or if any other moneys included in the Obligations have become unrecoverable from the GranCare Companies, or any of them, or any other Person by operation of law or for any other reason, including, without limitation, the invalidity or irregularity in whole or in part of any Obligation or of any GranCare Document, the legal disability of any GranCare Company or any other obligor in respect of Obligations, any discharge of or limitation on the liability of any GranCare Company or any other Person or any limitation on the method or terms of payment under any Obligation, or of any GranCare Document, which may now or hereafter be caused or imposed in any manner whatsoever (whether consensual or arising by operation of law or otherwise), this Guaranty shall -6- nevertheless remain in full force and effect and shall be binding upon the Guarantor to the same extent as if the Guarantor at all times had been the principal obligor on all Obligations. 10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the extent ----------------------------- not prohibited by applicable law, all presentments, demands for performance, notice of nonperformance, protests, notices of protests and notices of dishonor in connection with the Obligations or any GranCare Document, including but not limited to (a) notice of the existence, creation or incurring of any new or additional obligation or of any action or failure to act on the part of any GranCare Company, HRP, any endorser or creditor of any GranCare Company or any other Person; (b) any notice of any indulgence, extensions or renewals granted to any obligor with respect to the Obligations; (c) any requirement of diligence or promptness in the enforcement of rights under any GranCare Document, or any other agreement or instrument directly or indirectly relating thereto or to the Obligations; (d) any enforcement of any present or future agreement or instrument relating directly or indirectly thereto or to the Obligations; (e) notice of any of the matters referred to in Section 9 above; (f) any defense of --------- any kind which the Guarantor may now have with respect to his liability under this Guaranty; (g) any right to require HRP, as a condition of enforcement of this Guaranty, to proceed against any GranCare Company or any other Person or to proceed against or exhaust any security held by HRP at any time or to pursue any other right or remedy in HRP's power before proceeding against the Guarantor; (h) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of HRP to file or enforce a claim against the estate (in administration, bankruptcy, or any other proceeding) of any other Person or Persons; (i) any defense based upon an election of remedies by HRP; (j) any defense arising by reason of any "one action" or "anti-deficiency" law or any other law which may prevent HRP from bringing any action, including a claim for deficiency, against the Guarantor, before or after HRP's commencement of completion of any foreclosure action, either judicially or by exercise of a power of sale; (k) any defense based upon any lack of diligence by HRP in the collection of any Obligation; (l) any duty on the part of HRP to disclose to the Guarantor any facts HRP may now or hereafter know about any GranCare Company or any other obligor in respect of Obligations; (m) any defense arising because of an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code; (n) any defense based on any borrowing or grant of a security interest under Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or arising out of any defense which any GranCare Company or any other Person may have to the payment or performance of the Obligations (including but not limited to failure of consideration, breach of warranty, fraud, payment, accord and satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy, statute of limitations, lender liability and usury). Guarantor acknowledges and agrees that each of the waivers set forth herein on the part of the Guarantor is made with Guarantor's full knowledge of the significance and consequences thereof and that, under the circumstances, the waivers are reasonable. If any such waiver is determined to be contrary to Applicable Law such waiver shall be effective only to the extent no prohibited by such Applicable Law. 11. Reinstatement. This Guaranty shall continue to be effective, or be ------------- reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by HRP upon the insolvency, bankruptcy, dissolution, -7- liquidation or reorganization of any GranCare Company or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any GranCare Company or any substantial part of its property, or otherwise, all as though such payments had not been made. 12. Payments. The Guarantor hereby agrees that the Obligations will be paid to -------- HRP without set-off or counterclaim in U.S. Dollars at the office of HRP located at 400 Centre Street, Newton, Massachusetts 02158, or to such other location as HRP shall notify the Guarantor. 13. Covenants. The Guarantor hereby covenants and agrees with HRP that, from and after the date of this Guaranty until the Obligations are paid in full and all GranCare Documents have been terminated: (1) Legal Existence. The Guarantor shall do or cause to be done all things --------------- necessary to preserve and keep in full force and effect its corporate existence (subject as provided in Section 13.(b) hereof). -------------- (2) Merger; Sale of Assets, Etc. HRP agrees that, notwithstanding anything --------------------------- to the contrary in any GranCare Document, the Guarantor and any of its Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors of any of the foregoing, may, without any consent or approval of HRP, enter into mergers, consolidations, acquisitions, asset sales, sales of minority or majority interests in the Guarantor or such Affiliate or any other transactions (including, without limitation, any change of control, recapitalization or other restructuring of the Guarantor or any of such Affiliates or successors); provided, however, that so long as the Guarantor is a direct or indirect - -------- ------- shareholder of AMS Properties or GCIHCC, the Guarantor (i) shall not liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) and (ii) may not merge or consolidate with any Person, or convey, transfer or lease substantially all of its assets unless: (1) giving effect to such transaction, no Event of Default, or an event or condition that with the giving of notice or lapse of time or both would become an Event of Default, would occur under and as defined in any GranCare Document; and (2) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Guarantor, as the case may be, shall be a corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Guarantor is not such corporation, (i) such corporation shall have executed and delivered to HRP its assumption of the due and punctual performance and observance of each covenant and condition of this Guaranty to the same extent and with the same effect as though such corporation was a party hereto and was named and defined as the "Guarantor" herein and (ii) shall have caused to be delivered to HRP an opinion of outside counsel to such corporation to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof. -8- (3) Severability. Any provision of this Guaranty which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Additional Guaranties. This Guaranty shall be in addition to any other --------------------- guaranty or other security for the Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such other guaranty or security. 15. Paragraph Headings. The paragraph headings used in this Guaranty are for ------------------ convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies, Documentation of Expenses. HRP shall not by --------------------------------------------------------- any act (except by a written instrument pursuant to Paragraph 17 hereof), delay, ------------ indulgence, omission or otherwise, be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of HRP, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by HRP of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which HRP would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns. None of the terms or ---------------------------------------------- provisions of this Guaranty may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Guarantor and HRP, provided that any provision of this Guaranty may be waived by HRP in a letter or agreement executed by HRP or by telecopy from HRP. This Guaranty shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of HRP and its successors and assigns. 18. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE GUARANTOR ------------------------------------------------------------ HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY. BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS -9- GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 19. Notices. All notices under this Guaranty shall be in writing, and shall be ------- delivered by hand, by a nationally recognized commercial overnight delivery service, by first class mail or by telecopy, delivered, addressed or transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158, Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan & Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention: Harry E. Ekblom, Esq. (telecopy no. 617-338-2880), and if to the Guarantor, at its address or telecopy number set out below its signature in this Guaranty. Such notices shall be effective: in the case of hand deliveries, when received; in the case of an overnight delivery service, on the next business day after being placed in the possession of such delivery service, with delivery charges prepaid; in the case of mail, three days after deposit in the postal system, first class postage prepaid; and in the case of telecopy notices, when electronic indication of receipt is received. Either party may change its address and telecopy number by written notice to the other delivered in accordance with the provisions of this Section. 20. Termination. The obligations of Guarantor hereunder shall automatically ----------- terminate upon the indefeasible satisfaction in full of all Obligations after the Termination Date. 21. Existing Guaranties. This Guaranty amends, restates and consolidates the ------------------- Guaranties dated as of December 28, 1990 and June 30, 1992, each as amended, by the Guarantor in favor of HRP. -10- IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed and delivered as of the date first above written. GRANCARE, INC. By /s/ M. Henry Day, Jr. ----------------------------- Name: M. Henry Day, Jr. Title: Assistant Secretary Address for Notices: GranCare, Inc. Suite 1500 One Ravinia Drive Atlanta GA 30346 Attn: General Counsel Signature page to Guaranty by GranCare, Inc. dated as of October 31, 1997. EX-10.34 32 GUARANTY BY PARAGON EXHIBIT 10.34 GUARANTY BY PARAGON HEALTH NETWORK, INC. GUARANTY dated as of October 31, 1997 made by PARAGON HEALTH NETWORK, INC. (f/k/a "Living Centers of America, Inc."), a Delaware corporation (the "Guarantor") and HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate --------- investment trust (with its successor and assigns, "HRP"). --- W I T N E S S E T H : - - - - - - - - - - WHEREAS, GranCare, Inc., a Delaware corporation ("GranCare") and the other -------- GranCare Companies (as hereinafter defined) have entered into certain lease and loan financings with HRP governed by the GranCare Documents (as hereinafter defined); WHEREAS, pursuant to and subject to the terms and conditions of a Third Amended and Restated Agreement and Plan of Merger dated as of September 17, 1997 among the Guarantor, LCA Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Guarantor ("LCA Acquisition"), GranCare and --------------- Apollo Management, L.P. on behalf of one or more of its managed investment funds, GranCare shall become a wholly-owned subsidiary of the Guarantor through the merger of LCA Acquisition with and into GranCare and those certain other transactions defined as the "Transactions" in the Joint Proxy Statement dated September 26, 1997 by the Guarantor and GranCare (the "Transactions"); ------------ WHEREAS, the Guarantor and GranCare have requested that HRP consent to the Transactions and to make certain modifications to the GranCare Documents in connection therewith; WHEREAS, HRP is willing to so consent and agree, subject to the terms and conditions of a certain Restructure and Asset Exchange Agreement dated as of even date herewith (the "Restructure Agreement") among AMS Properties, Inc. and --------------------- GCI Health Care Centers, Inc., each a Delaware corporation and a wholly-owned subsidiary of GranCare ("AMS Properties"and "GCIHCC," respectively), and HRP; -------------- ------ WHEREAS, it is a condition to the effectiveness of the Restructure Agreement that, among other things, the Guarantor deliver this Guaranty in favor of HRP; WHEREAS, by virtue of the Transactions and the related modifications to the GranCare Documents contemplated by the Restructure Agreement, the GranCare Companies will benefit substantially from, among other things, increased access to capital; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Guarantor hereby agrees with HRP as follows: -2- 1. Defined Terms. Unless otherwise defined herein, terms which are defined in ------------- the Restructure Agreement and used herein are so used as so defined. In addition, the following terms shall have the meanings set forth below: "Applicable Law" shall mean any law of any governmental authority, -------------- whether domestic or foreign, including without limitation all federal and state laws, to which the Person in question is subject or by which it or any of its property is bound, and including without limitation any: (a) administrative, executive, judicial, legislative or other action, code, consent decree, constitution, decree, directive, enactment, finding, guideline, injunction, interpretation, judgment, law, order, ordinance, policy statement, proclamation, promulgation, regulation, requirement, rule, rule of law, rule of public policy, settlement agreement, statute, or writ, of any governmental authority, domestic or foreign, whether or not having the force of law; (b) common law or other legal or quasi-legal precedent; or (c) arbitrator's, mediator's or referee's award, decision, finding or recommendation, or, in any case, any particular section, part or provision thereof "GranCare Documents" shall mean, collectively, any agreement, note, ------------------ lease, master lease, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument now or hereafter executed by one or more of the GranCare Companies with, in favor of or for the benefit of, HRP or any Affiliate thereof (including, without limitation, any and all other documents executed in connection with, relating to, evidencing or creating collateral or security in favor of or for the benefit of HRP or any Affiliate thereof), and any agreement, note, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument hereafter executed by one or more of the GranCare Companies in connection with any extension, renewal, refunding or refinancing thereof, as any of the same may hereafter from time to time be amended, modified or supplemented. "GranCare Companies" shall mean, collectively, GranCare, AMS ------------------ Properties and GCIHCC, and their respective successors and assigns. "Consolidated Financials" shall mean, for any fiscal year or other ----------------------- accounting period of the Guarantor and its consolidated Subsidiaries, annual audited and quarterly unaudited financial statements prepared on a consolidated basis, including the Guarantor's consolidated balance sheet and the related statements of income and cash flows, all in reasonable detail, and setting forth in comparative form the corresponding figures for the corresponding period in the preceding fiscal year, and prepared in accordance with GAAP consistently applied throughout the periods presented. "Default Rate" shall mean 4% per annum above the prime rate or base ------------ rate on corporate loans at large U.S. money center commercial banks as published in The Wall Street Journal or, if publication of such rate shall be suspended or terminated, the annual rate of interest, determined daily and expressed as a percentage, from time to time announced by one of the five largest national-chartered banking institutions having their principal office in New York, New York and selected by HRP at the time such publication -3- is suspended or terminated. Each change in the Interest Rate shall take effect simultaneously with the date of publication or announcement, as applicable, of each corresponding change in such prime rate or base rate. "Event of Default" shall have the meaning set forth in any GranCare ---------------- Document. "Financial Officer's Certificate" shall mean a certificate of the ------------------------------- chief financial officer, treasurer or other executive officer of the Guarantor, duly authorized, accompanying the financial statements required to be delivered by such Person pursuant to Section 14, in which such officer shall (a) certify that such statements have been properly prepared in accordance with GAAP and are true, correct and complete in all material respects and fairly present the consolidated financial condition of the Guarantor at and as of the dates thereof and the results of its and their operations for the periods covered thereby, and (b) certify that such officer has reviewed the GranCare Documents and has no knowledge of any material default by the Guarantor or any Subsidiary thereof in the performance or observance of any of the provisions of any GranCare Document or of any condition or event which constitutes an Event of Default under any GranCare Document or which with the passage of time or the giving of notice or both would become such an Event of Default. "Material Adverse Effect" means a material adverse effect on (a) the ----------------------- business, operations, property or condition (financial or otherwise) of the Guarantor and its Subsidiaries taken as a whole, (b) the ability of the Guarantor to perform its obligations under this Guaranty, or (c) the validity or enforceability of this Guaranty, or the rights of HRP hereunder. "Obligations" shall mean the payment and performance of each and every ----------- obligation and liability of any GranCare Company to HRP under any GranCare Document, whether now existing or hereafter arising or created, joint or several, direct or indirect, absolute or contingent, due or to become due, matured or unmatured, liquidated or unliquidated, arising by contract, operation of law or otherwise, and including, without limitation, (i) all principal, premium or prepayment fee and interest under any promissory note payable to HRP by any GranCare Company, (ii) all rent under any lease with HRP as landlord, and (iii) all fees and charges, and all costs and expenses payable under any GranCare Document. "Subsidiary" shall mean any corporation of which more than fifty ---------- percent of the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by Guarantor, or Guarantor and one or more other Subsidiaries, or by one or more Subsidiaries. 2. Guaranty. The Guarantor hereby unconditionally and irrevocably guarantees -------- to HRP the prompt and complete payment and performance by the GranCare Companies (and each of them), -4- when due (whether at stated maturity, by acceleration or otherwise), of the Obligations. The Guarantor further agrees to pay any and all reasonable expenses (including, without limitation, all reasonable fees and disbursements of counsel to HRP) which may be paid or incurred by HRP in enforcing any of its rights under this Guaranty. This Guaranty is a guaranty of payment and not of collectibility and is absolute and in no way conditional or contingent. The Guarantor's liability hereunder is direct and unconditional and may be enforced after nonpayment or nonperformance by any GranCare Company of any Obligation without requiring HRP to resort to any other Person (including without limitation such GranCare Company) or any other right, remedy or collateral. This Guaranty shall remain in full force and effect until the Obligations are paid in full following the termination of all GranCare Documents (the "Termination ----------- Date"). - ---- 3. Costs and Expenses of Collection. The Guarantor agrees, as principal -------------------------------- obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in immediately available funds, all costs and expenses (including, without limitation, all court costs and all reasonable fees and disbursements of counsel to HRP) incurred or expended by HRP in connection with the enforcement of this Guaranty, together with interest on such amounts from the time such amounts become due until payment at the Default Rate. It shall be a condition of the obligations of Guarantor to pay any fees and expenses payable by it under this Guaranty that HRP shall have, or shall have caused to have, provided the Guarantor with a writing describing such fees and/or expenses in reasonable detail. 4. Right of Setoff. Regardless of the adequacy of any collateral or other --------------- means of obtaining repayment of the Obligations, HRP is hereby authorized, without notice to the Guarantor or compliance with any other condition precedent now or hereafter imposed by Applicable Law (all of which are hereby expressly waived to the extent permitted by Applicable Law) and to the fullest extent permitted by Applicable Law, to set off and apply any securities, deposits or other property belonging to the Guarantor now or hereafter held by HRP against the obligations of the Guarantor under this Guaranty, whether or not HRP shall have made any demand under this Guaranty, at any time and from time to time after the occurrence of a Event of Default under and as defined in any GranCare Document, in such manner as HRP in its sole discretion may determine, and the Guarantor hereby grants HRP a continuing security interest in such securities, deposits and property for the payment and performance of such obligations. 5. Subrogation and Contribution. Until the Obligations shall have been paid ---------------------------- and performed in full after the Termination Date, the Guarantor irrevocably and unconditionally suspends and subordinates any and all rights to which it may be entitled, by operation of law or otherwise, to be subrogated, with respect to any payment made by the Guarantor hereunder, to the rights of HRP against any GranCare Company, or otherwise to be reimbursed, indemnified or exonerated by any GranCare Company in respect thereof or to receive any payment, in the nature of contribution or for any other reason, from any other guarantor of the Obligations with respect to any payment made by the Guarantor hereunder. Until the Obligations shall have been paid and performed in full, the Guarantor waives any defense it may have based upon any election of remedies by HRP which impairs the Guarantor's subrogation rights or the Guarantor's rights to proceed against any GranCare Company for reimbursement (including without limitation any loss of rights the Guarantor may suffer by reason of any rights, powers or remedies of such -5- GranCare Company in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging any indebtedness to HRP). Until the Obligations shall have been paid, performed and satisfied in full after the Termination Date, the Guarantor further suspends and subordinates any right to enforce any remedy which HRP now has or may in the future have against any GranCare Company, any other guarantor or any other Person and any benefit of, or any right to participate in, any security whatsoever now or in the future held by HRP. 6. Effect of Bankruptcy Stay. If acceleration of the time for payment or ------------------------- performance of any of the Obligations is stayed upon the insolvency, bankruptcy or reorganization of any GranCare Company or any other Person or otherwise, all such amounts otherwise subject to acceleration shall nonetheless be payable by the Guarantor under this Guaranty forthwith upon demand. 7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents and ---------------------------------- warrants to HRP that (i) it has received true and complete copies of all existing GranCare Documents from the GranCare Companies (giving effect to the Closing under the Restructure Agreement), has read the contents thereof and reviewed the same with legal counsel of its choice; (ii) no representations or agreements of any kind have been made to the Guarantor which would limit or qualify in any way the terms of this Guaranty; (iii) this Guaranty is executed at the GranCare Companies' request and not at the request of HRP; (iv) HRP has made no representation to the Guarantor as to the creditworthiness of any GranCare Company; and (v) the Guarantor has established adequate means of obtaining from each GranCare Company on a continuing basis information regarding such GranCare Company's financial condition. The Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect the Guarantor's risks under this Guaranty, and the Guarantor further agrees that HRP shall have no obligation to disclose to the Guarantor any information or documents acquired by HRP in the course of its relationship with the GranCare Companies. 8. Amendments, etc. with Respect to the Obligations. The obligations of the ------------------------------------------------ Guarantor under this Guaranty shall remain in full force and effect without regard to, and shall not be released, altered, exhausted, discharged or in any way affected by any circumstance or condition (whether or not any GranCare Company shall have any knowledge or notice thereof), including without limitation (a) any amendment or modification of or supplement to any GranCare Document, or any obligation, duty or agreement of the GranCare Companies or any other Person thereunder or in respect thereof; (b) any assignment or transfer in whole or in part of any of the Obligations; any furnishing, acceptance, release, nonperfection or invalidity of any direct or indirect security or guaranty for any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence, settlement, compromise or other action or inaction under or in respect of any GranCare Document, or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of any such instrument (whether by operation of law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding with respect to any GranCare Company or any other Person or any of their respective properties or creditors or any resulting release or discharge of any Obligation (including without limitation any rejection of any lease pursuant to Section 365 of the Federal Bankruptcy Code); (e) any new or additional financing arrangements entered into by any GranCare Company or by any other Person on behalf of or for the benefit of any GranCare Company; (f) the merger or -6- consolidation of any GranCare Company with or into any other Person or of any other Person with or into any GranCare Company; (g) the voluntary or involuntary sale or other disposition of all or substantially all the assets of any GranCare Company or any other Person; (h) the voluntary or involuntary liquidation, dissolution or termination of any GranCare Company or any other Person; (i) any invalidity or unenforceability, in whole or in part, of any term hereof or of any GranCare Document, or any obligation, duty or agreement of any GranCare Company or any other Person thereunder or in respect thereof; (j) any provision of any applicable law or regulation purporting to prohibit the payment or performance by any GranCare Company or any other Person of any Obligation; (k) any failure on the part of any GranCare Company or any other Person for any reason to perform or comply with any term of any GranCare Document or any other agreement; or (l) any other act, omission or occurrence whatsoever, whether similar or dissimilar to the foregoing. The Guarantor authorizes each GranCare Company, each other guarantor in respect of the Obligations and HRP at any time in its discretion, as the case may be, to alter any of the terms of any of the Obligations. 9. Guarantor as Principal. If for any reason the GranCare Companies, or any of ---------------------- them, or any other Person is under no legal obligation to discharge any Obligation, or if any other moneys included in the Obligations have become unrecoverable from the GranCare Companies, or any of them, or any other Person by operation of law or for any other reason, including, without limitation, the invalidity or irregularity in whole or in part of any Obligation or of any GranCare Document, the legal disability of any GranCare Company or any other obligor in respect of Obligations, any discharge of or limitation on the liability of any GranCare Company or any other Person or any limitation on the method or terms of payment under any Obligation, or of any GranCare Document, which may now or hereafter be caused or imposed in any manner whatsoever (whether consensual or arising by operation of law or otherwise), this Guaranty shall nevertheless remain in full force and effect and shall be binding upon the Guarantor to the same extent as if the Guarantor at all times had been the principal obligor on all Obligations. 10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the extent ----------------------------- not prohibited by applicable law, all presentments, demands for performance, notice of nonperformance, protests, notices of protests and notices of dishonor in connection with the Obligations or any GranCare Document, including but not limited to (a) notice of the existence, creation or incurring of any new or additional obligation or of any action or failure to act on the part of any GranCare Company, HRP, any endorser or creditor of any GranCare Company or any other Person; (b) any notice of any indulgence, extensions or renewals granted to any obligor with respect to the Obligations; (c) any requirement of diligence or promptness in the enforcement of rights under any GranCare Document, or any other agreement or instrument directly or indirectly relating thereto or to the Obligations; (d) any enforcement of any present or future agreement or instrument relating directly or indirectly thereto or to the Obligations; (e) notice of any of the matters referred to in Section 9 above; (f) any defense of --------- any kind which the Guarantor may now have with respect to his liability under this Guaranty; (g) any right to require HRP, as a condition of enforcement of this Guaranty, to proceed against any GranCare Company or any other Person or to proceed against or exhaust any security held by HRP at any time or to pursue any other right or remedy in HRP's power before proceeding against the Guarantor; (h) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or -7- Persons or the failure of HRP to file or enforce a claim against the estate (in administration, bankruptcy, or any other proceeding) of any other Person or Persons; (i) any defense based upon an election of remedies by HRP; (j) any defense arising by reason of any "one action" or "anti-deficiency" law or any other law which may prevent HRP from bringing any action, including a claim for deficiency, against the Guarantor, before or after HRP's commencement of completion of any foreclosure action, either judicially or by exercise of a power of sale; (k) any defense based upon any lack of diligence by HRP in the collection of any Obligation; (l) any duty on the part of HRP to disclose to the Guarantor any facts HRP may now or hereafter know about any GranCare Company or any other obligor in respect of Obligations; (m) any defense arising because of an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code; (n) any defense based on any borrowing or grant of a security interest under Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or arising out of any defense which any GranCare Company or any other Person may have to the payment or performance of the Obligations (including but not limited to failure of consideration, breach of warranty, fraud, payment, accord and satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy, statute of limitations, lender liability and usury). Guarantor acknowledges and agrees that each of the waivers set forth herein on the part of the Guarantor is made with Guarantor's full knowledge of the significance and consequences thereof and that, under the circumstances, the waivers are reasonable. If any such waiver is determined to be contrary to Applicable Law such waiver shall be effective only to the extent no prohibited by such Applicable Law. 11. Reinstatement. This Guaranty shall continue to be effective, or be ------------- reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by HRP upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any GranCare Company or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any GranCare Company or any substantial part of its property, or otherwise, all as though such payments had not been made. 12. Payments. The Guarantor hereby agrees that the Obligations will be paid to -------- HRP without set-off or counterclaim in U.S. Dollars at the office of HRP located at 400 Centre Street, Newton, Massachusetts 02158, or to such other location as HRP shall notify the Guarantor. 13. Representations and Warranties. The Guarantor represents and warrants that: ------------------------------ (1) Corporate Existence. The Guarantor is a corporation duly ------------------- incorporated and validly existing under the laws of the jurisdiction of its incorporation, and is duly licensed or qualified as a foreign corporation in all states wherein the nature of its property owned or business transacted by it makes such licensing or qualification necessary, except where the failure to be licensed or to so qualify could not have a Material Adverse Effect. (2) No Violation. The execution, delivery and performance of this ------------ Guaranty and each other Restructure Document to which the Guarantor is a party will not contravene any provision of law, statute, rule or regulation to which the Guarantor or any GranCare Company is subject or any judgment, decree, franchise, order or permit applicable to the -8- Guarantor, or conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any lien or security interest upon any of the property or assets of the Guarantor pursuant to the terms of any agreement or instrument to which the Guarantor is party or by which its assets are bound, or violate any provision of the respective corporate charters or bylaws of the Guarantor. (3) Corporate Authority and Power. The execution, delivery and ----------------------------- performance of this Guaranty and each other Restructure Document to which the Guarantor is a party is within the corporate powers of the Guarantor and has been duly authorized by all necessary corporate action. (4) Enforceability. This Guaranty and each other Restructure Document -------------- to which the Guarantor is a party have been duly executed and delivered by the Guarantor, and this Guaranty and each such Restructure Document constitutes the valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and except as enforceability may be subject to general principles of equity, whether such principles are applied in a court of equity or at law. (5) Governmental Approvals. No order, permission, consent, approval, ---------------------- license, authorization, registration or validation of, or filing with, or exemption by, any governmental authority is required to authorize, or is required in connection with, the execution, delivery and performance of this Guaranty or any other Restructure Document to which the Guarantor is a party, or the taking of any action contemplated hereby or thereby. (6) Litigation. The Guarantor has no notice or knowledge of any ---------- action, suit or proceeding pending or threatened against or affecting it at law or in equity or before or by any governmental department, court, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind that would, if adversely determined, have a Material Adverse Effect. (7) Financial Statements. The consolidated financial statements of -------------------- the Guarantor contained in the joint proxy statement dated September 26, 1997 filed in connection with the Transactions, fairly present, in accordance with GAAP, the consolidated financial condition of the Guarantor and its Subsidiaries as of their dates of presentation, and the consolidated results of their operations and their consolidated cash flows for the respective fiscal period then ended. 14. Covenants. The Guarantor hereby covenants and agrees with HRP that, from --------- and after the date of this Guaranty until the Obligations are paid in full and all GranCare Documents have been terminated: -9- (1) Notices. The Guarantor shall promptly give notice to HRP of any ------- Default or Event of Default under any GranCare Document. (2) Financial Statements. The Guarantor shall furnish the following -------------------- statements to HRP: (1) within forty-five (45) days after each of the first three quarters of any Fiscal Year, the Consolidated Financials for such fiscal quarter, in each case accompanied by the Financial Officer's Certificate; (2) within ninety (90) days after the end of each Fiscal Year, the Consolidated Financials for such Fiscal Year, in each case certified by Ernst & Young LLP or any other independent certified public accountant of national reputation, and accompanied by the Financial Officer's Certificate; (3) promptly after the sending or filing thereof, copies of all reports which the Guarantor sends to its security holders generally, and copies of all periodic reports which the Guarantor files with the SEC or any stock exchange on which its shares are listed or traded; (4) at any time and from time to time upon not less than thirty (30) days notice from HRP, the Guarantor will furnish to HRP any Consolidated Financials or any other financial reporting information required to be filed by HRP with any securities and exchange commission, the SEC or any successor agency, or any other governmental authority, or required pursuant to any order issued by any court governmental authority or arbitrator in any litigation to which HRP is a party, for purposes of compliance therewith; and (5) promptly upon notice from HRP, such other information concerning the business, financial condition and affairs of the Guarantor as HRP may reasonably request from time to time. HRP may at any time, and from time to time, provide any lender to HRP with copies of any of the foregoing statements. (3) Reports. The Guarantor shall promptly provide to HRP such ------- certificates, reports and other documents required of the Guarantor hereunder and the Guarantor shall cause each GranCare Company to provide such certificates, reports and other documents required of it under the GranCare Documents. (4) Legal Existence. The Guarantor shall do or cause to be done all things --------------- necessary to preserve and keep in full force and effect its corporate existence (subject as provided in Section 14.(f) hereof). -------------- -10- (5) Compliance. The Guarantor shall , and shall cause each of its ---------- Subsidiaries to, comply in all material respects with all Applicable Laws in respect of the conduct of its business and the ownership of its property (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to environmental, safety and other similar standards or controls), except where the failure to comply, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (6) Merger; Sale of Assets, Etc. HRP agrees that, notwithstanding anything --------------------------- to the contrary in any GranCare Document, the Guarantor and any of its Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors of any of the foregoing, may, without any consent or approval of HRP, enter into mergers, consolidations, acquisitions, asset sales, sales of minority or majority interests in the Guarantor or such Affiliate or any other transactions (including, without limitation, any change of control, recapitalization or other restructuring of the Guarantor or any of such Affiliates or successors); provided, however, that the Guarantor (i) shall not liquidate, wind-up or - -------- ------- dissolve itself (or suffer any liquidation or dissolution) and (ii) may not merge or consolidate with any Person, or convey, transfer or lease substantially all of its assets unless: (1) giving effect to such transaction, no Event of Default, or an event or condition that with the giving of notice or lapse of time or both would become an Event of Default, would occur under and as defined in any GranCare Document; and (2) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Guarantor, as the case may be, shall be a corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Guarantor is not such corporation, (i) such corporation shall have executed and delivered to HRP its assumption of the due and punctual performance and observance of each covenant and condition of this Guaranty to the same extent and with the same effect as though such corporation was a party hereto and was named and defined as the "Guarantor" herein and (ii) shall have caused to be delivered to HRP an opinion of outside counsel to such corporation to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof. (7) Ownership of Stock of Tenant Entities. The Guarantor shall at all ------------------------------------- times, either directly or indirectly through one or more wholly-owned Subsidiaries that have each executed and delivered to HRP a guaranty in substantially the form of the Guaranty dated as of even date herewith by GranCare in favor of HRP, be the beneficial and record owner of all the shares of the outstanding capital stock of AMS Properties and GCIHCC. 15. Severability. Any provision of this Guaranty which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition -11- or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 16. Additional Guaranties. This Guaranty shall be in addition to any other --------------------- guaranty or other security for the Obligations, and it shall not be prejudiced or rendered unenforceable by the invalidity of any such other guaranty or security. 17. Paragraph Headings. The paragraph headings used in this Guaranty are for ------------------ convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 18. No Waiver; Cumulative Remedies, Documentation of Expenses. HRP shall not by --------------------------------------------------------- any act (except by a written instrument pursuant to Paragraph 19 hereof), delay, indulgence, omission or otherwise, be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of HRP, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by HRP of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which HRP would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 19. Waivers and Amendments; Successors and Assigns. None of the terms or ---------------------------------------------- provisions of this Guaranty may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Guarantor and HRP, provided that any provision of this Guaranty may be waived by HRP in a letter or agreement executed by HRP or by telecopy from HRP. This Guaranty shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of HRP and its successors and assigns. 20. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE GUARANTOR ------------------------------------------------------------ HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY. BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING MAY BE BROUGHT; (2) -12- IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF THE FEDERAL RULES OF CIVIL PROCEDURE. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 21. Notices. All notices under this Guaranty shall be in writing, and shall be ------- delivered by hand, by a nationally recognized commercial overnight delivery service, by first class mail or by telecopy, delivered, addressed or transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158, Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan & Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention: Harry E. Ekblom, Esq. (telecopy no. 617-338-2880), and if to the Guarantor, at its address or telecopy number set out below its signature in this Guaranty. Such notices shall be effective: in the case of hand deliveries, when received; in the case of an overnight delivery service, on the next business day after being placed in the possession of such delivery service, with delivery charges prepaid; in the case of mail, three days after deposit in the postal system, first class postage prepaid; and in the case of telecopy notices, when electronic indication of receipt is received. Either party may change its address and telecopy number by written notice to the other delivered in accordance with the provisions of this Section. 22. Termination. The obligations of Guarantor hereunder shall automatically ----------- terminate upon the indefeasible satisfaction in full of all Obligations after the Termination Date. -13- IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly executed and delivered as of the date first above written. PARAGON HEALTH NETWORK, INC. (f/k/a "Living Centers of America, Inc.") By /s/ Boyd P. Gentry ---------------------------------- Name: Boyd P. Gentry Title: Vice President and Treasurer Address for Notices: Paragon Health Network, Inc. c/o GranCare, Inc. Suite 1500 One Ravinia Drive Atlanta GA 30346 Attn: General Counsel EX-10.35 33 RESTRUCTURE AND ASSET EXCHANGE AGREEMENT EXHIBIT 10.35 RESTRUCTURE AND ASSET EXCHANGE AGREEMENT AGREEMENT dated as of October 31, 1997 among HEALTH AND RETIREMENT PROPERTIES TRUST (f/k/a "Health and Rehabilitation Properties Trust") (known in Wisconsin as "Health and Retirement Properties REIT"), a real estate investment trust formed under the laws of the State of Maryland ("HRP"), GRANCARE, INC. --- (f/k/a "New GranCare, Inc."), a Delaware corporation ("GranCare"), AMS -------- PROPERTIES, INC., a Delaware corporation ("AMS Properties"), and GCI HEALTH CARE -------------- CENTERS, INC., a Delaware corporation ("GCIHCC;" and together with GranCare and ------ AMS Properties, collectively, the "GranCare Parties") ---------------- W I T N E S S E T H WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"), --- GranCare, Inc., a California corporation ("Old GranCare"), American Medical ------------ Services, Inc., a Wisconsin corporation ("AMS") and AMS Properties have entered --- into an Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of December 28, 1990, as amended (as so amended, the "Acquisition ----------- Agreement"), under which, inter alia, (A) HRP has leased 18 nursing properties - --------- ----- ---- located in Wisconsin, California, Colorado and Illinois to AMS Properties pursuant to the several Facility Leases (as amended, the "AMS Properties -------------- Facility Leases"), each incorporating a Master Lease Document General Terms and - --------------- Conditions dated as of December 28, 1990 (as amended, the "AMS Properties Master --------------------- Lease") between HRP, as landlord, and AMS Properties, as tenant, and (B) HRP has - ----- made a mortgage loan to AMS Properties in the original principal amount of $11,500,000, the payment of which is currently evidenced by a Promissory Note dated as of October 1, 1994 by AMS Properties to HRP (the "Mortgage Note") and ------------- is secured, inter alia by Mortgage and Security Agreements dated as of March 31, ---------- 1995 (collectively, the "Mortgages") by AMS Properties in favor of HRP --------- encumbering the GranCare Wisconsin Properties (as hereinafter defined); WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition Agreement) took place, whereby Old GranCare, which previously had been a wholly- owned subsidiary of HMI, became the sole stockholder of HMI and AMS; and (b) in December 1993, AMS, which previously had owned all the outstanding common stock of AMS Properties, and AMS Rehab, Inc., a Delaware corporation and a wholly- owned subsidiary of Old GranCare, each merged into AMS Properties, with AMS Properties as the surviving corporation; WHEREAS, HRP has leased 7 nursing and/or residential living properties located in Arizona, California and South Dakota to GCIHCC pursuant to the several Facility Leases (as amended, the "GCIHCC Facility Leases"), each ---------------------- incorporating a Master Lease Document General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCIHCC Master Lease") between HRP, as landlord, ------------------- and GCIHCC, as tenant; WHEREAS, Old GranCare transferred all of its skilled nursing, home health care, assisted living and contract management businesses (including, without limitation, such capital stock), and related assets, to GranCare, with Old GranCare thereafter distributing GranCare -2- common stock to Old GranCare shareholders (collectively, the "Distribution"), ------------ pursuant to an Agreement and Plan of Distribution dated as of September 3, 1996 between Old GranCare and GranCare; WHEREAS, immediately following the Distribution, Old GranCare merged with and into Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"), -------- with Vitalink as the surviving corporation, pursuant to an Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996 between Vitalink and Old GranCare; and WHEREAS, GranCare proposes to merge with LCA Acquisition Sub, Inc., a Delaware corporation ("Acquisition Sub"), and a wholly-owned Subsidiary of --------------- Paragon Health Network, Inc., a Delaware corporation (f/k/a Living Centers of America, Inc.) ("Paragon"), with GranCare as the surviving corporation (the ------- "GranCare Merger"), pursuant to an Amended and Restated Agreement and Plan of - ---------------- Merger dated as of September 17, 1997 among GranCare, Paragon, Acquisition Sub and Apollo Management, L.P. on behalf of one of more of its managed investment funds (the "Merger Agreement"); and ---------------- WHEREAS, GranCare has requested that HRP agree to (a) restructure certain terms of the AMS Properties Facility Leases and the GCIHCC Facility Leases, (b) permit the otherwise prohibited prepayment of the Mortgage Note, (c) waive the provisions of (i) Section 9.15A of the Acquisition Agreement and (ii) any other agreement or document entered into by GranCare, Old GranCare, GCIHCC or AMS Properties in favor of HRP or any Affiliate (collectively, the "HRP Parties") ----------- which either requires consent or approval of one or more of the HRP Parties in order to permit the consummation of Transactions (as hereinafter defined), (d) cure any default arising as a result of the consummation of the Transactions without the consent of any of the HRP Parties, and (e) release Vitalink from its obligations under a Limited Guaranty dated as of February 12, 1997 (the "Limited ------- Guaranty") in favor of HRP; and HRP is, subject to the terms and provisions - -------- hereof, willing to so agree; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: SECTION 1. DEFINITIONS. ----------- Capitalized terms used in this Agreement shall have the meanings set forth in the preambles or the caption hereto, or as set forth below or in the Section referenced below. Terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa, and the reference to any gender shall be deemed to include all genders. References to "hereof", "herein" or similar terms are intended to refer to this Agreement as a whole and not a particular section, and references to "this Section" are intended to refer to the entire section and not a particular subsection thereof. 1.1 "Affiliate", "Affiliated" shall mean, with respect to any Person, any --------- ---------- other Person at the time directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. -3- 1.2 "Agreement" shall mean this Restructure and Asset Exchange Agreement, --------- together with the Exhibits and Schedules attached hereto, as it and they may be amended from time to time as herein provided. 1.3 "Applicable Laws" shall mean and include all applicable Federal, state --------------- or local statutes, laws, ordinances, rules and regulations, licensing requirements or conditions, whether now existing or hereafter arising, relating to Hazardous Substances. 1.4 "Authority" shall mean any governmental or quasi-governmental --------- authority, whether administrative, executive, judicial, legislative or other, or any combination thereof, including without limitation any federal, state, territorial, county, municipal or other government or governmental or quasi- governmental agency, arbitrator, authority, board, body, branch, bureau, central bank or comparable agency or entity, commission, corporation, court, department, instrumentality, master, mediator, panel, referee, system or other political unit or subdivision or other Entity of any of the foregoing, whether domestic or foreign. 1.5 "Business Day" shall mean any day other than a Saturday, Sunday or any ------------ other day on which banking institutions in The Commonwealth of Massachusetts are authorized by law or executive action to close. 1.6 "Cash Collateral Pledge" shall have the meaning given such term in ---------------------- Section 5.2. - ----------- 1.7 "Code" shall mean the Internal Revenue Code of 1986, as amended, and ---- the rules and regulations thereunder. 1.8 "Continuing Properties" shall mean the properties listed on Schedule --------------------- -------- 1.8. - --- 1.9 "Contracts" shall mean, with respect to any GranCare Exchange --------- Property, all service contracts, equipment leases and other arrangements or agreements to which AMS Properties or any predecessor is a party affecting the ownership, repair, maintenance or operation of such GranCare Exchange Property, to the extent AMS Properties' interest therein is assignable or transferable. 1.10 "Contractual Obligation" shall have the meaning given such term in ---------------------- Section 6.4. - ------------ 1.11 "Documents" shall mean, with respect to any GranCare Exchange --------- Property, all books, records and files relating to the leasing, maintenance, management or operation of such GranCare Exchange Property. 1.12 "Entity" shall mean any corporation, firm, unincorporated ------ organization, association, partnership, limited liability company, trust (inter vivos or testamentary), estate of a deceased, insane or incompetent individual, business trust, joint stock company, joint venture or other organization, entity or business, whether acting in an individual, fiduciary or other capacity, or any Authority. -4- 1.13 "Exchange Closing" shall have the meaning given such term in Section ---------------- ------- 3.1. - --- 1.14 "Exchange Closing Date" shall have the meaning given such term in --------------------- Section 3.1. - ----------- 1.15 "Exchange Properties" shall mean, collectively, the GranCare ------------------- Exchange Properties and the HRP Exchange Properties. 1.16 "Exchange Properties Escrow Agreement" shall have the meaning given ------------------------------------ such term in Section 5.6. ----------- 1.17 "Exchange Transaction" shall have the meaning given such term in -------------------- Section 3.1. - ----------- 1.18 "GranCare Exchange Properties" shall mean the GranCare North ---------------------------- Carolina Properties and the GranCare Wisconsin Properties. 1.19 "GranCare Guaranty" shall have the meaning given such term in ----------------- Section 5.4. - ----------- 1.20 "GranCare North Carolina Properties" shall mean the real property ---------------------------------- and related improvements and personal property, located in Wilson, Concord and Winston-Salem, North Carolina, and as otherwise described on Schedule 1.20 ------------- hereto. 1.21 "GranCare Wisconsin Properties" shall mean the real property and ----------------------------- related improvements and personal property, located in Milwaukee and Pewaukee, Wisconsin, and as otherwise described on Schedule 1.21 hereto. ------------- 1.22 "Hazardous Substances" shall mean hazardous substances (as defined -------------------- by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as now in effect or as hereafter from time to time amended), - -------- hazardous wastes (as defined by the Resource Conservation and Recovery Act ("RCRA"), as now in effect or as hereafter from time to time amended), any - ------ hazardous waste, hazardous substance, pollutant or contaminant, oils, radioactive materials, asbestos in any form or condition, or any pollutant or contaminant or hazardous, dangerous or toxic chemicals, materials or substances within the meaning of any other applicable Federal, state or local law, regulation, ordinance or requirements relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or materials, all as now in effect or hereafter from time to time amended. 1.23 "Healthcare Facilities" shall have the meaning given such term in --------------------- Section 6.8. - ----------- 1.24 "HRP Exchange Properties" shall mean the real property and related ----------------------- improvements and personal property, located in Milwaukee, Wisconsin, San Diego and Palm Springs, California, and Nashville, Illinois, and as otherwise described on Schedule 1.24 hereto. ------------- 1.25 "Intangible Property" shall mean, with respect to any GranCare ------------------- Exchange Property, all transferable or assignable permits, certificates of occupancy, operating permits, sign -5- permits, development rights and approvals, certificates, licenses, warranties and guarantees, rights to deposits, the Contracts, and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character with respect to such GranCare Exchange Property held by the parties. 1.26 "Lease Amendment" shall have the meaning given such term in Section --------------- ------- 5.5. - --- 1.27 "Legal Restriction" shall have the meaning given such term in Section ----------------- ------- 6.4. - ----- 1.28 "Lien" shall mean any mortgage, pledge, hypothecation, assignment, ---- deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any lease that should be capitalized in accordance with generally accepted accounting principles, and the filing of a financing statement under the Uniform Commercial Code or comparable law of any jurisdiction). 1.29 "New Facility Leases" shall have the meaning given such term in ------------------- Section 5.6. - ----------- 1.30 "Notices and Applications" shall have the meaning given such term in ------------------------ Section 6.10. - ------------ 1.31 "Paragon Guaranty" shall have the meaning given such term in Section ---------------- ------- 5.2. - --- 1.32 "Permitted Encumbrances" (a) with respect to any GranCare Exchange ---------------------- Property, shall mean those Liens disclosed on Schedule 1.32 hereto, and (b) with ------------- respect to the HRP Exchange Properties, shall mean those Liens disclosed on Schedule 1.32 hereto and any Lien created after the date hereof other than - ------------- through the act or omission of HRP. 1.33 "Person" shall mean any natural individual or any Entity. ------ 1.34 "Personal Property" shall mean, with respect to any GranCare Exchange ----------------- Property, all appliances, machinery, devices, fixtures, appurtenances, equipment, furniture, furnishings and articles of tangible personal property of every kind and nature whatsoever owned by the parties and located in or at, or used in connection with the ownership, operation or maintenance of such GranCare Exchange Property. 1.35 "Post Closing Consents" shall have the meaning given such term in --------------------- Section 6.5. - ----------- 1.36 "Real Property" shall mean the real property described in Schedules ------------- --------- 1.20, 1.21 and 1.24. - ---- ---- ---- 1.37 "Restructure Documents" shall mean, collectively, this Agreement and --------------------- each document, agreement and instrument delivered pursuant to Section 5 hereof. --------- 1.38 "Restructuring Closing" shall have the meaning given such term in --------------------- Section 4. - ---------- -6- 1.39 "Restructuring Closing Date" shall have the meaning given such term -------------------------- in Section 4. ---------- 1.40 "Subordination Agreement" shall have the meaning given such term in ----------------------- Section 5.3. - ----------- 1.41 "Tax" (and "Taxable", which shall mean subject to Tax), shall mean, --- ------- with respect to any Person, (a) all taxes (domestic or foreign), including without limitation any income (net, gross or other including recapture of any tax items such as investment tax credits), alternative or add-on minimum tax, gross income, gross receipts, gains, sales, use, leasing, lease, user, ad valorem, transfer, recording, franchise, profits, property (real or personal, tangible or intangible), fuel, license, withholding on amounts paid to or by such Person, payroll, employment, unemployment, social security, excise, severance, stamp, occupation, premium, environmental or windfall profit tax, custom, duty or other tax, or other like assessment or charge of any kind whatsoever, together with any interest, levies, assessments, charges, penalties, addition to tax or additional amount imposed by any Taxing Authority, (b) any joint or several liability of such Person with any other Person for the payment of any amounts of the type described in (a), and (c) any liability of such Person for the payment of any amounts of the type described in (a) as a result of any express or implied obligation to indemnify any other Person. 1.42 "Taxing Authority" shall mean any Authority responsible for the ---------------- imposition of any Tax. 1.43 "Title Company" shall mean First American Title Insurance Company. ------------- 1.44 "Transaction Documents" shall mean, collectively, this Agreement, each --------------------- other Restructure Document, and all documents, instruments and agreement listed on Schedule 1.44 hereto as in effect from time to time. ------------- 1.45 "Transactions" shall have the meaning given that term in the ------------ Preliminary Prospectus for Living Centers of America, Inc. and GranCare, Inc. included in their Joint Proxy Statement dated September 26, 1997 SECTION 2. MODIFICATIONS TO TRANSACTION DOCUMENTS -------------------------------------- Effective as of the date first set forth above, subject to the satisfaction of the conditions to effectiveness set forth in Section 5 hereof: --------- 1.46 Termination of Acquisition Agreement. The Acquisition Agreement is ------------------------------------ hereby terminated in its entirety and GranCare and its Affiliates shall have no further or continuing obligations thereunder. Wherever any Transaction Document refers to the Acquisition Agreement for a definition of any term, such reference shall be deemed to be a reference to such term as defined in the AMS Properties Master Lease, as in effect from time to time. -7- 1.47 Amendment of AMS Properties Master Lease. The AMS Properties Master ---------------------------------------- Lease is hereby amended as follows: 1.47.1 Article 1 of the AMS Properties Master Lease is amended by amending the definitions "Guarantor" and "Transaction Documents" in full to read as follows: Guarantor: GranCare, GCIHCC and Paragon, in each case together with --------- their respective successors and assigns, and any other Person that becomes a guarantor of Tenant's obligations under the applicable Lease after October 31, 1997. Transaction Documents: collectively, any agreement, note, lease, --------------------- master lease, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument now or hereafter executed by any or all of Tenant or any Guarantor in favor of, for the benefit of, or with, Landlord (including, without limitation, the GCIHCC Transaction Documents), and any agreement, note, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument hereafter executed in connection with any extension, renewal, refunding or refinancing thereof, as any of the same may hereafter from time to time be amended, amended and restated, modified or supplemented. 1.47.2 Article 1 of the AMS Properties Master Lease is further amended by adding the following definitions thereto to read as follows: Cash Collateral Pledge: The Cash Collateral Pledge Agreement dated as ---------------------- of October 31, 1997, between Paragon and Landlord, as amended, amended and restated, modified or supplemented from time to time. GCIHCC: GCI Health Care Centers, Inc., a Delaware corporation. ------ GCIHCC Leased Properties: collectively, the "Collective Leased ------------------------ Properties" as such term is defined in the GCIHCC Master Lease. GCIHCC Lease: any "Lease" as such term is defined in the GCIHCC Master ------------ Lease. GCIHCC Master Lease: the Master Lease Document dated as of June 30, ------------------- 1992 between HRP, as Landlord, and GCIHCC, as Tenant, as amended, amended and restated, modified or supplemented from time to time. GCIHCC Transaction Documents: the "Transaction Documents" as such term ---------------------------- is defined in the GCIHCC Master Lease. Guaranty: any guaranty in favor of Landlord of Tenant's obligations -------- under the applicable Lease, including, without limitation, (a) the Amended and Restated Guaranty -8- dated as of October 31, 1997 by GranCare in favor of Landlord, (b) the Guaranty dated as of October 31, 1997 by Paragon in favor of Landlord, and (c) the Guaranty, Cross Default and Cross Collateralization Agreement, dated as of June 30, 1992, from Tenant and GCIHCC in favor of Landlord, in each case as amended and as the same may be may hereafter be amended, amended and restated, modified or supplemented from time to time. Paragon: Paragon Health Network, Inc., a Delaware corporation (f/k/a ------- Living Centers of America, Inc.) Voting Trust Agreement: The Amended and Restated Voting Trust ---------------------- Agreement dated as of June 30, 1992 from Tenant to HRPT Advisors, Inc., as voting trustee, as amended, modified or supplemented from time to time. 1.47.3 Section 12.1 of the AMS Properties Master Lease is amended by amending paragraphs (d), (h) and (p) thereof in full to read as follows: (d) Tenant shall default in due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to Section 7.1, 9.1 or any of Sections 24.10 through 24.18; or ----------- --- ----- ----- (h)(A) any obligation of Tenant or any Guarantor (other than GranCare or Paragon), or of any Subsidiary thereof, in respect of any indebtedness for borrowed money or for the deferred purchase price of any material property or services (excluding (1) trade accounts payable in the ordinary course of business on customary trade terms and (2) indebtedness or obligations under the Transaction Documents) (hereinafter, "Indebtedness ------------ for Borrowed Money") or any guaranty relating thereto shall be declared to ------------------ be or shall become due and payable prior to the stated maturity thereof, or such Indebtedness for Borrowed Money shall not be paid as and when the same becomes due and payable, or there shall occur and be continuing any default under any instrument, agreement or evidence of indebtedness relating to any such Indebtedness for Borrowed Money the effect of which is to permit the holder or holders of such instrument, agreement or evidence of indebtedness, or a trustee, agent or other representative on behalf of such holder or holders, to cause such Indebtedness for Borrowed Money to become due prior to its stated maturity; or (B) any obligation of GranCare or Paragon, or of any Subsidiary thereof (other than Tenant or GCIHCC), in respect of any Indebtedness for Borrowed Money exceeding $1,000,000 in aggregate principal amount, or any guaranty relating thereto, shall be declared to be or shall become due and payable prior to the stated maturity thereof, or the holder or holders of any instrument, agreement or evidence of indebtedness relating to any such Indebtedness for Borrowed Money, or a trustee, agent or other representative on behalf of such holder or holders, shall accelerate prior to the stated maturity date or, if no stated maturity date, demand payment of such Indebtedness for Borrowed Money, and such declaration, acceleration or demand shall not have been rescinded within thirty (30) days of the date such declaration, acceleration or demand was made; or -9- (p) Paragon shall cease at any time to be, either directly or indirectly through one or more wholly-owned Subsidiaries that are each Guarantors, the beneficial and record owner of less than all of the shares of the outstanding capital stock of Tenant and GCIHCC; or 1.47.4 Section 12.1 of the AMS Properties Master Lease is further amended by adding new paragraph (q) thereto to read as follows: (q) Tenant shall have failed to extend the term of the Voting Trust Agreement in accordance with the applicable provisions thereof prior to the thirtieth day prior to the end of the then term of the Voting Trust Agreement; 1.47.5 Section 21.4 of the AMS Properties Master Lease is amended in full to read as follows: 21.4 Tenant's Option to Purchase the Collective Leased Properties. ------------------------------------------------------------ Provided, (a) no Default involving the nonpayment of Rent shall have occurred and be continuing, the Leases for each of the Collective Leased Properties shall be in full force and effect (other than Leases that have been terminated in accordance with the provisions hereof, other than after the occurrence of an Event of Default), and other than as expressly permitted by Article 17, Tenant shall not have assigned the Leases for any of the ---------- Collective Leased Properties or subleased all or any portion of the Collective Leased Properties; and (b) no default involving the nonpayment of "Rent" under and as defined in the GCIHCC Master Lease shall have occurred and be continuing, the GCIHCC Leases for each of the GCIHCC Leased Properties shall be in full force and effect (other than GCIHCC Leases that have been terminated in accordance with the provisions hereof, other than after the occurrence of an Event of Default under the GCIHCC Master Lease), and other than as expressly permitted by Article 17 thereof, GCIHCC shall not have assigned the GCIHCC Leases for any of the GCIHCC Leased Properties or subleased all or any portion of the GCIHCC Leased Properties; Tenant shall have the option, exercisable on not less than twelve (12) months prior Notice to Landlord, to purchase all, but not less than all, the Collective Leased Properties (other than those Collective Leased Properties whose Leases have been terminated in accordance with the provisions of Article 10 or Article 11) upon the expiration of the Fixed ---------- ---------- Term or any Extended Term, each for a purchase price equal to the greater of (i) ninety percent (90%) of the Fair Market Value Purchase Price of such Collective Leased Property as of the expiration of the Fixed Term or such Extended Term, as the case may be, or (ii)(1) if such option is exercised at the end of the Fixed Term, one hundred fifty percent (150%) of the Adjusted Purchase Price, (2) if such option is exercised at the end -10- of the first Extended Term, two hundred percent (200%) of the Adjusted Purchase Price or (3) if such option is exercised at the end of the second Extended Term, three hundred percent (300%) of the Adjusted Purchase Price; provided however that in each case GCIHCC shall simultaneously exercise its -------- option to purchase all, but not less than all of the GCIHCC Leased Properties (other than those GCIHCC Leased Properties whose GCIHCC Leases have been terminated in accordance with the provisions of Article 10 or Article 11 of the GCIHCC Master Lease) in accordance with Section 21.4 of the GCIHCC Master Lease. Such purchase by Tenant shall be made in accordance with the provisions of Article 15. ---------- 1.47.6 The AMS Properties Master Lease is further amended by adding an new Article 24 thereto to read as follows: ARTICLE 24. ADDITIONAL COVENANTS OF TENANT ------------------------------ Tenant agrees that during the Term of the Lease (as defined therein) and for as long thereafter as any amount payable hereunder or under any Transaction Document remains unpaid: 1.48 Business of Tenant. ------------------ Tenant shall engage in no business, trade or activity other than the operation of the Leased Properties, the leasing and operation of the Collective Leased Properties. 1.49 Maintenance of Existence and Licenses. ------------------------------------- (1) Tenant will maintain its existence and comply with all applicable statutes, rules and regulations as to which the failure to comply may have a material adverse effect upon the operation, business, prospects, property or assets of, or in the condition (financial or otherwise), of Tenant, and Tenant will maintain its properties in good operating condition, and continue to conduct its business as presently conducted. (2) Tenant will obtain and maintain in full force and effect all permissions, consents, approvals, licenses, authorizations, and permits necessary for it to use and operate in accordance with all applicable laws each Property or Facility owned, leased or operated by it for the purposes for which such Facility or Property was used immediately prior to October 31, 1997. 1.50 Taxes and Other Liens. --------------------- Tenant will pay all taxes, assessments, governmental charges or levies, or claims for labor, supplies, rent and other obligations made against it which, if unpaid, might become a lien or charge against Tenant, or on its property, except liabilities being -11- contested in good faith and by proper proceedings as to which appropriate reserves have been established in accordance with GAAP. 1.51 Estoppel Certificates --------------------- At any time and from time to time, upon not less than ten (10) days prior Notice by Landlord, Tenant shall furnish to Landlord an Officer's Certificate certifying that the applicable Lease is unmodified and in full force and effect (or that the applicable Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that Tenant is not in default in the performance or observance of any of the terms of the applicable Lease and that no event exists which with the giving of notice, lapse of time, or both, would constitute a Default or an Event of Default, or if a Default or an Event of Default shall exist, specifying in reasonable detail such Default or an Event of Default, and the steps being taken to remedy the same, and such additional information as Landlord may reasonably request. Any such certificate furnished pursuant to this Section 24.4 may be relied upon by ------------ Landlord and any prospective purchaser or mortgagee of the applicable Leased Property. 1.52 Financial Statements, Etc. ------------------------- Tenant shall furnish the following statements to Landlord: (1) within forty-five (45) days after each of the first three quarters of any Fiscal Year, year-to-date income statements of Tenant, on a property by property basis, accompanied by the Financial Officer's Certificate; (2) within ninety (90) days after the end of each Fiscal Year, the most recent Consolidated Financials of Tenant for such year, accompanied by the Financial Officer's Certificate; (3) at any time and from time to time upon not less than twenty (20) days Notice from Landlord, Tenant will furnish to Landlord any Consolidated Financials or any other financial reporting information required to be filed by Landlord with any securities and exchange commission, the SEC or any successor agency, or any other governmental authority, or required pursuant to any order issued by any court governmental authority or arbitrator in any litigation to which Landlord is a party, for purposes of compliance therewith; and (4) promptly upon notice from Landlord, such other information concerning the business, financial condition and affairs of Tenant as Landlord may reasonably request from time to time. Landlord may at any time, and from time to time, provide any Facility Mortgagee with copies of any of the foregoing statements. -12- 1.53 Notice of Default. ----------------- Within three (3) Business Days of becoming aware of the existence of any condition or event which constitutes a Default, Tenant will provide Landlord with written notice specifying the nature and period of existence thereof and what action Tenant is taking or proposes to take with respect thereto. 1.54 General Operations. ------------------ Tenant covenants and agrees to furnish to Landlord, promptly after Landlord's request therefor, copies of (1) all reports of surveys, statements of deficiencies, plans of correction, and all material correspondence relating thereto, including, without limitation, all reports and correspondence concerning compliance with or enforcement of licensure, Medicare/Medicaid, and accreditation requirements, including physical environment and Life Safety Code survey reports; and (2) such other confirmation as to the licensure and Medicare and Medicaid participation of Tenant as Landlord may reasonably request from time to time. 1.542 Annual Budgets. -------------- Not less than thirty (30) days prior to commencement of any Fiscal Year, proposed annual income and ordinary expense and capital improvement budgets setting forth projected income and costs and expenses projected to be incurred by Tenant in managing, owning, maintaining and operating the Facility during the next succeeding Fiscal Year. 1.55 Inspection. ---------- Tenant will, upon three (3) Business Days' request of Landlord, permit a representative of Landlord to inspect the Properties and Facilities and make copies of its direct or indirect Subsidiaries' books and records, and to discuss its affairs, finances and accounts with its officers and accountants, all at such reasonable times and as often as Landlord may reasonably request and, in each case, cause each of its direct and indirect Subsidiaries to do so; provided that any inspection by Landlord or its representatives will not unreasonably interfere with its or such Subsidiary's use and operation of its Properties and Facilities. 1.56 Further Assurances. ------------------ -13- Tenant will, and will cause each of its direct or indirect Subsidiaries to, execute and deliver to Landlord any writings and do all things necessary, effectual or reasonably requested by Landlord to carry into effect the provisions and intent of this Agreement. 1.57 Consolidation, Merger or Acquisition Involving Tenant. ----------------------------------------------------- Tenant shall not at any time merge or consolidate with or into any other Person, or make any acquisition of the business of any other Person. 1.59 Disposition of Assets by Tenant. ------------------------------- Tenant shall not at any time sell, lease or otherwise dispose of any of its assets to any Person, except that Tenant may (a) sell its inventory, ------ and obsolete or worn-out equipment, in the ordinary course of its business and (b) sell or otherwise dispose of the HRP Exchange Properties. 1.59 Indebtedness. ------------ Tenant shall not at any time create, incur, assume or guarantee, or permit to exist, or become or remain liable directly or indirectly upon, any Indebtedness except the following: (1) Indebtedness payable to Landlord; (2) unsecured Indebtedness consisting of accounts payable, accruals and similar items incurred in the ordinary course of business in accordance with reasonable and customary trade practices, that are neither owed to a Guarantor or a Subsidiary of a Guarantor nor constitute Indebtedness for money borrowed or a Guarantee thereof; (3) Indebtedness for taxes, assessments, governmental charges or levies to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Article 8 --------- hereof or of the other applicable provisions of the Transaction Documents; (4) Indebtedness in respect of judgments or awards which have been in force for less than the applicable appeal period, so long as execution is not levied or in respect of which Tenant shall at the time in good faith be prosecuting an appeal or proceedings for review, and in respect of which execution thereof shall have been stayed pending such appeal or review; provided that in each instance the -------- applicable requirements of each Transaction Document are complied with; (5) Indebtedness for taxes, assessments, governmental charges or levies, and claims for labor, materials and supplies, to the extent that payment -14- thereof shall not at the time be required to be made in accordance with the provisions of Article 8 hereof or of the other applicable provisions of the Transaction Documents; (6) unsecured Indebtedness (including without limitation, accrued and unpaid management fees and Indebtedness for Borrowed Money) of Tenant (i) owed to a Guarantor or a Subsidiary of a Guarantor (provided that the payment of such Indebtedness shall be subject to the terms of a subordination agreement in form and substance satisfactory to Landlord among Tenant as debtor, such Guarantor or such Subsidiary as subordinate creditor and Landlord as senior creditor); and (7) Indebtedness of Tenant, (i) as guarantor of or co-borrower with Paragon or any Subsidiary thereof, in respect of an $890 million credit facility provided to Paragon by The Chase Manhattan Bank, as agent bank (and successor or replacement indebtedness), (ii) as guarantor of senior subordinated notes and senior subordinated discount notes of Paragon (and/or its successors and subsidiaries) yielding proceeds of approximately $500 million (and successor or replacement indebtedness), and (iii) as guarantor of a residual guaranty by Paragon in respect of a master lease arrangement providing for the acquisition, development and construction of skilled nursing and assisted living facilities for a total amount of not to exceed $100,000,000 (and successor or replacement indebtedness); provided -------- that (A) the enforcement of such Indebtedness against Tenant shall at all times be subject to the terms of an intercreditor agreement in substantially the form (to the extent applicable) of the Intercreditor Agreement dated as of February 12, 1997 among Tenant, GCIHCC, GranCare, First Union National Bank of North Carolina, as agent, and Landlord, (B) the enforcement of security interests or liens securing such Indebtedness are permitted by paragraph (g) of Section 24.13, and ------------- ------------- (C) giving effect thereto and to the application of the proceeds thereof, no Event of Default would be created. 1.60 Encumbrances. ------------ Tenant shall not at any time create or suffer to exist any Lien on any of its properties or assets, except: (1) Permitted Encumbrances; (2) Liens in favor of Landlord; (3) Liens for taxes or assessments or governmental charges or levies, if payment shall not at the time be required to be made in accordance with Article 8 hereof and the other applicable provisions --------- of the Transaction Documents; -15- (4) Liens in respect of judgments or awards and liens of appeal and similar bonds incident to the conduct of litigation, so long as and to the extent that such judgments or awards, or the judgments or awards secured by such bonds, are permitted as Indebtedness by Section ------- 24.12(d) or are otherwise permitted under the Transaction Documents; -------- (5) Liens of carriers, warehousemen, mechanics, laborers and materialmen and similar liens incurred in the ordinary course of business for sums not yet due or being contested in good faith in accordance with the applicable provisions of this Agreement and the other Transaction Documents; (6) Liens (other than liens created by Section 302(f) or Section 4068 of ERISA or Section 412(n) of the Code) incurred on pledges or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security laws or similar legislation, and other liens incidental to the conduct of the business of Tenant which were not incurred in connection with the borrowing of money or the obtaining of advances or credits and do not in the aggregate materially detract from the value of any material property of Tenant or materially impair the use thereof in the operation of its business; and (7) Security interests in its capital stock and in its personal property (excluding collateral under the HRP Shares Pledge Agreement and the Cash Collateral Pledge) securing the Indebtedness incurred in compliance with clauses (i) and (ii) of Section 24.12(g); provided, ----------- ---- ---------------- -------- however, that (i) such security interest shall at all times be junior ------- to the liens and security interests in favor of Landlord, and confined solely to such assets, and (ii) that the enforcement of such junior liens and security interests, and all claims secured thereby, shall at all times be subject to the terms of an intercreditor agreement in substantially the form (to the extent applicable) of the Intercreditor Agreement dated as of February 12, 1997 among Tenant, GCIHCC, GranCare, First Union National Bank of North Carolina, as agent, and Landlord. 1.61 Dividends. --------- Tenant will not declare, order, pay or make, directly or indirectly, any Restricted Payment or set apart any sum or property therefor, or agree to do so; provided, however, that Tenant may -------- ------- declare and pay dividends on its common stock, so long as (1) at the time of such proposed action, or immediately after giving effect thereto, no Default shall have occurred and be continuing; and (2) giving effect to such proposed action, the capital surplus of Tenant will at least equal the capital surplus of Tenant on December 31, 1990, and the -16- sum of all dividends paid or made by Tenant after December 8, 1990 will not exceed the Net Income of Tenant accumulated for the period, considered as a single accounting period, from December 28, 1990 to the end of the quarterly accounting period next preceding the date of such proposed action for which Landlord has received financial statements under Section 24.5(b) hereof. 1.62 Investments. ----------- Tenant shall not at any time make, maintain or acquire any Investment in any Person other than: (1) Marketable direct full faith and credit obligations of, and marketable obligations guaranteed by, the United States of America, or any State thereof, which have a remaining maturity at the time of purchase of no more than one year; (2) Commercial paper maturing no more than 270 days from its date of issue; provided, that such paper is accorded a rating in the highest category by each of Moody's Investors Service, Inc. and Standard & Poor's Corporation; (3) Certificates of deposit which have a remaining term to maturity at the time of purchase of no more than one year (or which are subject to a repurchase agreement with one of the banks or trust companies described in this paragraph (c) exercisable within one year from the time of purchase) issued by banks or trust companies organized under the laws of the United States of America or a State thereof and which are member banks of the Federal Reserve System, and have aggregate capital, surplus and undivided profits of at least $100,000,000 and the long term obligations of which carry a rating of "A" or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation; (4) Bonds or debentures which have a remaining term to maturity at the time of purchase of no more than one year, issued by a corporation, other than an AMS Company or an Affiliate thereof, organized under the laws of a State of the United States or the District of Columbia; provided, that such obligations carry a rating of "A" or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation; and (5) any intercompany loans or advances by Tenant to any Guarantor or any wholly-owned Subsidiary thereof that are incurred and remain outstanding without violating the provisions of Section 24.17 ------------- hereof; provided that, (1) such intercompany loan shall not be subordinated to any other Indebtedness of such Guarantor or such debtor Subsidiary, as the case may be, and (2) no Default shall exist giving effect to the creation of such intercompany loan. -17- 1.63 Transactions with Affiliates. ---------------------------- Tenant will not, directly or indirectly, pay any funds to or for the account of, make any Investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, or engage in any other transaction of any kind with any of its Affiliates, except (i) as permitted by Sections 24.12 through 24.15 hereof or (ii) in connection with transactions the terms of which are at least as favorable to Tenant as those that could be obtained at that time from Persons that are not Affiliates of Tenant. 1.64 Current Ratio. ------------- Tenant will not permit its Current Ratio to be less than 1 to 1 at any time. 1.65 Net Income. ---------- Tenant will not permit the sum of (i) its Net Income accumulated for the period, considered as a single accounting period, from January 1, 1991 to the end of last fiscal quarter for which financial statements were, or should have been, delivered pursuant to Section 24.5(b), and (ii) the cash --------------- proceeds of any issuance by Tenant of its common stock to any Guarantor (other than GCIHCC) during the period from January 1, 1991 to the end of such fiscal quarter, to be less than $1.00 as of the end of such fiscal quarter. 1.66 Definitions. ----------- When used in this Article 24 the following terms shall have the ---------- respective meanings provided therefor and, unless otherwise specifically indicated, shall be deemed to relate to Tenant: (1) Consolidated Financials shall mean, for any Fiscal Year or ----------------------- other accounting period of Tenant, annual and quarterly unaudited financial statements prepared on a consolidated basis, including Tenant's consolidated balance sheet, the related statements of income and cash flows, all in reasonable detail, and setting forth in comparative form the corresponding figures for the corresponding period in the preceding Fiscal Year, and prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods reflected. (2) Current Ratio of any Person, at any time, shall mean all ------------- current assets of such Person and its Subsidiaries at such time, divided by the aggregate of all current liabilities of such Person and its Subsidiaries at such time, in each case as determined in accordance with GAAP. (3) Financial Officer's Certificate shall mean a certificate of ------------------------------- the financial officer of Tenant, duly authorized, accompanying the financial statements required to be delivered by Tenant pursuant to Section 24.5, in which ------------ -18- such officer shall (i) certify that such statements have been properly prepared consistent with GAAP (without accompanying footnotes), and are true, correct and complete in all material respects and fairly present the consolidated financial condition of Tenant at and as of the dates thereof and the results of its and their operations for the periods covered thereby, (ii) certify that such officer has reviewed the Leases and has no knowledge of any default by Tenant in the performance or observance of any of the provisions of the Leases or any other Transaction Document or of any condition or event which constitutes an Event of Default under the Leases or any of the Transaction Documents or which with the passage of time or the giving of notice or both would become such an Event of Default, and (iii) provide computations and schedules showing in reasonable detail compliance, as at the date of each such financial statement, with Sections 24.17 and 24.18 of the Master Lease Document. -------------- ----- (4) Fiscal Year shall mean the twelve (12) month period from ----------- October 1 to September 30, or such other fiscal year as may be adopted from time to time by Paragon. (5) GAAP shall mean generally accepted accounting principles ---- consistently applied. (6) Guarantee shall mean any obligation, contingent or --------- otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness (whether arising by virtue of partnership arrangements, by agreement to keep- well, to purchase assets, goods, securities or services, to take-or- pay, or to maintain or support financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include -------- endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. (7) Indebtedness shall mean all obligations of a Person, ------------ contingent or otherwise, which in accordance with GAAP should be reflected on such Person's balance sheet as liabilities, specifically including liabilities secured by any mortgage, pledge or lien existing on property owned or acquired subject to such mortgage, pledge or lien, whether or not the liability secured thereby shall have been assumed, all obligations of lessees under capitalized leases, all obligations under agreements, contingent or otherwise, to advance or supply funds for investment purposes, all obligations created or arising under any conditional sale or other title retention agreement, device or arrangement, even though the rights -19- and remedies of the seller or lender thereunder in the event of default are limited to repossession of property, all non-competition agreements, and all Guarantees (8) Investments shall mean with respect to any Person (the ----------- "investor") (i) any investment by the investor in any other Person, -------- whether by means of share purchase, capital contribution, purchase or other acquisition of a partnership or joint venture interest, loan, time deposit, demand deposit or otherwise and (ii) any Guarantee by the investor of any Indebtedness or other obligation of any other Person. (9) Net Income shall mean, for any period during which the ---------- amount thereof is to be determined for a specified Person, the net income (or net deficit, if a negative figure) of such Person for such period (taken as a cumulative whole, if such period shall include more than one fiscal period, with deficits netted against net income) determined in accordance with GAAP, exclusive of the write-up of any assets. (10) Restricted Payment shall mean, as to any Person (a) any ------------------ dividend or other distribution (including dividends payable solely in shares of capital stock or rights to acquire capital stock) on any shares of capital stock of such Person or (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of the capital stock of such Person or (ii) any option, warrant, convertible security or other right to acquire shares of the capital stock of such Person. 1.66.2 Effective as of the Exchange Closing Date, each reference in the AMS Properties Master Lease to the "Collective Leased Properties" shall be deemed to be a reference to the Continuing Properties leased by AMS Properties. 1.67 Amendment of GCIHCC Master Lease. The GCIHCC Master Lease is hereby -------------------------------- amended as follows: 1.67.1 Article 1 of the GCIHCC Master Lease is amended by amending the definitions "Guarantor" and "Transaction Documents" in full to read as follows: Guarantor: GranCare, AMS Properties and Paragon, in each case --------- together with their respective successors and assigns, and any other Person that becomes a Guarantor of Tenant's obligations under the applicable Lease after October 31, 1997. Transaction Documents: collectively, any agreement, note, lease, --------------------- master lease, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument now or hereafter executed by any or all of Tenant or any Guarantor in favor of, for the benefit of, or with, Landlord (including, without limitation, the AMS Properties Transaction Documents), and any agreement, note, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or -20- instrument hereafter executed in connection with any extension, renewal, refunding or refinancing thereof, as any of the same may hereafter from time to time be amended, amended and restated, modified or supplemented. 1.67.2 Article 1 of the GCIHCC Master Lease is further amended by adding the following definitions thereto to read as follows: AMS Properties: AMS Properties, Inc., a Delaware corporation. -------------- AMS Properties Lease: any "Lease" as such term is defined in the AMS -------------------- Properties Master Lease. AMS Properties Leased Properties: collectively, the "Collective Leased -------------------------------- Properties" as such term is defined in the AMS Properties Master Lease. AMS Properties Master Lease: the Master Lease Document dated as of --------------------------- December 28, 1990 between HRP, as Landlord, and AMS Properties, as Tenant, as amended, amended and restated, modified or supplemented from time to time. AMS Properties Transaction Documents: the "Transaction Documents" as ------------------------------------ such term is defined in the AMS Properties Master Lease. Cash Collateral Pledge: The Cash Collateral Pledge dated as of ---------------------- October 31, 1997, between Paragon and Landlord, as amended, modified or supplemented from time to time. Paragon: Paragon Health Network, Inc., a Delaware corporation (f/k/a ------- Living Centers of America, Inc.) Voting Trust Agreement: The Amended and Restated Voting Trust ---------------------- Agreement dated as of June 30, 1992 from AMS Properties to HRPT Advisors, Inc., as voting trustee, as amended, modified or supplemented from time to time. 1.67.3 Section 3.1.1 of the GCIHCC Master Lease is amended by amending paragraphs (b) and (c) thereof in full to read as follows: (b) Computation of Minimum Rent for each Extended Term. The Minimum -------------------------------------------------- Rent payable with respect to the Extended Term(s) for the applicable Lease shall equal an annual sum (determined at the commencement of each Extended Term for such Lease and subject to adjustment as set forth herein) equal to the greatest of (a) the Minimum Rent payable for the immediately preceding twelve (12) months for such Lease, (b) the product of (i) the Adjusted Purchase Price for the applicable Leased Property, and (ii) a percentage equal to 525 basis points above the yield (calculated on the basis of a monthly equivalent yield) on 5-year United States Treasury securities at the close of the Business Day which immediately precedes the commencement of the Extended Term for which the -21- Minimum Rent is being calculated, or (c) the Fair Market Rental for such Lease, payable in advance in equal, consecutive monthly installments on the first day of each calendar month of each Extended Term. The computation of the yield referenced in the preceding sentence shall be made using the information shown for such date quoted in The Wall Street Journal published ----------------------- on the following day. If there is no such quotation, the next preceding day for which there is a quotation shall be used. If The Wall Street Journal ----------------------- shall not be available, Landlord shall choose the quotation from another recognized source. (c) Mid-Term Adjustments of Minimum Rent. During the Term of the ------------------------------------ applicable Lease, on the 5th, 15th, 25th and 35th anniversary of the Commencement Date therefor, the Minimum Rent under such Lease shall be adjusted to the annual sum equal to the greater of (a) the Minimum Rent under such Lease for the immediately preceding twelve (12) months or (b) the product of (i) the sum of the Adjusted Purchase Price for the applicable Leased Property, and (ii) a percentage equal to 525 basis points above the yield (calculated on the basis of a monthly equivalent yield) on 5-year United States Treasury securities at the close of the Business Day immediately preceding such anniversary. The computation of the yield referenced in the preceding sentence shall be made using the information shown for such date quoted in The Wall Street Journal published on the ----------------------- following day. If there is no such quotation, the next preceding day for which there is a quotation shall be used. If The Wall Street Journal shall ------------------- not be available, Landlord shall choose the quotation from another recognized source. 1.67.4 Section 12.1 of the GCIHCC Master Lease is amended by amending paragraphs (h) and (p) thereof in full to read as follows: (h)(A) any obligation of Tenant or any Guarantor (other than GranCare or Paragon), or of any Subsidiary thereof, in respect of any Indebtedness for Borrowed Money or for the deferred purchase price of any material property or services (excluding (1) trade accounts payable in the ordinary course of business on customary trade terms and (2) indebtedness or obligations under the Transaction Documents) (hereinafter, "Indebtedness ------------ for Borrowed Money") or any guaranty relating thereto shall be declared to ------------------ be or shall become due and payable prior to the stated maturity thereof, or such Indebtedness for Borrowed Money shall not be paid as and when the same becomes due and payable, or there shall occur and be continuing any default under any instrument, agreement or evidence of indebtedness relating to any such Indebtedness for Borrowed Money the effect of which is to permit the holder or holders of such instrument, agreement or evidence of indebtedness, or a trustee, agent or other representative on behalf of such holder or holders, to cause such Indebtedness for Borrowed Money to become due prior to its stated maturity; or (B) any obligation of GranCare or Paragon, or of any Subsidiary thereof (other than Tenant or GCIHCC), in respect of any Indebtedness for Borrowed Money exceeding $1,000,000 in aggregate principal amount, or any guaranty relating thereto, shall be declared to be or shall become due and payable prior to the stated maturity thereof, or the holder or holders of any instrument, agreement or evidence of indebtedness relating to any such Indebtedness for Borrowed Money, or a -22- trustee, agent or other representative on behalf of such holder or holders, shall accelerate prior to the stated maturity date or, if no stated maturity date, demand payment of such Indebtedness for Borrowed Money, and such declaration, acceleration or demand shall not have been rescinded within thirty (30) days of the date such declaration, acceleration or demand was made; or (p) Paragon shall cease at any time to be, either directly or indirectly through one or more wholly-owned Subsidiaries that are each Guarantors, the beneficial and record owner of less than all of the shares of the outstanding capital stock of Tenant and AMS Properties; or 1.67.5 Section 12.1 of the GCIHCC Master Lease is further amended by adding new paragraph (q) thereto to read as follows: (q) Tenant shall have failed to extend the term of the Voting Trust Agreement in accordance with the applicable provisions thereof prior to the thirtieth day prior to the end of the then term of the Voting Trust Agreement; 1.67.6 Section 21.4 of the GCIHCC Master Lease is amended in full to read as follows: 21.4 Tenant's Option to Purchase the Collective Leased Properties. ------------------------------------------------------------ Provided, (a) no Default involving the nonpayment of Rent shall have occurred and be continuing, the Leases for each of the Collective Leased Properties shall be in full force and effect (other than Leases that have been terminated in accordance with the provisions hereof, other than after the occurrence of an Event of Default), and other than as expressly permitted by Article 17, Tenant shall not have ---------- assigned the Leases for any of the Collective Leased Properties or subleased all or any portion of the Collective Leased Properties; and (b) no default involving the nonpayment of "Rent" under and as defined in the AMS Properties Master Lease shall have occurred and be continuing, the AMS Properties Leases for each of the AMS Properties Leased Properties shall be in full force and effect (other than AMS Properties Leases that have been terminated in accordance with the provisions hereof, other than after the occurrence of an Event of Default under the AMS Properties Master Lease), and other than as expressly permitted by Article 17 of AMS Properties Master Lease, AMS Properties shall not have assigned the AMS Properties Leases for any of the AMS Properties Leased Properties or subleased all or any portion of the AMS Properties Leased Properties; -23- Tenant shall have the option, exercisable on not less than twelve (12) months prior Notice to Landlord, to purchase all, but not less than all, the Collective Leased Properties (other than those Collective Leased Properties whose Leases have been terminated in accordance with the provisions of Article 10 or Article 11) upon the expiration of the Fixed ---------- ---------- Term or any Extended Term, each for a purchase price equal to the greater of (i) ninety percent (90%) of the Fair Market Value Purchase Price of such Collective Leased Property as of the expiration of the Fixed Term or such Extended Term, as the case may be, or (ii)(1) if such option is exercised at the end of the Fixed Term, one hundred fifty percent (150%) of the Adjusted Purchase Price, (2) if such option is exercised at the end of the first Extended Term, two hundred percent (200%) of the Adjusted Purchase Price or (3) if such option is exercised at the end of the second Extended Term, three hundred percent (300%) of the Adjusted Purchase Price; provided -------- however that in each case AMS Properties shall simultaneously exercise its option to purchase all, but not less than all of the AMS Properties Leased Properties (other than those AMS Properties Leased Properties whose AMS Properties Leases have been terminated in accordance with the provisions of Article 10 or Article 11 of the AMS Properties Master Lease) in accordance with Section 21.4 of the AMS Properties Master Lease. Such purchase by Tenant shall be made in accordance with the provisions of Article 15. ---------- 1.67.7 Section 23.7(h) of the GCIHCC Master Lease is amended in full to read as follows: (h) Indebtedness of Tenant, (i) as guarantor of or co-borrower with Paragon or any Subsidiary thereof, in respect of an $890 million credit facility provided to Paragon by The Chase Manhattan Bank, as agent bank (and successor or replacement indebtedness), (ii) as guarantor of senior subordinated notes and senior subordinated discount notes of Paragon (and/or its successors and subsidiaries) yielding proceeds of approximately $500 million (and successor or replacement indebtedness) and (iii) as guarantor of a residual guaranty by Paragon in respect of a master lease arrangement providing for the acquisition, development and construction of skilled nursing and assisted living facilities for a total amount of not to exceed $100,000,000 (and successor or replacement indebtedness); provided -------- that (A) the enforcement of such Indebtedness against Tenant, and of any security interests or liens on the property or the capital stock of Tenant securing such Indebtedness, shall at all times be subject to the terms of an intercreditor agreement in substantially the form (to the extent applicable) of the Intercreditor Agreement dated as of February 12, 1997 among Tenant, GCIHCC, GranCare, First Union National Bank of North Carolina, as agent, and Landlord, and (B) giving effect thereto and to the application of the proceeds thereof, no Event of Default would be created; and 1.67.8 Section 23.5 of the GCIHCC Master Lease is amended in full to read as follows: 23.5 General Operations. ------------------ -24- Tenant covenants and agrees to furnish to Landlord, promptly after Landlord's request therefor, copies of (a) all written reports of surveys, statements of deficiencies, plans of correction, and all material correspondence relating thereto, including, without limitation, all written reports and correspondence concerning compliance with or enforcement of licensure, Medicare/Medicaid, and accreditation requirements, including physical environment and Life Safety Code survey reports; and (b) such other confirmation as to the licensure and Medicare and Medicaid participation of Tenant as Landlord may reasonably request from time to time. 1.67.9 Section 23.13 of the GCIHCC Master Lease is amended by adding new paragraph (e) thereto to read as follows: (e) Guarantee shall mean any obligation, contingent or otherwise, of --------- any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain or support financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include -------- endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. 1.68 Amendment of HRPT Shares Pledge Agreement. The HRPT Shares Pledge ----------------------------------------- Agreement dated as of December 28, 1990, as amended and restated by an amendment and restatement thereof dated as of June 30, 1992 (the "HRP Shares Pledge ----------------- Agreement"), is hereby amended by deleting Section 14 (captioned "Partial - --------- Release; Re-Pledge") in its entirety. 1.69 Amendment of Guaranty, Cross Default and Cross Collateralization ---------------------------------------------------------------- Agreement. Clause (i)(B) of the definition of "Guaranteed Obligations" in - --------- Section 1 of the Guaranty, Cross Default and Cross Collateralization Agreement dated as of June 30, 1992 among AMS Properties, GCIHCC and HRP, is amended in full to read as follows: ; and (B) the leases dated as of December 28, 1990 and March 27, 1992, and all other leases that incorporate by reference a master lease document dated as of December 28, 1990, as amended, between HRP, as lessor, and AMS, as lessee, relating to the real and personal property subject thereto and being described more particularly therein, as each of such leases and the master lease document may be amended, modified or supplemented -25- from time to time (collectively, the "AMS Lease", and together with the GCI --------- Lease, the "Leases"); ------ 1.70 Agreements of HRP. HRP hereby: ----------------- (1) irrevocably and unconditionally releases Vitalink from its obligations under the Vitalink Guaranty, and agrees to return to GranCare, or its order, at the Restructuring Closing, all original counterparts of the Vitalink Guaranty in its possession; (2) consents to the reduction in the number of licensed beds in the amount and at the facilities described on Schedule 2.6(b) hereto; --------------- (3) consents to the creation of junior liens and security interests in the personal property and capital stock of AMS Properties and GCIHCC (excluding, however, all collateral under the HRP Shares Pledge Agreement or the Cash Collateral Pledge) to secure guaranties by AMS Properties and GCIHCC of (i) an $890 million credit facility to be provided to Paragon by The Chase Manhattan Bank (and successor or replacement indebtedness) and (ii) senior subordinated notes and senior subordinated discount notes of Paragon (and/or its successors and subsidiaries) yielding proceeds of approximately $500 million (and successor or replacement indebtedness); provided that the enforcement of such junior liens and security interests, -------- and all claims secured thereby, shall at all times be subject to the terms of an intercreditor agreement in substantially the form (to the extent applicable) of the Intercreditor Agreement dated as of February 12, 1997 among the GranCare Parties, First Union National Bank of North Carolina, as administrative agent, and HRP; (4) cancels (i) the obligations of GranCare to complete net $25,000,000 in new mortgage and lease transactions ("Additional ---------- Financings") with HRP pursuant to Section 9.27 of the Acquisition Agreement ---------- or any similar provision of any Transaction Document, and (ii) the obligations of GranCare to make any payments (or any portion of any payment) in connection with the failure to complete any of the Additional Financings; (5) waives for all time any existing rights of first refusal (or any similar right) with respect to any sale, purchase, lease, sale/leaseback or other financing transaction by GranCare or any of its Affiliates (or successors) with any real estate investment trust; (6) consents to the consummation of the Transactions, and waives any resulting default under Section 9.15A of the Acquisition Agreement or any other Transaction Document or otherwise; (7) consents to the prepayment of the Mortgage Note (without additional premium or penalty other than the total consideration called for herein) and agrees to release its mortgage and security interest in the property securing the Mortgage Note on the Exchange Closing Date in accordance with Section 3.1 below; and ----------- -26- (8) agrees that Paragon and any of its Affiliates (specifically excluding AMS Properties and GCIHCC), or any successors of any of the foregoing, may, without any consent or approval of HRP, enter into mergers, consolidations, acquisitions, asset sales, sales of minority or majority interests in Paragon or such Affiliate or any other transactions (including, without limitation, any change of control, recapitalization or other restructuring of Paragon or any of such Affiliates or successors); provided, however, that Paragon (i) shall not liquidate, wind-up or -------- ------- dissolve itself (or suffer any liquidation or dissolution) and (ii) may not merge or consolidate with any Person, or convey, transfer or lease substantially all of its assets unless: (1) giving effect to such transaction, no Event of Default (as defined in any Transaction Document), or an event or condition that with the giving of notice or lapse of time or both would become an Event of Default, would occur under and as defined in any Transaction Document; and (2) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of Paragon, as the case may be, shall be a corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if Paragon is not such corporation, (i) such corporation shall have executed and delivered to HRP its assumption of the due and punctual performance and observance of each covenant and condition of the Paragon Guaranty to the same extent and with the same effect as though such corporation was a party hereto and was named and defined as the "Guarantor" therein and (ii) shall have caused to be delivered to HRP an opinion of outside counsel to such corporation to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof and of the Paragon Guaranty. (9) waives any Default or Event of Default arising under the Transaction Documents as the result of the ownership and/or operation of the Southpointe nursing facility located in Milwaukee, Wisconsin by AMS Properties, and, notwithstanding any provision to the contrary in any Transaction Document, hereby consents to the sale, transfer or other disposition of such facility by AMS Properties (including the transfer to an Affiliate without consideration); provided that, following such transfer, AMS Properties does not remain liable for any material liabilities associated with such facility. SECTION 25. LIKE-KIND EXCHANGE ------------------ 1.71 Effective the day (the "Exchange Closing Date") that all the --------------------- conditions to the occurrence of the Exchange Closing set forth in Section 3.2 ----------- below have been satisfied: (a) AMS Properties shall prepay in full the principal amount of the Mortgage Note, together with all accrued and unpaid interest thereon (but without prepayment premium) and (b) AMS Properties -27- and HRP will exchange the GranCare Exchange Properties for the HRP Exchange Properties (the "Exchange Transaction"), free and clear of any Liens of any -------------------- nature whatsoever except Permitted Encumbrances. Upon the occurrence of the Exchange Closing, the documents delivered to the Title Company in escrow pursuant to Sections 5.6 and 5.7 hereto shall be released for recordation or to ------------ --- the appropriate party pursuant to the terms of the Exchange Escrow Agreement (the "Exchange Closing"). ---------------- 1.72 The Exchange Closing shall be subject to the satisfaction (or the waiver by HRP) of the following conditions: (1) The prior occurrence of the Restructuring Closing; (2) Evidence of the receipt of all Post Closing Consents, and the continued licensure of each GranCare Exchange Property in accordance with the provisions hereof; (3) Giving effect to the Exchange Closing, no Default or Event of Default shall have occurred and be continuing, and, the representations contained in each Restructure Document (modified to reflect the obtaining of the Post Closing Consents) shall be true and correct at and giving effect to the Exchange Closing as if made on and as of the Exchange Closing; (4) HRP shall have received a certificate of a senior executive officer of GranCare and Paragon confirming satisfaction of the conditions described in paragraph (b) and (c) above; --------- - - (5) Evidence satisfactory to HRP that (i) the hazardous waste contamination with respect to the generator spill at the Wilson, North Carolina property has been remediated in accordance with Applicable Law and (ii) that the underground storage tank at the Winston-Salem, North Carolina property has been registered in accordance with Applicable Law; (6) Confirmation by the Title Company that it is prepared to issue a title policy to HRP and AMS Properties insuring title to the Exchange Properties free from Liens other than Permitted Encumbrances; (7) HRP shall have received such opinions of healthcare counsel to Paragon and GranCare as HRP shall have reasonably requested, each of which opinions shall be in form and substance reasonably satisfactory to HRP; and (8) The GranCare Parties shall have paid all costs, expenses and taxes provided for in Section 7.3 hereof in connection with the Exchange ----------- Closing. 1.73 Within ninety (90) days after the consummation of the Exchange Transaction, HRP shall prepare a schedule (the "Section 1031 Schedule") that --------------------- sets forth the "exchange groups" and "residual group" (each within the meaning of Treas. Reg. Section 1.1031(j)-1), -28- together with each asset included in the GranCare Exchange Properties and the HRP Exchange Properties that belongs to the relevant exchange group or residual group, and AMS Properties will provide HRP with such information as is necessary for the preparation of such Section 1031 Schedule. Such Section 1031 Schedule shall be prepared on the basis that, for purposes of Treas. Reg. Section 1.1031(j)-1, the Mortgage Note retired prior to the Exchange Closing pursuant Section 3.1 hereof is not assumed by HRP as part of the Like-Kind Exchange under - ----------- this Agreement, and further, the GranCare Exchange Properties are not conveyed subject to the Mortgages. The Purchase Price to be set forth in each New Facility Lease shall be allocated between the GranCare Exchange Properties as mutually agreed between HRP and AMS Properties; however, to the extent no such agreement is reached before the Exchange Closing Date, the Purchase Prices shall based upon the aggregate purchase prices for the HRP Exchange Properties and allocated among the GranCare Exchange Properties by HRP based upon the Section 1031 Schedule. 1.74 Each of AMS Properties and HRP shall report the transactions contemplated hereby as a Like-Kind Exchange under Section 1031 of the Code, consistent with the Section 1031 Schedule, and shall not take, and shall cause their respective Affiliates, representatives, successors and assigns not to take, any position on any federal, state or local Tax return or report, inconsistent with such reporting position or the Section 1031 Schedule. Each of AMS Properties and HRP shall promptly give the other notice of any disallowance of or challenge to such reporting by any Taxing Authority. 1.75 Each of AMS Properties and HRP shall cooperate with the other, including without limitation in preparing the Section 1031 Schedule and executing all necessary agreements and documents, to the extent necessary for HRP to treat the exchange of the GranCare Exchange Properties for the HRP Exchange Properties as a Like-Kind Exchange pursuant to Section 1031 of the Code. 1.76 Notwithstanding the provisions of this Section, the parties to this Agreement will rely solely on their own advisors in determining the tax consequences of the transactions contemplated by this Agreement and each party is not relying, and will not rely, on any representations or assurances of any other party regarding such consequences other than the representations, warranties, covenants and agreements set forth in writing in this Agreement or furnished pursuant to the provisions hereof. 1.77 The GranCare Parties shall use all reasonable efforts to obtain the Post Closing Consents as soon as possible after the date hereof, and HRP agrees to cooperate with all reasonable requests of the GranCare Parties in connection with obtaining the Post Closing Consents. In the event that, for any reason (other than the failure of HRP to cooperate as provided in the preceding sentence), the Exchange Closing Date does not occur prior to April 29, 1998 (as it may be extended as provided below, the "Post Closing Consent Date"), and for ------------------------- as long thereafter as the Exchange Closing Date shall fail to occur (and without limiting any other remedies that may be available to HRP; it being understood, however, that the failure to obtain the Post Closing Consents by the Post Closing Consent Date shall not, in and of itself, constitute an Event of Default under the Transaction Documents), AMS Properties shall pay, as an -29- Additional Charge under the AMS Properties Master Lease, an amount equal to $20,000 per month, payable in arrears on the one month anniversary of the Post Closing Consent Date and on the same day of each following month and on the Exchange Closing Date (provided that the last monthly installment shall be prorated as to any partial month). Notwithstanding the foregoing, however, if, despite the GranCare Parties' reasonable efforts, the Post Closing Consents applicable to any GranCare Exchange Property (the "Affected GranCare Exchange -------------------------- Property") cannot be obtained prior to the Post Closing Consent Date, AMS - -------- Properties may offer to substitute for the Affected GranCare Exchange Property another skilled or intermediate care nursing facility of equal or greater value and otherwise satisfactory to HRP. If HRP so approves such substitute facility (the "Substitute Exchange Property"), (i) the parties hereto shall amend the ---------------------------- Restructure Documents and the Transaction Documents to reflect the substitution of Substitute Exchange Property for the Affected GranCare Exchange Property, (ii) AMS Properties shall use all reasonable efforts to obtain, as soon as possible, all consents necessary to permit the exchange of the Substitute Exchange Property and (iii) the Post Closing Consent Date shall be extended for an additional period of ninety (90) days. 1.78 AMS Properties' obligation to pay Minimum Rent and Additional Rent under the New Facility Leases during the period from November 1, 1997 to the Exchange Closing Date shall be net of Minimum Rent and Additional Rent paid to HRP under the AMS Properties Facility Leases of the HRP Exchange Properties for such period. SECTION 26. CLOSING. ------- Section 2 of this Agreement shall become effective as of the date first set --------- forth above, upon the satisfaction of the conditions set forth below at a closing (the "Restructuring Closing") to be held at the offices of Sullivan & --------------------- Worcester LLP, One Post Office Square, Boston, Massachusetts, or at such other location as the GranCare Parties and HRP may agree, at 10:00 a.m. local time, on a date (the "Restructuring Closing Date") which is the earlier to occur of (i) -------------------------- November 30, 1997, and (ii) the date as of which all conditions precedent to the Restructuring Closing herein set forth have either been satisfied or waived by the party in whose favor such conditions run. In the event that the Restructuring Closing shall not have occurred on or before December 15, 1997, provided that no action for specific performance shall have been commenced by HRP to enforce this Agreement, either party shall have the right, by the giving of written notice, to terminate this Agreement. SECTION 27. CONDITIONS TO CLOSING --------------------- The occurrence of the Restructuring Closing is subject to the satisfaction of the following conditions: 1.79 Restructure Payment. GranCare shall have paid HRP a non-refundable ------------------- $10,000,000 restructure payment in immediately available funds. 1.80 Paragon Documents and Payment of Deposit. Paragon shall have: (a) ---------------------------------------- executed and delivered to HRP a Guaranty in the form of Exhibit A hereto (the --------- "Paragon Guaranty") and a ---------------- -30- Cash Deposit Security Agreement in the form of Exhibit B hereto (the "Cash --------- ---- Collateral Pledge"), and (b) paid HRP $15,000,000 in immediately available - ----------------- funds, representing the Cash Collateral Deposit referenced in the Cash Collateral Pledge. 1.81 Subordination Agreement. Paragon and GranCare, as subordinate ----------------------- creditors, and AMS Properties and GCIHCC, as debtors, shall have entered into a Subordination Agreement in the form of Exhibit C hereto (the "Subordination --------- ------------- Agreement"). - --------- 1.82 GranCare Guaranty. GranCare shall have executed and delivered to HRP ----------------- an Amended and Restated Guaranty in the form of Exhibit D hereto (the "GranCare --------- -------- Guaranty"). - -------- 1.83 Amendment to Facility Leases. AMS Properties and GCIHCC shall have ---------------------------- executed and delivered to HRP an Amendment to Facility Leases in the form of Exhibit E hereto (the "Lease Amendment"). 1.84 Exchange Transaction Documents--GranCare Exchange Properties. AMS ------------------------------------------------------------ Properties and GCIHCC shall have executed and delivered to HRP an Amendment to Facility Leases in the form of Exhibit E hereto (the "Lease Amendment"). Exchange Transaction Documents--GranCare Exchange Properties. AMS Properties shall have (i) executed and delivered an Exchange Properties Escrow Agreement among AMS Properties, HRP and the Title Company, as escrow agent, in the form furnished by HRP (the "Exchange Properties Escrow Agreement") to HRP, and (ii) ------------------------------------ delivered the following to the Title Company in escrow (pending the occurrence of the Exchange Closing), in each case in form and substance reasonably satisfactory to HRP: (1) A good and sufficient statutory warranty deed, with respect to each of the GranCare Exchange Properties, in proper statutory form for recording, duly executed and acknowledged by AMS Properties, conveying good and marketable title to such properties, free from all liens and encumbrances other than the Permitted Encumbrances; (2) A bill of sale and assignment agreement, in form and substance reasonably satisfactory to HRP, duly executed and acknowledged by AMS Properties, with respect to all of AMS Properties' right, title and interest in, to and under the Personal Property, the Contracts, the Documents and the Intangible Property with respect to the GranCare Exchange Properties (excluding, however, all accounts receivable, inventory and computers (including related hardware and software), and prepaid items); (3) Transfer tax forms with respect to each of the GranCare Exchange Properties; (4) An owner's affidavit for each of the GranCare Exchange Properties executed by AMS Properties; (5) A FIRPTA affidavit, executed by AMS Properties; (6) Copies of all title exception documents for each of the GranCare Exchange Properties; -31- (7) Counterparts of each New Facility Lease, duly executed by AMS Properties; (8) Title survey certificates for each of the GranCare Exchange Properties; and (9) Such other conveyance documents, certificates, deeds, affidavits and other instruments as HRP may reasonably require. 1.85 Exchange Transaction Documents--HRP Exchange Properties. HRP shall ------------------------------------------------------- have (i) executed and delivered the Exchange Properties Escrow Agreement to AMS Properties and (ii) delivered the following to the Title Company, in escrow (pending the occurrence of the Exchange Closing), in each case in form and substance reasonably satisfactory to AMS Properties: (1) A good and sufficient grant or special warranty deed, with respect to each of the HRP Exchange Properties (other than the Palm Springs, California property), in proper statutory form for recording, duly executed and acknowledged by HRP, conveying HRP's title to such properties, free from all liens and encumbrances created by or through HRP; (2) An assignment of ground lease with respect to the HRP Exchange Property at Palm Springs, California, in proper statutory form for recording, duly executed and acknowledged by HRP, conveying HRP's interest as ground lessee to such property, free from all liens and encumbrances created by or through HRP; (3) A bill of sale and assignment agreement, in form and substance reasonably satisfactory to AMS Properties, duly executed and acknowledged by HRP, with respect to any personal property with respect to the HRP Exchange Properties in which HRP has an interest; (4) Transfer Tax form with respect to each of the HRP Exchange Properties; (5) A FIRPTA affidavit, executed by HRP; and (6) The New Facility Leases, duly executed by HRP. 1.86 The Transactions. The Transactions shall have been consummated ---------------- concurrently with Restructuring Closing. 1.87 No Default; Representations and Warranties. Giving effect to the ------------------------------------------ Transactions and the occurrence of the Restructuring Closing, no Default or Event of Default shall have occurred and be continuing, and the representations contained in each Restructure Document shall be true and correct at the Restructuring Closing as if made on and as of such date; -32- 1.88 Officer's Certificates. HRP shall have received a certificate of a ---------------------- senior executive officer of GranCare and Paragon confirming satisfaction of the conditions described in Sections 5.8 and 5.9 above. ------------ --- 1.89 Other Documents. HRP shall have received such other documents, --------------- opinions and certificates (including without limitation, evidence of continued licensure of each Facility leased or operated by AMS Properties or GCIHCC, an opinion of counsel to Paragon and GranCare, and certificates of public officials and of officers of Paragon, GranCare, AMS Properties and GCIHCC) as HRP shall have reasonably requested, each of which shall be in form and substance reasonably satisfactory to HRP. 1.90 Fees and Expenses. GranCare shall have paid all costs, expenses and ----------------- taxes provided for in Section 7.3 hereof, as well as all fees and expenses ----------- currently payable by GranCare, AMS Properties and GCIHCC under any Transaction Document. SECTION 28. REPRESENTATIONS AND WARRANTIES Each of the GranCare Parties hereby jointly and severally represents and warrants to HRP as follows: 1.91 Status of GranCare Parties. Each GranCare Party is a corporation duly -------------------------- organized, and validly existing and in good standing under the laws of its respective state of its incorporation and has all requisite power and authority under the laws of such state and under its charter and by-laws to own the properties owned by it, to lease the properties leased by it, to operate the nursing or other facilities located thereon as heretofore operated, to enter into and perform its obligations under the Transaction Documents to which it is a party, and to transact the business in which it is engaged or proposes to engage. Each GranCare Party has duly qualified and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or to be conducted by it requires such qualification (except where the failure to so qualify could not reasonably be expected to have a material adverse effect on the financial condition and operations, or on the assets or business of such GranCare Party). 1.92 Authorization. Each GranCare Party has taken all necessary corporate ------------- and other action to authorize the execution, delivery and performance of each Restructure Document to which it is a party. 1.93 Enforceability. -------------- (1) This Agreement constitutes, and each other Restructure Document when executed and delivered by each GranCare Party party thereto shall constitute, the legal, valid and binding obligation and agreement of such GranCare Party, in each case enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. -33- (2) Upon the due execution and delivery of the Restructure Documents pursuant hereto, the Transaction Documents, as modified by the Restructure Documents, shall constitute the legal, valid and binding obligation and agreement of each GranCare Party party thereto, in each case enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 1.94 No Violations of Agreements, Etc. Neither the execution, delivery or -------------------------------- performance of any Restructure Document by any GranCare Party, nor the consummation of the Transactions and the other transactions contemplated hereby (other than the Exchange Closing), nor compliance with the terms and provisions thereof will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance (other than Liens permitted by the Transaction Documents) upon any property or assets of any GranCare Party pursuant to, the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument to which any GranCare Party may be a party or by which such GranCare Party or any of its property may be bound ("Contractual Obligations"), or its charter and by-laws, or violate any ----------------------- provisions of law or any order or regulation of any governmental commission, bureau or administrative agency or any applicable order, writ, injunction, judgment or decree of any court (collectively, "Legal Restrictions"). ------------------ 1.95 Governmental and Other Approvals. No order, permission, consent, -------------------------------- approval, license, authorization, registration or validation of, or filing with, or exemption by, any governmental agency, commission, board or public authority is required to authorize, or is required in connection with the execution, delivery and performance of any Restructure Document by any GranCare Party, or the consummation of the Transactions and the Restructuring Closing other transactions contemplated hereby, which has not been duly obtained or made on or prior to the Restructuring Closing Date, except (i) those which are customarily and routinely obtained after the closing of a transaction and that are reasonably expected to be obtained in due course and (ii) the orders, permissions, consents, approvals, licenses, authorizations, registrations and filings described in Schedule 6.5 hereto (collectively, the "Post Closing ------------ ------------ Consents"). - -------- 1.96 Compliance With Agreements, Etc. Upon the consummation of the ------------------------------- Transactions and the other transactions contemplated hereby, each GranCare Party will be in compliance in all material respects with the terms and provisions of each Contractual Obligation to which it is or will be a party at such time or by which it or its property is or will then be bound that is material to the operations, business, prospects, property or assets of, liabilities (including, without limitation, tax, ERISA and environmental liabilities) or the condition (financial or otherwise) of Paragon or of the GranCare Parties taken as a whole, and will not be in default under or with respect to any such Contractual Obligation. Each GranCare Party will be in compliance with, and no default shall have occurred under, each Legal Restriction that shall be applicable to it or its respective properties upon the consummation of the Transactions and the other transactions contemplated hereby, where the effect of such noncompliance would be material to the operations, business, prospects, property or assets of, liabilities (including, without limitation, -34- tax, ERISA and environmental liabilities) or the condition (financial or otherwise) of Paragon or of the GranCare Parties taken as a whole. No Event of Default exists or will occur giving effect to the consummation of the Transactions and the other transactions contemplated hereby. 1.97 Licenses, Permits, Etc. Giving effect to the consummation of the ---------------------- Transactions and the other transactions contemplated hereby, all licenses, permits, consents, permissions, certifications and other approvals from all federal, state and local governmental agencies necessary to provide the services and the number of available beds provided by the Continuing Properties owned and/or operated by the GranCare Parties immediately before consummation of the Transactions and the other transactions contemplated hereby contemplated hereby, shall continue to be in full force and effect, and shall not be subject to revocation as a result of the consummation of the Transactions or any of the other transactions contemplated hereby. 1.98 Licensed Beds. ------------- (1) Schedule 1.8 hereto is a complete and accurate statement of the ------------ bed categories for which each healthcare facility (collectively, the "Healthcare Facilities" individually, a "Healthcare Facility") located at a --------------------- ------------------- Continuing Property that is not a GranCare Exchange Property will be licensed as of the Restructuring Closing Date, the number of beds in each category for which such Healthcare Facility will be licensed as of the Restructuring Closing Date, and the number of Licensed Beds in each category that will be available for use in such Healthcare Facility as of the Restructuring Closing Date. Upon the Restructuring Closing, no beds will be in use or available at such Healthcare Facility for use in any category for which such Healthcare Facility is not licensed. No GranCare Party has any reason to believe that the number of Licensed Beds in any category may be reduced by any governmental agency. (2) Schedule 1.8 hereto is a complete and accurate statement of the ------------ bed categories for which each Healthcare Facility located at a GranCare Exchange Property will be licensed as of the Exchange Closing Date, the number of beds in each category for which such Healthcare Facility will be licensed as of the Exchange Closing Date, and the number of Licensed Beds in each category that will be available for use in such Healthcare Facility as of the Exchange Closing Date. Upon the Exchange Closing, no beds will be in use or available at such Healthcare Facility for use in any category for which such Healthcare Facility is not licensed. No GranCare Party has any reason to believe that the number of Licensed Beds in any category may be reduced by any governmental agency. 1.99 Licenses and Permits. Schedule 6.9 hereto, designated "Licenses and -------------------- ------------ Permits", is a complete and accurate list of all licenses, permits, consents, permissions, certifications and other approvals from all federal, state and local governmental agencies issued to each Healthcare Facility with respect to its operations that will be effective immediately prior to the Restructuring Closing (with respect to each Continuing Property other than a GranCare Exchange Property) and the Exchange Closing (with respect to each GranCare Exchange Property), and no GranCare Party has any reason to believe that any such license, permit or approval will not be in effect or -35- will be conditioned or restricted upon the consummation of the Restructuring Closing (with respect to each Continuing Property other than a GranCare Exchange Property) or the Exchange Closing (with respect to each GranCare Exchange Property), except such restrictions as are customary and reasonably expected to be satisfied promptly following the Restructuring Closing or the Exchange Closing, as the case may be. 1.100 Notices and Applications. ------------------------ (1) Except for the Post Closing Consents: (1) all notices required to be given by the GranCare Parties to consummate the Restructuring Closing and the Exchange Closing have been given to the federal, state and local governmental agencies and accrediting and certifying agencies having jurisdiction over each Continuing Property ("Notices and Applications"); and ------------------------ (2) each GranCare Party has received all licenses, permits, certifications, accreditations, approvals, permissions and consents that are required to be received by it in order to consummate the Transactions and the other transactions contemplated hereby and, following the Restructuring Closing and the Exchange Closing, to allow it to maintain the number of beds set forth in Schedule 1.8 and to ------------ maintain in good standing the licenses and permits set forth on Schedule 6.9 (except for those licenses, permits, certifications, ------------ accreditations, approvals, permissions and consents that are customarily and routinely received after the closing of a transaction, and that are reasonably expected to be satisfied promptly after the Restructuring Closing Date or the Exchange Closing Date, as the case may be). (2) To the best of the knowledge of each GranCare Party, no Person with an "ownership or control interest" in any GranCare Party and no "agent or managing employee" of any GranCare Party, each as defined by 42 C.F.R. (S)(S) 420.201 and 455.101, has been convicted of a criminal offense related to the involvement of such Person in the Medicare, Medicaid, or Title XX services program under the Social Security Act, or has been excluded from participation in the Medicare program, the Medicaid program, or other state health care program. (3) Each of AMS Properties and GCIHCC is and will be, following consummation of the Transactions and the Restructuring Closing and Exchange Closing, in substantial compliance with all Medicare (if applicable) and Medicaid Conditions and Standards of Participation, and is and will be, following consummation of the Transactions and the other transactions contemplated hereby, in substantial compliance with the requirements for licensure for each of the facilities to be operated by it. 1.101 Judgments; Litigation. There are no judgments presently outstanding --------------------- and unsatisfied against any GranCare Party or its properties, and, except as set forth in the Joint -36- Proxy Statement dated September 26, 1997, no GranCare Party or any of its properties is involved in any litigation at law or in equity, or in any proceeding before any court, or by or before any governmental or administrative agency, which litigation or proceeding could reasonably be expected to have a materially adverse effect on the operations, business, prospects, property or assets of, liabilities (including, without limitation, tax, ERISA and environmental liabilities), or the condition (financial or otherwise) of Paragon or of the GranCare Parties taken as a whole, or ownership by any GranCare Party or HRP of, or any security interest or lien in HRP's favor in, any Continuing Property and, to each GranCare Party's knowledge, no such material litigation or proceeding is threatened against any GranCare Party or against its properties (including any Continuing Property) and no investigation looking toward such a material proceeding has begun or is contemplated. 1.102 Affiliates and Subsidiaries. The names of all Subsidiaries and --------------------------- Affiliates of any GranCare Party or Paragon expected to derive revenue from any Continuing Property (whether by way of management fees, the lending of money or otherwise), other than the GranCare Party party to the Lease for such Continuing Property, are set forth on Schedule 6.12 hereto. ------------- 1.103 Environmental Laws. ------------------ (1) Each GranCare Party has obtained all governmental approvals that are required for the operation of its business under any Applicable Law, except when the failure to so obtain a governmental approval would not have a material adverse effect. (2) Each GranCare Party is in compliance with all terms and conditions of all required governmental approvals and is also in compliance with all terms and conditions of all Applicable Laws, noncompliance with which would have a material adverse effect. (3) There is no civil, criminal or administrative action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending or, to the best knowledge of any GranCare Party, threatened against any GranCare Party relating in any way to any Applicable Laws, and there is no lien of any private entity or governmental authority against any Continuing Property relating in any way to the Applicable Laws. (4) There has been no claim, complaint, notice, or request for information received by any GranCare Party with respect to any site listed on the National Priority List promulgated pursuant to CERCLA or any state list of sites requiring investigation or cleanup with respect to contamination by hazardous substances. (5) To the best of any GranCare Party's knowledge, there has been no release or threat of release of any hazardous substance at any Continuing Property which would likely result in liability being imposed upon any GranCare Party, which liability would have a material adverse effect. -37- 1.104 Disclosure. Neither this Agreement, any other Restructure Document ---------- nor any other document, certificate or written statement furnished to HRP by or on behalf of any GranCare Party in connection with the Transactions or the Restructuring Closing or Exchange Closing contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact required to be stated herein or therein or necessary in order to make the statements contained herein or therein not misleading. To the best of the knowledge of each GranCare Party, there is no fact or condition which materially and adversely affects the operations, business, prospects, property or assets of, liabilities (including, without limitation, tax, ERISA and environmental liabilities), or the condition (financial or otherwise) of the GranCare Parties that has not been set forth herein or in the Joint Proxy Statement dated September 26, 1997. SECTION 29. MISCELLANEOUS ------------- 1.105 Confirmation of Transaction Documents, Etc. Each of the Transaction ------------------------------------------ Documents, as amended hereby, remain in full force and effect and is hereby ratified and confirmed, except as specifically set forth herein. The amendments of the Transaction Documents set forth herein (a) do not constitute an amendment, waiver or modification of any term, condition or covenant of any Transaction Document, or any of the instruments or documents referred to therein, other than as specifically set forth herein, and (ii) shall not prejudice any rights which HRP or its successors and assigns may now or hereafter have under or in connection with any Transaction Document, as amended hereby or any of the instruments or documents referred to therein. 1.106 Claims. Without limiting any indemnification provision contained in ------ any Restructure Document or Transaction Document, the GranCare Parties hereby jointly and severally agree to and do hereby indemnify, protect, defend and hold harmless HRP, any shareholder of HRP, any lender to HRP and their respective officers, directors, trustees, shareholders, managers and affiliates, any of their respective successors or assigns, and each of them (individually an "Indemnitee") from and against any and all liabilities, losses, damages, costs ---------- and expenses of any kind (including, without limitation, the reasonable fees and disbursements of counsel for HRP in connection with any investigative, administrative or judicial proceeding, whether or not HRP shall be designated a party thereto) which may be incurred or suffered by any Indemnitee, relating to or arising out of any Restructure Document or Transaction Document, or the existence of any hazardous substance on, in, or under any Continuing Property, or any violation or alleged violation of any Applicable Law, or in connection with any Continuing Property, or in connection with the Southpointe nursing facility in Milwaukee, Wisconsin (including, without limitation, any disposition thereof) or involving the imposition of any lien under any Applicable Law; provided that HRP shall not have the right to be indemnified hereunder for its - -------- own gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The covenants in this Section 7.2 shall survive the ----------- termination of the Transaction Documents. 1.107 Costs and Expenses. GranCare, AMS Properties and GCIHCC hereby ------------------ jointly and severally agrees to pay all costs and expenses of HRP in connection with the preparation, -38- reproduction, execution and delivery, and administration, of this Agreement, including the reasonable fees and expenses of Sullivan & Worcester LLP, special counsel to HRP with respect thereto, and the payment of all recording fees, real estate transfer taxes, title insurance premiums and other expenses related to the satisfaction of the conditions to the Restructuring Closing and the Exchange Closing. 1.108 No Counterclaims, Etc.; Release. Each GranCare Party acknowledges ------------------------------- that immediately prior to its acceptance of this letter, it is obligated to pay all indebtedness and obligations arising under the Transaction Documents without a right of set-off, counterclaim or defense with respect thereto. In consideration of HRP's agreements contained herein, GranCare does hereby release and forever discharge HRP and its affiliates, officers, directors, agents, attorneys, employees, successors and assigns, of and from all manner of actions, causes of action, suits, judgments, claims and demands whatsoever, in law or in equity, which have arisen from the beginning of time up and including the date hereof, whether arising in connection with the transactions contemplated hereby or by the Restructure Documents or the Transaction Documents, or otherwise. 1.109 Survival. The representations, warranties and indemnities contained -------- in this Agreement shall survive the consummation of the Transactions and the other transactions contemplated hereby, and any investigation by HRP of any matters described in or related to the transactions contemplated by this Agreement or any Transaction Document. Although HRP or its representatives may have undertaken certain investigations with respect to the consummation of the Transactions and the other transactions contemplated hereby, each GranCare Party acknowledges that HRP is relying upon such representations, warranties, covenants and indemnities in connection therewith. 1.110 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of each party hereto and to their respective successors, assigns, transferees, executors and administrators. 1.111 CONSENT TO JURISDICTION. ANY ACTION TO ENFORCE, ARISING OUT OF, OR ----------------------- RELATING IN ANY WAY TO, ANY OF THE PROVISIONS OF THIS AGREEMENT OR ANY RESTRUCTURE DOCUMENT OR TRANSACTION DOCUMENT MAY BE BROUGHT AND PROSECUTED IN SUCH COURT OR COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS AS IS PROVIDED BY LAW; AND EACH OF THE ENTITIES CONSENTS TO THE JURISDICTION OF SAID COURT OR COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS AND TO SERVICE OF PROCESS BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, OR IN ANY MANNER PROVIDED BY LAW. 1.112 WAIVER OF JURY TRIAL. EXCEPT TO THE EXTENT PROHIBITED BY LAW WHICH -------------------- CANNOT BE WAIVED, EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY IN CONNECTION WITH ANY ACTION OR PROCEEDING OF ANY NATURE WHATSOEVER ARISING UNDER, OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER RESTRUCTURE DOCUMENT OR TRANSACTION -39- DOCUMENT AND IN CONNECTION WITH SUCH ACTION OR PROCEEDING, WHETHER ARISING UNDER STATUTE (INCLUDING ANY FEDERAL OR STATE CONSTITUTION) OR UNDER THE LAW OF CONTRACT, TORT OR OTHERWISE AND INCLUDING, WITHOUT LIMITATION, ANY CHALLENGE TO THE LEGALITY, VALIDITY, BINDING EFFECT OR ENFORCEABILITY OF THIS PARAGRAPH OR THIS AGREEMENT OR ANY OTHER RESTRUCTURE DOCUMENT OR TRANSACTION DOCUMENT. 1.113 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. 1.114 NO LIABILITY OF TRUSTEES THE DECLARATION OF TRUST OF HRP, DATED ------------------------ OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -40- IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. HEALTH AND RETIREMENT PROPERTIES TRUST (f/k/a "Health and Rehabilitation Properties Trust") (known in Wisconsin as "Health and Retirement Properties REIT") By:/s/ David J. Hegarty ----------------------------- Its: President GRANCARE, INC. (f/k/a New GranCare, Inc.) By:/s/ M. Henry Day, Jr. ----------------------------- Its: Assistant Secretary AMS PROPERTIES, INC. By: /s/ M. Henry Day, Jr. ----------------------------- Its: Assistant Secretary GCI HEALTH CARE CENTERS, INC. By:/s/ M. Henry Day, Jr. ----------------------------- Title Assistant Secretary SCHEDULE 1.8 CONTINUING PROPERTIES ---------------------
- ----------------------------------------------------------------------------------------- Facility Name Location Type of No. of No. of Licensed Service Licensed Available Beds Beds - ----------------------------------------------------------------------------------------- AMS Properties Facilities: - ------------------------- - ----------------------------------------------------------------------------------------- Flagship Newport Beach, Skilled Care 167 151 CA - ----------------------------------------------------------------------------------------- Lancaster Lancaster, Skilled Care 99 99 CA - ----------------------------------------------------------------------------------------- Pacific Gardens Fresno, CA Skilled Care 180 180 - ----------------------------------------------------------------------------------------- Tarzana Los Angeles, CA Skilled Care 173 173 - ----------------------------------------------------------------------------------------- Thousand Oaks Thousand Oaks, Skilled Care 124 124 CA - ----------------------------------------------------------------------------------------- Van Nuys Los Angeles, CA Skilled Care 58 58 - ----------------------------------------------------------------------------------------- Cedars HealthCare Center Lakewood, CO Skilled and 175 175 Intermediate Care - ----------------------------------------------------------------------------------------- Cherrelyn HealthCare Center Littleton, CO Skilled and 230 230 Intermediate Care - ----------------------------------------------------------------------------------------- Greentree Health and Clintonville, WI Skilled Care 66 66 Rehabilitation Center - ----------------------------------------------------------------------------------------- Pine Manor Health Care Embarrass, WI Skilled Care 101 101 Center - ----------------------------------------------------------------------------------------- Sunny Hill Health Care Madison, WI Skilled Care 73 73 - ----------------------------------------------------------------------------------------- The Virginia Waukesha, WI Skilled Care 102 102 - ----------------------------------------------------------------------------------------- Woodland Brookfield, WI Skilled Care 226 226 - ----------------------------------------------------------------------------------------- Christopher East Health Milwaukee, WI Skilled Care 215 215 and Rehabilitation Center - ----------------------------------------------------------------------------------------- Northwest Health Care Milwaukee, WI Skilled Care 93 93 Center - ----------------------------------------------------------------------------------------- River Hills West Pewaukee, WI Skilled Care 248 237 - -----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------- Facility Name Location Type of No. of No. of Licensed Service Licensed Available Beds Beds - ----------------------------------------------------------------------------------------- Brian Centers - Wilson Wilson, NC Skilled Care; 119 119 Intermediate Care - ----------------------------------------------------------------------------------------- Brian Centers - Cabarrus Concord, NC Skilled Care; Intermediate Care 110 110 - ----------------------------------------------------------------------------------------- Brian Centers - Winston Winston-Salem, Skilled Care; 80 80 Salem NC Intermediate Care - ----------------------------------------------------------------------------------------- GCI Health Care Centers, Inc. Facilities: - ---------------------------------------- - ----------------------------------------------------------------------------------------- Village Green Nursing Phoenix, Arizona Skilled Care 127 125 Home - ----------------------------------------------------------------------------------------- La Mesa Care Center Yuma, Arizona Skilled Care; 84; 44 81; 44 Intermediate Care - ----------------------------------------------------------------------------------------- SunQuest Village of Yuma Yuma, Arizona supervisory care 80 80 - ----------------------------------------------------------------------------------------- La Sallette Health and Stockton, CA Skilled Care 120 116 Rehabilitation Center - ----------------------------------------------------------------------------------------- Huron Nursing Home Huron, SD Skilled Care; 125; 38 125; 38 Intermediate Care - ----------------------------------------------------------------------------------------- SunQuest Village of Huron, SD retirement 59 59 Huron apartments - ----------------------------------------------------------------------------------------- Southridge Health Care Sioux Falls, SD Skilled Care; 109; 50 109; 50 Center Intermediate Care - -----------------------------------------------------------------------------------------
___________________ /1/ Not a licensed health care facility SCHEDULE 1.20 GRANCARE NORTH CAROLINA PROPERTIES ---------------------------------- SCHEDULE 1.21 GRANCARE WISCONSIN PROPERTIES ----------------------------- SCHEDULE 1.24 HRP EXCHANGE PROPERTIES ----------------------- SCHEDULE 1.32 PERMITTED ENCUMBRANCES ---------------------- SCHEDULE 1.44 CONTINUING TRANSACTION DOCUMENTS -------------------------------- 2. The Facility Leases dated as of December 28, 1990 or March 27, 1992 between HRP, as landlord, and AMS Properties, as tenant; 3. A Master Lease Document General Terms and Conditions dated as of December 28, 1990 between HRP, as landlord, and AMS Properties, as tenant; 4. A Guaranty, dated as of December 28, 1990, from Old GranCare in favor of HRP pursuant to which all obligations of AMS Properties are guaranteed; the obligations and liabilities under such Guaranty having been assumed by New GranCare pursuant to the Assumption Agreement; 5. A Guaranty, Cross Default and Cross Collateralization Agreement, dated as of June 30, 1992, from AMS Properties and GCIHCC in favor of HRP; 6. Memoranda of Lease, each dated as of December 28, 1990 or March 27, 1992 recorded with the Registry of Deeds of the appropriate county with respect to each Leased Property; 7. Precautionary UCC Financing Statements by AMS Properties, showing AMS Properties, as lessee, and HRP, as lessor, filed with the appropriate State and County UCC filing office with respect to each Leased Property; 8. Amended and Restated HRP Shares Pledge Agreement, dated as of June 30, 1992, between HRP and AMS Properties, pursuant to which AMS Properties has pledged the HRP Shares to HRP to secure its obligations to HRP; 9. Amended and Restated Voting Trust Agreement, dated as of June 30, 1992 from AMS Properties to HRPT Advisors, Inc., as voting trustee; 9.1 Voting Trust Certificate; 9.2 Stock Power; 10. A Security Agreement, dated as of December 28, 1990 from AMS Properties to HRP, granting HRP a security interest in all now owned and hereafter acquired tangible personal property and all accounts receivable, contract rights and general intangibles of AMS Properties; 11. A Collateral Assignment of Contracts and Permits, dated as of December 28, 1990 from AMS Properties to HRP, assigning to HRP all contracts and permits of AMS Properties; 12. UCC Financing Statements/Fixture Filings by AMS Properties, showing AMS Properties, as debtor, and HRP, as secured party, filed with the appropriate UCC filing office and -2- registries of deeds to perfect the interests of HRP as a secured creditor under the security instruments referred to above; 13. An Amended and Restated Renovation Funding Agreement dated as of January 13, 1992, between AMS Properties and HRP; 14. Renovation Loan Agreement, dated as of March 28, 1992, by and between AMS Properties and HRP relating to certain renovations to be made at the Christopher East Health Care Center, Milwaukee, Wisconsin; 15. Promissory Note, dated as of March 28, 1992, in the original principal amount of $1,250,000, executed by AMS Properties and accepted by HRP; 16. Security Agreement, dated as of March 28, 1992, made by AMS Properties in favor of HRP; 17. A Pledge Agreement dated as of December 28, 1990, as supplemented by a Pledge Agreement Supplement dated as of December 29, 1993, from Old GranCare (as successor to AMS) to HRP pursuant to which all shares of capital stock of AMS Properties are pledged to HRP, together with certificates relating to the AMS Properties shares and stock powers relating to such shares; the obligations and liabilities under such Pledge Agreement and Pledge Agreement Supplement having been assumed by New GranCare pursuant to the Assumption Agreement; 18. A Subordination Agreement dated as of December 28, 1990 among GranCare as subordinate creditor, AMS Properties as debtor, and HRP as senior creditor; the obligations and liabilities under such Subordination Agreement having been assumed by New GranCare pursuant to the Assumption Agreement; 19. A Subordination Agreement dated as of December 28, 1990 among HMI as subordinate creditor, AMS Properties as debtor and HRP as senior creditor; 20. A Subordination Agreement dated as of December 28, 1990 among AMS Green Tree as subordinate creditor, AMS Properties as debtor and HRP as senior creditor; 21. A Subordination Agreement dated as of December 28, 1990 among Am-Cal as subordinate creditor, AMS Properties as debtor and HRP as senior creditor; 22. Consent Letter dated March 31, 1995 by HRP and consented to by GranCare, AMS Properties and GCIHCC re: Subleases; 23. Assignment of Sublease Documents dated March 31, 1995 between AMS Properties and HRP; 24. Assignment of Leases and Rents dated March 31, 1995 by AMS Properties re: Subleases; -3- 25. A Rescission Agreement and Amendment to Transaction Documents dated as of October 1, 1994 among Old GranCare, AMS Properties, GCIHCC and HRP; and 26. The Assumption Agreement by New GranCare, Inc. in favor of HRP. 27. Letter Agreement dated April 25, 1992, from HRP to GranCare, accepted by GranCare; 28. Closing Escrow Agreement, dated May 29, 1992, among HRP, Samaritan, Samaritan Arizona, Samaritan California, Samaritan South Dakota and GCI and the Title Company, as escrow agent, delivering various closing documents and providing information and instructions regarding delivery and recording of such documents; 29. Master Lease Document, dated as of June 30, 1992, between HRP as Landlord and GCI as Tenant; 30. Facility Leases, each dated as of June 30, 1992, between HRP as Landlord and GCI as Tenant, for each Facility; 31. Amended and Restated HRP Shares Pledge Agreement, dated as of June 30, 1992, between HRP and AMS, pursuant to which AMS has pledged the HRP Shares to HRP to secure its obligations to HRP; 32. Amended and Restated Voting Trust Agreement, dated as of June 30, 1992 from AMS to HRPT Advisors, Inc., as voting trustee; 32.1 Voting Trust Certificate 32.2 Stock Power; 33. Guaranty, Cross Default and Cross Collateralization Agreement, dated as of June 30, 1992, from AMS and GCI, in favor of HRP; 34. A Guaranty, dated as of June 30, 1992 from GranCare in favor of HRP pursuant to which all obligations of AMS are guaranteed; the obligations and liabilities under such Guaranty having been assumed by New GranCare, Inc. pursuant to the Assumption Agreement referenced below; 35. Security Agreement, dated as of June 30, 1992, from GCI to HRP, granting HRP a security interest in all tangible and intangible personal property and including all accounts receivable, contract rights and general intangibles; 36. Assignment of Contracts, Licenses and Permits, dated as of June 30, 1992, from GCI to HRP, assigning to HRP, all contracts, licences and permits used in connection with the operation of the Facilities; -4- 37. Pledge Agreement, dated as of June 30, 1992 Date, from GranCare pursuant to which all of the capital stock of GCI is pledged to HRP to secure the obligations of GCI; 38. Stock power relating to pledged shares; 39. A Subordination Agreement dated as of June 30, 1992 among GranCare as subordinate creditor, GCI as debtor, and HRP as senior creditor; the obligations and liabilities under such Subordination Agreement having been assumed by New GranCare pursuant to the Assumption Agreement; 40. Subordination Agreement, dated as of June 30, 1992, among AMS as subordinated creditor, GCI, as debtor and HRP as senior creditor, pursuant to which all obligations of GCI to the subordinated creditor are subordinated; 41. Representation Letter and Indemnification Agreement, dated June 30, 1992, from GranCare, AMS and GCI, with respect to, inter alia, the continued ----- ---- effectiveness of the representations and warranties made by GranCare and GCI in, and the absence of any Defaults under, the Transaction Documents; 42. Consent Letter dated March 31, 1995 by HRP and consented to by GCI, GranCare and AMS re: HealthQuest Subleases; 43. Assignment of Sublease Documents dated March 31, 1995 between GCI and HRP re: HealthQuest Subleases; 44. Assignment of Leases and Rents dated March 31, 1995 by GCI re: HealthQuest Subleases; 45. Rescission Agreement and Amendment to Transaction Documents dated as of October 1, 1994 among GranCare, AMS, GCI and HRP; 46. Assumption Agreement by New GranCare, Inc. in favor of HRP (the "Assumption ---------- Agreement"). --------- SCHEDULE 2.6(b) PERMITTED REDUCTION IN NO. OF LICENSED BEDS -------------------------------------------
- ---------------------------------------------------------------------------------- Facility Name Location Reduction in No. of Total Beds, Beds as Reduced - ---------------------------------------------------------------------------------- AMS Properties, Inc. Facilities: - -------------------------------- - ---------------------------------------------------------------------------------- Tarzana Los Angeles, CA 19 173 - ---------------------------------------------------------------------------------- Cedars HealthCare Center Lakewood, CO 25 175 - ---------------------------------------------------------------------------------- Cherrelyn HealthCare Center Littleton, CO 15 230 - ---------------------------------------------------------------------------------- Greentree Health and Clintonville, WI 12 66 Rehabilitation Center - ---------------------------------------------------------------------------------- Pine Manor Health Care Embarrass, WI 20 101 Center - ---------------------------------------------------------------------------------- Christopher East Health and Milwaukee, WI 93 215 Rehabilitation Center - ---------------------------------------------------------------------------------- Northwest Health Care Milwaukee, WI 25 93 Center - ---------------------------------------------------------------------------------- River Hills West Pewaukee, WI 8 248 - ---------------------------------------------------------------------------------- GCI Health Care Centers, Inc. Facilities: - ----------------------------------------- - ---------------------------------------------------------------------------------- La Sallette Health and Stockton, CA 2 120 Rehabilitation Center - ----------------------------------------------------------------------------------
SCHEDULE 6.5 POST CLOSING CONSENTS --------------------- Palm Springs Health Care Center . Change of Ownership application to the California Department of Healthcare Services . Medicaid notification . Medicare notification, including Civil Rights Compliance package Park Manor HealthCare Center . Change of Ownership application to the Division of Health and Social Services . Certificate of Need transfer notification . Medicaid notification . Medicare notification, including Civil Rights Compliance package Brian Centers - Wilson . Change of Ownership application to the Department of Human Resources, Division of Licensing and Certification . Request for a Certificate of Need exemption to the Department of Human Resources, Division of Facility Services . Medicaid notification . Medicare notification, including Civil Rights Compliance package Brian Centers - Cabarrus . Change of Ownership application to the Department of Human Resources, Division of Licensing and Certification . Request for a Certificate of Need exemption to the Department of Human Resources, Division of Facility Services . Medicaid notification . Medicare notification, including Civil Rights Compliance package Brian Centers - Winston-Salem . Change of Ownership application to the Department of Human Resources, Division of Licensing and Certification . Request for a Certificate of Need exemption to the Department of Human Resources, Division of Facility Services . Medicaid notification . Medicare notification, including Civil Rights Compliance package SCHEDULE 6.9 LICENSES AND PERMITS --------------------
- ------------------------------------------------------------------------------------------------------------------ Facility Name Location Licenses, Permits - ------------------------------------------------------------------------------------------------------------------ AMS Properties Facilities: - ------------------------- - ------------------------------------------------------------------------------------------------------------------ Flagship Newport Beach, CA . Department of Health Services Skilled Nursing Facility license . Medicare certification . Medi-Cal certification - ------------------------------------------------------------------------------------------------------------------ Lancaster Lancaster, CA . Department of Health Services Skilled Nursing Facility license . Medicare certification . Medi-Cal certification__ - ------------------------------------------------------------------------------------------------------------------ Pacific Gardens Fresno, CA . Department of Health Services Skilled Nursing Facility license . Medicare certification . Medi-Cal certification - ------------------------------------------------------------------------------------------------------------------ Tarzana Los Angeles, CA . Department of Health Services Skilled Nursing Facility license . Medicare certification . Medi-Cal certification - ------------------------------------------------------------------------------------------------------------------ Thousand Oaks Thousand Oaks, CA . Department of Health Services Skilled Nursing Facility license . Medicare certification . Medi-Cal certification - ------------------------------------------------------------------------------------------------------------------ Van Nuys Los Angeles, CA . Department of Health Services Skilled Nursing Facility license . Medi-Cal certification - ------------------------------------------------------------------------------------------------------------------ Cedars HealthCare Center Lakewood, CO . Department of Health Nursing Care Facility . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------ Cherrelyn HealthCare Center Littleton, CO . Department of Health Nursing Care Facility license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------ Greentree Health and Clintonville, WI . Division of Health and Social Services Home Rehabilitation Center for Skilled Care license . Medicare certification - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Facility Name Location Licenses, Permits - ------------------------------------------------------------------------------------------------------------------- . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- Pine Manor Health Care Center Embarrass, WI . Division of Health and Social Services Home for Skilled Care license . Medicaid certification . Division of Health and Social Service . Facility for the Developmentally Disabled license - ------------------------------------------------------------------------------------------------------------------- Sunny Hill Health Care Madison, WI . Division of Health and Social Services Home for Skilled Care license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- The Virginia Waukesha, WI . Division of Health and Social Services Home for Skilled Care license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- Woodland Brookfield, WI . Division of Health and Social Services Home for Skilled Care license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- Christopher East Health and Milwaukee, WI . Division of Health and Social Services Rehabilitation Center Home for Skilled Care license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- Northwest Health Care Center Milwaukee, WI . Division of Health and Social Services license . Medicare certification . Medicaid certification - ------------------------------------------------------------------------------------------------------------------- River Hills West Pewaukee, WI . Division of Health and Social Services license . Medicare certification . Medicaid certification . Division of Community Services day care license . CBRF license - ------------------------------------------------------------------------------------------------------------------- Brian Centers - Wilson Wilson, NC . Department of Human Resources Nursing Facility license . Medicare certification . Medicaid Certification - ------------------------------------------------------------------------------------------------------------------- Brian Centers - Cabarrus Concord, NC . Department of Human Resources Nursing Facility license - -------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Facility Name Location Licenses, Permits - ------------------------------------------------------------------------------------------------------------------- . Medicare certification . Medicaid Certification - ------------------------------------------------------------------------------------------------------------------- Brian Centers - Winston Salem Winston-Salem, NC . Department of Human Resources Nursing Facility license . Medicare certification . Medicaid Certification - ------------------------------------------------------------------------------------------------------------------- GCI Health Care Centers, Inc. Facilities: - ----------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Village Green Nursing Home Phoenix, Arizona . Department of Health Services Nursing Care Institution license . Medicare certifications . AHCCCS (ALTCS) (Medical) certification - -------------------------------------------------------------------------------------------------------------------- La Mesa Care Center Yuma, Arizona . Department of Health Services Nursing Care Institution license . Medicare certification . AHCCCS (ALTCS) Medicaid) certification - -------------------------------------------------------------------------------------------------------------------- SunQuest Village of Yuma Yuma, Arizona Department of Health Services Supervisory Care Home license - -------------------------------------------------------------------------------------------------------------------- La Sallette Health and Stockton, CA . Department of Health Services Skilled Rehabilitation Center Nursing Facility license . Medicare certification . Medi-Cal certification - -------------------------------------------------------------------------------------------------------------------- Huron Nursing Home Huron, SD . Department of Public Health Nursing Home license . Medicare certification . Medicaid certification - -------------------------------------------------------------------------------------------------------------------- SunQuest Village of Huron Huron, SD None - -------------------------------------------------------------------------------------------------------------------- Southridge Health Care Center Sioux Falls, SD . Department of Public Health Nursing home license . Medicare certification . Medicaid certification - --------------------------------------------------------------------------------------------------------------------
SCHEDULE 6.12 SUBSIDIARIES AND AFFILIATES --------------------------- GranCare, Inc. (DE) American Pharmaceutical Services, Inc. (DE) American Rehability Management, Inc. (TN) American Rehability Services, Inc. (UT) American Senior Health Services, Inc. (DE) APS Holding Company, Inc. (NV) APS Pharmacy Management, Inc. (DE) Hospice Associates of America, Inc. (DE) Hospice Management Partners, Inc. (DE) Therapy Management Innovations, Inc. (NV) EXHIBIT A --------- FORM OF THE PARAGON GUARANTY ---------------------------- EXHIBIT B --------- FORM OF THE CASH COLLATERAL PLEDGE ---------------------------------- EXHIBIT C --------- FORM OF THE SUBORDINATION AGREEMENT ----------------------------------- EXHIBIT D --------- FORM OF THE GRANCARE GUARANTY ----------------------------- EXHIBIT E --------- FORM OF THE LEASE AMENDMENT --------------------------- EX-10.36 34 SUBORDINATION AGREEMENT EXHIBIT 10.36 SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT dated as of October 31, 1997 (this "Agreement") by and among (i) the corporations listed on the signature pages --------- hereto as "DEBTORS" (together with their respective successors and assigns, collectively,"Debtors"); (ii) HEALTH AND RETIREMENT PROPERTIES TRUST, a real ------- estate investment trust formed under the laws of the State of Maryland (together with its successors and assigns, "HRP" or "Senior Creditor"), and (iii) the --- --------------- corporations listed on the signature pages hereto as "SUBORDINATED CREDITORS" (together with their respective successors and assigns, collectively, the "Subordinated Creditors"). ---------------------- W I T N E S S E T H: - - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, each Subordinated Creditor and each Debtor agrees with Senior Creditor that, until the Senior Obligations (as hereinafter defined) are paid in full as herein provided, each such party to this Agreement will comply with such of the following provisions as are applicable to it: 1. Certain Definitions. ------------------- 1.1 Senior Obligations. The term "Senior Obligations" shall mean (a) each ------------------ ------------------ and every obligation and liability, now existing or hereafter arising, of Debtors, or any of them, to Senior Creditor under any agreement, note, lease, master lease, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument now or hereafter executed by, on the one hand, Senior Creditor, and, on the other, any Debtor, and any agreement, note, mortgage, security agreement, pledge agreement, assignment, guaranty or other agreement or instrument hereafter executed in connection with any extension, renewal, refunding or refinancing thereof, as any of the same may hereafter from time to time be amended, modified or supplemented (collectively, the "Senior Documents"), in each case as and when the same shall become due and ---------------- payable, whether at maturity, by acceleration or otherwise, according to the terms thereof, and the due and punctual performance and observance of all such payments and other obligations (including, without limitation, all fees, expenses and other amounts owing to Senior Creditor under the Senior Documents, whether now owing or hereafter incurred, in each case regardless of the extent to which such amounts are allowed as claims against any Debtor in any Reorganization, as such term is defined below (including any interest thereon accruing after the commencement of any Reorganization and any other interest that would have accrued thereon but for the commencement of such Reorganization)). 1.2 Subordinated Obligations. The term "Subordinated Obligations" shall ------------------------ ------------------------ mean any and all obligations and liabilities, direct or contingent, now existing or hereafter arising, of any Debtor to any Subordinated Creditor; provided that -------- Subordinated Obligations shall not include obligations of any Debtor to any Subordinated Creditor for the payment of goods and services (excluding management services) provided to the Debtor by the Subordinated Creditor in the -2- ordinary course of business and upon terms no less favorable to the Debtor than would have been the case if such goods and services had been provided to the Debtor by a non-affiliate. 1.3 Other Definitions. As used herein: ----------------- (1) the term "Default" shall mean (i) any event or condition which ------- relates to the payment of money and which constitutes or which with the giving of notice or the passage of time or both would constitute an Event of Default under, and as defined in, any Senior Document and (ii) any Event of Default, as defined in any Senior Document; and (2) the term "Subordinated Agreements" shall mean, collectively, any ----------------------- agreement or instrument executed in connection with, relating to or evidencing any Subordinated Obligations. 1.4 Other capitalized terms used and not defined herein shall have the meanings assigned to them in the Master Lease Document dated as of December 28, 1990, as amended (hereinafter, as the same may be amended, modified or supplemented from time to time, the "AMS Properties Master Lease"), among Senior --------------------------- Creditor, as Landlord, and AMS Properties, Inc., as tenant, and the Master Lease Document dated as of June 30, 1992, as amended (hereinafter, as the same may be amended, modified or supplemented from time to time, the "GCIHCC Master Lease"), ------------------- among Senior Creditor, as Landlord, and GCI Health Care Centers, Inc., as tenant. 2. Subordination. The payment of any and all Subordinated Obligations shall at ------------- all times be junior and subordinate and subject in right of payment and exercise of remedies to the prior payment in full of all Senior Obligations to the extent and in the manner herein provided. 3. Prohibited Payments; No Breach. No Debtor shall make, and no Subordinated ------------------------------ Creditor shall demand, accept or receive, any direct or indirect payment (in cash, property, by setoff or otherwise) of or on account of any Subordinated Obligations, and no such payment shall be due, unless and until all Senior Obligations shall have been paid in full as herein provided; provided, however, -------- ------- that so long as no Default shall have occurred and be continuing or would occur after giving effect to such payment, any Debtor may make, and any Subordinated Creditor may accept, a payment in respect of any Subordinated Obligation under any Subordinated Agreement. Any Debtor's failure to pay any amount in respect of any Subordinated Obligations under any Subordinated Agreement by reason of the operation of this Agreement shall not constitute a breach of or default with respect to such Subordinated Agreement on the part of such Debtor. 4. No Transfer. Each Subordinated Creditor agrees that it will not assign, ----------- transfer or otherwise dispose of any of the Subordinated Obligations except to a person who agrees in advance, in a writing delivered to Senior Creditor, to become a party to this Agreement, and subject in any case to the prior written consent of Senior Creditor. 5. Insolvency, etc. --------------- -3- 5.1 In the event of (i) any insolvency or bankruptcy proceeding, or any receivership, liquidation, reorganization or other similar proceeding in connection therewith, relative to any Debtor or its property, or (ii) any proceedings for voluntary liquidation, dissolution or other winding-up of any Debtor and whether or not involving insolvency or bankruptcy, or (iii) any assignment or receivership for the benefit of creditors, or (iv) any distribution, division, marshaling or application of any of the properties or assets (including, without limitation, properties or assets securing the Subordinated Obligations) of any Debtor or the proceeds thereof, to creditors, voluntary or involuntary, and whether or not involving legal proceedings (a "Reorganization"), then and in any such event all Senior Obligations shall first -------------- be indefeasibly paid in full as herein provided before any payment or distribution of any character, whether in cash, securities or other property, shall be made in respect of the Subordinated Obligations, and in furtherance thereof, (1) any payment or distribution of any character, whether in cash, securities or other property, which would otherwise (but for the terms hereof) be payable or deliverable by Debtors in respect of the Subordinated Obligations (including any payment or distribution in respect of the Subordinated Obligations by reason of any other indebtedness of Debtors being subordinated to the Subordinated Obligations or by reason of any properties or assets of Debtors securing the Subordinated Obligations), shall be paid or delivered directly to Senior Creditor, until all Senior Obligations shall have been paid in full as herein provided; (2) each Subordinated Creditor irrevocably authorizes and empowers (without imposing any obligation on) Senior Creditor and Senior Creditor's representatives to demand, sue for, collect and receive such payments and distributions in respect of the such Subordinated Obligations and to receipt therefor, and to file and prove all claims therefor and take all such other action (including the right to vote the Subordinated Obligations) in the name of Subordinated Creditor or otherwise, as Senior Creditor or Senior Creditor's representatives may determine to be necessary or appropriate; and (3) each Subordinated Creditor irrevocably authorizes, empowers and directs all receivers, trustees, liquidators, conservators and others having authority in the premises to effect all such payments and deliveries and agrees to execute and deliver to Senior Creditor and Senior Creditor's representatives all such further instruments confirming the above authorization, and all such powers of attorney, proofs of claim, as signments of claim and other instruments, and shall take all such other action as may be requested by Senior Creditor or Senior Creditor's representatives, in order to enable Senior Creditor to enforce all claims upon or in respect of the Subordinated Obligations. -4- 5.2 Unless and until all Senior Obligations shall have been indefeasibly paid in full as herein provided, no Subordinated Creditor will commence any proceeding against any Debtor, or join with any creditor in any such proceeding, under any bankruptcy, reorganization, readjustment of debt, arrangement of debt, receivership, liquidation or insolvency law or statute of the federal or any state government, unless the holders of the Senior Obligations shall also join in bringing such proceeding. 6. Payments and Distributions Received. If any payment or distribution of any ----------------------------------- character (whether in cash, securities or other property) or any security shall be received by any Subordinated Creditor in contravention of any of the terms hereof and before all Senior Obligations shall have been indefeasibly paid in full as herein provided, such payment or distribution or security shall be held in trust for the benefit of, and shall be paid over or delivered and transferred to, Senior Creditor (or Senior Creditor's representatives) for application to the payment of all Senior Obligations remaining unpaid, to the extent necessary to pay all such Senior Obligations in full as herein provided. In the event of the failure of any Subordinated Creditor to endorse or assign any such payment, distribution or security on demand, Senior Creditor and Senior Creditor's representatives shall be irrevocably authorized to endorse or assign the same. 7. Rights of Subrogation, etc. No Subordinated Creditor shall exercise any -------------------------- right of subrogation which it may have with respect to the Senior Obligations until the Senior Obligations shall have been indefeasibly paid in full following the termination of the Senior Documents. 8. Security. So long as any of the Senior Obligations shall not have been -------- indefeasibly paid in full following the termination of the Senior Documents, the Debtors shall not give and the holders of the Subordinated Obligations shall not demand, accept or receive, any security, direct or indirect, for any Subordinated Obligations. 9. Subordination Not Affected, etc. The terms hereof, the subordination ------------------------------- effected hereby, and the rights of Senior Creditor shall not be affected by (a) any amendment of or addition or supplement to any Senior Obligations, or any Senior Document, or any other instrument or agreement relating thereto; (b) any exercise or nonexercise of any right, power or remedy under or in respect of any Senior Obligations or any Senior Document, or any other instrument or agreement relating thereto; (c) any sale, exchange, release or other transaction affecting all or any part of any property at any time pledged or mortgaged to secure, or however securing, any Senior Obligations; or (d) any waiver, consent, release, indulgence, extension, renewal, modification, delay or other action, inaction or omission, in respect of any Senior Obligations, or any other Senior Document, or any instrument or agreement relating thereto; whether or not Subordinated Creditor shall have had notice or knowledge of any of the foregoing. 1. Payment in Full. For all purposes hereof, the Senior Obligations shall not --------------- be deemed to have been paid in full unless Senior Creditor (or its duly authorized representative) shall have received cash equal to the amount of Senior Obligations at the time outstanding. -5- 10. Limit on Right of Action. Each Subordinated Creditor, for itself and its ------------------------ successors and assigns, agrees for the benefit of Senior Creditor, that until all Senior Obligations shall have been paid in full after the termination of the Senior Documents, each Subordinated Creditor agrees it will not accelerate the maturity date of the Subordinated Obligations or commence any action, suit or other legal or equitable proceeding or otherwise seek to enforce its rights, powers or remedies as such holder with respect to the payment of any Subordinated Obligations, the performance of any obligations with respect thereto or the collection thereof, whether under any Subordinated Agreement, under applicable law or against any collateral. 11. Further Assurances. Each Debtor and each Subordinated Creditor, for itself ------------------ and its successors and assigns as holders of the Subordinated Obligations, covenants to execute and deliver to Senior Creditor such further instruments and documents and take such further actions as Senior Creditor may from time to time request for the purpose of carrying out the provisions and intent of this Agreement. 12. Requirement of Notice. Each Subordinated Creditor agrees to notify Senior --------------------- Creditor immediately upon the occurrence of any default or event of default in respect of the Subordinated Obligations or under any Subordinated Agreement or any event which, upon notice or lapse of time or both, would constitute such a default. 13. Notices. Any notice, request, demand, statement or consent ("Notice") ------- ------ desired or required to be given hereunder shall be in writing and shall be delivered by hand, sent by certified mail, return receipt requested, or sent by a nationally recognized commercial overnight delivery service with provisions for a receipt, postage or delivery charges prepaid, and shall be deemed given when actually delivered, if delivered by hand, (b) upon receipt, if sent by certified mail, or (c) the next Business Day after being placed in the possession of an overnight delivery service, if sent by an overnight delivery service, and shall be addressed as follows: if to any Debtor: c/o Paragon Health Network, Inc. One Ravinia Drive Atlanta, GA Attention: General Counsel if to Senior Creditor: Health and Retirement Properties Trust 400 Centre Street Newton, MA 02158 Attn: President -6- if to any Subordinated Creditor: c/o Paragon Health Network, Inc. One Ravinia Drive Atlanta, GA Attention: General Counsel or to such other address as any party hereto may from time to time hereafter designate to the others in writing. 14. Successors; Continuing Effect, etc. This Agreement is being entered into ---------------------------------- for the benefit of Senior Creditor and its respective successors and assigns. This Agreement shall be a continuing agreement and shall be irrevocable and shall remain in full force and effect so long as there are both Senior Obligations and Subordinated Obligations outstanding. The liability of each Subordinated Creditor hereunder shall be reinstated and revived, and the rights of Senior Creditor shall continue, with respect to any amount at any time paid on account of the Senior Obligations which shall thereafter be required to be restored or returned by Senior Creditor in any Reorganization, all as though such amount had not been paid. Senior Creditor will have relied and will continue to rely upon the subordination provided for herein, and each Subordinated Creditor and, by its acceptance hereof, each Debtor hereby waives notice and proof of such reliance. 15. Entire Agreement, Amendment. This Agreement constitutes the entire --------------------------- agreement of the parties and no modification or waiver of any provision of this Agreement shall in any event be effective unless the same shall be in writing signed by Senior Creditor and the Subordinated Creditor affected thereby. 16. Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. 17. Miscellaneous. The headings in this Agreement are for convenience of ------------- reference only and shall not alter or otherwise affect the meaning hereof. In the event of any conflict between the provisions of this Agreement and the provisions of any of the Senior Documents, or any of the Subordinated Agreements, the provisions of this Agreement shall control. Each Debtor and each Subordinated Creditor, jointly and severally, shall reimburse Senior Creditor upon demand for all reasonable costs and expenses (including reasonable attorney's fees and disbursements) paid or incurred by Senior Creditor in connection with any enforcement of this Agreement in favor of Senior Creditor. 18. Counterparts. This Agreement may be executed in any number of counterparts, ------------ all of which taken together shall constitute one and the same instrument and any parties hereto may execute this Agreement by signing any such counterpart. -7- 19. GOVERNING LAW. ------------- EXCEPT AS TO MATTERS REGARDING THE INTERNAL AFFAIRS OF SENIOR CREDITOR AND ISSUES OF OR LIMITATIONS ON ANY PERSONAL LIABILITY OF THE SHAREHOLDERS AND TRUSTEES OF SENIOR CREDITOR FOR OBLIGATIONS OF SENIOR CREDITOR, AS TO WHICH THE LAWS OF THE STATE OF MARYLAND SHALL GOVERN, THIS AGREEMENT AND ANY OTHER INSTRUMENTS EXECUTED AND DELIVERED TO EVIDENCE, COMPLETE, OR PERFECT THE TRANSACTIONS CONTEMPLATED HEREBY WILL BE INTERPRETED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS (OTHER THAN THE LAWS GOVERNING CONFLICTS OF LAWS) OF THE COMMONWEALTH OF MASSACHUSETTS. 20. NON-LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST ESTABLISHING SENIOR ------------------------- CREDITOR, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED WITH THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SENIOR CREDITOR SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SENIOR CREDITOR. ALL PERSONS DEALING WITH SENIOR CREDITOR, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SENIOR CREDITOR FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. [Intentionally left blank.] -8- IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed under seal by its duly authorized representative as of the day and year first above written. SENIOR CREDITOR: HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate investment trust By: /s/ David J. Hegarty -------------------------- Name: David J. Hegarty Title: President SUBORDINATED CREDITORS: PARAGON HEALTH NETWORK, INC., a Delaware corporation By:____________________________ Name: Title: GRANCARE, INC., a Delaware corporation AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation AMERICAN REHABILITY MANAGEMENT, INC., a Tennessee corporation AMERICAN REHABILITY SERVICES, INC., a Utah corporation AMERICAN SENIOR HEALTH SERVICES, INC., a Delaware corporation APS HOLDING COMPANY, INC., a Nevada corporation APS PHARMACY MANAGEMENT, INC., a Delaware corporation HOSPICE ASSOCIATES OF AMERICA, INC., a Delaware corporation HOSPICE MANAGEMENT PARTNERS, INC., a Delaware corporation THERAPY MANAGEMENT INNOVATIONS, INC., a Nevada corporation By: /s/ Boyd P. Gentry ---------------------------- Name: Boyd P. Gentry Title: Vice President -9- DEBTORS: AMS PROPERTIES, INC., a Delaware corporation GCI HEALTH CARE CENTERS, INC., a Delaware corporation By: /s/ M. Henry Day, Jr. ----------------------------- Name: M. Henry Day, Jr. Title: Assistant Secretary Signature page to Subordination Agreement dated as of October 31, 1997. EX-10.37 35 AMENDMENT TO LEASES EXHIBIT 10.37 AMENDMENT TO GCI HEALTH CARE CENTERS, INC. FACILITY LEASES AMENDMENT dated as of October 31, 1997 between HEALTH AND RETIREMENT PROPERTIES TRUST, a real estate investment trust formed under the laws of the State of Maryland ("HRP") and GCI HEALTH CARE CENTERS, INC., a Delaware --- corporation ("GCIHCC") ------ W I T N E S S E T H: WHEREAS, HRP, as landlord, and GCIHCC, as tenant, have entered into a Master Lease Document, General Terms and Conditions dated as of June 30, 1992, as amended (the "Master Lease"), and have also executed Facility Leases which ------------ incorporate by reference the Master Lease (collectively, the "Facility Leases") --------------- relating to the health care facilities described on Exhibit A-2 to the Master Lease; WHEREAS, HRP and GCIHCC have agreed to amend the Facility Leases as hereinafter provided; NOW, THEREFORE, in consideration of the foregoing, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, HRP and GCIHCC agree as follows: SECTION 1. AMENDMENTS TO FACILITY LEASES 1.1 Paragraphs 4 and 5 of the Facility Lease for each Leased Property is hereby amended in full to read as follows: 4. Fixed Term. The Fixed Term of this Lease is twenty (20) years ---------- and two hundred fourteen (214) days, commencing on July 1, 1992 (the "Commencement Date"), and ending on January 31, 2013. ----------------- 5. Extended Terms. Subject to the provisions of Section 2.4 of the -------------- Master Lease, Tenant is hereby granted the right to renew the Lease for two (2) 10-year consecutive optional renewal terms for a maximum term if all such options are exercised of twenty (20) years after the expiration of the Fixed Term. 1.2 The first sentence of Paragraph 6 of the Facility Lease for each Leased Property listed on Schedule 1 hereto is hereby amended to provide that ---------- the annual amount of initial Minimum Rent and the amount of each monthly installment of initial Minimum Rent for such Leased Property are the respective amounts set forth on Schedule 1 hereto. ---------- -2- SECTION 2. EFFECT ON FACILITY LEASES 1.3 Except as specifically provided above, the Facility Leases shall remain in full force and effect and each is hereby ratified and confirmed. 1.4 The amendments set forth herein (i) do not constitute an amendment, waiver or modification of any term, condition or covenant of any Facility Lease, or any of the instruments or documents referred to therein, other than as specifically set forth herein, and (ii) shall not prejudice any rights which HRP or its successors and assigns may now or hereafter have under or in connection with Facility Leases, as amended hereby, or any of the instruments or documents referred to therein. SECTION 3. EFFECTIVENESS This Amendment shall become effective as of the date first above indicated when a counterpart to this Amendment shall have been executed by each of the parties hereto. SECTION 4. COSTS, EXPENSES AND TAXES GCIHCC agrees to pay all costs and expenses of HRP in connection with the preparation, reproduction, execution and delivery of this Amendment, including the reasonable fees and expenses of Sullivan & Worcester LLP, special counsel to HRP with respect thereto. SECTION 5. GOVERNING LAW THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. SECTION 6. NO LIABILITY OF TRUSTEES THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. -3- IN WITNESS WHEREOF, the parties have executed this amendment as a sealed instrument as of the date first above written. LANDLORD: HEALTH AND RETIREMENT PROPERTIES TRUST, a Maryland real estate investment trust By: /s/ David J. Hegarty ------------------------------- Name: David J. Hegarty Title: President TENANT: GCI HEALTH CARE CENTERS, INC. By: /s/ M. Henry Day, Jr. ------------------------------- Name: M. Henry Day, Jr. Title: Assistant Secretary SCHEDULE 1 TO AMENDMENT ----------------------- Schedule of Revised Minimum Rent Amounts ----------------------------------------
Amount of Aggregate Monthly Facility Name State Yearly Installment of - ------------- ----- Minimum Rent Minimum Rent ------------ ------------ Village Green Nursing Arizona $ 436,479 $ 36,373.25 Home La Mesa Care Center Arizona 337,939 28,161.58 SunQuest Village of Arizona 109,063 9,088.58 Yuma La Sallette Health and CA 433,884 36,157.00 Rehabilitation Center Huron Nursing Home SD 418,585 34,882.08 SunQuest Village of SD 127,206 10,600.50 Huron Mom & Dads Home SD 435,716 36,309.67 and Health Care Center $2,298,872.00 $191,572.67 ============= ===========
EX-10.48 36 CREDIT AGREEMENT EXHIBIT 10.48 EXECUTION COPY ================================================================================ $890,000,000 CREDIT AGREEMENT among PARAGON HEALTH NETWORK, INC., as Borrower, The Several Lenders from Time to Time Parties Hereto, THE CHASE MANHATTAN BANK, as Administrative Agent, and NATIONSBANK, N.A., as Documentation Agent Dated as of November 4, 1997 ================================================================================ TABLE OF CONTENTS -----------------
Page ---- SECTION 1. DEFINITIONS................................................................. 1 1.1 Defined Terms................................................................ 1 ------------- 1.2 Other Definitional Provisions................................................ 22 ----------------------------- SECTION 2. AMOUNT AND TERMS OF COMMITMENTS............................................. 23 2.1 Term Loan Commitments........................................................ 23 --------------------- 2.2 Procedure for Term Loan Borrowing............................................ 24 --------------------------------- 2.3 Repayment of Term Loans...................................................... 24 ----------------------- 2.4 Revolving Credit Commitments................................................. 25 ---------------------------- 2.5 Procedure for Revolving Credit Borrowing..................................... 25 ---------------------------------------- 2.6 Swing Line Commitment........................................................ 26 --------------------- 2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line Loans............ 26 ----------------------------------------------------------------- 2.8 Commitment Fees, etc......................................................... 27 -------------------- 2.9 Termination or Reduction of Revolving Credit Commitments..................... 28 -------------------------------------------------------- 2.10 Optional Prepayments......................................................... 28 -------------------- 2.11 Mandatory Prepayments........................................................ 28 --------------------- 2.12 Conversion and Continuation Options.......................................... 29 ----------------------------------- 2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches.................... 30 --------------------------------------------------------- 2.14 Interest Rates and Payment Dates............................................. 30 -------------------------------- 2.15 Computation of Interest and Fees............................................. 30 -------------------------------- 2.16 Inability to Determine Interest Rate......................................... 31 ------------------------------------ 2.17 Pro Rata Treatment and Payments.............................................. 31 ------------------------------- 2.18 Requirements of Law.......................................................... 33 ------------------- 2.19 Taxes........................................................................ 34 ----- 2.20 Indemnity.................................................................... 35 --------- 2.21 Change of Lending Office..................................................... 36 ------------------------ 2.22 Replacement of Lenders under Certain Circumstances........................... 36 -------------------------------------------------- SECTION 3. LETTERS OF CREDIT........................................................... 36 3.1 L/C Commitment............................................................... 36 -------------- 3.2 Procedure for Issuance of Letter of Credit................................... 37 ------------------------------------------ 3.3 Commissions, Fees and Other Charges.......................................... 37 ----------------------------------- 3.4 L/C Participations........................................................... 37 ------------------ 3.5 Reimbursement Obligation of the Borrower..................................... 38 ---------------------------------------- 3.6 Obligations Absolute......................................................... 39 -------------------- 3.7 Letter of Credit Payments.................................................... 39 ------------------------- 3.8 Applications................................................................. 39 ------------ SECTION 4. REPRESENTATIONS AND WARRANTIES.............................................. 39 4.1 Financial Condition.......................................................... 39 ------------------- 4.2 No Change.................................................................... 40 --------- 4.3 Corporate Existence; Compliance with Law..................................... 41 ---------------------------------------- 4.4 Corporate Power; Authorization; Enforceable Obligations...................... 41 ------------------------------------------------------- 4.5 No Legal Bar................................................................. 41 -----------
Page ---- 4.6 No Material Litigation....................................................... 41 ---------------------- 4.7 No Default................................................................... 42 ---------- 4.8 Ownership of Property; Liens................................................. 42 ---------------------------- 4.9 Intellectual Property........................................................ 42 --------------------- 4.10 Taxes........................................................................ 42 ----- 4.11 Federal Regulations.......................................................... 42 ------------------- 4.12 Labor Matters................................................................ 42 ------------- 4.13 ERISA........................................................................ 42 ----- 4.14 Investment Company Act; Other Regulations.................................... 43 ----------------------------------------- 4.15 Subsidiaries................................................................. 43 ------------ 4.16 Use of Proceeds.............................................................. 43 --------------- 4.17 Environmental Matters........................................................ 43 --------------------- 4.18 Accuracy of Information, etc................................................. 44 ---------------------------- 4.19 Security Documents........................................................... 45 ------------------ 4.20 Solvency..................................................................... 45 -------- 4.21 Senior Indebtedness.......................................................... 45 ------------------- 4.22 Health Care Permits.......................................................... 45 ------------------- SECTION 5. CONDITIONS PRECEDENT........................................................ 46 5.1 Conditions to Initial Extension of Credit.................................... 46 ----------------------------------------- 5.2 Conditions to Each Extension of Credit....................................... 48 -------------------------------------- SECTION 6. AFFIRMATIVE COVENANTS....................................................... 49 6.1 Financial Statements......................................................... 49 -------------------- 6.2 Certificates; Other Information.............................................. 49 ------------------------------- 6.3 Payment of Obligations....................................................... 50 ---------------------- 6.4 Conduct of Business and Maintenance of Existence, etc........................ 50 ----------------------------------------------------- 6.5 Maintenance of Property; Insurance........................................... 51 ---------------------------------- 6.6 Health Care Permits and Approvals............................................ 51 --------------------------------- 6.7 Inspection of Property; Books and Records; Discussions....................... 51 ------------------------------------------------------ 6.8 Notices...................................................................... 51 ------- 6.9 Environmental Laws........................................................... 52 ------------------ 6.10 Additional Collateral, etc................................................... 53 -------------------------- 6.11 Permitted Acquisitions....................................................... 54 ---------------------- SECTION 7. NEGATIVE COVENANTS.......................................................... 55 7.1 Financial Condition Covenants................................................ 55 ----------------------------- 7.2 Limitation on Indebtedness................................................... 56 -------------------------- 7.3 Limitation on Liens.......................................................... 57 -------------------- 7.4 Limitation on Fundamental Changes............................................ 58 ---------------------------------- 7.5 Limitation on Sale of Assets................................................. 59 ---------------------------- 7.6 Limitation on Dividends...................................................... 60 ----------------------- 7.7 Limitation on Capital Expenditures........................................... 60 ---------------------------------- 7.8 Limitation on Investments, Loans and Advances................................ 61 --------------------------------------------- 7.9 Limitation on Optional Payments and Modifications of Debt Instruments, etc... 62 -------------------------------------------------------------------------- 7.10 Limitation on Transactions with Affiliates................................... 62 ------------------------------------------ 7.11 Limitation on Sales and Leasebacks........................................... 62 ---------------------------------- 7.12 Health Care Permits and Approvals............................................ 62 ---------------------------------
Page ---- 7.13 Limitation on Changes in Fiscal Periods..................................... 63 --------------------------------------- 7.14 Limitation on Negative Pledge Clauses....................................... 63 ------------------------------------- 7.15 Limitation on Restrictions on Subsidiary Distributions...................... 63 ------------------------------------------------------ 7.16 Limitation on Lines of Business............................................. 63 ------------------------------- 7.17 Limitation on Amendments to Recapitalization Documents, etc................. 63 ----------------------------------------------------------- SECTION 8. EVENTS OF DEFAULT........................................................... 63 SECTION 9. THE ADMINISTRATIVE AGENT.................................................... 67 9.1 Appointment................................................................. 67 ----------- 9.2 Delegation of Duties........................................................ 67 -------------------- 9.3 Exculpatory Provisions...................................................... 67 ---------------------- 9.4 Reliance by Administrative Agent............................................ 67 -------------------------------- 9.5 Notice of Default........................................................... 68 ----------------- 9.6 Non-Reliance on Administrative Agent and Other Lenders...................... 68 ------------------------------------------------------ 9.7 Indemnification............................................................. 68 --------------- 9.8 Administrative Agent in Its Individual Capacity............................. 69 ----------------------------------------------- 9.9 Successor Administrative Agent.............................................. 69 ------------------------------ 9.10 Authorization to Release Liens.............................................. 69 ------------------------------ SECTION 10. MISCELLANEOUS.............................................................. 70 10.1 Amendments and Waivers...................................................... 70 ---------------------- 10.2 Notices..................................................................... 70 ------- 10.3 No Waiver; Cumulative Remedies.............................................. 71 ------------------------------ 10.4 Survival of Representations and Warranties.................................. 71 ------------------------------------------ 10.5 Payment of Expenses and Taxes............................................... 71 ----------------------------- 10.6 Successors and Assigns; Participations and Assignments...................... 72 ----------------------------------------------------- 10.7 Adjustments; Set-off........................................................ 75 -------------------- 10.8 Counterparts................................................................ 75 ------------ 10.9 Severability................................................................ 75 ----------- 10.10 Integration................................................................. 75 ----------- 10.11 GOVERNING LAW............................................................... 75 ------------- 10.12 Submission To Jurisdiction; Waivers......................................... 76 ----------------------------------- 10.13 Acknowledgements............................................................ 76 ---------------- 10.14 WAIVERS OF JURY TRIAL....................................................... 76 --------------------- 10.15 Confidentiality............................................................. 76 ---------------
SCHEDULES: 1.1A Commitments 1.1B Mortgaged Property 3.1 Existing Letters of Credit 4.1 Material Dispositions 4.4 Consents and Authorizations 4.6 Litigation 4.9 Intellectual Property Matters 4.15(a) Subsidiaries 4.15(b) Excluded Domestic Subsidiaries 4.17 Environmental Matters 4.19(a) UCC Filing Jurisdictions 4.19(b) Mortgage Filing Jurisdictions 4.22 Health Care Matters 7.2(d) Existing Indebtedness 7.3(f) Existing Liens 7.4(e) HRPT Permitted Dispositions 7.14 Existing Negative Pledges 7.15 Existing Subsidiary Restrictions EXHIBITS: A Form of Guarantee and Collateral Agreement B Form of Compliance Certificate C Form of Closing Certificate D Form of Mortgage E Form of Assignment and Acceptance F Form of Legal Opinion of Powell, Goldstein, Frazer & Murphy LLP G-1 Form of Term Note G-2 Form of Revolving Credit Note G-3 Form of Swing Line Note G-4 Form of Alternative Term Note G-5 Form of Alternative Revolving Credit Note H Form of Prepayment Option Notice CREDIT AGREEMENT, dated as of November 4, 1997, among PARAGON HEALTH NETWORK, INC., a Delaware corporation (the "Borrower"), the several banks and -------- other financial institutions or entities from time to time parties to this Agreement (the "Lenders"), NATIONSBANK, N.A., as documentation agent (in such ------- capacity, the "Documentation Agent"), and THE CHASE MANHATTAN BANK, as ------------------- Administrative Agent. The parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the terms listed in ------------- this Section 1.1 shall have the respective meanings set forth in this Section 1.1. "ABR": for any day, a rate per annum (rounded upwards, if necessary, --- to the next 1/16th of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per annum publicly ---------- announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors); "Base CD Rate" shall mean ------------ the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) a fraction, the numerator of which is one and the denominator of which is one minus the C/D Reserve Percentage and (b) the C/D Assessment Rate; "Three-Month ----------- Secondary CD Rate" shall mean, for any day, the secondary market rate for three- - ----------------- month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 A.M., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it; and "Federal Funds ------------- Effective Rate" shall mean, for any day, the weighted average of the rates on - -------------- overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans the rate of interest applicable to which is based upon --------- the ABR. "Acquisition": any acquisition, whether in a single transaction or series ----------- of related transactions, by the Borrower or any one or more of its Subsidiaries of (a) all or a substantial part of the assets, or of a business, unit or division, of any Person, whether through purchase of assets or securities, by merger or otherwise; (b) any Person that becomes a Subsidiary after giving effect to such acquisition; or (c) control (as defined in clause (b) of the definition of "Affiliate") of a partnership, joint venture or other Person. 2 "Adjustment Date": as defined in the Pricing Grid. --------------- "Administrative Agent": The Chase Manhattan Bank, together with its -------------------- affiliates, as the arranger of the Commitments and as the administrative agent, or collateral agent, as the case may be, for the Lenders under this Agreement and the other Loan Documents, together with any of its successors. "Affiliate": as to any Person, any other Person which, directly or --------- indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agreement": this Credit Agreement, as amended, supplemented or otherwise --------- modified from time to time. "Alternative Note": as defined in Section 10.6(f)(ii). ---------------- "Alternative Noteholder": as defined in Section 10.6(f)(ii). ---------------------- "Apollo Merger Sub": Apollo LCA Acquisition Corp., a Delaware corporation. ----------------- "Applicable Margin": for each Type of Loan, the rate per annum set forth ----------------- under the relevant column heading below:
Eurodollar ABR Loans Loans ---------- ----------- Revolving Credit Loans and Swing Line Loans 1.25% 2.25% Tranche A Term Loans 1.25% 2.25% Tranche B Term Loans 1.50% 2.50% Tranche C Term Loans 1.75% 2.75%
; provided, that on and after the first Adjustment Date occurring after March -------- 31, 1998, the Applicable Margin with respect to Revolving Credit Loans, Swing Line Loans and Tranche A Term Loans will be determined pursuant to the Pricing Grid and provided further, that the Applicable Margin with respect to the ---------------- Tranche B Term Loans and the Tranche C Term Loans shall be reduced by 0.25% during any period when the Consolidated Leverage Ratio reported on the most recent Adjustment Date is equal to or less than 4.50 to 1.00 as at the end of the relevant Reference Period (provided that such reduction will not apply during any period when a Default has occurred and is continuing under Section 6.1 or an Event of Default shall have occurred and be continuing). "Application": an application, in such form as the Issuing Lender may ----------- specify from time to time, requesting the Issuing Lender to open a Letter of Credit. "Asset Sale": any Disposition of Property or series of related ---------- Dispositions of Property (including the issuance of Capital Stock of any Subsidiary but excluding any Disposition of Property permitted by clause (a), (b), (c) or (d) of Section 7.5). "Asset Swap": as defined in Section 7.5(e). ---------- 3 "Assignee": as defined in Section 10.6(c). -------- "Assignor": as defined in Section 10.6(c). -------- "Assumed Debt": Indebtedness assumed in connection with an ------------ Acquisition made pursuant to Section 7.8(h), provided, that (a) such -------- Indebtedness is outstanding at the time of such Acquisition and was not Incurred in contemplation thereof, (b) the terms of such Indebtedness do not include a cross-default, cross-acceleration or similar provision in respect of any other Indebtedness of the Borrower or its Subsidiaries (other than any such provision that relates solely to other related Assumed Debt held by the same lender or group of lenders), (c) the terms of such Indebtedness do not permit an acceleration of such Indebtedness, or require a modification, redemption or prepayment of such Indebtedness, upon the occurrence of a change of control of the Borrower or the Subsidiary Incurring such Indebtedness and (d) recourse for repayment of such Indebtedness is limited to specified Property acquired pursuant to such Acquisition. "Attributable Debt": in respect of a Sale/Leaseback Transaction, as ----------------- at the time of determination, the present value (discounted at the interest rate assumed in making calculations in accordance with FAS 13) of the total obligations of the Borrower or the relevant Subsidiary, as lessee, for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended). "Available Revolving Credit Commitment": as to any Revolving Credit ------------------------------------- Lender at any time, an amount equal to the excess, if any, of (a) such Lender's Revolving Credit Commitment over (b) such Lender's Revolving Extensions of ---- Credit; provided, that in calculating any Lender's Revolving Extensions of -------- Credit for the purpose of determining such Lender's Available Revolving Credit Commitment pursuant to Section 2.8(a), the aggregate principal amount of Swing Line Loans then outstanding shall be deemed to be zero. "Board": the Board of Governors of the Federal Reserve System of the ----- United States (or any successor). "Borrowing Date": any Business Day specified by the Borrower as a -------------- date on which the Borrower requests the relevant Lenders to make Loans hereunder. "Business": as defined in Section 4.17(b). -------- "Business Day": a day other than a Saturday, Sunday or other day on ------------ which commercial banks in New York City are authorized or required by law to close. "Capital Expenditures": for any period, with respect to any Person, -------------------- the aggregate of all expenditures (other than those arising from Acquisitions made pursuant to Section 7.8) by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "Capital Expenditures (Discretionary)": with respect to any Person, ------------------------------------ any Capital Expenditures which do not constitute Capital Expenditures (Maintenance) of such Person. 4 "Capital Expenditures (Maintenance)": with respect to any Person, any ---------------------------------- Capital Expenditures made in the ordinary course of business for maintenance or upkeep of the assets of such Person. "Capital Lease Obligations": as to any Person, the obligations of ------------------------- such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or ------------- other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "Cash Equivalents": (a) marketable direct obligations issued by, or ---------------- unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than $500,000,000; (c) commercial paper of an issuer rated at least A-2 by Standard & Poor's Ratings Services ("S&P") or P-2 by Moody's Investors Service, Inc. ("Moody's"), or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; (d) repurchase agreements relating to investments described in clauses (a) through (c) above with a market value at least equal to the consideration paid in connection therewith, with any Person that regularly engages in the business of entering into repurchase agreements and has a combined capital surplus and undivided profit of not less than $500,000,000, if at the time of entering into such agreement the long-term unsecured debt securities of such Person are rated at least A by S&P or at least A2 by Moody's; (e) money market mutual funds with a daily right of redemption and a net asset value of $1.00 per share substantially all the assets of which are comprised of assets of the types described in clauses (a) through (d) above; and (f) investments pursuant to the Borrower's captive insurance programs made in compliance with applicable Requirements of Law, including Medicare regulations. "C/D Assessment Rate": for any day as applied to any ABR Loan, the ------------------- annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund maintained by the Federal Deposit Insurance Corporation (the "FDIC") classified as well-capitalized and within supervisory subgroup "B" (or a ---- comparable successor assessment risk classification) within the meaning of 12 C.F.R. (S) 327.4 (or any successor provision) to the FDIC (or any successor) for the FDIC's (or such successor's) insuring time deposits at offices of such institution in the United States. "C/D Reserve Percentage": for any day as applied to any ABR Loan, ---------------------- that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board, for determining the maximum reserve requirement for a Depositary Institution (as defined in Regulation D of the Board as in effect from time to time) in respect of new non-personal time deposits in Dollars having a maturity of 30 days or more. 5 "Closing Date": the date on which the conditions precedent set forth ------------ in Section 5.1 shall have been satisfied, which date shall be no later than November 17, 1997. "Code": the Internal Revenue Code of 1986, as amended from time to ---- time. "Collateral": all Property of the Loan Parties, now owned or ---------- hereafter acquired, upon which a Lien is purported to be created by any Security Document. "Collateral Agent": as defined in the Guarantee and Collateral ---------------- Agreement. "Collateral Agent Agreement": as defined in the Guarantee and -------------------------- Collateral Agreement. "Commitment": as to any Lender, the sum of the Tranche A Term Loan ---------- Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan Commitment and the Revolving Credit Commitment of such Lender. "Commitment Fee Rate": 1/2 of 1% per annum; provided, that on and ------------------- -------- after the first Adjustment Date occurring after the completion of two full fiscal quarters of the Borrower after the Closing Date, the Commitment Fee Rate will be determined pursuant to the Pricing Grid. "Commonly Controlled Entity": an entity, whether or not incorporated, -------------------------- which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "Compliance Certificate": a certificate duly executed by a ---------------------- Responsible Officer substantially in the form of Exhibit B. "Confidential Information Memorandum": the Confidential Information ----------------------------------- Memorandum dated September 1997 and furnished to the Lenders. "Consolidated Current Assets": at a particular date, all amounts --------------------------- (other than cash and Cash Equivalents) which would, in conformity with GAAP, be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of the Borrower and its Subsidiaries at such date. "Consolidated Current Liabilities": at a particular date, all amounts -------------------------------- which would, in conformity with GAAP, be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of the Borrower and its Subsidiaries at such date, but excluding (a) the current portion of any Funded Debt of the Borrower and its Subsidiaries and (b) without duplication of clause (a) above, all Indebtedness consisting of Revolving Credit Loans or Swing Line Loans to the extent otherwise included therein. "Consolidated EBITDA": for any period, Consolidated Net Income for ------------------- such period plus, without duplication and to the extent reflected as a charge in ---- the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary or non- recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets 6 outside of the ordinary course of business) or, with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, writeoffs or changes to the income statements increasing the amount of reserves, in an aggregate amount not to exceed $15,000,000, of accounts receivable of the Borrower and its Subsidiaries, (f) any other non-cash charges, (g) with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, fees and expenses related to the transactions contemplated by the Recapitalization Agreement (including conforming accounting adjustments) and the financing thereof in an aggregate amount equal to the lesser of the actual amount of such expenses and $122,000,000 and (h) with respect to the computation of the financial covenants contained in Section 7.1, for the Reference Period ending: (a) December 31, 1997, $12,000,000, (b) March 31, 1998, $9,000,000 and (c) June 30, 1998, $6,000,000, and minus, to the extent ----- included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other non-cash income, all as determined on a consolidated basis. "Consolidated EBITDAR": for any period, Consolidated EBITDA for such -------------------- period plus Consolidated Rent Expense for such period. ---- "Consolidated Fixed Charge Coverage Ratio": for any period, the ratio ---------------------------------------- of (a) Consolidated EBITDAR for such period less the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such period on account of Capital Expenditures (Maintenance) (excluding the principal amount of Indebtedness Incurred in connection with such expenditures) to (b) Consolidated Fixed Charges for such period. "Consolidated Fixed Charges": for any period, the sum (without -------------------------- duplication) of (a) Consolidated Interest Expense for such period (excluding noncash interest expense), (b) scheduled payments made during such period on account of principal of Indebtedness of the Borrower or any of its Subsidiaries (including the Term Loans) and (c) Consolidated Rent Expense for such period. "Consolidated Interest Coverage Ratio": for any period, the ratio of ------------------------------------ (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period. "Consolidated Interest Expense": for any period, total interest ----------------------------- expense (including that attributable to Capital Lease Obligations and noncash interest expense attributable to the Senior Subordinated Discount Notes referred to in the definition of Senior Subordinated Notes) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Protection Agreements to the extent such net costs are allocable to such period in accordance with GAAP, but excluding interest expense in respect of Indebtedness that is defeased substantially concurrently with the Closing Date to the extent such defeasance is financed with the Incurrence of Indebtedness), determined net of (a) cash interest income received by the Borrower or any of its Subsidiaries during such period and (b) cash dividends paid to the Borrower during such period in respect of common stock of HRPT owned by the Borrower or a Wholly Owned Subsidiary of the Borrower on the Closing Date. "Consolidated Leverage Ratio": as at the last day of any period, the --------------------------- ratio of (a) the sum of (i) Consolidated Total Debt on such day and (ii) obligations of the Borrower or any of its Subsidiaries 7 on such day under any synthetic leases to (b) the sum of (i) Consolidated EBITDA for such period and (ii) rental payments paid by the Borrower or any of its Subsidiaries for such period under any synthetic leases. "Consolidated Leverage Ratio Stepdown Date": the first date on which ----------------------------------------- the aggregate Purchase Prices of the type referred to in Section 7.8(h)(iii) expended and/or incurred in any fiscal year, combined with the aggregate amount of Capital Expenditures (Discretionary) made during such fiscal year (other than amounts permitted to be carried over from the immediately preceding fiscal year), exceeds $125,000,000 in reliance on the provisos contained in Sections 7.7 and 7.8(h). "Consolidated Net Income": for any period, the consolidated net ----------------------- income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided that there shall be -------- excluded therefrom (a) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (b) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary to the Borrower is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Subsidiary. "Consolidated Net Worth": as of the day of determination, all items ---------------------- which in conformity with GAAP would be included under shareholders' equity on a consolidated balance sheet of the Borrower and its Subsidiaries on such day, determined without giving effect to any reduction thereof resulting from (a) non-recurring noncash losses or (b) the acquisition in a transaction accounted for as a "pooling of interests" of a Person that (i) has undergone a recapitalization transaction within two years prior to the date of such acquisition (including, but not limited to a repurchase of its own Capital Stock) and (ii) has a negative net worth (but only to the extent such negative net worth resulted from such recapitalization). "Consolidated Rent Expense": for any period, the aggregate amount of ------------------------- fixed and contingent rentals payable by the Borrower or any of its Subsidiaries for such period with respect to leases of real and personal property, net of rental income from any subleases relating to any of the aforementioned leases, determined on a consolidated basis in accordance with GAAP. "Consolidated Total Debt": at any date, the aggregate principal ----------------------- amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "Consolidated Working Capital": the excess of Consolidated Current ---------------------------- Assets over Consolidated Current Liabilities. "Contractual Obligation": as to any Person, any provision of any ---------------------- security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. "Control Investment Affiliate": as to any Person, any other Person ---------------------------- which (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, 8 to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Default": any of the events specified in Section 8, whether or not ------- any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Disposition": with respect to any Property, any sale, lease, sale ----------- and leaseback, assignment, conveyance, transfer or other disposition thereof; and the terms "Dispose" and "Disposed of" shall have correlative meanings. ------- ----------- "Dollars" and "$": dollars in lawful currency of the United States of ------- - America. "Domestic Subsidiary": any Subsidiary of the Borrower organized under ------------------- the laws of any jurisdiction within the United States of America. "ECF Percentage": 75%; provided, that, with respect to each fiscal -------------- -------- year of the Borrower, the ECF Percentage shall be reduced to 50% if the Consolidated Leverage Ratio as of the last day of such fiscal year is not greater than 4.50 to 1.0. "Employee Loans": as defined in Section 7.8(d). -------------- "Employee Loan Outstanding Amount": as defined in Section 7.8(d). -------------------------------- "Environmental Laws": any and all foreign, Federal, state, local or ------------------ municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a --------------------------------- Eurodollar Loan made by any Lender, the aggregate (without duplication) of the maximum rates (expressed as a decimal) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System as actually incurred by such Lender. "Eurodollar Base Rate": with respect to each day during each Interest -------------------- Period pertaining to a Eurodollar Loan, the rate per annum equal to the rate at which the Administrative Agent is offered Dollar deposits at or about 10:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loans to be outstanding during such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is ---------------- based upon the Eurodollar Rate. 9 "Eurodollar Rate": with respect to each day during each Interest --------------- Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ----------------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Eurodollar Tranche": the collective reference to Eurodollar Loans ------------------ the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Event of Default": any of the events specified in Section 8, ---------------- provided that any requirement for the giving of notice, the lapse of time, or - -------- both, has been satisfied. "Excess Cash Flow": for any fiscal year of the Borrower, the excess, ---------------- if any, of (a) the sum, without duplication, of (i) Consolidated Net Income for such fiscal year, (ii) an amount equal to the amount of all non-cash charges deducted in arriving at such Consolidated Net Income, (iii) decreases in Consolidated Working Capital for such fiscal year provided that, with respect to -------- the fiscal year ending September 30, 1998 no change in Consolidated Working Capital during the fiscal quarter ending December 31, 1997 shall be included in such Excess Cash Flow calculation, and (iv) an amount equal to the aggregate net non-cash loss on the Disposition of Property by the Borrower and its Subsidiaries during such fiscal year (other than sales in the ordinary course of business), to the extent deducted in arriving at such Consolidated Net Income over (b) the sum, without duplication, of (i) an amount equal to the amount of - ---- all non-cash credits included in arriving at such Consolidated Net Income, (ii) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of Capital Expenditures (excluding the principal amount of Indebtedness Incurred in connection with such expenditures and any such expenditures financed with the proceeds of any Reinvestment Deferred Amount), (iii) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of Acquisitions made pursuant to Section 7.8(h) (excluding the principal amount of Indebtedness Incurred in connection with such Acquisitions and any such Acquisitions financed with the proceeds of any Reinvestment Deferred Amount), (iv) the aggregate amount of all prepayments of Revolving Credit Loans and Swing Line Loans during such fiscal year to the extent accompanying permanent optional reductions of the Revolving Credit Commitments and all optional prepayments of the Term Loans during such fiscal year, (v) the aggregate amount of all regularly scheduled principal payments of Funded Debt (including, without limitation, the Term Loans) of the Borrower and its Subsidiaries made during such fiscal year (other than in respect of any revolving credit facility to the extent there is not an equivalent permanent reduction in commitments thereunder), (vi) increases in Consolidated Working Capital for such fiscal year provided that, with respect to -------- the fiscal year ending September 30, 1998 no change in Consolidated Working Capital during the fiscal quarter ending December 31, 1997 shall be included in such Excess Cash Flow calculation and (vii) an amount equal to the aggregate net non-cash gain on the Disposition of Property by the Borrower and its Subsidiaries during such fiscal year (other than sales in the ordinary course of business), to the extent included in arriving at such Consolidated Net Income. "Excess Cash Flow Application Date": as defined in Section 2.11(c). --------------------------------- "Exchange Act": as defined in Section 8(1)(i). ------------ "Excluded Domestic Subsidiaries": the Domestic Subsidiaries listed on ------------------------------ Schedule 4.15(b), each of which is prohibited by applicable Requirements of Law or by any Contractual 10 Obligation from executing and delivering the Guarantee and Collateral Agreement or which is inactive and, in the case of prohibitions resulting from Contractual Obligations, with respect to which such Subsidiary, after using its commercially reasonable best efforts, is unable to obtain a consent or waiver from the holder of such contractual obligation to such execution and delivery, and deems it materially detrimental to prepay the Indebtedness to which such Contractual Obligations relate, provided, that in no event shall PHCMI or any of its -------- Subsidiaries be required to seek the consent of Omega. "Excluded Foreign Subsidiaries": any Foreign Subsidiary the pledge of ----------------------------- all of whose Capital Stock as Collateral would, in the good faith judgment of the Borrower, result in adverse tax consequences to the Borrower or any of its Subsidiaries. "Facility": each of (a) the Tranche A Term Loan Commitments and the -------- Tranche A Term Loans made thereunder (the "Tranche A Term Loan Facility"), (b) ---------------------------- the Tranche B Term Loan Commitments and the Tranche B Term Loans made thereunder (the "Tranche B Term Loan Facility"), (c) the Tranche C Term Loan Commitments ---------------------------- and the Tranche C Term Loans made thereunder (the "Tranche C Term Loan ------------------- Facility") and (d) the Revolving Credit Commitments and the extensions of revolving credit made thereunder (the "Revolving Credit Facility"). ------------------------- "Federal Funds Effective Rate": as defined in the definition of ABR. ---------------------------- "Foreign Subsidiary": any Subsidiary of the Borrower that is not a ------------------ Domestic Subsidiary. "Funded Debt": as to any Person, all Indebtedness of such Person that ----------- matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendable, at the option of such Person, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders thereunder to extend credit during a period of more than one year from such date, including, without limitation, all current maturities and current sinking fund payments in respect of such Indebtedness whether or not required to be paid within one year from the date of its creation and, in the case of the Borrower, Indebtedness in respect of the Loans. "GAAP": generally accepted accounting principles in the United States ---- of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board and the rules and regulations of the Securities and Exchange Commission, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances of the Borrower as of the date of determination, except that for purposes of Section 7.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements delivered pursuant to Section 4.1(b). In the event that any "Accounting Change" (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Borrower and the Administrative Agent agree to enter into negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating the Borrower's financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. Until such time as such an amendment shall have been executed and delivered by the Borrower, the Administrative Agent and the Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Changes had not occurred. "Accounting ---------- Changes" refers to changes in accounting principles required by the promulgation - ------- of any rule, regulation, pronouncement 11 or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants or, if applicable, the Securities and Exchange Commission (or successors thereto or agencies with similar functions). "Governmental Authority": any nation or government, any state or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government (including, without limitation, the National Association of Insurance Commissioners). "GranCare": GranCare, Inc., a Delaware corporation, formerly known as -------- New GranCare, Inc. "Guarantee and Collateral Agreement": the Guarantee and Collateral ---------------------------------- Agreement to be executed and delivered by the Borrower and each Subsidiary Guarantor, substantially in the form of Exhibit A, as the same may be amended, supplemented or otherwise modified from time to time. "Guarantee Obligation": as to any Person (the "guaranteeing person"), -------------------- ------------------- any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit), to induce the creation of which, the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") ------------------- of any other third Person (the "primary obligor") in any manner, whether --------------- directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase Property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term -------- ------- Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Health Care Facility": any ownership interest in a facility which -------------------- provides any level of geriatric care, home care, medical care (including, without limitation, sub-acute care), assisted living or rehabilitative services, whether licensed as a skilled nursing facility, intermediate care facility, personal care facility, out-patient clinic or hospital (including, without limitation, any long-term acute care hospital) or any products or services reasonably related thereto. "Health Care Permit": every accreditation, authorization, certificate ------------------ of need, license or permit that is required by any applicable Governmental Authority to own, lease, operate or manage a Health Care Facility of the Borrower or any of its Subsidiaries. 12 "HRPT": Health and Retirement Properties Trust. ---- "HRPT Transaction Documents": as defined in the Restructure and Asset -------------------------- Exchange Agreement, dated as of November 4, 1997, among HRPT, the Borrower, AMS Properties, Inc., and GCI Health Care Centers, Inc. "Incur": as defined in Section 7.2; and the terms "Incurred" and ----- -------- "Incurrence" shall have correlative meanings. - ----------- "Indebtedness": of any Person at any date, without duplication, (a) ------------ all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of Property or services (other than current trade payables incurred in the ordinary course of such Person's business or trade payables which, though not current, are being contested in good faith by such Person), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person, (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party under acceptance, letter of credit or similar facilities, (g) all obligations of such Person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Capital Stock (other than common stock) of such Person, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above; (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on Property (including, without limitation, accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation; (j) to the extent not reflected in any of the foregoing any obligation (as primary obligor or guarantor) of such Person under any synthetic lease by such Person or any of its Subsidiaries; and (k) for the purposes of Section 8(e) only, all obligations of such Person in respect of Interest Rate Protection Agreements. "Insolvency": with respect to any Multiemployer Plan, the condition ---------- that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. --------- "Intellectual Property": the collective reference to all rights, --------------------- priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Interest Payment Date": (a) as to any ABR Loan, the last day of each --------------------- March, June, September and December and the final maturity date in respect thereof, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Loan (other than any Revolving Credit Loan that is an ABR Loan and any Swing Line Loan), the date of any repayment or prepayment made in respect thereof. "Interest Period": as to any Eurodollar Loan, (a) initially, the --------------- period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, 13 two, three, six or (if available to all Lenders under the relevant Facility) twelve months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three, six or (if available to all Lenders under the relevant Facility) twelve months thereafter, as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the -------- foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period with respect to a Revolving Credit Loan, a Tranche A Term Loan, a Tranche B Term Loan or a Tranche C Term Loan that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Tranche A Term Loans, the Tranche B Term Loans or the Tranche C Term Loans, as the case may be, shall end on the Revolving Credit Termination Date or such due date, as applicable; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iv) the Borrower shall use its commercially reasonable efforts to select Interest Periods so as not to require a scheduled payment of any Eurodollar Loan during an Interest Period for such Loan. "Interest Rate Protection Agreement": any interest rate protection ---------------------------------- agreement, interest rate futures contract, interest rate option, interest rate cap or other interest rate hedge arrangement, to or under which the Borrower or any of its Subsidiaries is a party or a beneficiary on the date hereof or becomes a party or a beneficiary after the date hereof. "Issuing Lender": the collective reference to (a) The Chase Manhattan -------------- Bank or any of its Affiliates and (b) one other Revolving Credit Lender (together with any of its Affiliates) selected by the Borrower with the approval of the Administrative Agent, in each case in its capacity as issuer of any Letter of Credit. "L/C Commitment": $50,000,000. -------------- "L/C Fee Payment Date": the last day of each March, June, September -------------------- and December and the last day of the Revolving Credit Commitment Period. "L/C Obligations": at any time, an amount equal to the sum of (a) the --------------- aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.5. "L/C Participants": the collective reference to all the Revolving ---------------- Credit Lenders other than the Issuing Lender. 14 "LCA": Living Centers of America, Inc., a Delaware corporation, --- which, after consummation of the Recapitalization, will be known as Paragon Health Network, Inc. "LCA Merger Sub": LCA Acquisition Sub, Inc., a Delaware corporation. -------------- "Letters of Credit": as defined in Section 3.1(a). ----------------- "Lien": any mortgage, pledge, hypothecation, assignment, deposit ---- arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing). "Loan": any loan made by any Lender pursuant to this Agreement. ---- "Loan Documents": this Agreement, the Security Documents, the -------------- Collateral Agent Agreement and the Notes. "Loan Parties": the Borrower and each Subsidiary of the Borrower ------------ which is a party to a Loan Document. "Majority Facility Lenders": with respect to any Facility, the ------------------------- holders of more than 50% of the aggregate unpaid principal amount of the Term Loans or the Total Revolving Extensions of Credit, as the case may be, outstanding under such Facility (or, in the case of the Revolving Credit Facility, prior to any termination of the Revolving Credit Commitments, the holders of more than 50% of the Total Revolving Credit Commitments). "Majority Revolving Credit Facility Lenders": the Majority Facility ------------------------------------------ Lenders in respect of the Revolving Credit Facility. "Material Adverse Effect": a material adverse effect on (a) the ----------------------- business, assets, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Material Environmental Amount": an amount payable by the Borrower ----------------------------- and/or its Subsidiaries in excess of $10,000,000 for remedial costs, compliance costs, compensatory damages, punitive damages, fines or penalties in connection with any Environmental Law, or any combination thereof. "Material Lease": any lease agreement with respect to a Health Care -------------- Facility or Health Care Facilities for which either (a) total revenues for such Health Care Facility or Health Care Facilities for the most recent Reference Period for which the relevant financial information is available represent 3% or more of the consolidated revenues of the Borrower and its Subsidiaries during such Reference Period or (b) the portion of Consolidated EBITDA contributed by the operation of such Health Care Facility or Health Care Facilities for the most recent Reference Period for which the relevant financial information is available represents 3% or more of Consolidated EBITDA during such Reference Period. "Materials of Environmental Concern": any gasoline or petroleum ---------------------------------- (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, 15 defined or regulated as such in or under or that could result in liability under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Mortgaged Properties": the real properties listed on Schedule 1.1B, -------------------- as to which the Collateral Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages. "Mortgages": each of the mortgages, deeds to secure debt and deeds of --------- trust made by any Loan Party in favor of, or for the benefit of, the Collateral Agent for the benefit of the Lenders, substantially in the form of Exhibit D (with such changes thereto as shall be advisable under the law of the jurisdiction in which such mortgage or deed of trust is to be recorded), as the same may be amended, supplemented or otherwise modified from time to time. "Multiemployer Plan": a Plan which is a multiemployer plan as defined ------------------ in Section 4001(a)(3) of ERISA. "Net Cash Proceeds": (a) in connection with any Asset Sale or any ----------------- Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Asset Sale or Recovery Event, net of attorneys' fees, accountants' fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset which is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith and net of taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (b) in connection with any issuance or sale of equity securities or debt securities or instruments or the incurrence of loans, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "New PHCMI Subsidiary": any Wholly Owned Subsidiary created or -------------------- acquired by PHCMI after the Closing Date which shall become the lessee of any Substitute Omega Property. "Non-Excluded Taxes": as defined in Section 2.19(a). ------------------ "Non-U.S. Lender": as defined in Section 2.19(b). --------------- "Notes": the collective reference to any promissory note evidencing ----- Loans. "Obligations": the unpaid principal of and interest on (including, ----------- without limitation, interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Administrative Agent or to any Lender (or, in the case of Interest Rate Protection Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Interest Rate Protection Agreement entered into with any Lender or any affiliate of any Lender or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, 16 indemnities, costs, expenses (including, without limitation, all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise. "Old GranCare": GranCare, Inc., a California corporation, and formerly ------------ the parent company of GranCare. "Omega": Omega Healthcare Investors, Inc., a Maryland corporation. ----- "Omega Letter of Credit": the $9,000,000 letter of credit issued by ---------------------- First Union National Bank for the benefit of Omega and for the account of GranCare, or any Letter of Credit issued in replacement thereof by the Issuing Lender for the benefit of Omega and for the account of the Borrower. "Participant": as defined in Section 10.6(b). ----------- "PBGC": the Pension Benefit Guaranty Corporation established pursuant ---- to Subtitle A of Title IV of ERISA (or any successor). "Permitted Acquisitions": as defined in Section 7.8(h). ---------------------- "Permitted Investors": the collective reference to the Sponsor and ------------------- its Control Investment Affiliates. "Person": an individual, partnership, corporation, limited liability ------ company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "PHCMI": Professional Health Care Management, Inc., a Michigan ----- corporation and a Wholly Owned Subsidiary of GranCare. "Plan": at a particular time, any employee benefit plan which is ---- covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pricing Grid": the pricing grid attached hereto as Annex A. ------------ "Pro Forma Balance Sheet": as defined in Section 4.1(a). ----------------------- "Projections": as defined in Section 6.2(c). ----------- "Property": any right or interest in or to property of any kind -------- whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Capital Stock. "Purchase Price": with respect to any Acquisition, the sum (without -------------- duplication) of (a) the amount of cash paid by the Borrower and its Subsidiaries in connection with such Acquisition, (b) the sum of (i) the value (as determined for purposes of such Acquisition in accordance with the applicable acquisition agreement) of all Capital Stock of the Borrower issued or given as consideration in connection with such Acquisition and (ii) the Qualified Net Cash Equity Proceeds applied to finance such Acquisition, (c) the principal amount (or, if less, the accreted value) at the time of such Acquisition 17 of all Indebtedness incurred, assumed or acquired by Borrower and its Subsidiaries in connection with such Acquisition, (d) all additional purchase price amounts in connection with such Acquisition in the form of earnouts, deferred purchase price and other contingent obligations that should be recorded as a liability on the balance sheet of the Borrower and its Subsidiaries in accordance with GAAP, Regulation S-X under the Securities Act of 1933, as amended, or any other rule or regulation of the United States Securities and Exchange Commission, (e) all amounts paid by the Borrower and its Subsidiaries in respect of covenants not to compete, consulting agreements and other affiliated contracts in connection with such Acquisition, and (f) the aggregate fair market value of all other consideration given by the Borrower and its Subsidiaries in connection with such Acquisition. "Qualified Net Cash Equity Proceeds": the Net Cash Proceeds of any ---------------------------------- offering of Capital Stock of the Borrower so long as (a) such offering was made in express contemplation of an Acquisition, (b) such Capital Stock is not mandatorily redeemable and (c) such Acquisition is consummated within 90 days after receipt by the Borrower of such Net Cash Proceeds. "Recapitalization": as defined in Section 5.1(b). ---------------- "Recapitalization Agreement": the collective reference to (i) the -------------------------- Amended and Restated Agreement and Plan of Merger, dated as of September 17, 1997, among the Sponsor, Apollo LCA Acquisition Corporation and LCA and (ii) the Amended and Restated Agreement and Plan of Merger, dated as of September 17, 1997, among LCA, Grancare and the Sponsor, as each of the same is amended, restated, supplemented or otherwise modified from time to time in accordance with the terms hereof. "Recovery Event": any settlement of or payment in respect of any -------------- property or casualty insurance claim or any condemnation proceeding relating to any asset of the Borrower or any of its Subsidiaries. "Reference Period": with respect to any date, means the period of ---------------- four consecutive fiscal quarters of the Borrower immediately preceding such date or, if such date is the last day of a fiscal quarter, ending on such date. "Refunded Swing Line Loans": as defined in Section 2.7(b). ------------------------- "Refunding Date": as defined in Section 2.7(c). -------------- "Register": as defined in Section 10.6(d). -------- "Regulation U": Regulation U of the Board as in effect from time to ------------ time. "Reimbursement Obligation": the obligation of the Borrower to ------------------------ reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit. "Reinvestment Deferred Amount": with respect to any Reinvestment ---------------------------- Event, the aggregate Net Cash Proceeds received by the Borrower or any of its Subsidiaries in connection therewith which are not applied to prepay the Term Loans pursuant to Section 2.11(b) as a result of the delivery of a Reinvestment Notice. "Reinvestment Event": any Asset Sale or Recovery Event in respect of ------------------ which the Borrower has delivered a Reinvestment Notice. 18 "Reinvestment Notice": a written notice executed by a Responsible ------------------- Officer stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through a Subsidiary) intends and expects to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or Recovery Event to acquire or improve assets useful in its business (including by way of making Capital Expenditures (Discretionary)) or, in the case of a Recovery Event only, to repair, restore, rebuild or replace the Property which was the subject of the Recovery Event. "Reinvestment Prepayment Amount": with respect to any Reinvestment ------------------------------ Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire or improve assets useful in the Borrower's business (including by way of making Capital Expenditures (Discretionary)). "Reinvestment Prepayment Date": with respect to any Reinvestment ---------------------------- Event, the earlier of (a) the date occurring twelve months after such Reinvestment Event (or, in the case of a Recovery Event with respect to which repair, rebuilding or replacement of the Property which was the subject of the Recovery Event can be completed but not within such twelve-month period, such longer period as may be required to complete such repair, rebuilding or replacement so long as Borrower or its applicable Subsidiary shall have expended at least 50% of the property or casualty insurance proceeds received in connection with such Recovery Event for the repair, rebuilding or replacement of such Property within twelve months of such Recovery Event and diligently prosecutes to complete such repair, rebuilding or replacement), and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire assets useful in the Borrower's business with all or any portion of the relevant Reinvestment Deferred Amount, or, in the case of a Recovery Event only, to repair, restore, rebuild or replace the Property which was the subject of the Recovery Event. "Related Fund": with respect to any Lender that is a fund that ------------ invests in loans, any other fund that invests in loans and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "Reorganization": with respect to any Multiemployer Plan, the -------------- condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ---------------- ERISA, other than those events as to which the thirty day notice period is waived under subsection .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. (S) 4043. "Required Lenders": the holders of more than 50% of (a) until the ---------------- Closing Date, the Commitments and (b) thereafter, the sum of (i) the aggregate unpaid principal amount of the Term Loans and (ii) the Total Revolving Credit Commitments or, if the Revolving Credit Commitments have been terminated, the Total Revolving Extensions of Credit. "Required Prepayment Lenders": the Majority Facility Lenders in --------------------------- respect of each Facility. "Requirement of Law": as to any Person, the Certificate or Articles ------------------ of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. 19 "Responsible Officer": the chief executive officer, president, chief ------------------- financial officer or treasurer of the Borrower, but in any event, with respect to financial matters, the chief financial officer or treasurer of the Borrower. "Revolving Credit Commitment": as to any Lender, the obligation of --------------------------- such Lender, if any, to make Revolving Credit Loans and participate in Swing Line Loans and Letters of Credit, in an aggregate principal and/or face amount not to exceed the amount set forth under the heading "Revolving Credit Commitment" opposite such Lender's name on Schedule 1.1A, as the same may be changed from time to time pursuant to the terms hereof. The original amount of the Total Revolving Credit Commitments is $150,000,000. "Revolving Credit Commitment Period": the period from and including ---------------------------------- the Closing Date to the Revolving Credit Termination Date. "Revolving Credit Lender": each Lender which has a Revolving Credit ----------------------- Commitment or which has made Revolving Credit Loans or other Revolving Extensions of Credit. "Revolving Credit Loans": as defined in Section 2.4. ---------------------- "Revolving Credit Percentage": as to any Revolving Credit Lender at --------------------------- any time, the percentage which such Lender's Revolving Credit Commitment then constitutes of the Total Revolving Credit Commitments (or, at any time after the Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Extensions of Credit then outstanding constitutes of the aggregate principal amount of the Revolving Extensions of Credit then outstanding). "Revolving Credit Termination Date": the earlier of (a) the Scheduled --------------------------------- Revolving Credit Termination Date and (b) the date on which the Revolving Credit Commitments shall terminate as provided herein. "Revolving Extensions of Credit": as to any Revolving Credit Lender ------------------------------ at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding, (b) such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding and (c) such Lender's Revolving Credit Percentage of the aggregate principal amount of Swing Line Loans then outstanding. "Sale/Leaseback Transaction": as defined in Section 7.11. -------------------------- "Scheduled Revolving Credit Termination Date": March 31, 2004. ------------------------------------------- "Security Documents": the collective reference to the Guarantee and ------------------ Collateral Agreement, the Mortgages and all other security documents now or hereafter delivered to the Administrative Agent granting a Lien on any Property of any Person to secure, among other things, the obligations and liabilities of any Loan Party under any Loan Document. "Senior Subordinated Note Indenture": the collective reference to the ---------------------------------- Indentures entered into by the Borrower in connection with the issuance of the Senior Subordinated Notes, as the same may be amended, supplemented or otherwise modified from time to time in accordance with Section 7.9. 20 "Senior Subordinated Notes": the collective reference to the Senior ------------------------- Subordinated Notes of the Borrower due 2007 and the Senior Subordinated Discount Notes of the Borrower due 2007, in each case issued on the Closing Date, as the same may be amended, supplemented or otherwise modified from time to time in accordance with Section 7.9. "Single Employer Plan": any Plan which is covered by Title IV of -------------------- ERISA, but which is not a Multiemployer Plan. "Solvent": when used with respect to any Person, means that, as of ------- any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the probable liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "Specified Change of Control": a "Change of Control" as defined in --------------------------- the Senior Subordinated Note Indenture. "Specified Facilities": as defined in Section 4.17(a). -------------------- "Sponsor": Apollo Management, L.P, a Delaware limited partnership. ------- "Subsidiary": as to any Person, a corporation, partnership, limited ---------- liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Subsidiary Guarantor": each Subsidiary of the Borrower other than -------------------- any Excluded Domestic Subsidiary and any Excluded Foreign Subsidiary. "Substitute Omega Property": any Health Care Facility and related ------------------------- personal property conveyed to PHCMI after the Closing Date (which Health Care Facility may be leased to a New PHCMI Subsidiary), which Health Care Facility is or becomes encumbered by a mortgage, deed to secure debt or deed of trust in favor of Omega, for the purpose of serving as substitute collateral for the obligations of PHCMI to Omega, in exchange for the surrender by Omega of the Omega Letter of Credit; provided that the Substitute Omega Property shall not, -------- in the aggregate, (i) represent more than $3,500,000 of the 21 Borrower's Consolidated EBITDA for the most recent Reference Period for which the relevant financial information is available or (ii) have a maximum aggregate capacity in excess of 600 beds. "Swing Line Commitment": the obligation of the Swing Line Lender to --------------------- make Swing Line Loans pursuant to Section 2.6 in an aggregate principal amount at any one time outstanding not to exceed $35,000,000. "Swing Line Lender": The Chase Manhattan Bank, in its capacity as the ----------------- lender of Swing Line Loans. "Swing Line Loans": as defined in Section 2.6. ---------------- "Swing Line Participation Amount": as defined in Section 2.7(c). ------------------------------- "Term Loan Lenders": the collective reference to the Tranche A Term ----------------- Loan Lenders, the Tranche B Term Loan Lenders and the Tranche C Term Loan Lenders. "Term Loans": the collective reference to the Tranche A Term Loans, ---------- Tranche B Term Loans and Tranche C Term Loans. "Total Revolving Credit Commitments": at any time, the aggregate ---------------------------------- amount of the Revolving Credit Commitments at such time. "Total Revolving Extensions of Credit": at any time, the aggregate ------------------------------------ amount of the Revolving Extensions of Credit of the Revolving Credit Lenders at such time. "Tranche A Term Loan": as defined in Section 2.1. ------------------- "Tranche A Term Loan Commitment": as to any Tranche A Term Loan ------------------------------ Lender, the obligation of such Lender, if any, to make a Tranche A Term Loan to the Borrower hereunder in a principal amount equal to the amount set forth under the heading "Tranche A Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche A Term Loan Commitments is $240,000,000. "Tranche A Term Loan Lender": each Lender which has a Tranche A Term -------------------------- Loan Commitment or which has made a Tranche A Term Loan. "Tranche A Term Loan Percentage": as to any Tranche A Term Loan ------------------------------ Lender at any time, the percentage which such Lender's Tranche A Term Loan Commitment then constitutes of the aggregate Tranche A Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche A Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche A Term Loans then outstanding). "Tranche B Term Loan": as defined in Section 2.1. ------------------- "Tranche B Term Loan Commitment": as to any Tranche B Term Loan ------------------------------ Lender, the obligation of such Lender, if any, to make a Tranche B Term Loan to the Borrower hereunder in a principal amount equal to the amount set forth under the heading "Tranche B Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche B Term Loan Commitments is $250,000,000. 22 "Tranche B Term Loan Lender": each Lender which has a Tranche B Term -------------------------- Loan Commitment or which has made a Tranche B Term Loan. "Tranche B Term Loan Percentage": as to any Tranche B Term Loan ------------------------------ Lender at any time, the percentage which such Lender's Tranche B Term Loan Commitment then constitutes of the aggregate Tranche B Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche B Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche B Term Loans then outstanding). "Tranche C Term Loan": as defined in Section 2.1. ------------------- "Tranche C Term Loan Commitment": as to any Tranche C Term Loan ------------------------------ Lender, the obligation of such Lender, if any, to make a Tranche C Term Loan to the Borrower hereunder in a principal amount equal to the amount set forth under the heading "Tranche C Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche C Term Loan Commitments is $250,000,000. "Tranche C Term Loan Lender": each Lender which has a Tranche C Term -------------------------- Loan Commitment or which has made a Tranche C Term Loan. "Tranche C Term Loan Percentage": as to any Tranche C Term Loan ------------------------------ Lender at any time, the percentage which such Lender's Tranche C Term Loan Commitment then constitutes of the aggregate Tranche C Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche C Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche C Term Loans then outstanding). "Transferee": as defined in Section 10.15. ---------- "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar ---- Loan. "Uniform Customs": the Uniform Customs and Practice for Documentary --------------- Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "U.S. Taxes": as defined in Section 10.6(f)(ii). ---------- "Voting Stock": with respect to any Person, any class or series of ------------ Capital Stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of stockholders called for such purpose, without the occurrence of any additional event or contingency. "Wholly Owned Subsidiary": as to any Person, any other Person all of ----------------------- the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. "Wholly Owned Subsidiary Guarantor": any Subsidiary Guarantor that is --------------------------------- a Wholly Owned Subsidiary of the Borrower and whose Guarantee Obligations under the Guarantee and Collateral Agreement have not been subordinated to any other Indebtedness. 23 1.2 Other Definitional Provisions. (a) Unless otherwise specified ----------------------------- therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) For the purposes of calculating Consolidated EBITDA for any Reference Period pursuant to any determination of the Consolidated Leverage Ratio, (i) if at any time during such Reference Period the Borrower or any Subsidiary shall have made any Material Disposition, the Consolidated EBITDA for such Reference Period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the Property which is the subject of such Material Disposition for such Reference Period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such Reference Period; (ii) if during such Reference Period the Borrower or any Subsidiary shall have made a Material Acquisition, Consolidated EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto as if such --- ----- Material Acquisition occurred on the first day of such Reference Period; and (iii) if during such Reference Period any Person that subsequently became a Subsidiary or was merged with or into the Borrower or any Subsidiary since the beginning of such Reference Period shall have entered into any disposition or acquisition transaction that would have required an adjustment pursuant to clause (i) or (ii) above if made by the Borrower or a Subsidiary during such Reference Period, Consolidated EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto as if such transaction occurred --- ----- on the first day of such Reference Period. As used in this paragraph, "Material Acquisition" means any acquisition of Property or series of related acquisitions of Property (including by way of merger) which (a) constitutes assets comprising all or substantially all of a facility or an operating unit of a business or constitutes all or substantially all of the common stock of a Person and (b) involves the payment of consideration by the Borrower and its Subsidiaries (valued at the initial principal amount thereof in the case of non-cash consideration consisting of notes or other debt securities and valued at fair market value in the case of other non-cash consideration) in excess of $3,000,000; and "Material Disposition" means any Disposition of Property or series of related Dispositions of Property which yields gross proceeds to the Borrower or any of its Subsidiaries (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $3,000,000. (d) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (e) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 24 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Term Loan Commitments. Subject to the terms and conditions --------------------- hereof, (a) each Tranche A Term Loan Lender severally agrees to make a term loan (a "Tranche A Term Loan") to the Borrower on the Closing Date in an amount equal ------------------- to the amount of the Tranche A Term Loan Commitment of such Lender, (b) each Tranche B Term Loan Lender severally agrees to make a term loan (a "Tranche B --------- Term Loan") to the Borrower on the Closing Date in an amount equal to the amount - --------- of the Tranche B Term Loan Commitment of such Lender and (c) each Tranche C Term Loan Lender severally agrees to make a term loan (a "Tranche C Term Loan") to ------------------- the Borrower on the Closing Date in an amount equal to the amount of the Tranche C Term Loan Commitment of such Lender. The Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.12. 2.2 Procedure for Term Loan Borrowing. The Borrower shall give the --------------------------------- Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 12:00 noon, New York City time, one Business Day prior to the anticipated Closing Date) requesting that the Term Loan Lenders make the Term Loans on the Closing Date and specifying the amount to be borrowed. The Term Loans made on the Closing Date shall initially be ABR Loans. Upon receipt of such notice the Administrative Agent shall promptly notify each Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the Closing Date each Term Loan Lender shall make available to the Administrative Agent at its office specified in Section 10.2 an amount in immediately available funds equal to the Term Loan or Term Loans to be made by such Lender. The Administrative Agent shall credit the account of the Borrower on the books of such office of the Administrative Agent with the aggregate of the amounts made available to the Administrative Agent by the Term Loan Lenders in immediately available funds. 2.3 Repayment of Term Loans. (a) The Tranche A Term Loan of each ----------------------- Tranche A Term Loan Lender shall be repayable in 22 consecutive quarterly installments on the last day of each December, March, June and September, commencing on December 31, 1998, each of which shall be in an amount equal to such Lender's Tranche A Term Loan Percentage multiplied by one-quarter of the amount set forth below opposite the period during which such installment is due or, in the case of the installments due from December 31, 2003 through March 31, 2004, one-half of the amount set forth below opposite the period during which such installment is due:
Period Principal Amount ------ ---------------- December 31, 1998 through September 30, 1999 $22,500,000 December 31, 1999 through September 30, 2000 $45,000,000 December 31, 2000 through September 30, 2001 $47,500,000 December 31, 2001 through September 30, 2002 $47,500,000 December 31, 2002 through September 30, 2003 $52,500,000 December 31, 2003 through March 31, 2004 $25,000,000
(b) The Tranche B Term Loan of each Tranche B Term Loan Lender shall be repayable in 26 consecutive quarterly installments on the last day of each December, March, June and September, commencing on December 31, 1998, each of which shall be in an amount equal to such Lender's Tranche B Term Loan Percentage multiplied by one-quarter of the amount set forth below opposite the period during which such installment is due or, in the case of the installments due from December 31, 2004 through March 31, 2005, one-half of the amount set forth below opposite the period during which such installment is due: 25
Period Principal Amount ------ ---------------- December 31, 1998 through September 30, 1999 $ 2,000,000 December 31, 1999 through September 30, 2000 $ 2,000,000 December 31, 2000 through September 30, 2001 $ 2,000,000 December 31, 2001 through September 30, 2002 $ 2,000,000 December 31, 2002 through September 30, 2003 $ 2,000,000 December 31, 2003 through September 30, 2004 $159,000,000 December 31, 2004 through March 31, 2005 $ 81,000,000
(c) The Tranche C Term Loan of each Tranche C Term Loan Lender shall be repayable in 30 consecutive quarterly installments on the last day of each December, March, June and September, commencing on December 31, 1998, each of which shall be in an amount equal to such Lender's Tranche C Term Loan Percentage multiplied by one-quarter of the amount set forth below opposite the period during which such installment is due or, in the case of the installments due from December 31, 2005 through March 31, 2006, one-half of the amount set forth below opposite the period during which such installment is due:
Period Principal Amount ------ ---------------- December 31, 1998 through September 30, 1999 $ 2,000,000 December 31, 1999 through September 30, 2000 $ 2,000,000 December 31, 2000 through September 30, 2001 $ 2,000,000 December 31, 2001 through September 30, 2002 $ 2,000,000 December 31, 2002 through September 30, 2003 $ 2,000,000 December 31, 2003 through September 30, 2004 $ 2,000,000 December 31, 2004 through September 30, 2005 $158,000,000 December 31, 2005 through March 31, 2006 $ 80,000,000
2.4 Revolving Credit Commitments. (a) Subject to the terms and ---------------------------- conditions hereof, each Revolving Credit Lender severally agrees to make revolving credit loans ("Revolving Credit Loans") to the Borrower from time to ---------------------- time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Credit Percentage of the sum of (i) the L/C Obligations then outstanding and (ii) the aggregate principal amount of the Swing Line Loans then outstanding, does not exceed the amount of such Lender's Revolving Credit Commitment. During the Revolving Credit Commitment Period the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof; provided, however, that up to $25,000,000 of the Revolving Credit Loans and - -------- ------- Swing Line Loans may be used to finance a portion of the Recapitalization and to pay related fees and expenses. The Revolving Credit Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.5 and 2.12, provided that -------- no Revolving Credit Loan shall be made as a Eurodollar Loan or converted to a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. (b) The Borrower shall repay all outstanding Revolving Credit Loans on the Revolving Credit Termination Date. 2.5 Procedure for Revolving Credit Borrowing. The Borrower may ---------------------------------------- borrow under the Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day, 26 provided that the Borrower shall give the Administrative Agent irrevocable - -------- notice (which notice must be received by the Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of ABR Loans), specifying (i) the amount and Type of Revolving Credit Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Borrowing notices pursuant to this Section 2.5 may be given by telephone so long as each such notice shall be confirmed promptly by delivery to the Administrative Agent of a written notice of borrowing. Subject to Section 3.5, each borrowing under the Revolving Credit Commitments shall be in an amount equal to (x) in the case of ABR Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then aggregate Available Revolving Credit Commitments are less than $5,000,000, such lesser amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof; provided, that the Swing Line Lender may request, on behalf of the -------- Borrower, borrowings under the Revolving Credit Commitments which are ABR Loans in other amounts pursuant to Section 2.7. Upon receipt of any such notice from the Borrower, the Administrative Agent shall promptly notify each Revolving Credit Lender thereof. Each Revolving Credit Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the - --- ---- account of the Borrower at the office of the Administrative Agent specified in Section 10.2 prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Revolving Credit Lenders and in like funds as received by the Administrative Agent. 2.6 Swing Line Commitment. (a) Subject to the terms and conditions --------------------- hereof, the Swing Line Lender agrees to make a portion of the credit otherwise available to the Borrower under the Revolving Credit Commitments from time to time during the Revolving Credit Commitment Period by making swing line loans ("Swing Line Loans") to the Borrower; provided that (i) the aggregate principal - ------------------ -------- amount of Swing Line Loans outstanding at any time shall not exceed the Swing Line Commitment then in effect (notwithstanding that the Swing Line Loans outstanding at any time, when aggregated with the Swing Line Lender's other outstanding Revolving Credit Loans hereunder, may exceed the Swing Line Commitment then in effect) and (ii) the Borrower shall not request, and the Swing Line Lender shall not make, any Swing Line Loan if, after giving effect to the making of such Swing Line Loan, the aggregate amount of the Available Revolving Credit Commitments would be less than zero. During the Revolving Credit Commitment Period, the Borrower may use the Swing Line Commitment by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof; provided, however, that up to $25,000,000 of the Revolving -------- ------- Credit Loans and Swing Line Loans may be used to finance a portion of the Recapitalization and to pay related fees and expenses. Swing Line Loans shall be ABR Loans only. (b) The Borrower shall repay all outstanding Swing Line Loans on the Revolving Credit Termination Date. 2.7 Procedure for Swing Line Borrowing; Refunding of Swing Line ----------------------------------------------------------- Loans. (a) Whenever the Borrower desires that the Swing Line Lender make Swing Line Loans it shall give the Swing Line Lender irrevocable telephonic notice confirmed promptly in writing (which telephonic notice must be received by the Swing Line Lender not later than 1:00 P.M., New York City time, on the proposed Borrowing Date), specifying (i) the amount to be borrowed and (ii) the requested Borrowing Date (which shall be a Business Day during the Revolving Credit Commitment Period). A copy of each such notice shall be promptly furnished by the Borrower to the Administrative Agent. Subject to Section 3.5, each borrowing under the Swing Line Commitment shall be in an amount equal to $500,000 or a 27 whole multiple of $100,000 in excess thereof. Not later than 3:00 P.M., New York City time, on the Borrowing Date specified in a notice in respect of Swing Line Loans, the Swing Line Lender shall make available to the Administrative Agent at its office specified in Section 10.2 an amount in immediately available funds equal to the amount of the Swing Line Loan to be made by the Swing Line Lender. The Administrative Agent shall make the proceeds of such Swing Line Loan available to the Borrower on such Borrowing Date by depositing such proceeds in the account of the Borrower with the Administrative Agent on such Borrowing Date in immediately available funds. (b) The Swing Line Lender, at any time and from time to time in its sole and absolute discretion may, on behalf of the Borrower (which hereby irrevocably directs the Swing Line Lender to act on its behalf), on one Business Day's notice given by the Swing Line Lender no later than 12:00 Noon, New York City time, request each Revolving Credit Lender to make, and each Revolving Credit Lender hereby agrees to make, a Revolving Credit Loan, in an amount equal to such Revolving Credit Lender's Revolving Credit Percentage of the aggregate amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on ------------------------- the date of such notice, to repay the Swing Line Lender. Each Revolving Credit Lender shall make the amount of such Revolving Credit Loan available to the Administrative Agent at its office set forth in Section 10.2 in immediately available funds, not later than 10:00 A.M., New York City time, one Business Day after the date of such notice. The proceeds of such Revolving Credit Loans shall be immediately applied by the Swing Line Lender to repay the Refunded Swing Line Loans. The Borrower irrevocably authorizes the Swing Line Lender to charge the Borrower's accounts with the Administrative Agent (up to the amount available in each such account) in order to immediately pay the amount of such Refunded Swing Line Loans to the extent amounts received from the Revolving Credit Lenders are not sufficient to repay in full such Refunded Swing Line Loans. (c) If prior to the time a Revolving Credit Loan would have otherwise been made pursuant to Section 2.7(b), one of the events described in Section 8(f) shall have occurred and be continuing with respect to the Borrower or if for any other reason, as determined by the Swing Line Lender in its sole discretion, Revolving Credit Loans may not be made as contemplated by Section 2.7(b), each Revolving Credit Lender shall, on the date such Revolving Credit Loan was to have been made pursuant to the notice referred to in Section 2.7(b) (the "Refunding Date"), purchase for cash an undivided participating interest in -------------- an amount equal to (i) its Revolving Credit Percentage times (ii) the aggregate ----- principal amount of Swing Line Loans then outstanding which were to have been repaid with such Revolving Credit Loans (the "Swing Line Participation Amount"). ------------------------------- (d) Whenever, at any time after the Swing Line Lender has received from any Revolving Credit Lender such Lender's Swing Line Participation Amount, the Swing Line Lender receives any payment on account of the Swing Line Loans, the Swing Line Lender will distribute to such Lender its Swing Line Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect such Lender's pro rata portion of such payment if such payment is not --- ---- sufficient to pay the principal of and interest on all Swing Line Loans then due); provided, however, that in the event that such payment received by the -------- ------- Swing Line Lender is required to be returned, such Revolving Credit Lender will return to the Swing Line Lender any portion thereof previously distributed to it by the Swing Line Lender. (e) Each Revolving Credit Lender's obligation to make the Loans referred to in Section 2.7(b) and to purchase participating interests pursuant to Section 2.7(c) shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any setoff, counterclaim, recoupment, defense or other right which such Revolving Credit Lender or the Borrower may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; 28 (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 5; (iii) any adverse change in the condition (financial or otherwise) of the Borrower; (iv) any breach of this Agreement or any other Loan Document by the Borrower, any other Loan Party or any other Revolving Credit Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. 2.8 Commitment Fees, etc. (a) The Borrower agrees to pay to the --------------------- Administrative Agent for the account of each Revolving Credit Lender a commitment fee for the period from and including the Closing Date to the last day of the Revolving Credit Commitment Period, computed at the Commitment Fee Rate on the average daily amount of the Available Revolving Credit Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the last day of each March, June, September and December and on the Revolving Credit Termination Date, commencing on the first of such dates to occur after the Closing Date. (b) The Borrower agrees to pay to the Administrative Agent the fees in the amounts and on the dates previously agreed to in writing by the Borrower. 2.9 Termination or Reduction of Revolving Credit Commitments. The -------------------------------------------------------- Borrower shall have the right, upon not less than three Business Days' notice to the Administrative Agent, to terminate the Revolving Credit Commitments or, from time to time, to reduce the amount of the Revolving Credit Commitments; provided -------- that no such termination or reduction of Revolving Credit Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans and Swing Line Loans made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Credit Commitments. Unless the Revolving Credit Commitments are being reduced in full, any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Revolving Credit Commitments then in effect. 2.10 Optional Prepayments. Subject to Section 2.17(d), the Borrower -------------------- may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon irrevocable notice delivered to the Administrative Agent at least three Business Days prior thereto in the case of Eurodollar Loans and at least one Business Day prior thereto in the case of ABR Loans, which notice shall specify the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or ABR Loans; provided, that if a -------- Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.20. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (except in the case of Revolving Credit Loans which are ABR Loans and Swing Line Loans) accrued interest to such date on the amount prepaid. Partial prepayments of Term Loans and Revolving Credit Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof. Partial prepayments of Swing Line Loans shall be in an aggregate principal amount of $100,000 or a whole multiple thereof. 2.11 Mandatory Prepayments. (a) Unless the Required Prepayment --------------------- Lenders shall otherwise agree, if any Capital Stock (other than (i) any Capital Stock issued by the Borrower to finance any Acquisition permitted by Section 7.8(h), subject to the limitations specified in clause (iv) thereof and the proviso at the end of said Section, and constituting payment of or issued to fund all or part of the Purchase Price for such Acquisition as described in clause (b) of the definition of Purchase Price, (ii) any Capital Stock issued to directors, officers or employees of the Borrower or any Subsidiary in connection with compensation programs and (iii) contributions made by any Permitted Investor to the common equity of the Borrower) or Indebtedness shall be issued or Incurred by the Borrower or any of its 29 Subsidiaries (excluding any Indebtedness Incurred in accordance with Section 7.2 as in effect on the Closing Date), an amount equal to 75%, in the case of any Capital Stock, or 100%, in the case of any such Indebtedness, of the Net Cash Proceeds thereof shall be applied promptly, but in any event within two Business Days after the date of such issuance or Incurrence, toward the prepayment of the Term Loans. (b) Unless the Required Prepayment Lenders shall otherwise agree, if on any date the Borrower or any of its Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or Recovery Event then, unless a Reinvestment Notice shall be delivered in respect thereof, 75% of such Net Cash Proceeds shall be applied within two Business Days after such date toward the prepayment of the Term Loans; provided, that, notwithstanding the foregoing, on each -------- Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Term Loans. (c) Unless the Required Prepayment Lenders shall otherwise agree, if, for any fiscal year of the Borrower commencing with the fiscal year ending September 30, 1998, there shall be Excess Cash Flow, the Borrower shall, on the relevant Excess Cash Flow Application Date, apply the ECF Percentage of such Excess Cash Flow toward the prepayment of the Term Loans. Each such prepayment shall be made on a date (an "Excess Cash Flow Application Date") no later than --------------------------------- five days after the earlier of (i) the date on which the financial statements of the Borrower referred to in Section 6.1(a), for the fiscal year with respect to which such prepayment is made, are required to be delivered to the Lenders and (ii) the date such financial statements are actually delivered. (d) Each prepayment of the Loans under Section 2.11 shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid and any amounts owing pursuant to Section 2.20. (e) All prepayments made pursuant to this Section 2.11 allocated to a particular Facility shall be applied, first, to ABR Loans outstanding ----- thereunder and, second, to Eurodollar Loans outstanding thereunder. ------ Notwithstanding anything to the contrary in this Section 2.11, in the event that a prepayment required by this Section would require the prepayment of a Eurodollar Loan prior to the end of the Interest Period then applicable thereto, the Borrower shall have the option to instead deposit the amount of such prepayment in an interest-bearing cash collateral account with the Administrative Agent, for application to the prepayment of the then outstanding Eurodollar Loans as the relevant Interest Periods expire, until the full amount required to be applied to prepay the Term Loans pursuant to this Section 2.11 has been so applied. (f) The requirements of this Section 2.11 shall be subject to the procedures specified in Section 2.17(d). 2.12 Conversion and Continuation Options. (a) The Borrower may elect ----------------------------------- from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be -------- made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election (which notice shall specify the length of the initial Interest Period therefor), provided that no ABR Loan under a particular Facility may be -------- converted into a Eurodollar Loan (i) when any Event of Default has occurred and is continuing and the Administrative Agent or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such conversions (and have notified the Borrower in writing of such 30 determination) or (ii) after the date that is one month prior to the final scheduled termination or maturity date of such Facility. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. (b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, provided -------- that no Eurodollar Loan under a particular Facility may be continued as such (i) when any Event of Default has occurred and is continuing and the Administrative Agent has or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such continuations (and have notified the Borrower in writing of such determination) or (ii) after the date that is one month prior to the final scheduled termination or maturity date of such Facility, and provided, further, that if the Borrower shall fail to give -------- ------- any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof. 2.13 Minimum Amounts and Maximum Number of Eurodollar Tranches. --------------------------------------------------------- Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions, continuations and optional prepayments of Eurodollar Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof and (b) no more than fifteen (15) Eurodollar Tranches shall be outstanding at any one time. 2.14 Interest Rates and Payment Dates. (a) Each Eurodollar Loan -------------------------------- shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Base Rate determined for such day plus the Applicable Margin. (b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR plus the Applicable Margin. (c) (i) If all or a portion of the principal amount of any Loan or Reimbursement Obligation shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), all outstanding Loans and Reimbursement Obligations (whether or not overdue) shall bear interest at a rate per annum which is equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section 2.14 plus 2% or (y) in the case of Reimbursement Obligations, the rate applicable to - ---- ABR Loans under the Revolving Credit Facility plus 2%, and (ii) if all or a ---- portion of any interest payable on any Loan or Reimbursement Obligation or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate applicable to ABR Loans under the relevant Facility plus 2% (or, in the case of any such other ---- amounts that do not relate to a particular Facility, the ABR plus 3.75%), in ---- each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section -------- 2.14 shall be payable from time to time on demand. 31 2.15 Computation of Interest and Fees. (a) Interest, fees and -------------------------------- commissions payable pursuant hereto shall be calculated on the basis of a 360- day year for the actual days elapsed, except that, with respect to ABR Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.14(a). 2.16 Inability to Determine Interest Rate. If prior to the first day ------------------------------------ of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Majority Facility Lenders in respect of the relevant Facility that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans under the relevant Facility requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans under the relevant Facility that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans under the relevant Facility shall be converted, on the first day of their respective Interest Periods, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans under the relevant Facility shall be made or continued as such, nor shall the Borrower have the right to convert Loans under the relevant Facility to Eurodollar Loans. 2.17 Pro Rata Treatment and Payments. (a) Each borrowing by the ------------------------------- Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Tranche A Term Loan Percentages, --- ---- Tranche B Term Loan Percentages, Tranche C Term Loan Percentages or Revolving Credit Percentages, as the case may be, of the relevant Lenders. (b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be applied pro rata --- ---- according to the respective outstanding principal amounts of the Term Loans then held by the Term Loan Lenders (except as otherwise provided in paragraph (d) below). The amount of each principal payment of the Term Loans made pursuant to 32 Section 2.10 or 2.11 shall be applied to reduce each of the then remaining installments of the Tranche A Term Loans, Tranche B Term Loans and Tranche C Term Loans, as the case may be, pro rata based upon the then remaining principal --- ---- amounts thereof. Amounts prepaid on account of the Term Loans may not be reborrowed. (c) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Credit Loans shall be made pro rata according to the respective outstanding principal amounts of the - --- ---- Revolving Credit Loans then held by the Revolving Credit Lenders. (d) Notwithstanding anything to the contrary in Section 2.10, 2.11 or any other paragraph of this Section 2.17, with respect to the amount of any optional or mandatory prepayment described in Section 2.10 or 2.11 that is allocated to Tranche B Term Loans or Tranche C Term Loans (such amounts, the "Tranche B Prepayment Amount" and the "Tranche C Prepayment Amount", - ---------------------------- --------------------------- respectively), at any time when Tranche A Term Loans remain outstanding, the Borrower will, in lieu of applying such amount to the prepayment of Tranche B Term Loans and Tranche C Term Loans, respectively, as provided in Section 2.10 (in the case of optional prepayments) or Section 2.11 (in the case of mandatory prepayments), on the date specified in Section 2.10 or 2.11, as the case may be, for such prepayment, give the Administrative Agent telephonic notice (promptly confirmed in writing) requesting that the Administrative Agent prepare and provide to each Tranche B Term Loan Lender and Tranche C Term Loan Lender a notice (each, a "Prepayment Option Notice") as described below. As promptly as ------------------------ practicable after receiving such notice from the Borrower, the Administrative Agent will send to each Tranche B Term Loan Lender and Tranche C Term Loan Lender a Prepayment Option Notice, which shall be in the form of Exhibit H, and shall include an offer by the Borrower to prepay on the date (each a "Prepayment ---------- Date") that is 10 Business Days after the date of the Prepayment Option Notice, - ---- the relevant Term Loans of such Lender by an amount equal to the portion of the Tranche B Prepayment Amount or the Tranche C Prepayment Amount, as the case may be, indicated in such Lender's Prepayment Option Notice as being applicable to such Lender's Tranche B Term Loans or Tranche C Term Loans, as the case may be. Each Tranche B Term Loan Lender and Tranche C Term Loan Lender shall notify the Administrative Agent and the Borrower in writing, by no later than 10:00 a.m., New York City time, on the second Business Day preceding the Prepayment Date, whether or not it accepts the Borrower's prepayment offer. Failure by such Lender to so notify the Administrative Agent by such time shall be deemed to be notice that such Lender accepts the Borrower's prepayment offer. On the Prepayment Date, (i) the Borrower shall pay to the Administrative Agent the aggregate amount necessary to prepay that portion of the outstanding relevant Term Loans in respect of which Tranche B Term Loan Lenders and Tranche C Term Loan Lenders have accepted prepayment as described above (such Lenders, the "Accepting Lenders"), and such amount shall be applied to reduce the Tranche B - ------------------ Prepayment Amounts and Tranche C Prepayment Amounts, as applicable, with respect to each Accepting Lender and (ii) the Borrower shall pay to the Administrative Agent an amount equal to the remaining portion of the Tranche B Prepayment Amount and the Tranche C Prepayment Amount not accepted by the Tranche B Term Loan Lenders and the Tranche C Term Loan Lenders, and such amount shall be applied to the prepayment of the Tranche A Term Loans. (e) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 noon, New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in Section 10.2, in Dollars and in immediately available funds. Payments received by the Administrative Agent after such time shall be deemed to have been received on the next Business Day. The Administrative Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and 33 payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension. (f) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this Section 2.17(f) shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans under the relevant Facility, on demand, from the Borrower. 2.18 Requirements of Law. (a) If the adoption of or any change in ------------------- any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.19 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, in each case by an amount which such Lender deems to be material, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 2.18, it shall promptly notify the Borrower (with a copy to the Administrative Agent), in reasonable detail, of the event by reason of which it has become so entitled; provided that the Borrower shall not be - -------- 34 required to compensate a Lender pursuant to this paragraph for any amounts incurred more than one year prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor; and provided -------- further that, if the circumstances giving rise to such claim have a retroactive - ------- effect, then such one-year period shall be extended to include the period of such retroactive effect. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, together with an explanation in reasonable detail of the basis on which such request is being made, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction; provided that the Borrower shall not be required to -------- compensate a Lender pursuant to this paragraph for any amounts incurred more than six months prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor; and provided further that, if -------- ------- the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect. (c) If any Lender shall become subject to any Eurocurrency Reserve Requirement with respect to its Loans or Reimbursement Obligations owing to it hereunder or with respect to any deposit or other funds acquired by it to fund such Loans or Reimbursement Obligations as reasonably determined by it and shall give notice to the Administrative Agent and the Borrower of becoming so subject, the Borrower shall thereafter pay to such Lender through the Administrative Agent on each Interest Payment Date with respect to any such Loan or Reimbursement Obligation, an additional amount equal to the difference between the Eurodollar Rate on such Loan or Reimbursement Obligation and the Eurodollar Base Rate thereon for the period for which interest is then payable (or, if less, the portion of the period following the date of such notice). Such Lender shall give prompt notice to the Administrative Agent and the Borrower of its ceasing to be subject to any Eurocurrency Reserve Requirement. (d) A certificate as to any additional amounts payable pursuant to this Section 2.18 submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section 2.18 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.19 Taxes. (a) All payments made by the Borrower under this ----- Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded 35 taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to ------------------ the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non- Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the -------- ------- Borrower shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof to the extent such Lender's compliance with the requirements of Section 2.19(b) at the time such Lender becomes a party to this Agreement fails to establish a complete exemption from such withholding. Whenever any Non- Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section 2.19 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender (or Transferee) that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America (or any jurisdiction thereof), or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "Non-U.S. Lender") shall --------------- deliver to the Borrower and the Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, an annual certificate representing that such Non-U.S. Lender is not a "bank" for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this Section 2.19(b), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.19(b) that such Non-U.S. Lender is not legally able to deliver. 2.20 Indemnity. The Borrower agrees to indemnify each Lender and to --------- hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of 36 Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such ---- Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section 2.20 submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.21 Change of Lending Office. Each Lender agrees that, upon the ------------------------ occurrence of any event giving rise to the operation of Section 2.18 or 2.19(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided, that such -------- designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and provided, further, that nothing in this Section 2.21 shall -------- ------- affect or postpone any of the obligations of any Borrower or the rights of any Lender pursuant to Section 2.18 or 2.19(a). 2.22 Replacement of Lenders under Certain Circumstances. The -------------------------------------------------- Borrower shall be permitted to replace any Lender which (a) requests reimbursement for amounts owing pursuant to Section 2.18 or 2.19 or (b) defaults in its obligation to make Loans hereunder, with a replacement financial institution; provided that (i) such replacement does not conflict with any -------- Requirement of Law, (ii) no Event of Default shall have occurred and be continuing at the time of such replacement, (iii) prior to any such replacement, such Lender shall have taken no action under Section 2.21 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.18 or 2.19, (iv) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender under this Agreement or any other Loan Documents on or prior to the date of replacement, (v) the Borrower shall be liable to such replaced Lender under Section 2.20 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (vi) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Administrative Agent, (vii) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 10.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (viii) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.18 or 2.19, as the case may be, and (ix) any such replacement shall not be deemed to be a waiver of any rights which the Borrower, the Administrative Agent or any other Lender shall have against the replaced Lender. SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. (a) Subject to the terms and conditions -------------- hereof, the Issuing Lender, in reliance on the agreements of the other Revolving Credit Lenders set forth in Section 3.4(a), agrees to issue letters of credit ("Letters of Credit") for the account of the Borrower on any Business Day during ----------------- the Revolving Credit Commitment Period in such form as may be approved from time to time by the Issuing Lender; provided that the Issuing Lender shall have no -------- obligation to issue any Letter of 37 Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment or (ii) the aggregate amount of the Available Revolving Credit Commitments would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date which is five Business Days prior to the Scheduled Revolving Credit Termination Date, provided -------- that any Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above). The letters of credit set forth on Schedule 3.1 shall be deemed to be issued under this Agreement and shall constitute Letters of Credit for all purposes hereunder. (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 3.2 Procedure for Issuance of Letter of Credit. The Borrower may ------------------------------------------ from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may reasonably request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount thereof). In the event of a conflict between the provisions of the Application and the terms of this Agreement, the terms of this Agreement shall govern. 3.3 Commissions, Fees and Other Charges. (a) The Borrower will pay ----------------------------------- a commission on all outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans under the Revolving Credit Facility, shared ratably among the Revolving Credit Lenders and payable quarterly in arrears on each L/C Fee Payment Date after the issuance date. In addition, the Borrower shall pay to the Issuing Lender for its own account a fronting fee in an amount agreed upon between the Issuing Lender and the Borrower, which shall in no event be greater than 1/4 of 1% per annum, payable quarterly in arrears on each L/C Fee Payment Date after the Issuance Date. (b) In addition to the foregoing fees and commissions, the Borrower shall pay or reimburse the Issuing Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit. 3.4 L/C Participations. (a) The Issuing Lender irrevocably agrees ------------------ to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, 38 each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Revolving Credit Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving Credit Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 3.4(a) is not made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to ABR Loans under the Revolving Credit Facility. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its pro --- rata share of such payment in accordance with Section 3.4(a), the Issuing Lender - ---- receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its pro rata share thereof; --- ---- provided, however, that in the event that any such payment received by the - -------- ------- Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 3.5 Reimbursement Obligation of the Borrower. The Borrower agrees to ---------------------------------------- reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (a) such draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in lawful money of the United States of America and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full at the rate set forth in Section 2.14(c). Unless reimbursed pursuant to this Section 3.5, each drawing under any Letter of Credit shall (unless an event of the type described in clause (i) or (ii) of Section 8(f) shall have occurred and be continuing with respect to the Borrower, in which case the procedures specified in Section 3.4 for funding by L/C Participants shall apply) constitute a request by the Borrower to the Administrative Agent for a borrowing pursuant to Section 2.5 of ABR Loans (or, at the option of the Administrative Agent and the Swing Line Lender in their sole discretion, a 39 borrowing pursuant to Section 2.7 of Swing Line Loans) in the amount of such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing. 3.6 Obligations Absolute. The Borrower's obligations under this -------------------- Section 3 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Issuing Lender. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York and the Uniform Customs, shall be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower. 3.7 Letter of Credit Payments. If any draft shall be presented for ------------------------- payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. 3.8 Applications. To the extent that any provision of any ------------ Application related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 4.1 Financial Condition. (a) The unaudited pro forma consolidated ------------------- --- ----- balance sheet of the Borrower and its consolidated Subsidiaries as at June 30, 1997 (including the notes thereto) (the "Pro Forma Balance Sheet"), a copy of ----------------------- which has heretofore been furnished to each Lender, has been prepared giving effect (as if such events had occurred on such date) to (i) the consummation of the Recapitalization, (ii) the Loans to be made and the Senior Subordinated Notes to be issued on the Closing Date and the use of proceeds thereof and (iii) the payment of fees and expenses in connection with the foregoing. The Pro Forma Balance Sheet complies with Regulation S-X of the Securities Act of 1933, as amended, based on the best information available to the Borrower as of the date of delivery thereof and consistent in all material respects with the sources and uses of funds for the Recapitalization 40 as previously disclosed to the Lenders and the forecasts and projections previously provided to the Lenders, and presents fairly on a pro forma basis the --- ----- estimated financial position of Borrower and its consolidated Subsidiaries as at June 30, 1997, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of (i) Old GranCare as at December 31, 1996, December 31, 1995 and December 31, 1994 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Ernst & Young LLP and (ii) LCA as at September 30, 1996, September 30, 1995 and September 30, 1994 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Ernst & Young LLP, in each case present fairly the consolidated financial condition of Old GranCare or LCA, as the case may be, as at such dates, and the consolidated results of their operations and their consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of GranCare as at June 30, 1997, and the related unaudited consolidated statements of income and cash flows for the six- month period ended on such date, present fairly the consolidated financial condition of GranCare as at such date, and the consolidated results of its operations and its consolidated cash flows for the six-month period then ended (subject to normal year-end audit adjustments). The unaudited consolidated balance sheet of LCA as at June 30, 1997, and the related unaudited consolidated statements of income and cash flows for the nine-month period ended on such date, present fairly the consolidated financial condition of LCA as at such date, and the consolidated results of its operations and its consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). The Borrower and its Subsidiaries do not have any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, which are not reflected in the most recent financial statements of GranCare or LCA, as the case may be, referred to in this paragraph (b). Except as disclosed in Schedule 4.1, during the period from September 30, 1996 to and including the Closing Date there has been no Disposition by LCA of any material part of its business or Property and during the period from December 31, 1996 to and including the Closing Date there has been no Disposition by Old GranCare prior to February 13, 1997, or by GranCare from and after February 13, 1997, of any material part of its business or Property. 4.2 No Change. (a) From September 30, 1996 to and including the date --------- hereof there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of LCA and its Subsidiaries taken as a whole; (b) from December 31, 1996 to and including the date hereof there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of Grancare and its Subsidiaries taken as a whole (other than the spin-off by Old GranCare of its interests in TeamCare to Vitalink Pharmacy Services, Inc.); (c) since the date hereof, there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole; and (d) since the date hereof, there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. 41 4.3 Corporate Existence; Compliance with Law. Each of the Borrower ---------------------------------------- and its Subsidiaries (a) is duly organized, validly existing (except to the extent the failure to so exist results from a transaction permitted by Section 7.4) and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its Property, to lease the Property it operates as lessee and to conduct the businesses in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification except where failure to so be qualified could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.4 Corporate Power; Authorization; Enforceable Obligations. Each ------------------------------------------------------- Loan Party has the corporate power and authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and, in the case of the Borrower, to borrow hereunder. Each Loan Party has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the borrowings on the terms and conditions of this Agreement. Each consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person required in connection with the Recapitalization and the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, has been obtained or made and is in full force and effect, except for the filings referred to in Section 4.19, which shall be made promptly after the Closing Date and except as set forth on Schedule 4.4. Each Loan Document has been duly executed and delivered on behalf of each Loan Party party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4.5 No Legal Bar. The execution, delivery and performance of this ------------ Agreement and the other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or, except with respect to those leases referred to on Schedule 4.4, any Contractual Obligation of the Borrower or any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 4.6 No Material Litigation. Except as described on Schedule 4.6, no ---------------------- litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 4.7 No Default. Neither the Borrower nor any of its Subsidiaries is ---------- in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 42 4.8 Ownership of Property; Liens. Each of the Borrower and its ---------------------------- Subsidiaries has title in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other Property, and none of such Property is subject to any Lien except as permitted by Section 7.3. 4.9 Intellectual Property. Except as described on Schedule 4.9: (a) --------------------- the Borrower and each of its Subsidiaries owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted; (b) to the best knowledge of the Borrower, no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does the Borrower know of any valid basis for any such claim; and (c) to the best knowledge of the Borrower, the use of Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person in any material respect. 4.10 Taxes. Each of the Borrower and each of its Subsidiaries has ----- filed or caused to be filed all Federal, state and other material tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other material taxes, fees or other charges imposed on it or any of its Property by any Governmental Authority (other than any such taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such material tax, fee or other charge. 4.11 Federal Regulations. No part of the proceeds of any Loans will ------------------- be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 4.12 Labor Matters. There are no strikes or other labor disputes ------------- against the Borrower or any of its Subsidiaries pending or, to the knowledge of the Borrower, threatened that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Borrower and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. All payments due from the Borrower or any of its Subsidiaries on account of employee health and welfare insurance that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect if not paid have been paid or accrued as a liability on the books of the Borrower or the relevant Subsidiary. 4.13 ERISA. Neither a Reportable Event nor an "accumulated funding ----- deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan (other than the American Medical Services Employees' Pension Plan (the "American Plan")) has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single 43 Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. Neither the Borrower nor any Commonly Controlled Entity has incurred any liability which remains outstanding to the PBGC by reason of the termination of the American Plan. 4.14 Investment Company Act; Other Regulations. No Loan Party is an ----------------------------------------- "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) which limits its ability to incur Indebtedness of the type incurred or to be incurred under this Agreement or any other Loan Document. 4.15 Subsidiaries. The Subsidiaries listed on Schedule 4.15(a) ------------ constitute all the Subsidiaries of the Borrower at the Closing Date. 4.16 Use of Proceeds. The proceeds of the Term Loans shall be used --------------- to finance a portion of the Recapitalization and to pay related fees and expenses. The proceeds of the Revolving Credit Loans, the Swing Line Loans and the Letters of Credit shall be used for permitted acquisitions, working capital needs and general corporate purposes; provided, however, that up to $25,000,000 -------- ------- of the Revolving Credit Loans and Swing Line Loans may be used to finance a portion of the Recapitalization and to pay related fees and expenses. 4.17 Environmental Matters. Except as described on Schedule 4.17 and --------------------- such other matters as, individually or in the aggregate, could not reasonably be expected to result in the payment of a Material Environmental Amount: (a) To the knowledge of the Borrower and its Subsidiaries, the facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "Specified Facilities") do not contain, and have -------------------- not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law. (b) All operations of the Borrower and its Subsidiaries at the Specified Facilities are in compliance and have in the last five years been in compliance with all applicable Environmental Laws, and (ii) to the knowledge of the Borrower and its Subsidiaries, there is no contamination at, under or about the Specified Facilities or violation of any Environmental Law with respect to the Specified Facilities or the business operated by the Borrower or any of its Subsidiaries (the "Business") which -------- could interfere with the continued operation of the Specified Facilities or impair the fair saleable value thereof. (c) Neither the Borrower nor any of its Subsidiaries has received or knows of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the 44 Specified Facilities or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened. (d) To the knowledge of the Borrower or any of its Subsidiaries, materials of Environmental Concern have not been transported or disposed of in violation of, or in a manner or to a location which could give rise to liability of the Borrower or any of its Subsidiaries under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any location in violation of, or in a manner that could reasonably be anticipated to give rise to liability of the Borrower or any of its Subsidiaries under, any applicable Environmental Law. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements applicable to the Borrower or any of its Subsidiaries outstanding under any Environmental Law. (f) To the knowledge of the Borrower and its Subsidiaries, there has been no release or threat of release of Materials of Environmental Concern at or from the Specified Facilities, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Specified Facilities or otherwise in connection with the Business, in violation of or that could reasonably be expected to give rise to liability under Environmental Laws. 4.18 Accuracy of Information, etc. No statement or information ---------------------------- contained in this Agreement, any other Loan Document, the Confidential Information Memorandum or any other document, certificate or statement furnished to the Administrative Agent or the Lenders or any of them, by or on behalf of any Loan Party for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished (or, in the case of the Confidential Information Memorandum, as of the Closing Date), any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained herein or therein not misleading. The projections and pro forma financial information contained in the materials --- ----- referenced above are based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. As of the Closing Date, the representations and warranties contained in the Recapitalization Agreement are true and correct in all material respects. There is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents, in the Confidential Information Memorandum or in any other documents, certificates and statements furnished to the Administrative Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. 4.19 Security Documents. (a) The Guarantee and Collateral Agreement ------------------ is effective to create in favor of the Collateral Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on or security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Guarantee and Collateral Agreement, when stock certificates representing such Pledged Stock (together with undated stock powers relating thereto) are delivered to the Administrative Agent, and in the case of the other Collateral described in the Guarantee and Collateral Agreement as to 45 which a security interest may be perfected by the filing of financing statements under the Uniform Commercial Code, when financing statements describing such Collateral in appropriate form are filed in the offices specified on Schedule 4.19(a), the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations (as defined in the Guarantee and Collateral Agreement), in each case prior and superior in right to any other Person, except as permitted in Section 7.3. (b) Each of the Mortgages is effective to create in favor of the Collateral Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged Properties described therein and proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 4.19(b), each such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Mortgaged Properties and the proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage), in each case prior and superior in right to any other Person, except as permitted in Section 7.3. 4.20 Solvency. Each Loan Party is, and after giving effect to the -------- Recapitalization and the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent. 4.21 Senior Indebtedness. The Obligations constitute "Senior ------------------- Indebtedness" of the Borrower under and as defined in the Senior Subordinated Note Indenture. The obligations of each Subsidiary Guarantor under the Guarantee and Collateral Agreement constitute "Guarantor Senior Indebtedness" of such Subsidiary Guarantor under and as defined in the Senior Subordinated Note Indenture. 4.22 Health Care Permits. Except as disclosed on Schedule 4.22: ------------------- (a) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (i) each of the Borrower and its Subsidiaries now has (after giving effect to the Recapitalization), and has no reason to believe it will not be able to maintain in effect, all Health Care Permits necessary for the lawful conduct of its business or operations wherever now conducted and as planned to be conducted, including, without limitation, the ownership and operation of its Health Care Facilities pursuant to all Requirements of Law, (ii) all such Health Care Permits are in full force and effect and have not been amended or otherwise modified, rescinded, revoked or assigned, (iii) the Borrower and each of its Subsidiaries is substantially complying with the requirements of each such Health Care Permit, and no event has occurred, and no condition exists, which, with the giving of notice, the passage of time, or both, would constitute a violation thereof, (iv) neither the Borrower nor any of its Subsidiaries, has received any written notice of any violation of any Requirement of Law, (v) to the knowledge of the Borrower, no condition exists or event has occurred which in itself or with the giving of notice or the lapse of time, or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such Health Care Permit, (vi) there is no claim filed with any Governmental Authority of which the Borrower or any of its Subsidiaries has been notified in writing challenging the validity of any such Health Care Permit and (vii) the continuation, validity and effectiveness of all such Health Care Permits will not be adversely affected by the Recapitalization or the execution and performance of any of the Loan Documents. (b) All Health Care Facilities owned, leased, managed or operated by the Borrower or any of its Subsidiaries are entitled to participate in, and receive payment under, the 46 appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that the Borrower or any of its Subsidiaries has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto. There are no proceedings pending or, to the knowledge of the Borrower, any proceedings threatened or investigations pending or threatened, by any Governmental Authority with respect to the Borrower's or any of its Subsidiaries' participation in the Medicare, Medicaid or related reimbursement programs and which could reasonably be expected to have a Material Adverse Effect. SECTION 5. CONDITIONS PRECEDENT 5.1 Conditions to Initial Extension of Credit. The agreement of each ----------------------------------------- Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received (i) -------------- this Agreement, executed and delivered by a duly authorized officer of the Borrower, (ii) the Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of the Borrower and each Subsidiary Guarantor, (iii) each of the Mortgages, executed and delivered by a duly authorized officer of each party thereto, and (iv) for the account of each relevant Lender, Notes conforming to the requirements hereof and executed and delivered by a duly authorized officer of the Borrower. (b) Recapitalization, etc. (i) The following transactions shall --------------------- have been consummated, or shall be consummated substantially contemporaneously with the initial extension of credit hereunder, in each case in accordance with the Recapitalization Agreement: (A) Apollo Merger Sub shall have received at least $240,000,000 from the proceeds of equity issued by Apollo Merger Sub to the Permitted Investors; (B) Apollo Merger Sub shall have merged with and into LCA; (C) Grancare and LCA Merger Sub shall have merged, with the surviving entity of such merger remaining a Wholly Owned Subsidiary of LCA, and any transactions related to any of the foregoing, all pursuant to the Recapitalization Agreement (collectively, the "Recapitalization") and no provision of the Recapitalization Agreement ---------------- shall have been waived, amended, supplemented or otherwise modified in any manner reasonably deemed by the Administrative Agent to be material and adverse to the Lenders; and (D) the Borrower shall have received at least $450,000,000 in gross cash proceeds from the issuance of the Senior Subordinated Notes. (ii) The Borrower shall not be in breach or violation of any of its obligations under the Recapitalization Agreement or the other documents executed in connection therewith (including, without limitation, the Senior Subordinated Note Indenture) and the execution and delivery by the Borrower of the Recapitalization Agreement shall not violate any Requirement of Law or Contractual Obligation to which the Borrower or any of its Subsidiaries or Affiliates is subject. 47 (c) Pro Forma Balance Sheet; Financial Statements. The Lenders shall --------------------------------------------- have received (i) the Pro Forma Balance Sheet, (ii) audited consolidated financial statements of Old GranCare and LCA for the 1996, 1995 and 1994 fiscal years and (iii) unaudited interim consolidated financial statements of GranCare and LCA for each fiscal quarterly period ended subsequent to the date of the latest applicable financial statements delivered pursuant to clause (ii) of this paragraph as to which such financial statements are available, and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of GranCare or LCA, as the case may be, as reflected in the financial statements or projections contained in the Confidential Information Memorandum. (d) Approvals. All material governmental and third party approvals --------- and filings (including, without limitation, approvals or filings required in connection with Health Care Permits and landlords', real estate investment trusts' and other consents) necessary in connection with the Recapitalization, the continuing operations of the Borrower and its Subsidiaries and the transactions contemplated hereby shall have been obtained or made, as applicable, and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Recapitalization or the financing contemplated hereby (or in the case of Health Care Permits which cannot be obtained prior to consummation of the Recapitalization, the Administrative Agent shall have received evidence that satisfactory arrangements have been made to apply for and obtain such Health Care Permits as promptly as practicable after the Closing Date). No litigation or order of any court of competent jurisdiction shall be pending which seeks the enjoinment of or which has had the effect of enjoining the Recapitalization shall be pending or shall be in full force and effect. The Lenders shall be reasonably satisfied with the resolution or settlement of any such litigation or court order. (e) Lien Searches. The Administrative Agent shall have received the ------------- results of a recent lien search in each of the jurisdictions where assets of the Loan Parties are located, and such search shall reveal no liens on any of the assets of the Borrower or its Subsidiaries except for liens permitted by Section 7.3 or liens to be discharged on or prior to the Closing Date. (f) Expenses. The Administrative Agent shall have received -------- reasonably satisfactory evidence that the fees and expenses to be incurred in connection with the Recapitalization and the financing thereof shall not exceed $122,000,000. (g) Closing Certificate. The Administrative Agent shall have ------------------- received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments. (h) Legal Opinions. The Administrative Agent shall have received the -------------- following executed legal opinions: (i) the legal opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel to the Borrower and its Subsidiaries, substantially in the form of Exhibit F; (ii) to the extent consented to by the relevant counsel, each legal opinion, if any, delivered in connection with the Recapitalization Agreement, accompanied by a reliance letter in favor of the Lenders; and 48 (iii) the legal opinion of local counsel in each jurisdiction where the Borrower or any Subsidiary Guarantor keeps a material amount of its Property. Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require. (i) Pledged Stock; Stock Powers. The Administrative Agent shall have --------------------------- received the certificates representing the shares of Capital Stock pledged pursuant to the Guarantee and Collateral Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. (j) Filings, Registrations and Recordings. Each document (including, ------------------------------------- without limitation, any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent, for the benefit of the Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), shall be in proper form for filing, registration or recordation. (k) Mortgages, etc. The Administrative Agent shall have received a -------------- Mortgage with respect to each Mortgaged Property, executed and delivered by a duly authorized officer of each party thereto. (l) Solvency Opinion. The Administrative Agent shall have received a ---------------- solvency opinion from Valuation Research Corp. (m) Insurance. The Administrative Agent shall have received --------- insurance certificates satisfying the requirements of Section 5 of the Guarantee and Collateral Agreement. (n) Fees. The Administrative Agent and the Lenders shall have ---- received the fees to be received on the Closing Date previously agreed to in writing between them and all expenses for which invoices have been presented on or before the Closing Date. 5.2 Conditions to Each Extension of Credit. The agreement of each -------------------------------------- Lender to make any extension of credit requested to be made by it on any date (including, without limitation, its initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and ------------------------------ warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (b) No Default. No Default or Event of Default shall have occurred ---------- and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date. Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 5.2 have been satisfied. 49 SECTION 6. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Administrative Agent hereunder, the Borrower shall and shall cause each of its Subsidiaries to: 6.1 Financial Statements. Furnish to the Administrative Agent (with -------------------- sufficient copies for each Lender): (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form (for fiscal years 1998 and thereafter) the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Ernst & Young LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 6.2 Certificates; Other Information. Furnish to each of the Lenders: ------------------------------- (a) concurrently with the delivery of the financial statements referred to in Section 6.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of any financial statements pursuant to Section 6.1, (i) a certificate of a Responsible Officer stating that, to the best of each such Responsible Officer's knowledge, each Loan Party during such period has observed or performed all of its covenants and other material agreements, and satisfied every material condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) in the case of quarterly or annual financial statements, (x) a Compliance Certificate containing all information necessary for determining compliance by the Borrower and its Subsidiaries with the provisions of Section 7.1 of this Agreement referred to therein as of the last day of the fiscal quarter or fiscal year of the Borrower, as the case may be, and (y) to the extent not previously disclosed to the Administrative Agent, a listing of any county or state within the United States where any Loan 50 Party keeps inventory (excluding immaterial pharmaceutical inventory located in a county where neither the Borrower nor any of its Subsidiaries maintains a distribution center) or equipment and of any Intellectual Property acquired by any Loan Party since the date of the most recent list delivered pursuant to this clause (y) (or, in the case of the first such list so delivered, since the Closing Date); (c) as soon as available, and in any event no later than 45 days after the end of each fiscal year of the Borrower, a detailed consolidated budget for the following fiscal year (including a projected consolidated balance sheet of the Borrower and its Subsidiaries as of the end of the following fiscal year, and the related consolidated statements of projected cash flow, projected changes in financial position and projected income), and, as soon as available, significant revisions, if any, of such budget and projections with respect to such fiscal year (collectively, the "Projections"), which Projections shall in each case be accompanied by a summary of assumptions and a certificate of a Responsible Officer stating that such Projections are based on reasonable estimates, information and assumptions and that such Responsible Officer has no reason to believe that such Projections are incorrect or misleading in any material respect; (d) promptly following the circulation thereof for execution, but prior to the effectiveness thereof, copies of substantially final drafts of any proposed amendment, supplement, waiver or other modification with respect to the Senior Subordinated Note Indenture, the Senior Subordinated Notes or the Recapitalization Agreement; (e) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to the holders of any class of its debt securities or public equity securities and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request (through the Administrative Agent). 6.3 Payment of Obligations. Pay, discharge or otherwise satisfy at ---------------------- or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be. 6.4 Conduct of Business and Maintenance of Existence, etc. (a) (i) ------------------------------------------------------ Continue to engage in the business of owning, operating, managing and/or financing Health Care Facilities and providing other services or amenities customarily provided by, or other activities customarily undertaken by, Persons owning, operating, managing and/or financing Health Care Facilities, (ii) preserve, renew and keep in full force and effect its corporate existence (except as otherwise permitted by Section 7.4) and (iii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (iii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 51 6.5 Maintenance of Property; Insurance. (a) Keep all Property ---------------------------------- useful and necessary in its business in good working order and condition, ordinary wear and tear excepted and (b) maintain with financially sound and reputable insurance companies insurance on all its Property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against by companies engaged in the same or a similar business in the same geographic areas. 6.6 Health Care Permits and Approvals. Take all action reasonably --------------------------------- necessary to (a) maintain in full force and effect all Health Care Permits reasonably necessary for the lawful conduct of its business or operations where now conducted and as planned to be conducted, including the ownership and operation of its Health Care Facilities, pursuant to all Requirements of Law and (b) to ensure that all Health Care Facilities owned, leased, managed or operated by the Borrower or any of its Subsidiaries are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent the Borrower or any of its Subsidiaries has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, except, in each case, where a failure to do so could not reasonably be expected to have a Material Adverse Effect. 6.7 Inspection of Property; Books and Records; Discussions. (a) ------------------------------------------------------ Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants; provided, that the Administrative Agent shall use reasonable efforts to - -------- coordinate any such visits prior to the occurrence and during the continuance of an Event of Default. 6.8 Notices. Promptly give notice to the Administrative Agent and ------- each Lender of: (a) the occurrence of any Default or Event of Default, provided, that -------- in the case of Defaults or Events of Default referred to in Section 8(d), the Borrower has knowledge thereof; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of its Subsidiaries in which the amount involved is $10,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any 52 Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; (e) the following events, as soon as possible and in any event within five Business Days (i) after obtaining knowledge thereof, the occurrence of any event that would (with the giving of notice, the passage of time, or both) be a violation of any Health Care Permit necessary for the lawful conduct of the business or operations of the Borrower or any of its Subsidiaries (other than those Health Care Permits the violation of which could not reasonably be expected to have a Material Adverse Effect), including, without limitation, the ownership and operation of its Health Care Facilities, (ii) after receipt thereof, any notice of any violation of any Requirements of Law which would (with the giving of notice, the passage of time, or both) cause any of the Health Care Permits referred to in clause (i) to be modified, rescinded or revoked and which the Borrower does not reasonably expect to be able to cure within a reasonable period of time, (iii) after receipt thereof, any notice, summons, citation or other proceeding seeking to adversely modify in any material respect, revoke, or suspend any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of the Borrower or any of its Subsidiaries in any manner which could reasonably be expected to have a Material Adverse Effect, or (iv) after obtaining knowledge thereof, any revocation or involuntary termination of any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of the Borrower or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect; (f) as soon as possible and in any event within 10 days of obtaining knowledge thereof, the default, notice of default, event of default or breach by the Borrower or any of its Subsidiaries under any Material Lease; (g) any development or event which has had or could reasonably be expected to have a Material Adverse Effect; and (h) as soon as possible and in any event within 10 days of obtaining knowledge thereof, any development, event, or condition that, individually or in the aggregate with other developments, events or conditions, could reasonably be expected to result in the payment by Borrower and its Subsidiaries, in the aggregate, of a Material Environmental Amount. Each notice pursuant to this Section 6.8 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the Borrower or the relevant Subsidiary proposes to take with respect thereto. 6.9 Environmental Laws. (a) Comply in all material respects with, ------------------ and use commercially reasonable efforts to ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and use commercially reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply with all orders and directives of all Governmental Authorities regarding Environmental Laws, unless such requirement, order or directive is being timely challenged in appropriate proceedings and the pendency 53 of such proceedings could not reasonably be expected to result in payment of a Material Environmental Amount. (c) With respect to any development, event, or condition that is (or should have been) the subject of a notice provided pursuant to subsection 6.8(h) of this Agreement, provide such information to the Administrative Agent as may be necessary to give the Administrative Agent reasonable assurance that such development, event, or condition could not reasonably be expected to result in a Material Adverse Effect. 6.10 Additional Collateral, etc. (a) With respect to any Property -------------------------- acquired after the Closing Date by the Borrower or any of its Subsidiaries (other than (w) owned or leased real property, (x) any Property described in paragraph (b), (c) or (d) below, (y) any Property subject to a Lien expressly permitted by Section 7.3(g), (k) or (l), and (z) Property located at a particular site having a value of less than $400,000) as to which the Collateral Agent, for the benefit of the Lenders, does not have a perfected Lien, promptly (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement or such other documents as the Administrative Agent deems reasonably necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Lenders, a security interest in such Property and (ii) take all actions reasonably necessary or advisable to grant to the Collateral Agent, for the benefit of the Lenders, a perfected security interest in such Property that is prior to all other security interests except as permitted by Section 7.3, including without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be reasonably requested by the Administrative Agent. (b) With respect to any fee interest in any real estate having a value (together with improvements thereof) of at least $2,000,000 acquired after the Closing Date by the Borrower or any of its Subsidiaries (other than any such real estate subject to a Lien expressly permitted by Section 7.3(g), (k) or (l)), promptly (i) execute and deliver a first priority mortgage, deed to secure debt or deed of trust, as the case may be, in favor of the Collateral Agent, for the benefit of the Lenders, covering such real estate, in form and substance reasonably satisfactory to the Administrative Agent and (ii) provide the Administrative Agent with evidence of title to such real estate. (c) With respect to any new Subsidiary (other than an Excluded Foreign Subsidiary) created or acquired after the Closing Date by the Borrower or any of its Subsidiaries (which, for the purposes of this paragraph (c), shall include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary or any existing inactive Subsidiary which becomes active), promptly (i) execute and deliver to the Administrative Agent such amendments or joinders to the Guarantee and Collateral Agreement as the Administrative Agent deems reasonably necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Borrower or any of its Subsidiaries (subject to any Liens permitted by Section 7.3), (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be and (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement and (B) to take such actions reasonably necessary or advisable to grant to the Collateral Agent for the benefit of the Lenders a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement with respect to such new Subsidiary (subject to any Liens permitted by Section 7.3), including, without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be reasonably requested by the Administrative Agent. 54 (d) With respect to any new Excluded Foreign Subsidiary created or acquired after the Closing Date by the Borrower or any of its Subsidiaries, promptly (i) execute and deliver to the Administrative Agent such amendments or joinders to the Guarantee and Collateral Agreement as the Administrative Agent deems necessary or advisable in order to grant to the Collateral Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Borrower or any of its Subsidiaries (provided that in no event shall more than 65% of the total outstanding Capital Stock of any such new Subsidiary be required to be so pledged) and (ii) deliver to the Administrative Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be. 6.11 Permitted Acquisitions. (a) Deliver to the Lenders, not less ---------------------- than 10 Business Days prior to the closing of any proposed Acquisition involving a Purchase Price greater than or equal to $10,000,000 (which Purchase Price shall be increased to $25,000,000 if the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0), each of the following: (i) a description of the property, assets and/or equity interest being purchased, in reasonable detail; (ii) a term sheet or other description setting forth the essential terms and the basic structure of the proposed Acquisition (including, Purchase Price and method and structure of payment; in this regard, if the Purchase Price includes a note or other right to payment the Borrower shall detail the economic terms thereof and state in writing the balance sheet amount that will be required to be recorded in connection with such consideration; if the proposed Acquisition is approved, the amount of such consideration for purposes of the restrictions set forth in Section 7.8(h) shall be such balance sheet amount); (iii) projected statements of income for the entity that is being acquired (or the assets, if an asset Acquisition) for at least a two-year period following such Acquisition (including a summary of assumptions or pro forma adjustments for such projections); (iv) to the extent made available to Borrower, historical financial statements for the entity that is being acquired (or the assets, if an asset Acquisition) (including balance sheets and statements of income, retained earnings and cash flows for at least a two-year period prior to such Acquisition); and (v) confirmation, supported by detailed calculations, that the Borrower and its Subsidiaries (A) would have been in compliance with all the covenants in Section 7.1 for the fiscal quarter ending immediately prior to the consummation of such Permitted Acquisition, with such compliance determined on a pro forma basis as if such Permitted Acquisition had been consummated on the first day of the Reference Period ending on the last day of such fiscal quarter, and (B) will have been in compliance with all the covenants of Section 7.1 for the Reference Period beginning on the first day of the fiscal quarter during which the consummation of such Permitted Acquisition occurs, with such compliance determined on a pro forma basis as if such Permitted Acquisition had been consummated on the first day of such Reference Period. With respect to any proposed Acquisition involving a Purchase Price of $25,000,000 or more, the Borrower agrees that in reviewing such compliance and the historical financial statements of the Person or Persons being acquired, the Administrative Agent may require a review, at the cost of the Borrower, by an independent certified public accountant. (b) Deliver to the Lenders, not later than 45 days after the end of each fiscal quarter of the Borrower, the information required pursuant to clause (i) of paragraph (a) above for each Permitted Acquisition which was closed during such fiscal quarter and involves a Purchase Price of at least $3,000,000. SECTION 7. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the 55 Administrative Agent hereunder, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 7.1 Financial Condition Covenants. ----------------------------- (a) Consolidated Leverage Ratio. Permit the Consolidated Leverage --------------------------- Ratio as at the last day of any Reference Period ending during any period set forth below to exceed the ratio set forth below opposite such period:
Consolidated Period Leverage Ratio ------ -------------- December 31, 1997 through September 30, 1998 6.75 to 1.00 December 31, 1998 through June 30, 1999 6.50 to 1.00 September 30, 1999 through June 30, 2000 6.00 to 1.00 September 30, 2000 through June 30, 2001 5.50 to 1.00 September 30, 2001 through June 30, 2002 5.00 to 1.00 September 30, 2002 through June 30, 2003 4.75 to 1.00 September 30, 2003 (or, if earlier, the Consolidated Leverage Ratio Stepdown Date) and thereafter 4.50 to 1.00
(b) Consolidated Interest Coverage Ratio. Permit the Consolidated ------------------------------------ Interest Coverage Ratio for any Reference Period ending during any period set forth below to be less than the ratio set forth below opposite such period:
Consolidated Interest Period Coverage Ratio ------ --------------------- December 31, 1997 through September 30, 1998 1.60 to 1.00 December 31, 1998 through September 30, 1999 1.75 to 1.00 December 31, 1999 through September 30, 2000 2.00 to 1.00 December 31, 2000 through September 30, 2001 2.25 to 1.00 December 31, 2001 through September 30, 2002 2.50 to 1.00 December 31, 2002 and thereafter 2.75 to 1.00
; provided, that for the purposes of determining the ratio described above for -------- the fiscal quarters of the Borrower ending December 31, 1997, March 31, 1998 and June 30, 1998, Consolidated Interest Expense for the relevant Reference Period shall be deemed to equal Consolidated Interest Expense for such fiscal quarter (and, in the case of the latter two such determinations, each previous fiscal quarter commencing after September 30, 1997) multiplied by 4, 2 and 4/3, ------------- respectively. (c) Consolidated Fixed Charge Coverage Ratio. Permit the ---------------------------------------- Consolidated Fixed Charge Coverage Ratio for any Reference Period ending during any period set forth below to be less than the ratio set forth below opposite such period:
Consolidated Fixed Period Charge Coverage Ratio ------ --------------------- December 31, 1997 through September 30, 1998 1.10 to 1.00 December 31, 1998 through September 30, 1999 1.15 to 1.00
56 December 31, 1999 through September 30, 2001 1.20 to 1.00 December 31, 2001 and thereafter 1.25 to 1.00
; provided, that for the purposes of determining the ratio described above for -------- the fiscal quarters of the Borrower ending December 31, 1997, March 31, 1998 and June 30, 1998, Consolidated Interest Expense and Capital Expenditures (Maintenance) for the relevant Reference Period shall be deemed to equal Consolidated Interest Expense or Capital Expenditures (Maintenance), as the case may be, for such fiscal quarter (and, in the case of the latter two such determinations, each previous fiscal quarter commencing after September 30, 1997) multiplied by 4, 2 and 4/3, respectively. ------------- (d) Maintenance of Consolidated Net Worth. Permit Consolidated Net ------------------------------------- Worth at the last day of any fiscal quarter of the Borrower ending after December 31, 1997 to be less than the sum of (x) all items which were included on the consolidated balance sheet under shareholders' equity at December 31, 1997 less $50,000,000, (y) 50% of Consolidated Net Income (if positive) for the period from January 1, 1998 to such date and (z) without duplication, 100% of the Net Cash Proceeds of any issuance of Capital Stock by, or capital contributions made to, the Borrower or any of its Subsidiaries after the Closing Date. 7.2 Limitation on Indebtedness. Create, incur, assume or suffer to -------------------------- exist (in each case, to "Incur") any Indebtedness, except: ----- (a) Indebtedness of any Loan Party pursuant to any Loan Document; (b) Indebtedness of the Borrower to any Subsidiary and of any Wholly Owned Subsidiary Guarantor and, if incurred in the ordinary course of business, any other Wholly Owned Subsidiary, to the Borrower or any other Subsidiary; (c) Indebtedness referred to in Section 7.3(g), Capital Lease Obligations and Attributable Debt in an aggregate principal amount for all Indebtedness referred to in this paragraph (c) not to exceed $50,000,000 at any one time outstanding, provided, that in no event shall the aggregate -------- principal amount of Attributable Debt exceed $10,000,000 at any one time outstanding; (d) Indebtedness outstanding on the Closing Date and listed on Schedule 7.2(d) and any refinancings, refundings, renewals or extensions thereof (without any increase in the principal amount thereof, except to the extent (i) interest, premium and other amounts owing in respect of the Indebtedness being refinanced, refunded, renewed or extended and (ii) customary transaction costs incurred in connection with such refinancings, refundings, renewals or extensions, in each case, are capitalized in connection therewith); (e) (i) guarantees made in the ordinary course of business by the Borrower or any of its Subsidiaries of obligations of any Wholly Owned Subsidiary; (ii) guarantees made by the Borrower of any Assumed Debt of any Wholly Owned Subsidiary Guarantor; (iii) guarantees by any New PHCMI Subsidiary of PHCMI's obligations to Omega in connection with granting Omega a Lien on any Substitute Omega Property; and (iv) guarantees made by the Borrower, GranCare, AMS Properties, Inc. and GCI Health Care Centers, Inc. under the HRPT Transaction Documents as described on Schedule 7.4(e); (f) Indebtedness of the Borrower in respect of the Senior Subordinated Notes; provided, that the aggregate gross proceeds thereof do -------- not exceed $500,000,000; 57 (g) additional Indebtedness of the Borrower in an aggregate principal amount not to exceed $25,000,000 at any one time outstanding; (h) Assumed Debt Incurred pursuant to an Acquisition consummated in accordance with Section 7.8(h); (i) additional Indebtedness of any of the Borrower's Subsidiaries in an aggregate principal amount (for all Subsidiaries) not to exceed $25,000,000 at any one time outstanding; (j) Indebtedness in respect of Interest Rate Protection Agreements with any Lender or any affiliate of any Lender for hedging and not for speculative purposes; and (k) obligations to acquire Capital Stock pursuant to Section 7.6(b). 7.3 Limitation on Liens. Create, incur, assume or suffer to exist ------------------- any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with -------- respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which do not in any case materially detract from the value of the Property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (f) Liens in existence on the Closing Date listed on Schedule 7.3(f), securing Indebtedness permitted by Section 7.2(d), provided that no such -------- Lien is spread to cover any additional Property after the Closing Date and that the amount of Indebtedness secured thereby is not increased (it being understood that if such Indebtedness is refinanced, refunded, renewed or extended in accordance with Section 7.2(d), Liens with respect to the relevant Property may continue to apply to such Indebtedness as so refinanced, refunded, renewed or extended); (g) Liens securing Indebtedness of the Borrower or any other Subsidiary Incurred pursuant to Section 7.2(c) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created -------- substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any Property other than the Property financed by such Indebtedness and (iii) the amount of Indebtedness secured thereby is not increased; 58 (h) Liens created pursuant to the Security Documents; (i) Liens resulting from judgments not constituting an Event of Default so long as no remedies in respect of such Liens have been exercised; (j) any interest or title of a lessor under any lease entered into by the Borrower or any other Subsidiary in the ordinary course of its business and covering only the assets so leased; (k) Liens securing Assumed Debt so long as such Liens (i) were not incurred in contemplation of the Acquisition consummated in conjunction with the assumption of such Assumed Debt and (ii) such Liens do not encumber any Property other than the Property acquired pursuant to such Acquisition; (l) Liens securing Indebtedness Incurred pursuant to Section 7.2(i) so long as (i) such Indebtedness was Incurred to finance the acquisition of Property, (ii) recourse for repayment of such Indebtedness is limited to the Property so acquired and (iii) such Liens do not encumber any Property other than the Property so acquired; (m) the creation of Liens by PHCMI and any New PHCMI Subsidiary in favor of Omega with respect to any Substitute Omega Property; (n) the creation of Liens by the Borrower, GranCare, AMS Properties, Inc. and GCI Health Care Centers, Inc. in favor of HRPT in connection with the transactions described in Schedule 7.4(e) hereto; (o) Liens not otherwise permitted by this Section 7.3 so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds (as to the Borrower and all Subsidiaries) $5,000,000 at any one time; and (p) Permitted Exceptions (as such term is defined in the Mortgages) in effect on the Closing Date. 7.4 Limitation on Fundamental Changes. Enter into any merger, --------------------------------- consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of, all or substantially all of its Property or business, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or -------- surviving corporation) or with or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly Owned Subsidiary Guarantor shall be the -------- continuing or surviving corporation); (b) any Subsidiary of the Borrower may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any Wholly Owned Subsidiary Guarantor; (c) any Subsidiary of the Borrower may Dispose of one or more Substitute Omega Properties to PHCMI or any of the New PHCMI Subsidiaries in connection with providing substitute collateral to Omega in exchange for the surrender by Omega of the Omega Letter of Credit; 59 (d) any acquisition expressly permitted by Section 7.8 may be structured as a merger with or into the Borrower (provided that the -------- Borrower shall be the continuing or surviving corporation) or with or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly Owned -------- Subsidiary Guarantor shall be the continuing or surviving corporation); and (e) the Dispositions described in Schedule 7.4(e) hereto and the transactions permitted pursuant to Section 7.5(e) and 7.5(f). 7.5 Limitation on Sale of Assets. Dispose of any of its Property or ---------------------------- business (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person, except: (a) the Disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) Dispositions permitted by Section 7.4(b), 7.4(c) or 7.4(e); (d) the sale or issuance of any Subsidiary's Capital Stock to the Borrower or any Wholly Owned Subsidiary Guarantor; (e) the exchange by the Borrower or any of its Subsidiaries of any of its Health Care Facilities for any Health Care Facility of any third Person other than any exchange described in Schedule 7.4(e) hereto (any such exchange, an "Asset Swap"); provided, that (i) the aggregate amount of ---------- -------- Asset Swaps that may be consummated during the term of this Agreement shall not exceed $50,000,000, valued at the fair market value thereof, (ii) prior to consummating any Asset Swap the Borrower shall have provided evidence reasonably satisfactory to the Administrative Agent demonstrating pro forma compliance by the Borrower with Section 7.1 both before and after giving effect to such Asset Swap, (iii) the fair market value of the property being received by the Borrower or any of its Subsidiaries in connection with any such Asset Swap shall be substantially equivalent to the fair market value of the property being exchanged by the Borrower or any of its Subsidiaries, (iv) prior to consummating any Asset Swap the Borrower shall have provided evidence reasonably satisfactory to the Administrative Agent demonstrating that the net effect of any such Asset Swap on Consolidated EBITDA on a pro forma basis would be substantially equivalent to or greater than the Consolidated EBITDA for such Reference Period and (v) the Borrower or the relevant Subsidiary shall take all steps requested by the Administrative Agent to provide the Administrative Agent on behalf of the Lenders with a fully perfected Lien on or security interest in the property being received by the Borrower or any of its Subsidiaries in connection with any such Asset Swap to the same extent as the Lien or security interest which the Administrative Agent had in the property being exchanged by the Borrower or any of its Subsidiaries; and (f) the sale of other assets having a fair market value not to exceed $50,000,000 in the aggregate for any fiscal year of the Borrower; provided, -------- that no such individual sale or series of sales in an aggregate amount in excess of $10,000,000 may be consummated unless the Borrower provides a certificate to the Administrative Agent demonstrating pro forma compliance with Section 7.1 both before and after consummating such sale or sales; and provided further, that regardless of the aggregate amount of such ---------------- individual sale or series of sales, the Borrower 60 shall be in pro forma compliance with Section 7.1 both before and after any such sale or series of sales. 7.6 Limitation on Dividends. Declare or pay any dividend (other than ----------------------- dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any Subsidiary or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (collectively, "Restricted Payments"), except that: (a) any Subsidiary may make Restricted Payments to the Borrower or any Wholly Owned Subsidiary Guarantor; and (b) so long as no Default or Event of Default shall have occurred and be continuing, the Borrower may purchase its common stock or common stock options (i) from present or former officers or employees of the Borrower or any Subsidiary upon the death, disability or termination of employment of such officer or employee or (ii) to the extent deemed necessary by the Borrower in connection with employee compensation programs, provided, that -------- after giving effect to any payment under this paragraph (b), the aggregate amount of all payments made pursuant to this paragraph (b) during the term of this Agreement, when added to the Employee Loan Outstanding Amount then in effect, shall not exceed $10,000,000. 7.7 Limitation on Capital Expenditures. Make or commit to make (by ---------------------------------- way of the acquisition of securities of a Person or otherwise) any Capital Expenditures (Discretionary), except (a) Capital Expenditures (Discretionary) of the Borrower and its Subsidiaries in any fiscal year which, when combined with the aggregate amount of Permitted Acquisitions made pursuant to Section 7.8(h) during such fiscal year (excluding the aggregate amount of the Purchase Prices thereof which is made in the form of the consideration referred to in clause (b) of the definition of Purchase Price), shall not exceed $125,000,000; provided -------- that (i) no Default or Event of Default has occurred and is continuing (unless a binding commitment to make such Capital Expenditures was entered into prior to the occurrence of such Default or Event of Default), or would occur after giving effect to any such Capital Expenditures (Discretionary); (ii) any amount permitted herein for Capital Expenditures (Discretionary) during any fiscal year and not so expended in the fiscal year for which it is permitted may be carried over for expenditure only in the next following fiscal year; (iii) Capital Expenditures (Discretionary) made pursuant to this clause (a) during any fiscal year shall be deemed made, first, in respect of amounts carried over from the ----- prior fiscal year pursuant to subclause (ii) above and, second, in respect of ------ amounts permitted for the then-current fiscal year as provided above and (iv) if the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0 then the amount referred to above shall be increased to $200,000,000 (and if availability under this clause (iv) is utilized the Consolidated Leverage Ratio Stepdown Date shall occur) and (b) Capital Expenditures made with the proceeds of any Reinvestment Deferred Amount. 7.8 Limitation on Investments, Loans and Advances. On or after the --------------------------------------------- Closing Date, make any advance, loan, extension of credit (by way of guarantee or otherwise) or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any Acquisition from, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; 61 (b) investments in Cash Equivalents; (c) Guarantee Obligations permitted by Section 7.2; (d) loans and advances ("Employee Loans") to employees of the -------------- Borrower or its Subsidiaries in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses), so long as, after giving effect to the making of any Employee Loan, the aggregate amount of Employee Loans made since the Closing Date (determined net of amounts actually repaid in cash in respect thereof) (the "Employee -------- Loan Outstanding Amount"), when added to the aggregate amount of Restricted ----------------------- Payments made since the Closing Date pursuant to Section 7.6(b), shall not exceed $10,000,000; (e) the Recapitalization; (f) investments made by the Borrower or any of its Subsidiaries with the proceeds of any Reinvestment Deferred Amount; (g) capital contributions or other similar investments by the Borrower or any of its Subsidiaries in the Borrower or any Person that, prior to any such investment, is a Wholly Owned Subsidiary Guarantor or, if made in the ordinary course of business, any other Wholly Owned Subsidiary; (h) any Acquisition of any Person or business, either through the purchase of the assets (including the goodwill) of such Person or business or the purchase of 100% of the Capital Stock of such Person, if each of the following conditions is satisfied: (i) the requirements of Section 6.11 have been satisfied with respect to such Acquisition and the Borrower shall be in pro forma compliance with Section 7.1 both before and after giving effect to such Acquisition; (ii) no Default or Event of Default has occurred and is continuing, or would occur after giving effect to such Acquisition; (iii) the aggregate Purchase Prices (not including clause (b) of the definition thereof) of all such Acquisitions in any fiscal year of the Borrower, when combined with the aggregate amount of Capital Expenditures (Discretionary) made during such fiscal year, shall not exceed $125,000,000; (iv) the Purchase Price (or any portion thereof) which is paid in the form of the consideration referred to in clause (b) of the definition of Purchase Price for all such Acquisitions in any fiscal year of the Borrower shall not exceed $200,000,000; and (v) any such Acquisition shall have been approved by the Board of Directors or such comparable governing body of the Person or business being acquired; provided, that if -------- the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter for which the relevant financial information is available both before and after giving pro forma effect for such Acquisition as if such Acquisition were consummated on the first day of the Reference Period ending on the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0, then the amount referred to in clause (iii) shall be increased to $200,000,000 (and if availability under this proviso is utilized the Consolidated Leverage Ratio Stepdown Date shall occur); and provided, further, that if the Consolidated Leverage ----------------- Ratio as of the last day of the most recently completed fiscal quarter for which the relevant financial information is available after giving pro forma effect for such Acquisition as if such Acquisition were consummated on the first day of the Reference Period ending on the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0, then the amount referred to in clause (iv) shall be increased to $300,000,000 (all such Acquisitions, the "Permitted Acquisitions"); ---------------------- (i) investments by the Borrower or any of its Subsidiaries in patient trust accounts; 62 (j) investments representing non-cash consideration in the form of senior notes of the purchasing party pledged by the Borrower or the relevant Subsidiary in favor of the Collateral Agent for the benefit of the Lenders received by the Borrower or any of its Subsidiaries in connection with any Asset Sale; provided that the aggregate amount of any such -------- investments shall not exceed $50,000,000 during the term of this Agreement; and (k) in addition to investments otherwise expressly permitted by this Section 7.8, investments by the Borrower or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed $20,000,000 in the aggregate during the term of this Agreement. 7.9 Limitation on Optional Payments and Modifications of Debt --------------------------------------------------------- Instruments, etc. (a) Make or offer to make any payment, prepayment, - ----------------- repurchase or redemption of or otherwise defease or segregate funds with respect to the Senior Subordinated Notes (other than scheduled interest payments required to be made in cash), (b) amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of the Senior Subordinated Indenture or the Senior Subordinated Notes (other than any such amendment, modification, waiver or other change which (i) would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon or (ii) is not adverse to the interests of the Lenders in any respect) or (c) designate any Indebtedness as "Designated Senior Indebtedness" for the purposes of the Senior Subordinated Note Indenture. 7.10 Limitation on Transactions with Affiliates. Enter into any ------------------------------------------ transaction, including, without limitation, any purchase, sale, lease or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than the Borrower or any Wholly Owned Subsidiary) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of business of the Borrower or such Subsidiary, as the case may be, and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 7.11 Limitation on Sales and Leasebacks. Enter into any arrangement ---------------------------------- with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary (any such transaction, a "Sale/Leaseback Transaction"), except (a) to the extent expressly permitted by -------------------------- Section 7.2(c), (b) Sale/Leaseback Transactions identified on Schedule 7.2(d) and (c) the Sale/Leaseback Transaction described on Schedule 7.4(e). 7.12 Health Care Permits and Approvals. Engage in any activity that --------------------------------- (a) constitutes or, with the giving of notice, the passage of time, or both, would result in a material violation of, any Health Care Permit necessary for the lawful conduct of its business or operations or (b) constitutes or, with the giving of notice, the passage of time, or both, would result in the loss by any Health Care Facility owned, leased, managed or operated by the Borrower or any of its Subsidiaries of the right to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that such Loan Party has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, in each case, except where the loss of such Health Care Permit or rights to participate in or receive payments under such programs could not reasonably be expected to have a Material Adverse Effect. 63 7.13 Limitation on Changes in Fiscal Periods. Permit the fiscal year --------------------------------------- of the Borrower to end on a day other than September 30 or change the Borrower's method of determining fiscal quarters. 7.14 Limitation on Negative Pledge Clauses. Except as set forth on ------------------------------------- Schedule 7.14, enter into or suffer to exist or become effective any agreement which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, other than (a) this Agreement and the other Loan Documents and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). 7.15 Limitation on Restrictions on Subsidiary Distributions. Except ------------------------------------------------------ as set forth on Schedule 7.15, enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Borrower to (a) pay dividends or make any other distributions in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any other Subsidiary of the Borrower, (b) make loans or advances to the Borrower or any other Subsidiary of the Borrower or (c) transfer any of its assets to the Borrower or any other Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents and (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. 7.16 Limitation on Lines of Business. Enter into any business, ------------------------------- either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the Closing Date or which are reasonably related thereto. 7.17 Limitation on Amendments to Recapitalization Documents, etc. ----------------------------------------------------------- Amend, supplement or otherwise modify the terms and conditions of the Recapitalization Agreement or any other document delivered by the parties thereto (other than the Borrower) or any of their Affiliates in connection therewith except to the extent that any such amendment, supplement or modification could not reasonably be expected to have a Material Adverse Effect. SECTION 8. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or 64 (c) Any Loan Party shall default in the observance or performance of any agreement contained in clause (i) or (ii) of Section 6.4(a) (with respect to the Borrower and GranCare only), Section 6.8(a) or Section 7; or (d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than any Mortgage), and such default shall continue unremedied for a period of 30 days after notice to the Borrower from the Administrative Agent or the Required Lenders; or (e) the Borrower or any of its Subsidiaries shall (i) default in making any payment of any principal of any Indebtedness (including, without limitation, any Guarantee Obligation, but excluding the Loans) on the scheduled or original due date with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; provided, that a default, event or condition -------- described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default under this Agreement unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $10,000,000; or (f) (i) the Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or 65 (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could, in the sole judgment of the Required Lenders, reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $10,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (i) Any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party or any Affiliate of any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (j) The guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in full force and effect or any Loan Party or any Affiliate of any Loan Party shall so assert; or (k) Any breach, default or event of default shall occur, or any other event shall occur or condition exist, under any Material Lease of the Borrower or any of its Subsidiaries if the effect thereof is to terminate, or permit the counterparty to such Material Lease to terminate, such Material Lease or any Material Lease of the Borrower or any of its Subsidiaries shall be terminated by the lessor thereof (other than as a result of the expiration of the term of such Material Lease); or (l) (i) Any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding the Permitted Investors, shall at any time designate or obtain the right to designate a percentage (the "Third Party Board Percentage") equal to 25% or more of the members of the Board of Directors of the Borrower unless at such time the percentage of the members ------ of the Board of Directors of the Borrower designated by the Permitted Investors is greater than the Third Party Board Percentage; (ii) any "person" or "group" (as such terms are defined above), excluding the Permitted Investors, shall at any time become, or obtain rights (whether by means of warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rules 13(d) 3 and 13(d) 5 under the Exchange Act), directly or indirectly, of a percentage (the "Third Party Stock Percentage") equal to 33-1/3% or more of the Voting Stock of the Borrower unless at such time ------ 66 the percentage of outstanding Voting Stock of the Borrower beneficially owned by the Permitted Investors (determined on a fully diluted basis) is equal to or greater than the Third Party Stock Percentage, provided, that -------- for the purposes of this clause (ii), Voting Stock that a Permitted Investor has the power to vote in its sole discretion pursuant to contract or proxy shall be deemed to be beneficially owned by such Permitted Investor and not by any other "person" or "group"; or (iii) a Specified Change of Control shall occur; or (m) The Senior Subordinated Notes shall cease, for any reason, to be validly subordinated to the Obligations, as provided in the Senior Subordinated Note Indenture, or any Loan Party or any Affiliate of any Loan Party or any trustee in respect of the Senior Subordinated Notes shall so assert; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Revolving Credit Facility Lenders, the Administrative Agent may, or upon the request of the Majority Revolving Credit Facility Lenders, the Administrative Agent shall, by notice to the Borrower declare the Revolving Credit Commitments to be terminated forthwith, whereupon the Revolving Credit Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other Obligations of the Borrower. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto). SECTION 9. THE ADMINISTRATIVE AGENT 9.1 Appointment. Each Lender hereby irrevocably designates and ----------- appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this 67 Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 9.2 Delegation of Duties. The Administrative Agent may execute any -------------------- of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 9.3 Exculpatory Provisions. Neither the Administrative Agent nor any ---------------------- of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party a party thereto to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party. 9.4 Reliance by Administrative Agent. The Administrative Agent shall -------------------------------- be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 9.5 Notice of Default. The Administrative Agent shall not be deemed ----------------- to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice 68 thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); provided that unless and until the Administrative Agent shall have received such - -------- directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.6 Non-Reliance on Administrative Agent and Other Lenders. Each ------------------------------------------------------ Lender expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any affiliate of a Loan Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 9.7 Indemnification. The Lenders agree to indemnify the --------------- Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Revolving Credit Percentages, Tranche A Term Loan Percentages, Tranche B Term Loan Percentages and Tranche C Term Loan Percentages in effect on the date on which indemnification is sought under this Section 9.7 (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided -------- that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section 9.7 shall survive the payment of the Loans and all other amounts payable hereunder. The Administrative Agent shall have the right to deduct any amount owed to it by any Lender under this Section from any payment made by it to such Lender hereunder. 69 9.8 Administrative Agent in Its Individual Capacity. The ----------------------------------------------- Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though the Administrative Agent were not the Administrative Agent. With respect to its Loans made or renewed by it and with respect to any Letter of Credit issued or participated in by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 9.9 Successor Administrative Agent. The Administrative Agent may ------------------------------ resign as Administrative Agent upon 15 days' notice to the Lenders and the Borrower. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default under Section 8(a) or Section 8(f) with respect to the Borrower shall have occurred and be continuing) be approved by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is 15 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Lenders shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. 9.10 Authorization to Release Liens. The Administrative Agent is ------------------------------ hereby irrevocably authorized by each of the Lenders to (a) release any Lien covering any Property of the Borrower or any of its Subsidiaries that is the subject of a Disposition or an Asset Swap which is permitted by this Agreement or which has been consented to in accordance with Section 10.1, (b) release any Lien covering a Pledged Note (as defined in the Guarantee and Collateral Agreement) if all amounts owing in respect of such Pledged Note have been paid in full, (c) release a Subsidiary Guarantor from its obligations under the Guarantee and Collateral Agreement, if all of its Capital Stock has been the subject of a Disposition or an Asset Swap which is permitted by this Agreement or which has been consented to in accordance with Section 10.1 or if such Subsidiary Guarantor has been merged out of existence in accordance with Section 7.4 and (d) release Liens relating to one or more Specified Facilities in connection with allowing such Specified Facilities to become Substitute Omega Properties. SECTION 10. MISCELLANEOUS 10.1 Amendments and Waivers. Other than as contemplated by Section ---------------------- 9.10, neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and each Loan Party party to the relevant Loan Document may, or, with the written consent of the Required Lenders, the Administrative Agent and each Loan Party party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties 70 hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, -------- however, that no such waiver and no such amendment, supplement or modification - ------ shall (i) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest, fee or letter of credit commission payable hereunder or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender's Revolving Credit Commitment, in each case without the consent of each Lender directly affected thereby (it being understood that a waiver of the application of Section 2.14(c), the last parenthetical contained in the definition of "Applicable Margin" or the second or third sentences of the paragraph set forth beneath the Pricing Grid shall not be deemed to be changes of the type covered by this clause (i)); (ii) amend, modify or waive any provision of this Section 10.1 or reduce any percentage specified in the definition of Required Lenders or Required Prepayment Lenders, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or substantially all of the Collateral or release all or substantially all of the Subsidiary Guarantors or GranCare from their or its obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all Lenders; (iii) amend, modify or waive any condition precedent to any extension of credit under the Revolving Credit Facility set forth in Section 5.2 (including, without limitation, in connection with any waiver of an existing Default or Event of Default) without the written consent of the Majority Revolving Credit Facility Lenders; (iv) reduce the percentage specified in the definition of Majority Facility Lenders without the written consent of all Lenders under each affected Facility; (v) amend, modify or waive any provision of Section 9 without the written consent of the Administrative Agent; (vi) amend, modify or waive any provision of Section 2.6 or 2.7 without the written consent of the Swing Line Lender; (vii) amend, modify or waive any provision of Section 3 without the written consent of the Issuing Lender; or (viii) amend, modify or waive any provision of Section 2.17 providing for the application of any optional or mandatory prepayments which would reduce the amount or delay the application of any payment to be applied to any Facility without the written consent of the Majority Facility Lenders in respect of such Facility. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Administrative Agent and all future holders of the Loans. In the case of any waiver, the Loan Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing, but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 10.2 Notices. Unless otherwise expressly provided herein, all ------- notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, certified mail, return receipt requested, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Borrower and the Administrative Agent, and as set forth in an administrative questionnaire delivered to the Administrative Agent in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto: 71 The Borrower: Paragon Health Network, Inc. One Ravinia Drive, 15th Floor Atlanta, Georgia 30346 Attention: Treasurer Telecopy: (770) 393-8599 with a copy to: Paragon Health Network, Inc. One Ravinia Drive, 15th Floor Atlanta, Georgia 30346 Attention: Chief Financial Officer Telecopy: (770) 393-8599 The Administrative Agent: The Chase Manhattan Bank 270 Park Avenue 48th Floor New York, New York 10017 Attention: Dawn Lee Lum Telecopy: (212) 270-3279 with a copy to: The Chase Manhattan Bank Agent Bank Services Group One Chase Manhattan Plaza 8th Floor New York, New York 10081 Attention: Joseph Brusco Telecopy: (212) 552-7500 provided that any notice, request or demand to or upon the Administrative Agent - -------- or the Lenders shall not be effective until received. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no ------------------------------ delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4 Survival of Representations and Warranties. All representations ------------------------------------------ and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 10.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay ----------------------------- or reimburse the Administrative Agent for all its out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent (provided that the Borrower shall not be required to reimburse the Administrative 72 Agent for expenses associated with any general inspection of the Borrower and its Subsidiaries conducted by the Administrative Agent pursuant to Section 6.7 (other than one such general inspection per fiscal year of the Borrower) unless any such inspection is conducted at any time when a Default or Event of Default has occurred and is continuing), (b) to pay or reimburse each Lender and the Administrative Agent for all its out-of-pocket costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the reasonable fees and disbursements of counsel to each Lender and of counsel to the Administrative Agent, (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, indemnify, and hold each Lender and the Administrative Agent and their respective officers, directors, trustees, investment advisors, employees, affiliates, agents and controlling persons (each, an "indemnitee") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that the Borrower shall -------- have no obligation hereunder to any indemnitee with respect to indemnified liabilities to the extent such indemnified liabilities are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such indemnitee. The agreements in this Section 10.5 shall survive repayment of the Loans and all other amounts payable hereunder. 10.6 Successors and Assigns; Participations and Assignments. (a) ------------------------------------------------------ This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent, all future holders of the Loans and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, without the consent of the Borrower, in accordance with applicable law, at any time sell to one or more banks, financial institutions or other entities (each, a "Participant") participating interests ----------- in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Loans or any fees payable hereunder, or postpone the date of the final maturity of the Loans, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this 73 Agreement and the Loans are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing such participating interest, such -------- Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.18, 2.19 and 2.20 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; provided that, in the case of Section 2.19, such Participant shall have -------- complied with the requirements of said Section and provided, further, that no -------- ------- Participant shall be entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender (an "Assignor") may, in accordance with applicable -------- law, at any time and from time to time assign to any Lender, any affiliate or any Related Fund thereof or, with the consent of the Borrower and the Administrative Agent (which, in each case, shall not be unreasonably withheld or delayed), to an additional bank, financial institution or other entity (an "Assignee") all or any part of its rights and obligations under this Agreement - --------- pursuant to an Assignment and Acceptance, substantially in the form of Exhibit E, executed by such Assignee and such Assignor (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) and delivered to the Administrative Agent for its acceptance and recording in the Register; provided that no such assignment to an -------- Assignee (other than any Lender, any affiliate or any Related Fund thereof) shall be in an aggregate principal amount of less than $5,000,000 (other than in the case of an assignment of all of a Lender's interests under this Agreement), unless otherwise agreed by the Borrower and the Administrative Agent. Any such assignment need not be ratable as among the Facilities. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment and/or Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of an Assignor's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). Notwithstanding any provision of this Section 10.6, the consent of the Borrower shall not be required, and, unless requested by the Assignee and/or the Assignor, new Notes shall not be required to be executed and delivered by the Borrower, for any assignment which occurs at any time when any of the events described in Section 8(f) shall have occurred and be continuing. (d) The Administrative Agent shall maintain at its address referred to in Section 10.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of -------- the Lenders and the Commitments of, and the principal amount of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, each other Loan Party, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loan recorded therein for all purposes of this Agreement. (e) Upon its receipt of an Assignment and Acceptance executed by an Assignor and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof, by the Borrower and the Administrative Agent) together with payment to the Administrative Agent of a 74 registration and processing fee of $3,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) record the information contained therein in the Register on the effective date determined pursuant thereto. (f) (i) Upon request of any Lender, the Loans made by such Lender shall be evidenced by a Note issued by the Borrower, substantially in the form of Exhibit G-1, G-2, G-3, G-4 or G-5, as the case may be, payable to the order of such Lender (or, in the case of any Alternative Note, payable to such Lender or its registered assigns). Each Lender is hereby authorized to record, on the schedule annexed to and constituting a part of the relevant Note, information regarding the relevant Loans made by such Lender, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, ----- ----- provided that the failure to make any such recordation or any error in such - -------- recordation shall not affect the Borrower's obligations hereunder or under any Note. On or prior to the effective date of an Assignment and Acceptance, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the relevant Notes, new Notes to the order of the Assignee and, if applicable, the Assignor. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Notes replaced thereby. (ii) Any Non-U.S. Lender that could become completely exempt from withholding of any tax, assessment or other charge or levy imposed by or on behalf of the United States or any taxing authority thereof ("U.S. Taxes") in ---------- respect of payment of any Obligations due to such Non-U.S. Lender under this Agreement if the Obligations were in registered form for U.S. federal income tax purposes may request the Borrower (through the Administrative Agent), and the Borrower agrees thereupon, to exchange any promissory note(s) evidencing such Obligations for promissory note(s) substantially in the form of Exhibit G-4 or G-5, as the case may be (each, an "Alternative Note"). Alternative Notes may ---------------- not be exchanged for promissory notes that are not Alternative Notes. Each Non- U.S. Lender that holds Alternative Note(s) (an "Alternative Noteholder") (or, if ---------------------- such Alternative Noteholder is not the beneficial owner thereof, such beneficial owner) shall deliver to the Borrower prior to or at the time such Non-U.S. Lender becomes an Alternative Noteholder each of the forms and certifications required by Section 2.19(b). An Alternative Note and the Obligation(s) evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Alternative Note and the Obligation(s) evidenced thereby on the Register (and each Alternative Note shall expressly so provide). Any assignment or transfer of all or part of such Obligation(s) and the Alternative Note(s) evidencing the same shall be registered on the Register only upon surrender for registration of assignment or transfer of the Alternative Note(s) evidencing such Obligation(s), duly endorsed by (or accompanied by a written instrument of assignment or transfer duly executed by) the Alternative Noteholder thereof, and thereupon one or more new Alternative Note(s) in the same aggregate principal amount shall be issued to the designated Assignee(s). No assignment of an Alternative Note and the Obligations evidenced thereby shall be effective unless it has been recorded in the Register. (g) Notwithstanding the limitations set forth in paragraph (b) above, (i) any Lender may at any time assign or pledge all or any portion of its rights under this Agreement or any Note to a Federal Reserve Bank and (ii) any Lender which is a "fund" may at any time assign or pledge all or any portion of its rights under this Agreement to secure such Lender's indebtedness, in each case without the prior written consent of any Borrower or the Administrative Agent; provided that each such assignment shall be made in accordance with -------- applicable law and no such assignment shall release a Lender from any of its obligations hereunder. 10.7 Adjustments; Set-off. (a) Except to the extent that this -------------------- Agreement provides for payments to be allocated to the Lenders under a particular Facility, if any Lender (a "Benefitted Lender") shall at any time ----------------- receive any payment of all or part of its Loans or the Reimbursement Obligations owing 75 to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or the Reimbursement Obligations owing to such other Lender, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan and/or of the Reimbursement Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits - -------- ------- is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such setoff and application made by such Lender, provided that the failure to give such notice shall not affect -------- the validity of such setoff and application. 10.8 Counterparts. This Agreement may be executed by one or more of ------------ the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. 10.9 Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10 Integration. This Agreement and the other Loan Documents ----------- represent the agreement of the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS ------------- OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (WITHOUT REGARD FOR THE CONFLICT OF LAWS PRINCIPLES THEREOF). 76 10.12 Submission To Jurisdiction; Waivers. The Borrower hereby ----------------------------------- irrevocably and unconditionally: (a) submits for itself and its Property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 10.2 or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 10.12 any special, exemplary, punitive or consequential damages. 10.13 Acknowledgements. The Borrower hereby acknowledges that: ---------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Administrative Agent and Lenders, on one hand, and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE AGENT --------------------- AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 10.15 Confidentiality. Each of the Administrative Agent and each --------------- Lender agrees to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement that is designated by such Loan Party as confidential; provided that nothing herein shall prevent the -------- 77 Administrative Agent or any Lender from disclosing any such information (a) to the Administrative Agent, any other Lender or any affiliate of any Lender, (b) to any Participant or Assignee (each, a "Transferee") or prospective Transferee --------- which agrees to comply with the provisions of this Section 10.15, (c) to the employees, directors, agents, attorneys, accountants and other professional advisors of such Lender or its affiliates, (d) upon the request or demand of any Governmental Authority having jurisdiction over the Administrative Agent or such Lender, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, provided, however, that in the case of any such request or -------- ------- requirement, the Administrative Agent or Lender (as applicable) so requested or required to make such disclosure shall as soon as practicable notify the Borrower thereof and provide the Borrower with copies of all pleadings, orders or other documents evidencing or purportedly substantiating such request or requirement which it has received, (g) which has been publicly disclosed other than in breach of this Section 10.15, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with ratings issued with respect to such Lender, or (i) in connection with the exercise of any remedy hereunder or under any other Loan Document. 78 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By: /s/ Charles B. Carden ------------------------------------- Name: Charles B. Carden Title: Executive Vice President, Chief Financial Officer THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: /s/ Bruce S. Borden ------------------------------------- Name: Bruce S. Borden Title: Vice President 79 Annex A ------- PRICING GRID FOR REVOLVING CREDIT LOANS, SWING LINE LOANS TRANCHE A TERM LOANS AND COMMITMENT FEES
================================================================================================================================= Consolidated Leverage Ratio Applicable Margin Applicable Margin Commitment for ABR Loans for Eurodollar Loans Fee Rate - --------------------------------------------------------------------------------------------------------------------------------- greater than and equal to 5.25 to 1.0 1.25% 2.25% .50% - --------------------------------------------------------------------------------------------------------------------------------- less than 5.25 to 1.0 and greater than and equal to 4.75 to 1.0 1.00% 2.00% .50% - --------------------------------------------------------------------------------------------------------------------------------- less than 4.75 to 1.0 and greater than and equal to 4.25 to 1.0 .75% 1.75% .375% - --------------------------------------------------------------------------------------------------------------------------------- less than 4.25 to 1.0 and greater than and equal to 3.75 to 1.0 .50% 1.50% .375% - --------------------------------------------------------------------------------------------------------------------------------- less than 3.75 to 1.0 and greater than and equal to 3.25 to 1.0 .25% 1.25% .30% - --------------------------------------------------------------------------------------------------------------------------------- less than 3.25 to 1.0 and greater than and equal to 2.75 to 1.0 0% 1.00% .30% - --------------------------------------------------------------------------------------------------------------------------------- less than 2.75 to 1.0 0% .75% .25% =================================================================================================================================
Changes in the Applicable Margin with respect to Revolving Credit Loans, Tranche A Term Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "Adjustment ---------- Date") on which financial statements are delivered to the Lenders pursuant to - ---- Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the Consolidated Leverage Ratio shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. Each determination of the Consolidated Leverage Ratio hereunder shall be made with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements. EX-10.49 37 GUARANTEE AND COLLATERAL AGREEMENT EXHIBIT 10.49 EXECUTION COPY ================================================================================ GUARANTEE AND COLLATERAL AGREEMENT made by PARAGON HEALTH NETWORK, INC. and certain of its Subsidiaries in favor of THE CHASE MANHATTAN BANK, as Collateral Agent Dated as of November 4, 1997 ================================================================================ TABLE OF CONTENTS
Page ---- SECTION 1. DEFINED TERMS................................................................................ 2 1.1 Definitions.................................................................................... 2 ----------- 1.2 Other Definitional Provisions.................................................................. 5 ----------------------------- SECTION 2. GUARANTEE.................................................................................... 7 2.1 Guarantee...................................................................................... 7 --------- 2.2 Right of Contribution.......................................................................... 7 --------------------- 2.3 No Subrogation................................................................................. 7 -------------- 2.4 Amendments, etc. with respect to the Borrower Obligations...................................... 8 --------------------------------------------------------- 2.5 Guarantee Absolute and Unconditional........................................................... 8 ------------------------------------ 2.6 Reinstatement.................................................................................. 9 ------------- 2.7 Payments....................................................................................... 9 -------- SECTION 3. GRANT OF SECURITY INTEREST................................................................... 9 SECTION 4. REPRESENTATIONS AND WARRANTIES............................................................... 10 4.1 Representations in Corporate Credit Agreement.................................................. 10 --------------------------------------------- 4.2 Title; No Other Liens.......................................................................... 10 --------------------- 4.3 Perfected First Priority Liens................................................................. 10 ------------------------------ 4.4 Chief Executive Office......................................................................... 11 ---------------------- 4.5 Inventory and Equipment........................................................................ 11 ----------------------- 4.6 Farm Products.................................................................................. 11 ------------- 4.7 Pledged Securities............................................................................. 11 ------------------ 4.8 Receivables.................................................................................... 11 ----------- 4.9 Intellectual Property.......................................................................... 11 --------------------- SECTION 5. COVENANTS.................................................................................... 12 5.1 Covenants in Corporate Credit Agreement........................................................ 12 --------------------------------------- 5.2 Delivery of Instruments and Chattel Paper...................................................... 12 ----------------------------------------- 5.3 Maintenance of Insurance....................................................................... 12 ------------------------ 5.4 Payment of Obligations......................................................................... 13 ---------------------- 5.5 Maintenance of Perfected Security Interest; Further Documentation.............................. 13 ----------------------------------------------------------------- 5.6 Changes in Locations, Name, etc................................................................ 13 ------------------------------- 5.7 Notices........................................................................................ 14 ------- 5.8 Pledged Securities............................................................................. 14 ------------------ 5.9 Receivables.................................................................................... 15 ----------- 5.10 Intellectual Property......................................................................... 15 --------------------- SECTION 6. REMEDIAL PROVISIONS.......................................................................... 16 6.1 Certain Matters Relating to Receivables........................................................ 16 --------------------------------------- 6.2 Communications with Obligors; Grantors Remain Liable........................................... 17 ---------------------------------------------------- 6.3 Pledged Stock.................................................................................. 17 ------------- 6.4 Proceeds to be Turned Over To Collateral Agent................................................. 18 ---------------------------------------------- 6.5 Application of Proceeds........................................................................ 18 ----------------------- 6.6 Code and Other Remedies........................................................................ 19 -----------------------
Page ---- 6.7 Registration Rights.......................................................................... 19 ------------------- 6.8 Waiver; Deficiency........................................................................... 20 ------------------ 6.9 Governmental Obligor Limited Receivables..................................................... 20 ---------------------------------------- SECTION 7. THE COLLATERAL AGENT....................................................................... 21 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc...................................... 21 ------------------------------------------------------- 7.2 Duty of Collateral Agent..................................................................... 22 ------------------------ 7.3 Execution of Financing Statements............................................................ 22 --------------------------------- 7.4 Authority of Collateral Agent................................................................ 23 ----------------------------- SECTION 8. MISCELLANEOUS.............................................................................. 23 8.1 Amendments in Writing........................................................................ 23 --------------------- 8.2 Notices...................................................................................... 23 ------- 8.3 No Waiver by Course of Conduct; Cumulative Remedies.......................................... 23 --------------------------------------------------- 8.4 Enforcement Expenses; Indemnification........................................................ 23 ------------------------------------- 8.5 Successors and Assigns....................................................................... 24 ---------------------- 8.6 Set-Off...................................................................................... 24 ------- 8.7 Counterparts................................................................................. 24 ------------ 8.8 Severability................................................................................. 24 ------------ 8.9 Section Headings............................................................................. 25 ---------------- 8.10 Integration................................................................................. 25 ----------- 8.11 GOVERNING LAW............................................................................... 25 ------------- 8.12 Submission To Jurisdiction; Waivers......................................................... 25 ----------------------------------- 8.13 Acknowledgements............................................................................ 25 ---------------- 8.14 WAIVER OF JURY TRIAL........................................................................ 26 -------------------- 8.15 Additional Grantors......................................................................... 26 ------------------- 8.16 Releases.................................................................................... 26 ---------
1 GUARANTEE AND COLLATERAL AGREEMENT, dated as of November 4, 1997, made by each of the signatories hereto (together with any other entity that may become a party hereto as provided herein, the "Grantors"), in favor of THE CHASE -------- MANHATTAN BANK, as collateral agent (in such capacity, the "Collateral Agent") ---------------- for (i) the banks and other financial institutions or entities (the "Corporate Lenders") from time to time parties to the Credit Agreement, ------------------ dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Corporate Credit Agreement"), among Paragon Health -------------------------- Network, Inc. (the "Borrower"), the Corporate Lenders, The Chase Manhattan -------- Bank, as administrative agent for the Corporate Lenders (in such capacity, the "Administrative Agent"), and NationsBank, N.A., as documentation agent -------------------- (in such capacity, the "Documentation Agent"); and ------------------- (ii) the banks and other financial institutions (the "Synthetic --------- Lenders"; collectively with the Corporate Lenders, the "Lenders") from time ------- ------- to time parties to the Amended and Restated Credit Agreement, dated as of the date hereof (as amended, supplemented or otherwise modified from time to time, the "Synthetic Credit Agreement"; collectively with the Corporate -------------------------- Credit Agreement, the "Credit Agreements"), among FBTC Leasing Corp. ----------------- ("FBTC"), the Synthetic Lenders and The Chase Manhattan Bank, as ---- administrative agent for the Synthetic Lenders (in such capacity, the "Synthetic Agent"; collectively with the Administrative Agent, the ---------------- "Agents"). ------ W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Corporate Credit Agreement, the Corporate Lenders have severally agreed to make extensions of credit to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, the Borrower is a member of an affiliated group of companies that includes each other Grantor; WHEREAS, the proceeds of the extensions of credit under the Corporate Credit Agreement will be used in part to enable the Borrower to make valuable transfers to one or more of the other Grantors in connection with the operation of their respective businesses; WHEREAS, the Borrower and the other Grantors are engaged in related businesses, and each Grantor will derive substantial direct and indirect benefit from the making of the extensions of credit under the Corporate Credit Agreement; WHEREAS, pursuant to the Synthetic Credit Agreement, the Synthetic Lenders have severally agreed to make extensions of credit to FBTC upon the terms and subject to the conditions set forth therein; WHEREAS, the Grantors (in such capacity, the "Synthetic Guarantors"), -------------------- under the Amended and Restated Guarantee, dated as of the date hereof (the "Synthetic Guarantee"), in favor of the Synthetic Agent for the benefit of the - -------------------- Synthetic Lenders, have guaranteed the obligations of the FBTC under the Synthetic Credit Agreement, subject to certain limitations set forth therein; WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective extensions of credit to the Borrower and FBTC under the respective Credit Agreements that 2 the Grantors shall have executed and delivered this Agreement to the Collateral Agent for the ratable benefit of the Lenders; NOW, THEREFORE, in consideration of the premises and to induce the Agents and the Lenders to enter into the respective Credit Agreements and to induce the Lenders to make their respective extensions of credit to the Borrower and FBTC thereunder (as applicable), each Grantor hereby agrees with the Collateral Agent, for the ratable benefit of the Lenders, as follows: SECTION 1. DEFINED TERMS 1.1 Definitions. (a) Unless otherwise defined herein, terms defined ----------- in the Corporate Credit Agreement and used herein shall have the meanings given to them in the Corporate Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, Instruments, Inventory and Investment Property. (b) The following terms shall have the following meanings: "Agreement": this Guarantee and Collateral Agreement, as the same may --------- be amended, supplemented or otherwise modified from time to time. "Borrower Obligations": the collective reference to the unpaid -------------------- principal of and interest on the Loans and Reimbursement Obligations and all other obligations and liabilities of the Borrower (including, without limitation, interest accruing at the then applicable rate provided in the Corporate Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Corporate Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post- filing or post-petition interest is allowed in such proceeding) to the Administrative Agent, any Lender or the Collateral Agent (or, in the case of any Hedge Agreement referred to below, any Affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Corporate Credit Agreement, this Agreement, the other Loan Documents, any Letter of Credit or any Hedge Agreement entered into by the Borrower with any Lender (or any Affiliate of any Lender) or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent, to the Lenders or to the Collateral Agent that are required to be paid by the Borrower pursuant to the terms of any of the foregoing agreements). "Collateral": as defined in Section 3. ---------- "Collateral Account": any collateral account established by the ------------------ Collateral Agent as provided in Section 6.1, 6.4 or 6.9. "Collateral Agent Agreement": the Collateral Agent Agreement, dated as -------------------------- of the date hereof, among the Corporate Lenders, the Corporate Agent, the Synthetic Lenders, the Synthetic Agent, FBTC and the Collateral Agent. 3 "Copyrights": (i) all copyrights arising under the laws of the United ---------- States, any other country or any political subdivision thereof, whether registered or unregistered and whether published or unpublished (including, without limitation, those listed in Schedule 6), all registrations and ---------- recordings thereof, and all applications in connection therewith, including, without limitation, all registrations, recordings and applications in the United States Copyright Office, and (ii) the right to obtain all renewals thereof. "Copyright Licenses": any written agreement naming any Grantor as ------------------ licensor or licensee (including, without limitation, those listed in Schedule 6), granting any right under any Copyright, including, without ---------- limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright, to the extent, in each case where any Grantor is a licensee under any such written agreement, the grant by such Grantor of a security interest pursuant to this Agreement is not prohibited by such written agreement. "General Intangibles": all "general intangibles" as such term is ------------------- defined in Section 9-106 of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, including, without limitation, with respect to any Grantor, all contracts, agreements, instruments and indentures in any form, and portions thereof, to which such Grantor is a party or under which such Grantor has any right, title or interest or to which such Grantor or any property of such Grantor is subject, as the same may from time to time be amended, supplemented or otherwise modified, including, without limitation, (i) all rights of such Grantor to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of such Grantor to damages arising thereunder and (iii) all rights of such Grantor to perform and to exercise all remedies thereunder, in each case to the extent the grant by such Grantor of a security interest pursuant to this Agreement in its right, title and interest in such contract, agreement, instrument or indenture is not prohibited by such contract, agreement, instrument or indenture without the consent of any other party thereto, would not give any other party to such contract, agreement, instrument or indenture the right to terminate its obligations thereunder, or is permitted with consent if all necessary consents to such grant of a security interest have been obtained from the other parties thereto (it being understood that the foregoing shall not be deemed to obligate such Grantor to obtain such consents); provided, that -------- the foregoing limitation shall not affect, limit, restrict or impair the grant by such Grantor of a security interest pursuant to this Agreement in any Receivable or any money or other amounts due or to become due under any such contract, agreement, instrument or indenture. "Governmental Obligor Limited Receivables": any amount payable to a ---------------------------------------- Grantor under or in connection with any Receivable where the obligor on any such Receivable is a Governmental Authority or a governmental program (including, but not limited to, Medicare and Medicaid) which pursuant to applicable law (including, but not limited to, the Federal Assignment of Claims Act) may not be sold by any Grantor or collected directly from, or enforced directly against, such obligor or Account holder by the holder of a security interest therein. "Guarantor Obligations": with respect to any Guarantor, the --------------------- collective reference to (i) the Borrower Obligations and (ii) all obligations and liabilities of such Guarantor which may arise under or in connection with this Agreement or any other Loan Document to which such Guarantor is a party, in each case whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Collateral Agent, to the Administrative Agent or to the Lenders that are required to be paid by such Guarantor pursuant to the terms of this Agreement or any other Loan Document). 4 "Guarantors": the collective reference to each Grantor other than the ---------- Borrower. "Hedge Agreements": as to any Person, all interest rate swaps, caps ---------------- or collar agreements or similar arrangements entered into by such Person providing for protection against fluctuations in interest rates or currency exchange rates or the exchange of nominal interest obligations, either generally or under specific contingencies. "Intellectual Property": the collective reference to all rights, --------------------- priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, the Copyrights, the Copyright Licenses, the Patents, the Patent Licenses, the Trademarks and the Trademark Licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "Intercompany Note": any promissory note evidencing loans made by any ----------------- Grantor to the Borrower or any of its Subsidiaries. "Issuers": the collective reference to each issuer of a Pledged ------- Security. "New York UCC": the Uniform Commercial Code as from time to time in ------------ effect in the State of New York. "Obligations": (i) in the case of the Borrower, the Borrower ----------- Obligations, (ii) in the case of each Guarantor, its Guarantor Obligations and (iii) the Synthetic Obligations. "Patents": (i) all letters patent of the United States, any other ------- country or any political subdivision thereof, all reissues and extensions thereof and all goodwill associated therewith, including, without limitation, any of the foregoing referred to in Schedule 6, (ii) all ---------- applications for letters patent of the United States or any other country and all divisions, continuations and continuations-in-part thereof, including, without limitation, any of the foregoing referred to in Schedule -------- 6, and (iii) all rights to obtain any reissues or extensions of the - foregoing. "Patent License": all agreements, whether written or oral, providing -------------- for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including, without limitation, any of the foregoing referred to in Schedule 6, to the extent, ---------- in each case where any Grantor is a grantee under any such agreement, the grant by such Grantor of a security interest pursuant to this Agreement is not prohibited by such agreement. "Pledged Notes": all promissory notes listed on Schedule 2, all ------------- ---------- Intercompany Notes at any time issued to any Grantor and all other promissory notes issued to or held by any Grantor (other than promissory notes issued in connection with extensions of trade credit by any Grantor in the ordinary course of business) or any Investment Property. "Pledged Securities": the collective reference to the Pledged Notes ------------------ and the Pledged Stock. "Pledged Stock": the shares of Capital Stock listed on Schedule 2, ------------- ---------- together with any other shares, stock certificates, options or rights of any nature whatsoever in respect of the Capital Stock of any Person that may be issued or granted to, or held by, any Grantor while this Agreement is in effect or any Investment Property. 5 "Proceeds": all "proceeds" as such term is defined in Section 9- -------- 306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Securities, collections thereon or distributions or payments with respect thereto. "Receivable": any right to payment for goods sold or leased or for ---------- services rendered, whether or not such right is evidenced by an Instrument or Chattel Paper and whether or not it has been earned by performance (including, without limitation, any Account). "Securities Act": the Securities Act of 1933, as amended. -------------- "Support Letter of Credit": an irrevocable letter of credit delivered ------------------------ pursuant to Section 8.16 to an Issuing Lender in connection with any Letter of Credit which shall remain outstanding after the termination of this Agreement naming such Issuing Lender as beneficiary thereunder, and which letter of credit shall in all respects be satisfactory to such Issuing Lender and the Collateral Agent. "Synthetic Obligations": with respect to any Grantor, all obligations --------------------- and liabilities of such Grantor which may arise under or in connection with the Synthetic Guarantee whether on account of guarantee obligations, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Synthetic Agent or to the Synthetic Lenders that are required to be paid by such Grantor pursuant to the terms of this Agreement or the Synthetic Guarantee). "Trademarks": (i) all trademarks, trade names, corporate names, ---------- company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers, and all goodwill associated therewith, now existing or hereafter adopted or acquired, all registrations and recordings thereof, and all applications in connection therewith, whether in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, or otherwise, and all common-law rights related thereto, including, without limitation, any of the foregoing referred to in Schedule 6, and (ii) the ---------- right to obtain all renewals thereof. "Trademark License": any agreement, whether written or oral, ----------------- providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any of the foregoing referred to in Schedule 6, to the extent, in each case where any Grantor is a grantee ---------- under any such agreement, the grant by such Grantor of a security interest pursuant to this Agreement is not prohibited by such agreement. "Vehicles": all cars, trucks, trailers, construction and earth moving -------- equipment and other vehicles covered by a certificate of title law of any state and all tires and other appurtenances to any of the foregoing. 1.2 Other Definitional Provisions. (a) The words "hereof," ----------------------------- "herein", "hereto" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 6 (c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor's Collateral or the relevant part thereof. 7 SECTION 2. GUARANTEE 2.1 Guarantee. (a) Each of the Guarantors hereby, jointly and --------- severally, unconditionally and irrevocably, guarantees to the Collateral Agent, for the ratable benefit of the Corporate Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations. (b) Anything herein or in any other Loan Document to the contrary notwithstanding, the maximum liability of each Guarantor hereunder and under the other Loan Documents shall in no event exceed the amount which can be guaranteed by such Guarantor under applicable federal and state laws relating to the insolvency of debtors (after giving effect to the right of contribution established in Section 2.2). (c) Each Guarantor agrees that the Borrower Obligations may at any time and from time to time exceed the amount of the liability of such Guarantor hereunder without impairing the guarantee contained in this Section 2 or affecting the rights and remedies of the Collateral Agent, the Administrative Agent or any Corporate Lender hereunder. (d) The guarantee contained in this Section 2 shall remain in full force and effect until all the Borrower Obligations and the obligations of each Guarantor under the guarantee contained in this Section 2 shall have been satisfied by payment in full, no Letter of Credit shall be outstanding and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Corporate Credit Agreement the Borrower may be free from any Borrower Obligations. (e) No payment made by the Borrower, any of the Guarantors, any other guarantor or any other Person or received or collected by the Administrative Agent, the Collateral Agent or any Corporate Lender from the Borrower, any of the Guarantors, any other guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Borrower Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the Borrower Obligations or any payment received or collected from such Guarantor in respect of the Borrower Obligations), remain liable for the Borrower Obligations up to the maximum liability of such Guarantor hereunder until the Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. 2.2 Right of Contribution. Each Guarantor hereby agrees that to the --------------------- extent that a Guarantor shall have paid more than its proportionate share of any payment made hereunder, such Guarantor shall be entitled to seek and receive contribution from and against any other Guarantor hereunder which has not paid its proportionate share of such payment. Each Guarantor's right of contribution shall be subject to the terms and conditions of Section 2.3. The provisions of this Section 2.2 shall in no respect limit the obligations and liabilities of any Guarantor to the Collateral Agent, Administrative Agent and the Corporate Lenders, and each Guarantor shall remain liable to the Collateral Agent, the Administrative Agent and the Corporate Lenders for the full amount guaranteed by such Guarantor hereunder. 2.3 No Subrogation. Notwithstanding any payment made by any -------------- Guarantor hereunder or any set-off or application of funds of any Guarantor by the Collateral Agent, the Administrative Agent or any Corporate Lender, no Guarantor shall be entitled to be subrogated to any of the rights of the 8 Collateral Agent, the Administrative Agent or any Corporate Lender against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Collateral Agent, the Administrative Agent or any Corporate Lender for the payment of the Borrower Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by such Guarantor hereunder, until all amounts owing to the Collateral Agent, the Administrative Agent and the Corporate Lenders by the Borrower on account of the Borrower Obligations are paid in full, no Letter of Credit shall be outstanding and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Borrower Obligations shall not have been paid in full, such amount shall be held by such Guarantor in trust for the Collateral Agent, the Administrative Agent and the Corporate Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Collateral Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Collateral Agent, if required), to be applied against the Borrower Obligations, whether matured or unmatured, in such order as the Collateral Agent may determine. 2.4 Amendments, etc. with respect to the Borrower Obligations. Each --------------------------------------------------------- Guarantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against any Guarantor and without notice to or further assent by any Guarantor, any demand for payment of any of the Borrower Obligations made by the Collateral Agent, the Administrative Agent or any Corporate Lender may be rescinded by the Collateral Agent, the Administrative Agent or such Corporate Lender and any of the Borrower Obligations continued, and the Borrower Obligations, or the liability of any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Collateral Agent, the Administrative Agent or any Corporate Lender, and the Corporate Credit Agreement and the other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the requisite number of Lenders under the Corporate Credit Agreement, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Collateral Agent, the Administrative Agent or any Corporate Lender for the payment of the Borrower Obligations may be sold, exchanged, waived, surrendered or released. Neither the Collateral Agent, the Administrative Agent nor any Corporate Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Borrower Obligations or for the guarantee contained in this Section 2 or any property subject thereto. 2.5 Guarantee Absolute and Unconditional. Each Guarantor waives any ------------------------------------ and all notice of the creation, renewal, extension or accrual of any of the Borrower Obligations and notice of or proof of reliance by the Collateral Agent, the Administrative Agent or any Corporate Lender upon the guarantee contained in this Section 2 or acceptance of the guarantee contained in this Section 2; the Borrower Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon the guarantee contained in this Section 2; and all dealings between the Borrower and any of the Guarantors, on the one hand, and the Collateral Agent, the Administrative Agent and the Corporate Lenders, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon the guarantee contained in this Section 2. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or any of the Guarantors with respect to the Borrower Obligations. Each Guarantor understands and agrees that the guarantee contained in this Section 2 shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity or enforceability of the Corporate Credit Agreement or any other Loan Document, any of the Borrower Obligations or any other collateral security therefor or guarantee or right of offset with respect 9 thereto at any time or from time to time held by the Collateral Agent, the Administrative Agent or any Corporate Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any other Person against the Collateral Agent, the Administrative Agent or any Corporate Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Borrower Obligations, or of such Guarantor under the guarantee contained in this Section 2, in bankruptcy or in any other instance. When making any demand hereunder or otherwise pursuing its rights and remedies hereunder against any Guarantor, the Collateral Agent, the Administrative Agent or any Corporate Lender may, but shall be under no obligation to, make a similar demand on or otherwise pursue such rights and remedies as it may have against the Borrower, any other Guarantor or any other Person or against any collateral security or guarantee for the Borrower Obligations or any right of offset with respect thereto, and any failure by the Collateral Agent, the Administrative Agent or any Corporate Lender to make any such demand, to pursue such other rights or remedies or to collect any payments from the Borrower, any other Guarantor or any other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower, any other Guarantor or any other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any obligation or liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Collateral Agent, the Administrative Agent or any Corporate Lender against any Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 2.6 Reinstatement. The guarantee contained in this Section 2 shall ------------- continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Borrower Obligations is rescinded or must otherwise be restored or returned by the Collateral Agent, the Administrative Agent or any Corporate Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 2.7 Payments. Each Guarantor hereby guarantees that payments -------- hereunder will be paid to the Collateral Agent without set-off or counterclaim in Dollars at the office of the Collateral Agent located at 270 Park Avenue, New York, New York 10017. SECTION 3. GRANT OF SECURITY INTEREST Each Grantor hereby assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Lenders, a security interest in, all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), as collateral security for the prompt and complete payment and - ----------- performance when due (whether at the stated maturity, by acceleration or otherwise) of such Grantor's Obligations: (a) all Accounts; (b) all Chattel Paper; (c) all Documents; 10 (d) all Equipment; (e) all General Intangibles; (f) all Instruments; (g) all Intellectual Property; (h) all Inventory; (i) all Investment Property; (j) all Pledged Securities; (k) all books and records pertaining to the Collateral; and (l) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any Person with respect to any of the foregoing. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Agents and the Lenders to enter into the Credit Agreements and to induce the Lenders to make their respective extensions of credit to the Borrower or FBTC, as the case may be, thereunder, each Grantor hereby represents and warrants to each Agent and each Lender that: 4.1 Representations in Corporate Credit Agreement. In the case of --------------------------------------------- each Guarantor, the representations and warranties set forth in Section 4 of the Corporate Credit Agreement as they relate to such Guarantor or to the Loan Documents to which such Guarantor is a party, each of which is hereby incorporated herein by reference, are true and correct, and the Collateral Agent, the Agents and each Lender shall be entitled to rely on each of them as if they were fully set forth herein, provided that each reference in each such -------- representation and warranty to the Borrower's knowledge shall, for the purposes of this Section 4.1, be deemed to be a reference to such Guarantor's knowledge. 4.2 Title; No Other Liens. Except for the security interest granted --------------------- to the Collateral Agent for the ratable benefit of the Lenders pursuant to this Agreement and the other Liens permitted to exist on the Collateral by the Corporate Credit Agreement, such Grantor owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent, for the ratable benefit of the Lenders, pursuant to this Agreement or as are permitted by the Corporate Credit Agreement. 4.3 Perfected First Priority Liens. The security interests granted ------------------------------ pursuant to this Agreement (a) upon delivery to the Collateral Agent of stock certificates or other documents representing the Pledged Stock (together with undated stock powers duly executed in blank relating thereto), delivery to the Collateral Agent of the Pledged Notes, duly endorsed in blank by the appropriate Grantor and completion of the filings specified on Schedule 3 (which, in the ---------- case of all filings referred to on said Schedule, have been delivered to the Collateral Agent in completed and duly executed form) will constitute valid perfected security interests in all of the Collateral in favor of the Collateral Agent, for the 11 ratable benefit of the Lenders, as collateral security for such Grantor's Obligations, enforceable in accordance with the terms hereof against all creditors of such Grantor and any Persons purporting to purchase any Collateral from such Grantor (except, in each case, under the circumstances provided to the contrary in the New York UCC or in the Uniform Commercial Code in effect in any applicable jurisdiction) and (b) are prior to all other Liens on the Collateral in existence on the date hereof except for (i) unrecorded Liens permitted by the Corporate Credit Agreement which have priority over the Liens on the Collateral by operation of law and (ii) Liens described on Schedule 7. ---------- 4.4 Chief Executive Office. On the date hereof, such Grantor's ---------------------- jurisdiction of organization and the location of such Grantor's chief executive office or sole place of business are specified on Schedule 4. ---------- 4.5 Inventory and Equipment. On the date hereof, the Inventory and ----------------------- the Equipment (other than mobile goods) are kept at the locations listed on Schedule 5. - ---------- 4.6 Farm Products. None of the Collateral constitutes, or is the ------------- Proceeds of, Farm Products. 4.7 Pledged Securities. (a) The shares of Pledged Stock pledged by ------------------ such Grantor hereunder constitute all the issued and outstanding shares of all classes of the Capital Stock of each Issuer owned by such Grantor in the case of Domestic Subsidiaries, and 65% of the issued and outstanding shares of all classes of the Capital Stock of each Issuer that is a Foreign Subsidiary which is owned by such Grantor. (b) All the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable. (c) Each of the Pledged Notes constitutes the legal, valid and binding obligation of the obligor with respect thereto, enforceable in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (d) Such Grantor is the record and beneficial owner of, and has good and marketable title to, the Pledged Securities pledged by it hereunder, free of any and all Liens or options in favor of, or claims of, any other Person, except the security interest created by this Agreement. 4.8 Receivables. (a) No amount payable to such Grantor under or in ----------- connection with any Receivable is evidenced by any Instrument or Chattel Paper which has not been delivered to the Collateral Agent. (b) The amounts represented by such Grantor to the Lenders from time to time as owing to such Grantor in respect of the Receivables will at such times be accurate (except for immaterial inadvertent inaccuracies). 4.9 Intellectual Property. (a) Schedule 6 lists all Intellectual --------------------- ---------- Property owned by such Grantor in its own name on the date hereof. 12 (b) On the date hereof, all material Intellectual Property is valid, subsisting, unexpired and enforceable, has not been abandoned and, to the best of such Grantor's knowledge, does not infringe the intellectual property rights of any other Person, subject to the disclosure made in Schedule 6. ---------- (c) Except as set forth in Schedule 6, on the date hereof, none of ---------- the Intellectual Property is the subject of any licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor. (d) No holding, decision or judgment has been rendered by any Governmental Authority which would limit, cancel or question the validity of, or such Grantor's rights in, any Intellectual Property in any respect that could reasonably be expected to have a Material Adverse Effect. (e) Except as disclosed in Schedule 6, no action or proceeding is ---------- pending, or, to the knowledge of such Grantor, threatened, on the date hereof (i) seeking to limit, cancel or question the validity of any Intellectual Property or such Grantor's ownership interest therein, or (ii) which, if adversely determined, would have a material adverse effect on the value of any Intellectual Property. SECTION 5. COVENANTS Each Grantor covenants and agrees with the Collateral Agent, the Agents and the Lenders that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 5.1 Covenants in Corporate Credit Agreement. In the case of each --------------------------------------- Guarantor, such Guarantor shall take, or shall refrain from taking, as the case may be, each action that is necessary to be taken or not taken, as the case may be, so that no Default or Event of Default is caused by the failure to take such action or to refrain from taking such action by such Guarantor or any of its Subsidiaries, subject in each instance to the applicable grace and cure periods, if any, provided in the Corporate Credit Agreement or any other Loan Document to which such Guarantor is a party. 5.2 Delivery of Instruments and Chattel Paper. If any amount payable ----------------------------------------- under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper not constituting Investment Property, such Instrument or Chattel Paper shall promptly be delivered to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Agreement. 5.3 Maintenance of Insurance. (a) Such Grantor will maintain, with ------------------------ financially sound and reputable companies, insurance policies (i) insuring the Inventory, Equipment and Vehicles against loss by fire, explosion, theft and such other casualties as may be reasonably satisfactory to the Collateral Agent and (ii) insuring such Grantor, the Collateral Agent, the Agents and the Lenders against liability for personal injury and property damage relating to such Inventory, Equipment and Vehicles, such policies to comply with the requirements of Section 6.5 of the Corporate Credit Agreement and to be in such form as may be reasonably satisfactory to the Collateral Agent. The Collateral Agent acknowledges that such policies in effect as of the date hereof are reasonably satisfactory with respect to coverages, forms and amounts. (b) All such insurance shall (i) provide that no cancellation, material reduction in amount or material change in coverage thereof shall be effective until at least 30 days after receipt by the Collateral Agent of written notice thereof, (ii) name the Collateral Agent as an additional insured party or 13 loss payee, (iii) if reasonably requested by the Collateral Agent, include a breach of warranty clause and (iv) be reasonably satisfactory in all other respects to the Collateral Agent. (c) The Borrower shall annually deliver to the Collateral Agent, the Agents and the Lenders a renewal notice of a reputable insurance broker with respect to such insurance at least 15 days prior to the expiration of such insurance and reports of a reputable insurance broker with respect to such insurance as the Collateral Agent may from time to time reasonably request. 5.4 Payment of Obligations. Such Grantor will pay and discharge or ---------------------- otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind (including, without limitation, claims for labor, materials and supplies) against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of such Grantor and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any material portion of the Collateral or any interest therein. 5.5 Maintenance of Perfected Security Interest; Further --------------------------------------------------- Documentation. (a) Such Grantor shall maintain the security interest created by this Agreement as a perfected security interest (to the extent the security interest in such Collateral can be perfected by filing of one or more financing statements or by possession of such Collateral by the Collateral Agent) having at least the priority described in Section 4.3 and shall defend such security interest against the claims and demands of all Persons whomsoever, except for Permitted Liens. (b) Such Grantor will furnish to the Collateral Agent, the Agents and the Lenders from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. (c) At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby. 5.6 Changes in Locations, Name, etc. Such Grantor will not, except -------------------------------- upon 15 days' prior written notice to the Collateral Agent and delivery to the Collateral Agent of (a) subject to Section 6.10(a) of the Corporate Credit Agreement, all additional executed financing statements and other documents requested by the Collateral Agent to maintain the validity, perfection and priority of the security interests provided for herein and (b) if applicable, a written supplement to Schedule 5 showing any additional location at which ---------- Inventory or Equipment shall be kept: (i) permit any of the Inventory or Equipment to be kept at a location other than those listed on Schedule 5; ---------- 14 (ii) change the location of its chief executive office or sole place of business, as the case may be, from that referred to in Section 4.4; or (iii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Collateral Agent in connection with this Agreement would become misleading. 5.7 Notices. Such Grantor will advise the Collateral Agent, the ------- Agents and the Lenders promptly, in reasonable detail, of: (a) any Lien (other than security interests created hereby or Liens permitted under the Corporate Credit Agreement) on any of the Collateral which would adversely affect the ability of the Collateral Agent to exercise any of its remedies hereunder; and (b) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the security interests created hereby. 5.8 Pledged Securities. (a) If such Grantor shall become entitled ------------------ to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock of any Issuer or any Investment Property, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, such Grantor shall accept the same as the agent of the Collateral Agent, the Agents and the Lenders, hold the same in trust for the Collateral Agent, the Agents and the Lenders and deliver the same forthwith to the Collateral Agent in the exact form received, duly indorsed by such Grantor to the Collateral Agent, if required, together with an undated stock power covering such certificate duly executed in blank by such Grantor and with, if the Collateral Agent so requests, signature guaranteed, to be held by the Collateral Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Securities upon the liquidation or dissolution of any Issuer shall be paid over to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Securities or any property shall be distributed upon or with respect to the Pledged Securities pursuant to the recapitalization or reclassification of the capital of any Issuer or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Collateral Agent, be delivered to the Collateral Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Securities shall be received by such Grantor, such Grantor shall, until such money or property is paid or delivered to the Collateral Agent, hold such money or property in trust for the Lenders, segregated from other funds of such Grantor, as additional collateral security for the Obligations. (b) Without the prior written consent of the Collateral Agent, such Grantor will not (i) vote to enable, or take any other action to permit, any Issuer to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of any Issuer, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Securities or Proceeds thereof (except pursuant to a transaction expressly permitted by the Corporate Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Securities or Proceeds thereof, or any interest therein, except for the security interests 15 created by this Agreement or otherwise permitted by the Corporate Credit Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Collateral Agent to sell, assign or transfer any of the Pledged Securities or Proceeds thereof. (c) In the case of each Grantor which is an Issuer, such Issuer agrees that (i) it will be bound by the terms of this Agreement relating to the Pledged Securities issued by it and will comply with such terms insofar as such terms are applicable to it, (ii) it will notify the Collateral Agent promptly in writing of the occurrence of any of the events described in Section 5.8(a) with respect to the Pledged Securities issued by it and (iii) the terms of Sections 6.3(c) and 6.7 shall apply to it, mutatis mutandis, with respect to all actions ------- -------- that may be required of it pursuant to Section 6.3(c) or 6.7 with respect to the Pledged Securities issued by it. 5.9 Receivables. (a) Other than in the ordinary course of business ----------- consistent with industry standards, such Grantor will not (i) grant any extension of the time of payment of any Receivable, (ii) compromise or settle any Receivable for less than the full amount thereof, (iii) release, wholly or partially, any Person liable for the payment of any Receivable, (iv) allow any credit or discount whatsoever on any Receivable or (v) amend, supplement or modify any Receivable in any manner that could adversely affect the value thereof. (b) Such Grantor will deliver to the Collateral Agent a copy of each demand, notice or document received by it that questions or calls into doubt the validity or enforceability of more than 5% of the aggregate amount (for the Grantors as a whole) of the then outstanding Receivables. 5.10 Intellectual Property. (a) Such Grantor (either itself or --------------------- through licensees) will (i) continue to use each material Trademark on each and every trademark class of goods, if any, or services as reflected in its current catalogs, brochures and price lists in order to maintain such Trademark in full force free from any claim of abandonment for non-use, (ii) maintain as in the past the quality of products, if any, and services offered under such Trademark, (iii) use such Trademark with the appropriate notice of registration and all other notices and legends required by applicable Requirements of Law, (iv) not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark unless the Collateral Agent, for the ratable benefit of the Lenders, shall obtain a perfected security interest in such mark pursuant to this Agreement, and (v) not do (and use commercially reasonable efforts to prevent any licensee or sublicensee thereof from doing) any act or knowingly omit to do any act whereby such Trademark may become invalidated or impaired in any way. (b) Such Grantor (either itself or through licensees) will not do any act, or omit to do any act, whereby any material Patent may become forfeited, abandoned or dedicated to the public. (c) Such Grantor (either itself or through licensees) (i) will employ each material Copyright and (ii) will not do (and will use commercially reasonable efforts to prevent any licensee or sublicensee thereof from doing) any act or knowingly omit to do any act whereby any material portion of the Copyrights may become invalidated or otherwise impaired if such impairment would have a Material Adverse Effect. Such Grantor will not (either itself or through licensees) do any act whereby any material portion of the Copyrights may fall into the public domain. (d) Such Grantor (either itself or through licensees) will not do any act that knowingly uses any Intellectual Property to infringe the intellectual property rights of any other Person if such infringement could reasonably be expected to have a Material Adverse Effect. 16 (e) Such Grantor will promptly notify the Collateral Agent if it knows of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantor's ownership of, or the validity of, any material Intellectual Property or such Grantor's right to register the same or to own and maintain the same. (f) Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Collateral Agent as part of the Borrower's quarterly Compliance Certificate required pursuant to Section 6.2(b) of the Corporate Credit Agreement with respect to the fiscal quarter in which such filing occurs. Upon request of the Collateral Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent's, the Agents' and the Lenders' security interest in any Copyright, Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. (g) Such Grantor will take all commercially reasonable steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. (h) In the event that any material Intellectual Property is infringed, misappropriated or diluted by a third party, such Grantor shall (i) take such actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property and (ii) if such Intellectual Property is of material economic value, promptly notify the Collateral Agent after it learns thereof and sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution. (i) Nothing contained in this Section 5.10 shall operate or be construed to require any Grantor to initiate or file any new applications to register any Trademark or Copyright. SECTION 6. REMEDIAL PROVISIONS 6.1 Certain Matters Relating to Receivables. (a) The Collateral --------------------------------------- Agent shall have the right to make test verifications of the Receivables in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Collateral Agent may reasonably require in connection with such test verifications. At any time and from time to time, upon the Collateral Agent's reasonable request and at the expense of the relevant Grantor, such Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Receivables. (b) The Collateral Agent hereby authorizes each Grantor to collect such Grantor's Receivables, subject to the Collateral Agent's direction and control, and the Collateral Agent may curtail or terminate said authority at any time after the occurrence and during the continuance of an Event of 17 Default. If required by the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, any payments of Receivables, when collected by any Grantor, (i) shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Lenders only as provided in Section 65, and (ii) until so turned over, shall be held by such Grantor in trust for the Collateral Agent, the Agents and the Lenders, segregated from other funds of such Grantor. Each such deposit of Proceeds of Receivables shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. (c) At the Collateral Agent's request, each Grantor shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Receivables, including, without limitation, all original orders, invoices and shipping receipts, though such Grantor may retain copies thereof for its records. 6.2 Communications with Obligors; Grantors Remain Liable. (a) The ---------------------------------------------------- Collateral Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with obligors under the Receivables to verify with them to the Collateral Agent's satisfaction the existence, amount and terms of any Receivables. (b) Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify obligors on the Receivables that the Receivables have been assigned to the Collateral Agent for the ratable benefit of the Lenders and that payments in respect thereof shall be made directly to the Collateral Agent. (c) Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of the Receivables to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Collateral Agent, either Agent nor any Lender shall have any obligation or liability under any Receivable (or any agreement giving rise thereto) by reason of or arising out of this Agreement or the receipt by the Collateral Agent, either Agent or any Lender of any payment relating thereto, nor shall the Collateral Agent, either Agent or any Lender be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Receivable (or any agreement giving rise thereto), to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 6.3 Pledged Stock. (a) Unless an Event of Default shall have ------------- occurred and be continuing and the Collateral Agent shall have given notice to the relevant Grantor of the Collateral Agent's intent to exercise its corresponding rights pursuant to Section 6.3(b), each Grantor shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and all payments made in respect of the Pledged Notes, in each case paid in the normal course of business of the relevant Issuer, to the extent permitted in the Corporate Credit Agreement, and to exercise all voting and corporate rights with respect to the Pledged Securities; provided, however, that no vote shall be cast -------- ------- or corporate right exercised or other action taken which, in the Collateral Agent's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Corporate Credit Agreement, this Agreement or any other Loan Document, the Synthetic Guarantee or the Collateral Agent Agreement. 18 (b) If an Event of Default shall occur and be continuing and the Collateral Agent shall give notice of its intent to exercise such rights to the relevant Grantor or Grantors, (i) the Collateral Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Securities and make application thereof to the Obligations in such order as the Collateral Agent may determine in accordance with the Collateral Agent Agreement, and (ii) any or all of the Pledged Securities shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Pledged Securities at any meeting of shareholders of the relevant Issuer or Issuers or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Securities as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Securities upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of any Issuer, or upon the exercise by any Grantor or the Collateral Agent of any right, privilege or option pertaining to such Pledged Securities, and in connection therewith, the right to deposit and deliver any and all of the Pledged Securities with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to any Grantor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) Each Issuer acknowledges and consents to the pledge herein of the Pledged Stock issued by it. Each Grantor hereby authorizes and instructs each Issuer of any Pledged Securities pledged by such Grantor hereunder to (i) comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Securities directly to the Collateral Agent. 6.4 Proceeds to be Turned Over To Collateral Agent. In addition to ---------------------------------------------- the rights of the Collateral Agent, the Agents and the Lenders specified in Sections 6.1 and 6.9 with respect to payments of Receivables, if an Event of Default shall occur and be continuing, all Proceeds received by any Grantor consisting of cash, checks and other near-cash items shall be held by such Grantor in trust for the Collateral Agent, the Agents and the Lenders, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required). All Proceeds received by the Collateral Agent hereunder shall be held by the Collateral Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Collateral Agent in a Collateral Account (or by such Grantor in trust for the Collateral Agent, the Agents and the Lenders) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 65. 6.5 Application of Proceeds. If an Event of Default shall have ----------------------- occurred and be continuing, at any time at the Collateral Agent's election, the Collateral Agent may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations in such order as the Collateral Agent may elect in accordance with the Collateral Agent Agreement, and any part of such funds which the Collateral Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Collateral Agent to the Borrower or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the 19 Commitments shall have terminated shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive the same. 6.6 Code and Other Remedies. If an Event of Default shall occur and ----------------------- be continuing, the Collateral Agent, on behalf of the Lenders, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below or any notice otherwise expressly required in the Loan Documents) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent, either Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent, either Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any action taken by it pursuant to this Section 6.6, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent, the Agents and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect in accordance with the Collateral Agent Agreement, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the New York UCC, need the Collateral Agent account for the surplus, if any, to any Grantor. To the extent permitted by applicable law, each Grantor waives all claims, damages and demands it may acquire against the Collateral Agent, either Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 6.7 Registration Rights. (a) If the Collateral Agent shall ------------------- determine to exercise its right to sell any or all of the Pledged Stock pursuant to Section 6.6, and if in the opinion of the Collateral Agent it is necessary or advisable to have the Pledged Stock, or that portion thereof to be sold, registered under the provisions of the Securities Act, the relevant Grantor will cause the Issuer thereof to (i) execute and deliver, and cause the directors and officers of such Issuer to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Collateral Agent, necessary or advisable to register the Pledged Stock, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged Stock, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of the Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and 20 regulations of the Securities and Exchange Commission applicable thereto. Each Grantor agrees to cause such Issuer to comply with the provisions of the securities or "Blue Sky" laws of any and all jurisdictions which the Collateral Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of Section 11(a) of the Securities Act. (b) Each Grantor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so. (c) Each Grantor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Stock pursuant to this Section 6.7 valid and binding and in compliance with any and all other applicable Requirements of Law. Each Grantor further agrees that a breach of any of the covenants contained in this Section 6.7 will cause irreparable injury to the Collateral Agent, the Agents and the Lenders, that the Collateral Agent, the Agents and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 6.7 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Corporate Credit Agreement. 6.8 Waiver; Deficiency. Each Grantor waives and agrees not to assert ------------------ any rights or privileges which it may acquire under Section 9-112 of the New York UCC. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent, either Agent or any Lender to collect such deficiency. 6.9 Governmental Obligor Limited Receivables. Notwithstanding the ---------------------------------------- provisions of Section 6.1, the Collateral Agent shall not collect or enforce payment of any Governmental Obligor Limited Receivable if and to the extent that such collection or enforcement is prohibited under 42 U.S.C. (S)(S) 1395(g) or 1396(a) or under any comparable provision of federal or state law. To the extent the Collateral Agent's rights as to any Governmental Obligor Limited Receivable are limited pursuant to this Section 6.9, upon the occurrence and during the continuation of an Event of Default, each Grantor will (i) use its reasonable and diligent best efforts to collect and enforce payment of such Governmental Obligor Limited Receivable, (ii) immediately deposit in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a Collateral Account maintained under the sole dominion and control of the Collateral Agent, subject to withdrawal by the Collateral Agent for the account of the Lenders only as provided in Section 65, and until so turned over, shall be held by such Grantor in trust for the Collateral Agent, the Agents and the Lenders, segregated from other funds of such Grantor and (iii) upon written demand by the Collateral Agent at any time and from time to time, remit (and cause the depository bank for such Collateral Account to remit) directly to the Collateral Agent, as Proceeds of the 21 Collateral and for application to the payment of the Obligations pursuant to Section 6.5, all finally collected funds on deposit in such Collateral Account. SECTION 7. THE COLLATERAL AGENT 7.1 Collateral Agent's Appointment as Attorney-in-Fact, etc. (a) ------------------------------------------------------- Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following: (i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Receivable or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Receivable or with respect to any other Collateral whenever payable; (ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Collateral Agent may request to evidence the Collateral Agent's, the Agents' and the Lenders' security interest in such Intellectual Property and the goodwill and general intangibles of such Grantor relating thereto or represented thereby; (iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof; (iv) execute, in connection with any sale provided for in Section 6.6 or 6.7, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (v) (i) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (ii) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (iii) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (iv) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (v) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (vi) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; (vii) assign any Copyright, Patent or Trademark (along with the goodwill 22 of the business to which any such Copyright, Patent or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (viii) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's, the Agents' and the Lenders' security interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do. Anything in this Section 7.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 7.1(a) unless an Event of Default shall have occurred and be continuing. (b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 7.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due ABR Loans under the Corporate Credit Agreement, from the date of payment by the Collateral Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Collateral Agent on demand. (d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 7.2 Duty of Collateral Agent. The Collateral Agent's sole duty with ------------------------ respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent, either Agent, any Lender nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Collateral Agent, the Agents and the Lenders hereunder are solely to protect the Collateral Agent's, the Agents' and the Lenders' interests in the Collateral and shall not impose any duty upon the Collateral Agent, either Agent or any Lender to exercise any such powers. The Collateral Agent, the Agents and the Lenders shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7.3 Execution of Financing Statements. Pursuant to Section 9-402 of --------------------------------- the New York UCC and any other applicable law, each Grantor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Collateral Agent reasonably determines appropriate to perfect the security interests of the Collateral Agent under this 23 Agreement. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. 7.4 Authority of Collateral Agent. Each Grantor acknowledges that ----------------------------- the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non- exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as among the Collateral Agent, the Agents and the Lenders, be governed by the Corporate Credit Agreement or the Synthetic Guarantee (as the case may be) and the Collateral Agent Agreement, and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Grantors, the Collateral Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. SECTION 8. MISCELLANEOUS 8.1 Amendments in Writing. None of the terms or provisions of this --------------------- Agreement may be waived, amended, supplemented or otherwise modified except in accordance with subsection 10.1 of the Corporate Credit Agreement. 8.2 Notices. All notices, requests and demands to or upon the ------- Collateral Agent or any Grantor hereunder shall be effected in the manner provided for in subsection 10.2 of the Corporate Credit Agreement; provided that -------- any such notice, request or demand to or upon any Guarantor shall be addressed to such Guarantor at its notice address set forth on Schedule 1 and provided, ---------- --------- further, that each reference in such subsection to the Administrative Agent - -------- shall, for the purposes of this Section 8.2, be deemed to be a reference to the Collateral Agent. 8.3 No Waiver by Course of Conduct; Cumulative Remedies. Neither the --------------------------------------------------- Collateral Agent, either Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, either Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent, either Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent, such Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 8.4 Enforcement Expenses; Indemnification. (a) Each Guarantor ------------------------------------- agrees to pay or reimburse each Lender, each Agent and the Collateral Agent for all its costs and expenses incurred in collecting against such Guarantor under the guarantee contained in Section 2 or otherwise enforcing or preserving any rights under this Agreement, the other Loan Documents to which such Guarantor is a party, the Synthetic Guarantee and the Collateral Agent Agreement, including, without limitation, the fees and disbursements of counsel to each of the Lenders, the Agents and the Collateral Agent. 24 (b) Each Guarantor agrees to pay, and to save the Collateral Agent, the Agents and the Lenders and their respective officers, directors, trustees, investment advisors, employees, affiliates, agents and controlling persons harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (c) Each Guarantor agrees to pay, and to save the Collateral Agent, the Agents and the Lenders and their respective officers, directors, trustees, investment advisors, employees, affiliates, agents and controlling persons harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to subsection 10.5 of the Corporate Credit Agreement. (d) The agreements in this Section 8.4 shall survive repayment of the Obligations and all other amounts payable under the Corporate Credit Agreement, the other Loan Documents and the Synthetic Guarantee. 8.5 Successors and Assigns. This Agreement shall be binding upon the ---------------------- successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent, the Agents and the Lenders and their successors and assigns; provided that no Grantor may assign, transfer or delegate any of its rights or - -------- obligations under this Agreement without the prior written consent of the Collateral Agent. 8.6 Set-Off. Each Grantor hereby irrevocably authorizes the ------- Collateral Agent, the Agents and each Lender at any time and from time to time during the continuance of an Event of Default, without prior notice to such Grantor or any other Grantor, any such notice being expressly waived by each Grantor, to set-off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Collateral Agent, such Agent or such Lender to or for the credit or the account of such Grantor, or any part thereof in such amounts as the Collateral Agent, such Agent or such Lender may elect, against and on account of the obligations and liabilities of such Grantor to the Collateral Agent, such Agent or such Lender hereunder and claims of every nature and description of the Collateral Agent, such Agent or such Lender against such Grantor, in any currency, whether arising hereunder, under the Corporate Credit Agreement, any other Loan Document, the Synthetic Guarantee, the Collateral Agent Agreement or otherwise, as the Collateral Agent, such Agent or such Lender may elect, whether or not the Collateral Agent, either Agent or any Lender has made any demand for payment and although such obligations, liabilities and claims may be contingent or unmatured. The Collateral Agent, each Agent and each Lender shall notify such Grantor promptly of any such set-off and the application made by the Collateral Agent, such Agent or such Lender of the proceeds thereof, provided -------- that the failure to give such notice shall not affect the validity of such set- off and application. The rights of the Collateral Agent, each Agent and each Lender under this Section 8.6 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Collateral Agent, such Agent or such Lender may have. 8.7 Counterparts. This Agreement may be executed by one or more of ------------ the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 25 8.8 Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8.9 Section Headings. The Section headings used in this Agreement ---------------- are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 8.10 Integration. This Agreement, the other Loan Documents, the ----------- Synthetic Guarantee and the Collateral Agent Agreement represent the agreement of the Grantors, the Collateral Agent, the Agents and the Lenders with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Collateral Agent, either Agent or any Lender relative to subject matter hereof and thereof not expressly set forth or referred to herein, in the other Loan Documents, the Synthetic Guarantee or the Collateral Agent Agreement. 8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 8.12 Submission To Jurisdiction; Waivers. Each Grantor hereby ----------------------------------- irrevocably and unconditionally: (a) submits for itself and its property in any legal action or proceeding relating to this Agreement, the other Loan Documents to which it is a party and the Synthetic Guarantee or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to such Grantor at its address referred to in Section 8.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. 26 8.13 Acknowledgements. Each Grantor hereby acknowledges that: ---------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party and the Synthetic Guarantee; (b) neither the Collateral Agent, either Agent nor any Lender has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement, any of the other Loan Documents, the Synthetic Guarantee or the Collateral Agent Agreement, and the relationship between the Grantors, on the one hand, and the Collateral Agent, the Agents and the Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or the Synthetic Guarantee or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Grantors and the Lenders. 8.14 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND -------------------- UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE SYNTHETIC GUARANTEE, OR THE COLLATERAL AGENT AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 8.15 Additional Grantors. Each Subsidiary of the Borrower that is ------------------- required to become a party to this Agreement pursuant to subsection 6.10 of the Corporate Credit Agreement shall become a Grantor for all purposes of this Agreement and party to the Collateral Agent Agreement upon execution and delivery by such Subsidiary of an Assumption Agreement in the form of Annex 1 hereto. 8.16 Releases. (a) At such time as the Loans, the Reimbursement -------- Obligations and the other Obligations shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding (except, with respect to any outstanding Letter of Credit, to the extent a corresponding Support Letter of Credit has been delivered to the Issuing Lender of such Letter of Credit and delivery thereof has been confirmed in writing to the Collateral Agent by such Issuing Lender), the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and each Grantor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral, except any Support Letter of Credit, shall revert to the Grantors. At the request and sole expense of any Grantor following any such termination, the Collateral Agent shall deliver to such Grantor any Collateral held by the Collateral Agent hereunder, and execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by any Grantor in a transaction permitted by the Corporate Credit Agreement, then the Collateral Agent, at the request and sole expense of such Grantor, shall execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. At the request and sole expense of the Borrower, a Guarantor shall be released from its obligations hereunder in the event that all the Capital Stock of such Guarantor shall be sold, transferred or otherwise disposed of in a transaction permitted by the Corporate Credit Agreement; provided that the Borrower shall have delivered to the Collateral Agent, at - -------- least ten Business Days prior to the date of the proposed release, a written request for release identifying the relevant Guarantor and the terms of the sale or other disposition in reasonable detail, including the price thereof and any expenses in connection 27 therewith, together with a certification by the Borrower stating that such transaction is in compliance with the Corporate Credit Agreement, the other Loan Documents and the Synthetic Guarantee. IN WITNESS WHEREOF, each of the undersigned has caused this Guarantee and Collateral Agreement to be duly executed and delivered as of the date first above written. PARAGON HEALTH NETWORK, INC. By: /s/ Charles B. Carden --------------------------------- Title: Executive Vice President and Chief Financial Officer AMERICAN-CAL MEDICAL SERVICES, INC. AMS GREEN TREE, INC. AMS PROPERTIES, INC. CONNERWOOD HEALTHCARE, INC. COORDINATED HOME HEALTH SERVICES, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE, INC. EVERGREEN HEALTHCARE LTD., L.P. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REALTY, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VALLEY MANOR HEALTH CARE CENTER, INC. GCI VILLAGE GREEN, INC. GCI-CAL HEALTH CARE CENTERS, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE GPO SERVICES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE, INC. GRANCARE NURSING SERVICES AND HOSPICE, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE TRADING, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSTMASTERS, INC. NATIONAL HERITAGE REALTY, INC. OMEGA/INDIANA CARE CORPORATION RENAISSANCE MENTAL HEALTH CENTER, INC. STONECREEK MANAGEMENT COMPANY, INC. By: /s/ Everett W. Benton --------------------------------- Title: Vice President AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY MANAGEMENT, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN SENIOR HEALTH SERVICES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC. DEVCON HOLDING COMPANY EXTENDED ACUTE HOSPITALS OF AMERICA, INC. GULF COAST PHYSICAL THERAPY GROUP, INC. HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC. HOMECARE ASSOCIATES OF AMERICA, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSPICE CARE OF TENNESSEE, INC. HOSPICE MANAGEMENT PARTNERS, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS - EAST, INC. LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. MED-CARE SALES AND RENTALS, INC. MED-THERAPY REHABILITATION SERVICES, INC. PROFESSIONAL RX SYSTEMS, INC. PROGRESSIVE CARE CENTERS OF AMERICA, INC. REHABILITY HEALTH SERVICES, INC. REHABILITY HOSPITAL SERVICES, INC. THERACARE HOME HEALTH AGENCY, INC. THERAPY MANAGEMENT INNOVATIONS, INC. TOICA, INC. WORKHEALTH HEALTHCARE MANAGEMENT INC. By: /s/ Sydney Boone ----------------------------------- Title: Vice President Schedule 1 ---------- NOTICE ADDRESSES OF GUARANTORS Schedule 2 ---------- DESCRIPTION OF PLEDGED SECURITIES PLEDGED STOCK:
Issuer Class of Stock Stock Certificate No. No. of Shares ----------------------------- ------------------- --------------------------------- -------------------
PLEDGED NOTES:
Issuer Payee Principal Amount - --------------------------------- ------------------- ------------------------------
Schedule 3 ---------- FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS Uniform Commercial Code Filings ------------------------------- See Annex A to this Schedule 3 Patent and Trademark Filings ---------------------------- Notice of the Collateral Agent's security interest in the Intellectual Property listed on Schedule 6 shall be filed with the PTO and/or USCO, as the case may be. Schedule 4 ---------- LOCATION OF JURISDICTION OF ORGANIZATION AND CHIEF EXECUTIVE OFFICE Grantor Location ------- -------- Schedule 5 ---------- LOCATION OF INVENTORY AND EQUIPMENT Grantor Locations ------- --------- Schedule 6 ---------- COPYRIGHTS AND COPYRIGHT LICENSES PATENTS AND PATENT LICENSES TRADEMARKS AND TRADEMARK LICENSES Schedule 7 ---------- EXISTING PRIOR LIENS Annex 1 to Guarantee and Collateral Agreement ---------------------------------- ASSUMPTION AGREEMENT, dated as of ________________, _____, made by ______________________________, a ______________ corporation (the "Additional ---------- Grantor"), in favor of THE CHASE MANHATTAN BANK, as collateral agent (in such - ------- capacity, the "Collateral Agent") for the Lenders. All capitalized terms not ---------------- defined herein shall have the meaning ascribed to them in the Guarantee and Collateral Agreement referred to below. W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Borrower, the Corporate Lenders, the Administrative Agent and the Documentation Agent have entered into the Corporate Credit Agreement; WHEREAS, FBTC, the Synthetic Lenders and the Synthetic Agent have entered into the Synthetic Credit Agreement; WHEREAS, in connection with the Corporate Credit Agreement and the Synthetic Guarantee, the Borrower and certain of its Affiliates (other than the Additional Grantor) have entered into the Guarantee and Collateral Agreement, dated as of November 4, 1997 (as amended, supplemented or otherwise modified from time to time, the "Guarantee and Collateral Agreement"), in favor of the ---------------------------------- Collateral Agent for the benefit of the Lenders; WHEREAS, the Corporate Credit Agreement requires the Additional Grantor to become a party to the Guarantee and Collateral Agreement and to the Collateral Agent Agreement; and WHEREAS, the Additional Grantor has agreed to execute and deliver this Assumption Agreement in order to become a party to the Guarantee and Collateral Agreement and the Collateral Agent Agreement; NOW, THEREFORE, IT IS AGREED: 1. Guarantee and Collateral Agreement. By executing and delivering ---------------------------------- this Assumption Agreement, the Additional Grantor, as provided in Section 8.15 of the Guarantee and Collateral Agreement, hereby becomes a party to the Guarantee and Collateral Agreement as a Grantor thereunder and to the Collateral Agent Agreement, in each case with the same force and effect as if originally named therein as a Grantor or a party thereto and, without limiting the generality of the foregoing, hereby expressly assumes all obligations and liabilities of a Grantor under the Guarantee and Collateral Agreement and a party to the Collateral Agent Agreement. The information set forth in Annex 1-A hereto is hereby added to the information set forth in Schedules ____________/*/ to the Guarantee and Collateral Agreement. The Additional Grantor hereby represents and warrants that each of the representations and warranties contained in Section 4 of the Guarantee and Collateral Agreement is true and correct on and as the date hereof (after giving effect to this Assumption Agreement) as if made on and as of such date. _______________________________ * Refer to each Schedule which needs to be supplemented. 2 2. GOVERNING LAW. THIS ASSUMPTION AGREEMENT SHALL BE GOVERNED BY, ------------- AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the undersigned has caused this Assumption Agreement to be duly executed and delivered as of the date first above written. [ADDITIONAL GRANTOR] By:______________________ Name: Title: ACKNOWLEDGEMENT AND CONSENT* The undersigned hereby acknowledges receipt of a copy of the Guarantee and Collateral Agreement, dated as of November 4, 1997 (the "Agreement"), made by --------- the Grantors parties thereto for the benefit of The Chase Manhattan Bank, as Collateral Agent. The undersigned agrees for the benefit of the Collateral Agent, the Agents and the Lenders as follows: 1. The undersigned will be bound by the terms of the Agreement and will comply with such terms insofar as such terms are applicable to the undersigned. 2. The undersigned will notify the Collateral Agent promptly in writing of the occurrence of any of the events described in Section 5.8(a) of the Agreement. 3. The terms of Sections 6.3 and 6.7 of the Agreement shall apply to it, mutatis mutandis, with respect to all actions that may be required of it - ------- -------- pursuant to Section 6.3 or 6.7 of the Agreement. [NAME OF ISSUER] By _______________________________ Title ____________________________ Address for Notices: __________________________________ __________________________________ Fax: _____________________________ * To be delivered by any Issuer which is not party to this Guarantee and Collateral Agreement. EX-10.50 38 AMENDED AND RESTATED PARTICIPATION AGREEMENT EXHIBIT 10.50 ================================================================================ AMENDED AND RESTATED PARTICIPATION AGREEMENT among LIVING CENTERS HOLDING COMPANY, as Lessee, FBTC LEASING CORP., a New York corporation, as Lessor, THE CHASE MANHATTAN BANK, as Agent for the Lenders, THE FUJI BANK, LIMITED (HOUSTON AGENCY), as Co-Agent and THE LENDERS PARTIES HERETO ______________________________ Dated as of November 4, 1997 ______________________________ ================================================================================ TABLE OF CONTENTS -----------------
Page ---- SECTION 1. THE LOANS......................................................... 2 SECTION 2. LESSOR CONTRIBUTION.............................................. 2 2.1. Lessor Contribution.............................................. 2 2.2. Allocated Lessor Yield........................................... 3 SECTION 3. SUMMARY OF THE TRANSACTIONS...................................... 3 3.1. Operative Agreements............................................. 3 3.2. Property Purchase and Lease...................................... 3 3.3. Construction of Improvements; Lease of Improvements.............. 4 3.4. Aggregate Tranche A Percentage; Tranche A Percentage............. 4 SECTION 4. THE CLOSINGS..................................................... 5 4.1. Initial Closing Date; Reorganization Closing Date................ 5 4.2. Subsequent Funding Dates......................................... 5 SECTION 5. FUNDING OF ADVANCES.............................................. 5 5.1. General.......................................................... 5 5.2. Procedures for Funding........................................... 5 5.3. Substitute Properties............................................ 6 SECTION 6. CONDITIONS OF THE CLOSING........................................ 6 6.1. Conditions to Loans and Lessor Contributions..................... 6 6.2. Conditions to the Lessor's and the Lenders' Obligations to Make Advances to pay Property Acquisition Costs....................... 10 6.3. Conditions to the Lessor's and the Lenders' Obligations to Make Advances to pay Project Costs for Construction on any Property... 13 SECTION 7. REPRESENTATIONS AND WARRANTIES................................... 14 7.1. Representations and Warranties of Lessor on the Reorganization Closing Date..................................................... 14 7.2. Representations and Warranties of the Lessee on the Reorganization Closing Date..................................................... 16 7.3. Representations and Warranties of the Lessee on Property Closing Dates............................................................ 20 7.4. Representations and Warranties of the Lessee Upon each Funding Date............................................................. 23 SECTION 8. PAYMENT OF CERTAIN EXPENSES...................................... 25 8.1. Transaction Expenses............................................. 25
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Page ---- 8.2. Brokers' Fees and Stamp Taxes..................................... 25 8.3. Certain Fees and Expenses......................................... 26 8.4. Credit Agreement and Related Obligations.......................... 26 8.5. Commitment Fees................................................... 26 SECTION 9. OTHER COVENANTS AND AGREEMENTS.................................... 26 9.1. Covenants of the Lessor........................................... 26 9.2. Repayment of Certain Amounts on Maturity Date..................... 27 9.3. Amendment of Certain Documents.................................... 27 9.4. Proceeds of Casualty or Condemnation.............................. 28 SECTION 10. CREDIT AGREEMENT................................................ 28 10.1. Lessee's Credit Agreement Rights................................. 28 SECTION 11. TRANSFER OF INTEREST............................................. 29 11.1. Restrictions on Transfer......................................... 29 11.2. Effect of Transfer............................................... 30 SECTION 12. INDEMNIFICATION................................................. 30 12.1. General Indemnity................................................ 30 12.2. General Tax Indemnity............................................ 31 SECTION 13. MISCELLANEOUS................................................... 35 13.1. Survival of Agreements........................................... 35 13.2. No Broker, etc................................................... 35 13.3. Notices.......................................................... 36 13.4. Counterparts..................................................... 37 13.5. Amendments and Termination....................................... 37 13.6. Headings, etc.................................................... 38 13.7. Parties in Interest.............................................. 38 13.8. GOVERNING LAW.................................................... 38 13.9. Severability..................................................... 38 13.10. Rights of Lessee................................................ 38 13.11. Rights of Lessor................................................ 38 13.12. Further Assurances.............................................. 38 13.13. Successors and Assigns.......................................... 39 13.14. No Representation or Warranty................................... 39 13.15. Confidentiality................................................. 39
-ii- Exhibits - -------- Exhibit A-1 Form of Mortgage and Security Agreement Exhibit A-2 Form of Deed of Trust and Security Agreement Exhibit B Form of Assignment of Leases Exhibit C Form of Requisition Exhibit D-1 Form of Opinion of Local Counsel -iii- AMENDED AND RESTATED PARTICIPATION AGREEMENT, dated as of November 4, 1997 (this "Agreement"), among LIVING CENTERS HOLDING COMPANY, a Delaware --------- corporation (the "Lessee"); FBTC LEASING CORP., a New York corporation (the ------ "Lessor"); THE CHASE MANHATTAN BANK, a New York banking corporation, as agent ------ (in such capacity, the "Agent") for each of the financial institutions listed on ----- the signature pages hereof and for the financial institutions from time to time parties hereto (each, a "Lender"; collectively, the "Lenders") and THE FUJI ------ ------- BANK, LIMITED (HOUSTON AGENCY), as co-agent (in such capacity, the "Co-Agent"). --------- Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Annex A hereto. Recitals -------- Pursuant to that certain Participation Agreement dated as of October 10, 1996 (the "Original Participation Agreement") among the Lessee, the Lessor, -------------------------------- the Agent and certain banks and financial institutions (the "Prior Lenders"), ------------- the parties thereto agreed to participate in a transaction in which, among other things, (i) the Prior Lenders agreed to make certain loans to the Lessor pursuant to the Credit Agreement; (ii) the Lessor agreed to use the proceeds of the Loans to acquire and construct the Properties; and (iii) the Lessor agreed to lease the Properties to Lessee pursuant to the Lease. The obligations of the Lessor under the Credit Agreement and the other Operative Agreements are guaranteed by Living Centers of America, Inc. (the "Original Guarantor") together with certain of its subsidiaries. ------------------ Upon the consummation of the transactions contemplated in the Recapitalization Agreement, the Original Guarantor will be known as Paragon Health Network, Inc., a Delaware corporation (the "Guarantor"). --------- To evidence the foregoing agreements, the Lessee, the Lessor, the Agent and the Lenders are amending and restating the terms and conditions of the Original Participation Agreement as of the date hereof upon the terms and conditions set forth herein. Preliminary Statement --------------------- In consideration of the mutual agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto hereby agree that (i) all of the covenants, conditions and stipulations contained in the Original Participation Agreement are hereby ratified and confirmed in all respects as of the date hereof and (ii) the terms, covenants and provisions of the Original Participation Agreement are hereby modified, amended, reaffirmed and restated in their entirety and the terms, covenants and conditions set forth herein supersede, amend, modify and restate all provisions of the Original Participation Agreement in its entirety as follows: 2 SECTION 1. THE LOANS. The Lenders have agreed to make loans to the Lessor in an aggregate principal amount of up to $97,000,000 in order for the Lessor to acquire the Properties, to develop and construct the Improvements (if such Property is not a Completed Property) in accordance with the Construction Contract and the Agency Agreement, and to pay other Project Costs, and in consideration of the receipt of the proceeds of such Loans, the Lessor will issue the Tranche A Notes and the Tranche B Notes. The Loans shall be made and the Notes shall be issued pursuant to the Credit Agreement. Pursuant to this Agreement and the Credit Agreement, the Loans will be made to the Lessor from time to time at the request of the Lessee for the purpose of providing funds to the Lessor to acquire one or more parcels of Land, and, if such Property is not a Completed Property, to construct the Improvements in accordance with the Plans and Specifications. The Loans and the obligations of the Lessor under the Credit Agreement shall be secured by, inter alia, (i) a first priority assignment of the Lease, ----- ---- granted pursuant to the Assignment of Leases and consented to by the Lessee pursuant to the Consent to Assignment (in each case in the respective forms set forth in Exhibit B hereto), (ii) a first priority assignment of the Agency --------- Agreement, granted pursuant to the Contract Assignment and consented to by the Construction Agent pursuant to the Consent to Contract Assignment; and (iii) a first priority mortgage lien on each Property pursuant to a Mortgage in the form set forth on Exhibit A-1 or Exhibit A-2 hereto, as applicable. ----------- ----------- The obligations of the Lessor under the Credit Agreement and the obligations of the Lessee under each of the Operative Agreements to which it is a party shall be guaranteed by each of the Guarantors to the extent provided in the Guarantee. SECTION 2. LESSOR CONTRIBUTION. 2.1. Lessor Contribution. Subject to the terms and conditions of ------------------- this Agreement, and in reliance on the representations and warranties of each of the parties hereto contained herein or made pursuant hereto, on each Funding Date the Lessor shall make an equity contribution (each, a "Lessor ------ Contribution") in an amount equal to 3% of the amount of the Advance requested - ------------ by the Construction Agent in the Requisition for such Funding Date. The aggregate amount of Lessor Contributions made by the Lessor shall not exceed the Lessor Commitment. The Lessor shall use the Lessor Contributions to pay a portion of the Project Costs simultaneously and pro rata with the fundings by the Lenders. 2.2. Allocated Lessor Yield. With respect to each Construction ---------------------- Period Property, on each date which is one Business Day prior to any date on which the Lessor is entitled to a payment on account of the Lessor Yield, the Construction Agent shall be deemed to have requested that the Lessor make a Lessor Contribution in an amount equal to the Lessor Yield due and payable on 3 such date with respect to the Construction Period Properties solely for the purpose of paying such Lessor Yield which is then due and payable. SECTION 3. SUMMARY OF THE TRANSACTIONS. 3.1. Operative Agreements. (a) On the Initial Closing Date, each of -------------------- the respective parties thereto executed and delivered the Lease, the Construction Contract, the Agency Agreement, the Contract Assignment, the Consent to Contract Assignment and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. (b) On the Reorganization Closing Date, each of the respective parties thereto shall execute and deliver this Agreement, the Notes, the Guarantee, the Credit Agreement, the Completion Guarantee and such other documents, instruments, certificates and opinions of counsel as agreed to by the parties hereto. 3.2. Property Purchase and Lease. (a) On each Property Closing --------------------------- Date and subject to the terms and conditions of this Agreement and the Credit Agreement (i) the Lessor will make a Lessor Contribution in accordance with Section 2 hereof, (ii) the Lenders will make loans in accordance with Section 5 hereof and the terms and provisions of the Credit Agreement, (iii) the Lessor will purchase all right, title and interest in and to each Property identified by the Construction Agent pursuant to the Agency Agreement with respect to such Property Closing Date, and (iv) the Lessor will simultaneously lease (or sublease, as the case may be) all of its right, title and interest in the Property to the Lessee by delivering a Lease Supplement pursuant to the Lease. (b) On each Property Closing Date, the Lessee shall certify to the Agent on the Property Closing Certificate, delivered pursuant to Section 6.2(a), the Maximum Residual Guarantee Amount for each Property being acquired on such Property Closing Date. The Maximum Residual Guarantee Amount so certified shall be the Maximum Residual Guarantee Amount for such Properties for the duration of the Term. (c) No Property Closing Date shall occur after the fifth anniversary of the Reorganization Closing Date. 3.3. Construction of Improvements; Lease of Improvements. (a) On --------------------------------------------------- each Property Closing Date (provided such Property is not a Completed Property), the Lessor and Lessee will execute and deliver an Agency Agreement Supplement, dated as of such Property Closing Date, pursuant to which Living Centers Development Company will agree to act as Construction Agent and to perform the Lessor's obligations under the Construction Contract in connection with the completion of the construction of the Improvements on such Property. (b) On each Property Closing Date or the Construction Commencement Date, if later, provided that the applicable Property Closing Certificate indicates that the cost of the Land is greater 4 than or equal to 25% of the Property Cost for such Property (a "Twenty-Five ----------- Percent Property"), the Lessor and the Lessee shall execute and deliver an - ---------------- additional Lease Supplement pursuant to which the Lessor will lease (or sublease, as the case may be) all of its right, title and interest in such Improvements to the Lessee. Notwithstanding that the Improvements on a Twenty- Five Percent Property (whether existing on the date of acquisition of the Land or to be constructed pursuant to the Agency Agreement) may be leased by a separate Lease Supplement, the term "Property" shall include the Land and the Improvements. (c) If the Property Closing Certificate indicates that the cost of the Land is less than 25% of the Property Cost, no additional Lease Supplement will be required to be delivered and the Land and the Improvements will be leased on the Property Closing Date under the Lease Supplement delivered pursuant to Section 6.2(d) and the term "Property" will be deemed to mean Land and Improvements. (d) On each Property Closing Date, the Lessor and Lessee will execute and deliver a Memorandum of Lease which will be recorded in the real estate records in the county where such Property is located. 3.4. Aggregate Tranche A Percentage; Tranche A Percentage. ---------------------------------------------------- (a) Notwithstanding any other provision of this Agreement or the other Operative Agreements, the Lessee agrees that in no event shall the Lessee specify a Property for the Lessor to acquire and lease pursuant to the execution and delivery of a Lease Supplement if the Aggregate Tranche A Percentage after giving effect to the acquisition and lease pursuant to the execution and delivery of a Lease Supplement of such Property would be less than 85%. (b) Notwithstanding any other provision of this Agreement or the other Operative Agreements, the Lessee agrees that in no event shall the Lessee specify a Property for the Lessor to acquire and lease pursuant to the execution and delivery of a Lease Supplement if the Tranche A Percentage with respect to such Property would be less than 85% of Budgeted Total Property Costs with respect to such Property upon the acquisition of such Property. SECTION 4. THE CLOSINGS. 4.1. Initial Closing Date; Reorganization Closing Date. All ------------------------------------------------- documents and instruments required to be delivered on either the Initial Closing Date or the Reorganization Closing Date have been or shall be delivered at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, or at such other location as may be determined by the Agent and the Lessee. 4.2. Subsequent Funding Dates. The Lessee shall deliver to the ------------------------ Lessor and the Agent a Requisition appropriately completed, in connection with each Funding Date. 5 SECTION 5. FUNDING OF ADVANCES. 5.1. General. To the extent funds have been made available to the ------- Borrower under the Credit Agreement, such funds, along with the Lessor Contributions, will be applied by the Construction Agent from time to time in accordance with the terms and conditions of this Agreement and the other Operative Agreements in order to: (i) allow the Lessor, at the direction of the Lessee, to acquire the Land in accordance with the terms of this Agreement and the other Operative Agreements; (ii) allow the Lessor, on behalf of the Lessee, to pay Transaction Expenses; (iii) permit the Construction Agent to construct the Improvements (provided that such Property is not a Completed Property) in accordance with the Plans and Specifications and the terms of the Construction Contract, the Agency Agreement, the Lease and the other Operative Agreements; and (iv) pay all other Project Costs. 5.2. Procedures for Funding. (a) Not less than three Business Days ---------------------- prior to each proposed Funding Date, the Construction Agent shall deliver to the Lessor and the Agent, a requisition (a "Requisition"), appropriately completed, ----------- in the form of Exhibit C hereto. --------- (b) Each Requisition shall: (i) be irrevocable; and (ii) request funds in an amount of at least $500,000 (or such lesser amount as shall be equal to the total aggregate of the Available Commitments plus the Available Lessor Commitment at such time) for the payment of Property Acquisition Costs or other Project Costs which have previously been incurred and were not the subject of and funded pursuant to a prior Requisition, in each case as specified in the Requisition. (c) So long as no Default or Event of Default has occurred and is continuing and subject to the satisfaction of the conditions set forth in Sections 6.1, 6.2 and/or 6.3, as applicable, on each Funding Date (i) the Lenders shall make Loans to the Lessor in an aggregate amount equal to 97% of the funds specified in any Requisition, up to an aggregate principal amount equal to the aggregate Available Commitments; (ii) the Lessor shall make a Lessor Contribution in an amount equal to 3% of the funds specified in any Requisition, up to an amount equal to the Available Lessor Commitment; and (iii) the total amount of such Loans and Lessor Contribution made on such date shall be paid to the Disbursement Account, provided, however, amounts requested to be -------- ------- disbursed into the Disbursement Account may be used to pay Project Costs reasonably anticipated by the Construction Agent to be incurred within 60 days of the applicable Funding Date. There shall in no event be an amount in excess of $2,600,000 in the Disbursement Account and the Agent shall at all times retain the right to demand that funds remaining in the Disbursement Account, after outstanding checks have cleared, be immediately returned to the Agent for distribution to the Lenders and the Lessor. So long as no Default or Event of Default has occurred and is continuing and subject to the satisfaction of the conditions set forth in Sections 6.1, 6.2 and/or 6.3, as applicable, on each date on which the Construction Agent is required to pay Project Costs the Construction Agent shall cause funds to be disbursed from the Disbursement Account to pay such Project Costs. The Construction Agent may cause funds on account in the Disbursement Account to be invested in Permitted Investments. 6 5.3. Substitute Properties. If, prior to the expiration of the --------------------- Commitment Period, the Lessee purchases one or more Properties (each, a "Purchased Property") pursuant to the provisions of the Lease and a portion of - ------------------- the Loans are prepaid in accordance with Section 2.5 of the Credit Agreement, the Lessee may cause the Lessor to purchase one or more substitute Properties (each, a "Substitute Property", collectively, the "Substitute Properties"), ------------------- --------------------- provided that (a) the aggregate Property Cost of all Substitute Properties may not exceed $20,000,000, (b) Lessee shall cause the Lessor to purchase the applicable Substitute Property within one year from the date that the Lessee purchased the applicable Purchased Property and (c) all of the conditions to the making of Advances and Lessor Contributions contained in this Agreement, the Credit Agreement and any other Operative Agreement shall have been satisfied on or prior to the applicable Funding Date for the purchase of the Substitute Property. SECTION 6. CONDITIONS OF THE CLOSINGS AND ADVANCES 6.1. Conditions to Loans and Lessor Contributions. The agreement of -------------------------------------------- each Lender to make and continue its Loans and the Lessor to make and continue its Lessor Contributions, is subject to the satisfaction, immediately prior to or concurrently with the making and continuation of such Loans and Lessor Contribution, of the following conditions precedent: (a) Operative Agreements. Each of the Operative Agreements shall have -------------------- been duly authorized, executed, acknowledged and delivered by the parties thereto and shall be in full force and effect, and no default shall exist thereunder (both before and after giving effect to the transactions contemplated by the Operative Agreements), and the Agent, the Lenders and the Lessor shall have received a fully executed copy of each of the Operative Agreements (other than the Notes of which the Agent shall have received the originals thereof); (b) Taxes. All taxes, fees and other charges in connection with the ----- execution, delivery, and, where applicable, recording, filing and registration of the Operative Agreements shall have been paid or provisions for such payment shall have been made to the satisfaction of the Agent and the Lessor; (c) Governmental Approvals. All necessary (or, in the reasonable ---------------------- opinion of the Agent, the Lessor and their respective counsel, advisable) Governmental Actions, in each case required by any law or regulation enacted, imposed or adopted on or after the date hereof or by any change in fact or circumstances since the date hereof, shall have been obtained or made and be in full force and effect; (d) Litigation. No action or proceeding shall have been instituted, ---------- nor to the knowledge of the Lessee shall any action or proceeding be threatened before any Governmental Authority, nor shall any order, judgment or decree have been issued or proposed to be issued by any Governmental Authority (i) to set aside, restrain, enjoin or prevent the full 7 performance of this Agreement, any other Operative Agreement or any of the transactions contemplated hereby or thereby or (ii) which is reasonably likely to have a Material Adverse Effect; (e) Legal Requirements. In the reasonable opinion of the Agent, the ------------------ Lessor and their respective counsel, the transactions contemplated by the Operative Agreements do not and will not violate in any respect any Legal Requirements and do not and will not subject the Agent, any Lender or the Lessor to any adverse regulatory prohibitions or constraints; (f) Corporate Proceedings of the Lessee, the Construction Agent and --------------------------------------------------------------- the Guarantors. On the Reorganization Closing Date, the Agent and the -------------- Lessor shall have received a copy of the resolutions or minutes, in form and substance satisfactory to the Agent and the Lessor, of the Board of Directors of each of the Lessee, the Construction Agent and the Guarantors authorizing the execution, delivery and performance of this Agreement, the Guarantee and the other Operative Agreements to which they are parties, certified by the Secretary or an Assistant Secretary of the Lessee, the Construction Agent and each Guarantor as of the Reorganization Closing Date, which certificate shall be in form and substance satisfactory to the Agent and the Lessor and shall state that the resolutions or minutes thereby certified have not been amended, modified, revoked or rescinded; (g) Lessee, Construction Agent and Guarantor Incumbency Certificate. --------------------------------------------------------------- On the Reorganization Closing Date, the Agent and the Lessor shall have received a certificate of the Lessee, the Construction Agent and each Guarantor, dated the Reorganization Closing Date, as to the incumbency and signature of the officers of the Lessee, the Construction Agent and such Guarantor executing any Operative Agreement satisfactory in form and substance to the Agent and the Lessor, executed by the President or any Vice President and the Secretary or any Assistant Secretary of the Lessee, the Construction Agent and such Guarantor; (h) Lessor Incumbency Certificate. On the Reorganization Closing ----------------------------- Date, the Agent and the Lessee shall have received a certificate of the Lessor, dated the Initial Closing Date, as to the incumbency and signature of the officers of the Lessor executing any Operative Agreements satisfactory in form and substance to the Agent and the Lessee, executed by a Vice President and the Secretary or an Assistant Secretary of the Lessor; (i) Corporate Proceedings of the Lessor. On the Reorganization ----------------------------------- Closing Date, the Agent and the Lessee shall have received a copy of the resolutions, in form and substance satisfactory to the Agent and the Lessee, of the Board of Directors of the Lessor authorizing the execution, delivery and performance of the Operative Agreements to which it is a party, certified by the Secretary or an Assistant Secretary of the Lessor as of the Reorganization Closing Date, which certificate shall be in form and substance satisfactory to the Agent and the Lessee and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded; 8 (j) Corporate Documents. On the Reorganization Closing Date the Agent ------------------- and the Lessor shall have received true and complete copies of the articles of incorporation and by-laws of the Lessee and each Guarantor, certified as of the Reorganization Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Lessee and such Guarantor; (k) Consents, Licenses and Approvals. The Agent and the Lessor shall -------------------------------- have received a certificate of the Vice President of the Lessee stating that all consents, authorizations and filings required to consummate the transaction contemplated by this Agreement have been obtained and are in full force and effect, and each such consent, authorization and filing shall be in form and substance reasonably satisfactory to the Agent and the Lessor; (l) Fees. The Agent and the Arranger shall have received the fees to ---- be paid on the Reorganization Closing Date pursuant to the Fee Letter and the Lessor shall have received the upfront fees agreed to between the Lessor and Living Centers to be paid on the Reorganization Closing Date, which fees shall not be paid using the proceeds of the Loans or Lessor Contributions; (m) Legal Opinions. On the Reorganization Closing Date (i) the Agent, -------------- the Lenders and the Lessor shall have received the executed legal opinion of Powell, Goldstein, Frazer & Murphy, counsel to the Lessee and the Guarantors; and (ii) the Agent and the Lessee shall have received the executed legal opinion of Porter & Hedges, counsel to the Lessor; (n) Insurance. The Agent and the Lessor shall have received evidence --------- in form and substance satisfactory to them that all of the requirements of Section 14 of the Lease shall have been satisfied; (o) Representations and Warranties. The representations and ------------------------------ warranties of the Lessor, the Lessee and each of the Guarantors contained herein and in each of the other Operative Agreements shall be true and correct in all material respects on and as of such Funding Date as if made on and as of such Funding Date; (p) Performance of Operative Agreements. The parties hereto (other ----------------------------------- than the Lenders) shall have performed their respective agreements contained herein and in the other Operative Agreements on or prior to each such Funding Date; (q) Default. There shall not have occurred and be continuing any ------- Default or Event of Default under any of the Operative Agreements and no Default or Event of Default under any of the Operative Agreements will have occurred after giving effect to the Advance requested by such Requisition; and 9 (r) Material Adverse Change. As of such Funding Date, there shall not ----------------------- have occurred any Material Adverse Change. 6.2. Conditions to the Lessor's and the Lenders' Obligations to Make --------------------------------------------------------------- Advances to pay Property Acquisition Costs. - ------------------------------------------ The obligations of the Lessor to make each Lessor Contribution, and of the Lenders to make Loans to the Lessor, on a Property Closing Date for the purpose of providing funds to the Lessor necessary to acquire a Property are subject to the satisfaction or waiver of the following conditions precedent: (a) Requisition; Property Closing Certificate. The Agent shall have ----------------------------------------- received (i) a fully executed counterpart of the Requisition dated as of such Property Closing Date (but delivered at least two Business Days prior to the Property Closing Date), appropriately completed; and (ii) a Property Closing Certificate dated as of such Property Closing Date, appropriately completed; (b) Deed; Ground Lease. There shall have been delivered to the ------------------ Lessor (i) a bargain and sale deed with a covenant against grantor's acts (or local equivalent) (a "Deed"), in form and substance appropriate for ---- recording with the applicable Governmental Authorities, with respect to each Property (and all Improvements located thereon) being purchased on such Property Closing Date, conveying fee simple title to such Property to the Lessor, subject only to the Permitted Exceptions, or (ii) a Ground Lease with respect to each Property being ground leased on such Property Closing Date (such Ground Lease, or a Memorandum of Ground Lease, as appropriate under applicable Legal Requirements, to be in form and substance appropriate for recording with the applicable Governmental Authorities), and the Agent and the Lessor shall have received a fully executed counterpart of such Ground Lease and, if applicable, such Memorandum of Ground Lease; (c) Title; Location. Title to all of the Properties shall conform to --------------- the representations and warranties set forth in Section 7.4(g) and each Property shall be located in the United States; (d) Lease Supplement and Memorandum of Lease. The Lessee shall have ---------------------------------------- delivered a Lease Supplement and a Memorandum of Lease executed by the Lessee and the Lessor with respect to each Property being acquired on such Property Closing Date to the Agent; (e) Mortgage. The Lessee shall have recorded in the real estate -------- records of the county where each Property is located an original of the Mortgage executed by the Lessor and Lessee with respect to each Property being acquired on such Property Closing Date; (f) Assignment of Lease. The Lessee shall have recorded in the real ------------------- estate 10 records of the county where each Property is located an original of an Assignment of Lease executed by the Lessor with respect to each Property being acquired on such Property Closing Date; (g) Consent to Assignment of Lease. The Lessee shall have delivered ------------------------------ to the Agent a consent to the Assignment of Lease executed by the Lessee with respect to each Property being acquired on such Property Closing Date; (h) Environmental Audit. (i) The Agent, the Lenders and the Lessor ------------------- shall have received not less than 60 days prior to such Property Closing Date an Environmental Audit with respect to each Property being acquired on such Property Closing Date, prepared by an environmental engineer (the "Environmental Engineer") reasonably satisfactory to the Agent and the ---------------------- Lessor and the results of the Environmental Audit shall be in form and substance reasonably satisfactory to the Agent, the Lenders and the Lessor; and (ii) the Agent, the Lenders and the Lessor shall have received letters from the Environmental Engineer stating, among other things, that the Agent, the Lenders and the Lessor may rely on the Environmental Audit with respect to each Property being acquired on such Property Closing Date which were prepared by such firm as if they were originally addressed to them in all respects; (i) Appraisal. The Agent, the Lenders and the Lessor shall have --------- received an Appraisal of each Property being acquired on such Property Closing Date and such Appraisal shall indicate a value (assuming Completion of the Improvements on such Property) of at least six times the amount of the Tranche B Loans which will be allocable to such Property (based on the Budgeted Total Property Costs for such Property as of such Property Closing Date or the Property Cost, as applicable) and otherwise be in form and substance reasonably acceptable to each Lender and the Lessor; (j) Survey. The Agent, the Lenders and the Lessor shall have ------ received, and the Title Company shall have received, a survey of each Property being acquired on such Property Closing Date, certified to the Agent, the Lenders, the Lessor and the Title Company in a manner satisfactory to them, dated as of a date within ninety days of the Property Closing Date, by an independent professionally licensed land surveyor satisfactory to the Agent and the Lessor, which survey shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such survey the following: (i) the locations on such Property of all the buildings, structures and other improvements, if any, and the established building setback lines; (ii) the lines of streets abutting such Property; (iii) all access and other easements appurtenant to such Property; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting such Property, whether recorded, apparent from a physical 11 inspection of the Property or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building, structures and improvements on such Property; and (vi) if such Property is described as being on a filed map, a legend relating the survey to said map; (k) Mortgagee's Title Insurance Policy. With respect to each Property ---------------------------------- being acquired on such Property Closing Date, the Agent shall have received with respect to the Mortgage a mortgagee's title policy or marked up unconditional binder for such insurance dated the Property Closing Date; such policy shall (i) be in an amount equal to the aggregate amount shown on the Budget for such Property (with a pending disbursements clause, if applicable) or if such Property is a Completed Property, in the amount of the Acquisition Cost of such Property; (ii) be issued at ordinary rates; (iii) insure that the Mortgage insured thereby creates a valid first Lien on such Property, free and clear of all defects and encumbrances, except Permitted Exceptions; (iv) name the Agent for the benefit of the Lenders as the insured thereunder; (v) be in the form of ALTA Loan Policy - 1970 (Amended 10/17/70), if available or another form of lenders' policy customarily used in commercial transactions in the jurisdiction where such Property is located; (vi) contain comprehensive, zoning, access, subdivision, tax lot, revolving credit and such other endorsements and affirmative coverage as the Agent may reasonably request (if available and customarily issued in the jurisdiction where the Property is located); and (vii) be issued by the Title Company; the Agent shall have received evidence reasonably satisfactory to it that all premiums in respect of such policy, and all charges for any mortgage recording tax with respect to the Mortgage have been paid or provision made therefor; (l) Owner's Title Insurance Policy. The Lessor shall have received an ------------------------------ owner's title policy, or marked up unconditional binder for such insurance, dated the Property Closing Date for each Property being acquired on such Property Closing Date; and the Lessor shall have received evidence reasonably satisfactory to it that all premiums in respect of such policy have been paid or provision made therefor; (m) Agency Agreement Supplement. The Lessee shall have delivered an --------------------------- Agency Agreement Supplement executed by the Lessee and the Lessor with respect to each Property (other than any Completed Properties) being acquired on such Property Closing Date to the Agent; (n) Recorded Documents. The Agent and the Lessor shall have received ------------------ a legible copy of all recorded documents referred to, or listed as exceptions to title in, the title policy referred to above; (o) Legal Opinions. With respect to (i) any Property or (ii) any -------------- group of Properties which are acquired on the same Property Closing Date or from the same seller and are located in the same state, and which Property or group of Properties have an estimated aggregate Property Cost in excess of $5 million, the Agent, the Lenders and the Lessor shall have received an executed legal opinion of local counsel to the Lessee and the Guarantors for 12 each state in which such Property or Properties are located, substantially in the form of Exhibit D-1 hereto; and ----------- (p) Actions to Perfect Liens. The Agent and the Lessor shall have ------------------------ received evidence in form and substance satisfactory to it that all filings, recordings, registrations and other actions, including the filing of duly executed Lender Financing Statements and Lessor Financing Statements, the Mortgage, and the Memorandum of Lease, necessary or, in the reasonable opinion of the Agent or the Lessor, desirable to perfect the Liens created by the Security Documents shall have been completed. (q) Maximum Property Cost for Construction Period Properties. The -------------------------------------------------------- aggregate Budgeted Total Property Cost of Construction Period Properties will not exceed $25,000,000, after giving effect to the Advance being requested. 6.3. Conditions to the Lessor's and the Lenders' Obligations to Make --------------------------------------------------------------- Advances to pay Project Costs for Construction on any Property. The obligations - -------------------------------------------------------------- of the Lessor to make each Lessor Contribution, and of the Lenders to make Loans to the Lessor on a Funding Date for the purpose of providing funds to the Lessor necessary to pay for the construction of the Improvements or the payment of Transaction Costs or other Project Costs (other than Property Acquisition Costs) are subject to the satisfaction or waiver of the following conditions precedent: (a) Performance of Obligations. The parties hereto shall have -------------------------- performed their respective agreements contained herein and in the other Operative Agreements on or prior to such Funding Date; (b) Requisition. The Agent shall have received a fully executed ----------- counterpart of the Requisition, appropriately completed; (c) Title. Title to all of the Properties shall conform to the ----- representations set forth in Section 7.4(g); (d) Budget in Balance. Based upon the Construction Budgets, the ----------------- Available Commitments and the Available Lessor Commitment will be sufficient to complete the Improvements for which the Requisition relates on such Properties. SECTION 7. REPRESENTATIONS AND WARRANTIES ------------------------------ 7.1. Representations and Warranties of Lessor on the Reorganization -------------------------------------------------------------- Closing Date. Lessor represents and warrants to each of the other parties - ------------ hereto as of the Reorganization Closing Date as follows: (a) Due Organization, etc. Lessor is a duly organized and validly ---------------------- existing 13 corporation in good standing under the laws of the State of New York and has the power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement, each Operative Agreement to which it is or will be a party and each other agreement, instrument and document executed and delivered or to be executed and delivered by it in connection with or as contemplated by each such Operative Agreement. (b) Authorization; No Conflict. The execution, delivery and -------------------------- performance of each Operative Agreement to which it is or will be a party has been duly authorized by all necessary action on its part and neither the execution and delivery thereof by the Lessor, nor the consummation of the transactions contemplated thereby by the Lessor, nor compliance by it with any of the terms and provisions thereof (i) requires or will require any approval of (which approval has not been obtained) any party or approval or consent of any trustee or holders of any indebtedness or obligations of the Lessor (ii) contravenes or will contravene any Legal Requirement applicable to or binding on it as of the date hereof, (iii) does or will contravene or result in any breach of or constitute any default under, or result in the creation of any Lessor Lien upon the Property or any of the Improvements, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement or other agreement or instrument to which it or its properties may be bound or (iv) does or will require any Governmental Action by any Governmental Authority. (c) Enforceability, etc. Each Operative Agreement to which it is or -------------------- will be a party has been duly executed and delivered by it and constitutes, or upon execution and delivery will constitute, a legal, valid and binding obligation enforceable against it in accordance with the terms thereof, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) Litigation. No litigation, investigation or proceeding of or ---------- before any arbitrator or Governmental Authority is pending or, to the knowledge of the Lessor, threatened by or against the Lessor (a) with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. (e) Assignment. Lessor has not assigned or transferred any of its ---------- right, title or interest in or under the Lease, any other Operative Agreement or any of the Properties, except in accordance with the Operative Agreements. (f) No Default. The Lessor is not in default under or with respect to ---------- any of its Contractual Obligations in any respect which could have a material adverse effect on the assets, liabilities, operations, business or financial condition of the Lessor. No Default or Event of Default under the Operative Agreements attributable to it has occurred and is continuing. 14 (g) Use of Proceeds. The proceeds of the Loans and the Lessor --------------- Contribution shall be applied by the Lessor solely in accordance with the provisions of the Operative Agreements. (h) Chief Place of Business. The Lessor's chief place of business, ----------------------- chief executive office and office where the documents, accounts and records relating to the transactions contemplated by this Agreement and each other Operative Agreement are kept are located at Two World Trade Center, New York, New York. (i) Federal Reserve Regulations. The Lessor is not engaged --------------------------- principally in, and does not have as one of its most important activities, the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board), and no part of the proceeds of the Loans will be used by it to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulations G, T, U or X of the Board. (j) Investment Company Act. The Lessor is not an "investment ---------------------- company" or a company controlled by an "investment company" within the meaning of the Investment Company Act. (k) Securities Act. Neither the Lessor nor any Person authorized by -------------- the Lessor to act on its behalf has offered or sold any interest in the Property or the Notes, or in any similar security or interest relating to the Property, or in any security the offering of which for the purposes of the Securities Act would be deemed to be part of the same offering as the offering of the aforementioned securities to, or solicited any offer to acquire any of the same from, any Person other than, in the case of the Notes, the Agent, and neither the Lessor nor any Person authorized by the Lessor to act on its behalf will take any action which would subject the issuance or sale of any interest in the Properties or the Notes to the provisions of Section 5 of the Securities Act or require the qualification of any Operative Agreement under the Trust Indenture Act of 1939, as amended. (l) ERISA. The Lessor is making the Lessor Contribution contemplated ----- to be made by it hereunder in the ordinary course of its business, and no part of such amount constitutes the assets of any Employee Benefit Plan. (m) Lessor Liens. The Property is free and clear of all Lessor Liens. ------------ 7.2. Representations and Warranties of the Lessee on the --------------------------------------------------- Reorganization Closing Date. The Lessee represents and warrants to each of the - --------------------------- other parties hereto as of the Reorganization Closing Date as follows: 15 (a) Corporate Existence; Subsidiaries. The Lessee is a corporation --------------------------------- duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified would reasonably be expected to cause a Material Adverse Effect. Each Subsidiary of the Lessee is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified would reasonably be expected to cause a Material Adverse Effect. (b) Corporate Power. The execution, delivery, and performance by the --------------- Lessee of this Agreement and the other Operative Agreements to which the Lessee is a party and the consummation of the transactions contemplated hereby and thereby (a) are within the Lessee's corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) the Lessee's certificate or articles, as the case may be, of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Lessee, the contravention of which would reasonably be expected to cause a Material Adverse Effect and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. (c) Authorization and Approvals. No authorization or approval or --------------------------- other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Lessee of this Agreement or the other Operative Agreements to which the Lessee is a party. (d) Enforceable Obligations. This Agreement and the other Operative ----------------------- Agreements to which the Lessee is a party have been duly executed and delivered by the Lessee. Each Operative Agreement to which the Lessee is a party is the legal, valid, and binding obligation of the Lessee enforceable against the Lessee in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity (whether considered in proceeding at law or in equity). (e) Litigation. There is no pending or, to the best knowledge of the ---------- Lessee, threatened action or proceeding affecting the Lessee or any of its Subsidiaries before any court, Governmental Agency or arbitrator, which would reasonably be expected to have a Material Adverse Effect or which purports to affect the legality, validity, binding effect or enforceability of this Agreement or any other Operative Agreement or the consummation of any of the transactions contemplated hereby or thereby. (f) Investment Company Act. Neither the Lessee nor any of its ---------------------- Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the 16 meaning of the Investment Company Act of 1940, as amended. (g) Public Utility Holding Company Act. Neither the Lessee nor any of ---------------------------------- its Subsidiaries is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. (h) No Defaults. The Lessee is not in default under or with respect ----------- to any contract, agreement, lease or other instrument to which the Lessee is a party and which would reasonably be expected to have a Material Adverse Effect. To the knowledge of a Responsible Officer of the Lessee, the Lessee has not received any notice of default under any contract, agreement, lease or other instrument to which the Lessee is a party which is continuing and which, if not cured, would reasonably be expected to have a Material Adverse Effect. (ii) No Default has occurred and is continuing. (i) Environmental Condition. (i) The Lessee (A) has obtained all ----------------------- Environmental Permits necessary for the ownership and operation of its material properties and the conduct of its business of which the failure to obtain would reasonably be expected to have a Material Adverse Effect; (B) has been and is in compliance with all terms and conditions of such Environmental Permits and with all other material requirements of applicable Environmental Laws of which the failure to comply would reasonably be expected to have a Material Adverse Effect; (C) has not received notice of any violation or alleged violation of any Environmental Law or Environmental Permit the violation of which would reasonably be expected to have a Material Adverse Effect; and (D) is not subject to any actual or contingent Environmental Claim, which Environmental Claim would reasonably be expected to have a Material Adverse Effect. (ii) To the knowledge of any Responsible Officer of the Lessee, none of the present or previously owned or operated property of the Lessee, wherever located, (A) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs, or have been otherwise designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws; (B) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any property owned or operated by the Lessee, wherever located, which Lien would reasonably be expected to have a Material Adverse Effect; or (C) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations which has caused at the site or at any third-party site any condition that has resulted in or would reasonably be expected to result in the need for Response that would have a Material Adverse Effect. 17 (iii) Without limiting the foregoing, the present and, to the best knowledge of any Responsible Officer of the Lessee, future liability, if any, of the Lessee, which would reasonably be expected to arise in connection with requirements under Environmental Laws will not have a Material Adverse Effect. (j) Permits, Licenses, etc. The Lessee possesses all permits, ---------------------- licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which the failure to possess could reasonably be expected to have a Material Adverse Effect. The Lessee manages and operates its business in accordance with all applicable Legal Requirements which the failure to so manage or operate would reasonably be expected to have a Material Adverse Effect. (k) Health Care Regulatory Matters. Except as disclosed on Schedule ------------------------------ 1 hereto: (i) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, (A) the Lessee now has (after giving effect to the Recapitalization), and has no reason to believe it will not be able to maintain in effect, all Health Care Permits necessary for the lawful conduct of its business or operations wherever now conducted and as planned to be conducted (other than those Health Care Permits the lack of which could not reasonably be expected to have a Material Adverse Effect), including, without limitation, the ownership and operation of its Health Care Facilities pursuant to all Requirements of Law, (B) all such Health Care Permits are in full force and effect and have not been amended or otherwise modified, rescinded, revoked or assigned, (C) the Lessee is substantially complying with the requirements of each such Health Care Permit, and no event has occurred, and no condition exists, which, with the giving of notice, the passage of time, or both, would constitute a violation thereof, (D) the Lessee has not received any written notice of any violation of any Requirement of Law, (E) to the knowledge of Lessee, no condition exists or event has occurred which in itself or with the giving of notice or the lapse of time, or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such Health Care Permit, (F) there is no claim filed with any Governmental Authority of which Lessee has been notified challenging the validity of any such Health Care Permit and (G) the continuation, validity and effectiveness of all such Health Care Permits will not be adversely affected by the Recapitalization or the execution and performance of any of the Loan Documents or Operative Agreements. (ii) All Health Care Facilities owned, leased, managed or operated by Lessee are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that Lessee has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto. There are no proceedings pending or, to the knowledge of Lessee, any proceedings threatened or 18 investigations pending or threatened, by any Governmental Authority with respect to the Lessee's participation in the Medicare, Medicaid or related reimbursement programs and which could reasonably be expected to have a Material Adverse Effect. (l) Lease. Upon the execution and delivery of each Lease Supplement ----- to the Lease, (i) the Lessee will have unconditionally accepted the Property subject to the Lease Supplement, and will have a valid and subsisting leasehold interest in the Property and (ii) no offset will exist with respect to any Rent or other sums payable under the Lease. 7.3. Representations and Warranties of the Lessee on Property -------------------------------------------------------- Closing Dates. The Lessee hereby represents and warrants as of each Property - ------------- Closing Date as follows: (a) Representations and Warranties; No Default. The ------------------------------------------ representations and warranties of the Construction Agent, the Lessee and the Guarantors set forth in the Operative Agreements are true and correct and to the best of Lessee's knowledge, the representations and warranties of the Lessor are true and correct on and as of such date as if made on and as of such date. To the best of Lessee's knowledge, the Lessor is in compliance with its respective obligations under the Operative Agreements. The Construction Agent, the Lessee and the Guarantors are in compliance with their respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on such Property Closing Date. (b) Authorization by the Lessee. The execution and delivery of each --------------------------- Lease Supplement, Memorandum of Lease, Consent to Assignment and other Operative Agreement delivered by the Lessee on such Property Closing Date and the performance of the obligations of the Lessee under each such Lease Supplement, Memorandum of Lease, Consent to Assignment and other Operative Agreements have been duly authorized by all requisite corporate action of the Lessee. (c) Execution and Delivery by the Lessee. Each Lease Supplement, ------------------------------------ Memorandum of Lease, Consent to Assignment and other Operative Agreement delivered on such Property Closing Date by the Lessee have been duly executed and delivered by the Lessee. (d) Valid and Binding Obligations. Each Lease Supplement, ----------------------------- Memorandum of Lease, Consent to Assignment and other Operative Agreement delivered by the Lessee on such Property Closing Date is a legal, valid and binding obligation of the Lessee, enforceable against the Lessee in accordance with its respective terms. (e) Recording of Documents. Each of the Deed, the Lease Supplement, ---------------------- the Memorandum of Lease, the Assignment of Lease, the Consent to the Assignment of Lease and the Mortgage delivered on such Property Closing Date will be filed for recordation with the appropriate Governmental Authorities in the order set forth in this paragraph, and the UCC Financing Statements with respect to the Property being acquired will be filed with the appropriate Governmental 19 Authorities. (f) Priority of Liens. (i) Upon proper recordation, each Mortgage, ----------------- each Assignment of Lease and each Memorandum of Lease delivered on such Property Closing Date, will constitute a valid and perfected first lien on each applicable Property and the Improvements located thereon in an amount not less than the Property Cost with respect to such Property, subject only to the Permitted Exceptions, and (ii) upon proper filing, the Lessor Financing Statements will protect the Lessor's interest under the Lease to the extent the Lease is a security agreement governed by Article 9 of the Uniform Commercial Code. (g) Flood Zone. No portion of any Property being acquired by the ---------- Lessor on such Property Closing Date is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, or if any such Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Section 14.2(b) of the Lease and in accordance with the National Flood Insurance Act of 1968, as amended. (h) Insurance Coverage. The Lessee maintains insurance coverage for ------------------ each Property being acquired by the Lessor on such Property Closing Date which meets the requirements of Section 14.1 of the Lease and all of such coverage is in full force and effect. (i) Legal Requirements. Each Property being acquired by the Lessor ------------------ on such Property Closing Date complies with all Legal Requirements (including all zoning and land use laws and Environmental Laws) in all material respects. (j) Consents, etc. All material consents, licenses and building ------------- permits required by all Legal Requirements for construction, completion, occupancy and operation, as to be operated by Lessee or Lessee's sublessees, of each Property being acquired on such Property Closing Date, to the extent such consents, licenses and building permits are required to have been obtained on or before such Property Closing Date, have been obtained and are in full force and effect. (k) Utilities. All utility services and facilities necessary for the --------- use of the Improvements existing, or to be constructed, on the Land (including gas, electrical, water and sewage services and facilities) will be available to the Property on or prior to the Outside Completion Date. (l) Environmental Matters. To the best knowledge of the Lessee or --------------------- Construction Agent: (i) the Property being acquired on the Property Closing Date does not contain any Hazardous Substances in amounts or concentrations which (a) constitute a violation of, or (b) would give rise to liability under, any Environmental Law. (ii) the Property and all operations at the Property are in compliance in all 20 material respects with all applicable Environmental Laws, and there is no contamination at, on or under the Property or violation of any Environmental Law with respect to the Property or the business operated by Lessee or any of its Subsidiaries at the Property (the "Business") that -------- would constitute a violation of any applicable Environmental Law. (iii) neither the Lessee nor any of its Subsidiaries has received any written notice of violation, alleged violation, non- compliance, liability or potential liability regarding compliance with Environmental Laws with regard to the Property, nor does the Lessee have knowledge that any such notice will be received or is being threatened. (iv) Hazardous Substances have not been transported or disposed of from the Property in violation of any Environmental Law, nor have any Hazardous Substances been generated, treated, stored or disposed of at, on or under the Property in violation of any applicable Environmental Law. (v) no judicial proceeding or governmental or administrative action is pending or, to the best knowledge of the Lessee, threatened, under any Environmental Law to which the Lessee or any Subsidiary is named as a party with respect to the Property, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Property or the Business. (vi) there has been no Release of Hazardous Substances at or from the Property, or arising from or related to the operations of the Lessee or any Subsidiary in connection with the Property, in violation of or in amounts or in a manner that could reasonably be expected to give rise to any material liability under any Environmental Laws. (m) Title to the Properties. Upon the acquisition of each Property ----------------------- on such Property Closing Date, the Lessor will have marketable title to the Property in fee simple, subject only to the Permitted Exceptions. Upon the acquisition of each Property on such Property Closing Date, the Lessor will have the right to grant the Mortgage on the Property. The Lessor will at all times have marketable title to the Building and any other Improvements, subject only to Permitted Exceptions. (n) Conditions Precedent in Operative Agreements. All conditions -------------------------------------------- precedent contained in this Agreement and in the other Operative Agreements to the acquisition of the Property being acquired on such Property Closing Date by the Lessor have been satisfied in full. 7.4. Representations and Warranties of the Lessee Upon each ------------------------------------------------------ Funding Date. The Lessee hereby represents and warrants as of each Funding Date - ------------ as follows: (a) Representations and Warranties; No Default. The representations ------------------------------------------ and warranties of the Construction Agent, the Lessee and the Guarantors set forth in the Operative Agreements are true and correct and to the best of Lessee's knowledge, the representations and 21 warranties of the Lessor are true and correct, on and as of such date as if made on and as of such date. To the best of Lessee's knowledge, the Lessor is in compliance with its respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements. The Construction Agent, the Lessee and the Guarantors are in compliance with their respective obligations under the Operative Agreements and there exists no Default or Event of Default under any of the Operative Agreements. No Default or Event of Default will occur under any of the Operative Agreements as a result of, or after giving effect to, the Advance requested by the Requisition on such date. (b) Priority of Liens. Each Mortgage, Supplement to the Assignment ----------------- of Lease and Memorandum of Lease constitutes a valid and perfected first lien on each applicable Property and the Improvements located thereon in an amount not less than the Property Cost with respect to such Property, subject only to Permitted Exceptions. (c) Execution and Delivery by the Construction Agent. The execution ------------------------------------------------ and delivery of each Operative Agreement delivered by the Construction Agent on such date and the performance of the Construction Agent's obligations under each Agency Agreement Supplement and other Operative Agreement have been duly authorized by all requisite corporate action of the Construction Agent. (d) Agency Agreement Supplements. Each Operative Agreement delivered ---------------------------- by the Construction Agent on such date has been duly executed and delivered by the Construction Agent. (e) Valid and Binding Obligations of the Lessee and the Construction ---------------------------------------------------------------- Agent. Each Operative Agreement delivered by the Lessee and the Construction - ----- Agent on such date is a legal, valid and binding obligation of the Lessee and the Construction Agent, enforceable against the Lessee and the Construction Agent in accordance with its terms. (f) Insurance. The Construction Agent has obtained insurance --------- coverage covering the Property which meets the requirements of the Agency Agreement, the Lease and the other Operative Agreements before commencing construction, repairs or Modifications, as the case may be, and such coverage is in full force and effect. (g) Property-Related Matters. The Property, as improved in ------------------------ accordance with the Plans and Specifications, will comply in all material respects with all Legal Requirements (including all applicable zoning and land use laws and Environmental Laws) and Insurance Requirements. The Plans and Specifications have been or will be prepared so as to comply with all applicable Legal Requirements (including all applicable Environmental Laws and building, planning, zoning and fire codes) and upon completion of the applicable Improvements in accordance with the Plans and Specifications, such Improvements on the Property will not encroach in any manner onto any adjoining land (except as permitted by express written easements or variance) and such Improvements and the use thereof by the Lessee and its agents, assignees, employees, invitees, lessees, licensees and tenants will comply in all material respects with all applicable Legal Requirements (including all applicable Environmental Laws and building, planning, zoning and fire codes). There is no action, suit or 22 proceeding (including any proceeding in condemnation or eminent domain or under any applicable Environmental Law) pending or, to the best knowledge of Lessee threatened which adversely affects the title to, or materially affects the use, operation or value of, the Properties. No fire or other casualty with respect to the Properties has occurred which fire or other casualty has had a material adverse effect on the Lessee's ability to perform its obligations under the Agency Agreement and the other Operative Agreements. All utilities serving the Properties, or proposed to serve the Properties in accordance with the Plans and Specifications, are located in, and in the future will be located in, and vehicular access to the Improvements on each of the Properties is provided by, either public rights-of-way abutting the Property or Appurtenant Rights. All applicable material licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof of dedication, required for (i) the use, treatment, storage, transport, disposal or disposition of any Hazardous Substance on, at, under or from the Properties during the construction of the Improvements thereon and the use and operation of the Improvements following such construction, (ii) the construction of the Improvements in accordance with the Plans and Specifications and the Agency Agreement and (iii) the use and operation of the Improvements following such construction as permitted pursuant to the Lease have been obtained, to the extent necessary at the time of this representation, from the appropriate Governmental Authorities having jurisdiction or from private parties. (h) Lease Requirements. The Improvements, when completed, will ------------------ comply in all material respects with all requirements and conditions set forth in the Lease and all other conditions and requirements of the Operative Documents. (i) Conditions Precedent contained in the Operative Agreements. All ---------------------------------------------------------- conditions precedent contained in this Agreement and in the other Operative Agreements relating to the relevant Advance have been satisfied in full. (j) Projected Completion Value. The Property Cost of each -------------------------- Improvement as established by the Construction Budget shall not exceed an amount equal to the Projected Completion Value. SECTION 8. PAYMENT OF CERTAIN EXPENSES. Lessee agrees, for the benefit of the Lessor, the Agent, the Co-Agents and each of the Lenders, to: 8.1. Transaction Expenses. (a) On the Reorganization Closing Date, -------------------- pay, or cause to be paid, all fees, expenses and disbursements of each of the Lessor's and the Agent's counsel in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Reorganization Closing Date, including all Transaction Expenses, and all other 23 expenses in connection with such Reorganization Closing Date, including all expenses relating to all fees, taxes and expenses for the recording, registration and filing of documents. (b) On each Property Closing Date, pay, or cause to be paid, all fees, expenses and disbursements of each of the Lessor's and the Agent's counsel in connection with the transactions contemplated by the Operative Agreements and incurred in connection with such Property Closing Date, including all Transaction Expenses arising from such Property Closing Date, and all other expenses in connection with such Property Closing Date, including all expenses relating to each Appraisal, and all fees, taxes and expenses for the recording, registration and filing of documents. 8.2. Brokers' Fees and Stamp Taxes. Pay or cause to be paid brokers' ----------------------------- fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable in connection with the transactions contemplated by this Agreement and the other Operative Agreements. 8.3. Certain Fees and Expenses. Pay or cause to be paid (i) all ------------------------- costs and expenses incurred by the Lessee, the Agent or the Lessor in entering into any future amendments or supplements with respect to any of the Operative Agreements, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers of consents hereto or thereto, which have been requested by the Lessee, and (ii) all costs and expenses incurred by the Lessor, the Lessee, or the Agent in connection with any purchase of any Property by the Lessee pursuant to Article XX of the Lease. 8.4. Credit Agreement and Related Obligations. (a) Pay, before the ---------------------------------------- due date thereof, all costs and expenses (other than principal and interest on the Loans, but including breakage costs and interest on overdue amounts pursuant to Section 2.8(c) of the Credit Agreement or otherwise) required to be paid by the Lessor under the Credit Agreement, the Mortgage, the Assignment of Lease and the Contract Assignment. (b) Pay the Agent all fees specified in the Fee Letter at the time and in the manner required by the Fee Letter, which fees may not be paid by using the proceeds of the Loans or Lessor Contribution. 8.5. Commitment Fees. Pay to the Agent for the account of each --------------- Lender and the Lessor the Commitment Fee on each Commitment Fee Payment Date. SECTION 9. OTHER COVENANTS AND AGREEMENTS. 9.1. Covenants of the Lessor. The Lessor hereby agrees that so long ----------------------- as this Agreement is in effect: (a) Discharge of Liens. The Lessor will not create or permit to ------------------ exist at any time, and will, at its own cost and expense, promptly take such action as may be necessary duly to discharge, 24 or to cause to be discharged, all Lessor Liens on the Property attributable to it; provided, however, that the Lessor shall not be required to so discharge any -------- ------- such Lessor Lien while the same is being contested in good faith by appropriate proceedings diligently prosecuted so long as such proceedings shall not involve any material danger of impairment of the Liens of the Security Documents or of the sale, forfeiture or loss of, and shall not interfere with the use or disposition of, any Property or title thereto or any interest therein or the payment of Rent. (b) No Voluntary Bankruptcy. The Lessor shall not (i) commence any ----------------------- case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, arrangement, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seek appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial benefit of its creditors; and the Lessor shall not take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in this paragraph. (c) Change of Chief Place of Business. The Lessor shall give prompt --------------------------------- notice to the Lessee and the Agent if the Lessor's chief place of business or chief executive office, or the office where the records concerning the accounts or contract rights relating to the Property are kept, shall cease to be located at Two World Trade Center, New York, New York or if it shall change its name. (d) Loan Documents. Provided that no Event of Default is -------------- continuing, none of the Lenders, the Lessor, the Lessee nor the Agent shall consent to or permit any amendment, supplement, waiver or other modification of the terms and provisions of the Credit Agreement, the Notes or the Security Documents, in each case without the prior written consent of the Lessee. (e) Compliance with Operative Agreements. The Lessor shall at all ------------------------------------ times observe and perform all of the covenants, conditions and obligations required to be performed by it under each Operative Agreement to which it is a party. 9.2. Repayment of Certain Amounts on Maturity Date. The Lessor and --------------------------------------------- the Agent hereby agree that if (i) on the Maturity Date (after giving effect to all payments made by the Lessee under the Lease and the application of all sales proceeds pursuant to Section 8 of the Credit Agreement) there remains any outstanding principal or accrued and unpaid principal under the Tranche B Notes (the aggregate amount of such outstanding principal, the "Tranche B Deficit") ----------------- and (ii) during the Marketing Period the Lessor has received any Marketing Period Equity Return, then on the Maturity Date the Lessor shall pay to the Agent an amount up to the amount of the Tranche B Deficit, but in no event greater than the Marketing Period Equity Return received by it. 9.3. Amendment of Certain Documents. The Agent, for itself and on ------------------------------ behalf of the Lenders, hereby agrees for the benefit of the Lessor that it will not amend, alter or otherwise modify, or consent to any amendment, alteration or modification of, the Lease (including the definitions of any terms used in such document) without the prior written consent of the Lessor, if such amendment, alteration or modification would materially and adversely affect the interests of the Lessor. Provisions 25 requiring consent, include any amendment, alteration or modification that would release the Lessee from any of its obligations in respect of the payment of Basic Rent, Supplemental Rent, Termination Value, Maximum Residual Guarantee Amount or the Purchase Option Price or any other payments in respect of the Properties as set forth in the Lease, or reduce the amount of, or change the time or manner of payment of, obligations of the Lessee as set forth in the Lease, or create or impose any obligation on the part of the Lessor under the Lease, or extend or shorten the duration of the Term, or modify the provisions of this Section 9.3. 9.4. Proceeds of Casualty or Condemnation. The Lessor agrees, for ------------------------------------ the benefit of the Agent and the Lenders, that if at any time the Lessor receives any proceeds as a result, directly or indirectly, of any Casualty or Condemnation with respect to the Property which the Lessor is entitled to retain and hold in accordance with the terms of the Lease, the Lessor agrees that it will promptly deposit such amounts in an account with the Agent. The Lessor also agrees that it will execute and deliver such documents and instruments as the Agent may request in order to grant the Agent, for the benefit of the Lenders, a valid and perfected, first priority security interest in such proceeds. SECTION 10. CREDIT AGREEMENT. 10.1. Lessee's Credit Agreement Rights. Notwithstanding anything to -------------------------------- the contrary contained in the Credit Agreement, the Agent, the Lessee and the Lessor hereby agree that: (a) the Lessee shall have the right to give the notice referred to in Section 2.3 of the Credit Agreement; (b) the Lessee shall have the right to convert or continue Loans in accordance with Section 2.6 of the Credit Agreement; (c) the Lessee shall receive copies of all notices delivered to the Lessor under the Credit Agreement and the other Operative Agreements and such notices shall not be effective until received; (d) the Lessee shall have the right to select Interest Periods in accordance with the terms of the Credit Agreement; (e) the Lessee shall have the right to give notice of prepayment of the Loans in accordance with the Credit Agreement; (f) the Lessee shall have the right to cure, to the extent susceptible to a cure, any Default or Event of Default of the Lessor under the Credit Agreement; (g) the Lessee shall have the right to approve any successor Agent pursuant to Section 7.9 of the Credit Agreement; 26 (h) the Lessee shall have the right, on behalf of the Lessor, to select any person or persons (including the Lessee) to whom funds may be paid at the discretion of the Lessor in accordance with Sections 8.1 and 8.2 of the Credit Agreement; (i) the Lessee shall have the right to consent to any assignment by a Lender if required pursuant to Section 9.7 of the Credit Agreement; and (j) the Lessee shall have the right to designate the portion of the Loans on which interest is due and payable for purposes of the definitions of "Allocated Interest" and "Allocated Lessor Yield"; (k) the Lessee shall have the right to request that another lending office be designated pursuant to Section 2.15 of the Credit Agreement; (l) the Lessee shall have the obligation to notify the Agent of the amounts or information specified in Section 5.8 of the Credit Agreement; and (m) without limiting the foregoing clauses (a) through (l), and in addition thereto, (x) the Lessor shall not exercise any right under the Credit Agreement without giving the Lessee at least ten (10) Business Days' prior written notice (or such shorter period as may be required but in no case less than two (2) Business Days) and, following such notice, the Lessor shall take such action, or forbear from taking such action, as the Lessee shall direct and (y) the Lessee shall have the right to exercise any other right of the Lessor under the Credit Agreement upon not less than two (2) Business Days' prior written notice from the Lessee to the Lessor. SECTION 11. TRANSFER OF INTEREST. 11.1. Restrictions on Transfer. (a) The Lessor may not, directly or ------------------------ indirectly, assign, convey or otherwise transfer any of its right, title or interest in or to any of the Properties without the consent of the Agent, the Required Lenders and the Lessee, which consent shall not be unreasonably withheld or delayed. Any transfer by the Lessor as above provided, shall be effected pursuant to an agreement in form and substance reasonably satisfactory to the Agent, the Required Lenders, the Lessor, the Lessee and their respective counsel; provided, however, that no such consent for any such transfer shall be -------- ------- required if, in the Lessor's sole discretion, the continued ownership of the Properties, or any part thereof, would violate or conflict with any Requirement of Law or interpretation thereof, provided, further, however, in such event, -------- ------- ------- Lessor may only transfer its interest in the Properties upon not less than 30 days prior written notice to the Agent (who will notify the Lenders) and the Lessee and only to an institutional investor whose net worth is at least $50,000,000 or whose obligations under the Operative Agreements are guaranteed by an entity whose net worth is at least $50,000,000. (b) In the event that the Lessor shall be in breach of any of its material obligations under the Operative Agreements which breach continues uncured for a period of 30 days or more after 27 written notice thereof by the Lessee or the Agent, then at the request of the Lessee, the Lessor shall promptly transfer and assign its interest in the Properties to a third party, reasonably acceptable to the Agent and the Required Lenders, designated by the Lessee. If the Agent has obtained knowledge of a default by the Lessor, it shall notify the Lessee of such default. 11.2. Effect of Transfer. From and after any transfer effected in ------------------ accordance with this Section 11, the transferor shall be released, to the extent of such transfer, from its liability hereunder and under the other documents to which it is a party in respect of obligations to be performed on or after the date of such transfer. Upon any transfer by the Lessor as above provided, any such transferee shall assume the obligations of the Lessor, and the Lessor, and shall be deemed the "Lessor" for all purposes of such documents and each reference herein to the transferor shall thereafter be deemed a reference to such transferee for all purposes, except as provided in the preceding sentence. Notwithstanding any transfer of all or a portion of the transferor's interest as provided in this Section 11, the transferor shall be entitled to all benefits accrued and all rights vested prior to such transfer including rights to indemnification under any such document. 28 SECTION 12. INDEMNIFICATION. 12.1. General Indemnity. The Lessee, whether or not any of the ----------------- transactions contemplated hereby shall be consummated, hereby assumes liability for and agrees to defend, indemnify and hold harmless each Indemnified Person on an After Tax Basis from and against any Claims which may be imposed on, incurred by or asserted against an Indemnified Person in any way relating to or arising or alleged to arise out of (a) the financing, refinancing, purchase, acceptance, rejection, ownership, design, construction, delivery, acceptance, nondelivery, leasing, subleasing, possession, use, operation, repair, modification, transportation, condition, sale, return, repossession (whether by summary proceedings or otherwise), or any other disposition of the Property or any part thereof; (b) any latent or other defects in any property whether or not discoverable by an Indemnified Person or the Lessee; (c) a violation of Environmental Laws, Environmental Claims or other loss of or damage relating to the Properties; (d) the Operative Agreements, or any transaction contemplated thereby; (e) any breach by the Lessee of any of its representations or warranties under the Operative Agreements or failure by the Lessee to perform or observe any covenant or agreement to be performed by it under any of the Operative Agreements; and (f) personal injury, death or property damage relating to the Properties, including Claims based on strict liability in tort; but in any event excluding (x) Claims to the extent such Claims arise solely out of events occurring after the expiration of the Term and after the Lessee's discharge of all its obligations under the Lease or (y) Claims to the extent such Claims arise solely out of the gross negligence or willful misconduct of an Indemnified Person. The Lessee shall be entitled to control, and shall assume full responsibility for the defense of any Claim; provided, however, that the -------- ------- Lessor and the Agent named in such Claim, may each retain separate counsel at the expense of the Lessee in the event of and to the extent of a conflict or a potential conflict. The Lessee and each Indemnified Person agree to give each other prompt written notice of any Claim hereby indemnified against but the giving of any such notice by an Indemnified Person shall not be a condition to the Lessee's obligations under this Section 12.1, except to the extent failure to give such notice materially prejudices Lessee's rights hereunder. After an Indemnified Person has been fully indemnified for a Claim pursuant to this Section 12.1, and so long as no Event of Default under the Lease shall have occurred and be continuing, the Lessee shall be subrogated to any right of such Indemnified Person with respect to such Claim. None of the Indemnified Persons shall settle a Claim without the consent of the Lessee, which consent shall not be unreasonably withheld or delayed. 12.2. General Tax Indemnity. (a) The Lessee shall pay and assume --------------------- liability for, and does hereby agree to indemnify, protect and defend the Property and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. Each Tax Indemnitee further agrees to comply with recommendations made by the Lessee regarding techniques to minimize Taxes indemnifiable hereunder, provided that (i) the Lessee agrees to make payments to (or otherwise indemnify) such Tax Indemnitee against any cost or expense arising from instituting the Lessee's recommendations and (ii) such Tax Indemnitee determines in its reasonable discretion that such recommendations will not have an adverse impact on such Tax Indemnitee. (b) Provided that no Event of Default has occurred and is continuing, if any Tax Indemnitee obtains a refund or a reduction in a liability (but only if such reduction relates to a Tax not 29 otherwise indemnifiable hereunder and has not been taken into account in determining the amount of a payment on an After Tax Basis) as a result of any Imposition paid or reimbursed by the Lessee (in whole or in part), such Tax Indemnitee shall promptly pay to the Lessee the lesser of (x) the amount of such refund or reduction in liability and (y) the amount previously so paid or advanced by the Lessee, in each case net of reasonable expenses not already paid or reimbursed by the Lessee. (c) (i) Subject to the terms of Section 12.2(g), the Lessee shall pay or cause to be paid all Impositions directly to the taxing authorities where feasible and otherwise to the Tax Indemnitee, as appropriate, and the Lessee shall at its own expense, upon such Tax Indemnitee's reasonable request, furnish to such Tax Indemnitee copies of official receipts or other satisfactory proof evidencing such payment. (ii) In the case of Impositions for which no contest is conducted pursuant to Section 12.2(g) and which the Lessee pays directly to the taxing authorities, the Lessee shall pay such Impositions prior to the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which the Lessee reimburses a Tax Indemnitee, the Lessee shall do so within thirty (30) days after receipt by the Lessee of demand by such Tax Indemnitee describing in reasonable detail the nature of the Imposition and the basis for the demand (including the computation of the amount payable), but in no event shall the Lessee be required to pay such reimbursement prior to thirty (30) days before the latest time permitted by the relevant taxing authority for timely payment. In the case of Impositions for which a contest is conducted pursuant to Section 12.2(g), the Lessee shall pay such Impositions or reimburse such Tax Indemnitee for such Impositions, to the extent not previously paid or reimbursed pursuant to subsection (a), prior to the latest time permitted by the relevant taxing authority for timely payment after conclusion of all contests under Section 12.2(g). (iii) Impositions imposed for a billing period during which the Lease expires or terminates with respect to the Property (unless the Lessee has exercised the Purchase Option with respect to the Properties) shall be adjusted and prorated by the Agent on a daily basis between the Lessee and the Lessor, whether or not such Imposition is imposed before or after such expiration or termination and each party shall pay or reimburse the other for each party's pro rata share thereof. (iv) At the Lessee's request, the amount of any indemnification payment by the Lessee pursuant to subsection (a) shall be verified and certified by an independent public accounting firm mutually acceptable to the Lessee and the Tax Indemnitee. The fees and expenses of such independent public accounting firm shall (i) in the case of the Trust Company or the Lessor, be paid by the Lessee, and (ii) in the case of all other Tax Indemnitees, be paid by the Lessee unless such verification shall result in an adjustment in the Lessee's favor of 10% or more of the payment as computed by such Tax Indemnitee, in which case such fee shall be paid by such Tax Indemnitee. (d) (i) The Lessee shall be responsible for preparing and filing any real and personal property or ad valorem tax returns in respect of the Property. In case any other report or tax return shall be required to be made with respect to any obligations of the Lessee under or arising out of subsection (a) and of which the Lessee has knowledge, the Lessee, at its sole cost and expense, shall 30 notify the relevant Tax Indemnitee of such requirement and (except if such Tax Indemnitee notifies the Lessee that such Person intends to file such report or return) (A) to the extent required or permitted by and consistent with Legal Requirements, make and file in its own name such return, statement or report; and (B) in the case of any other such return, statement or report required to be made in the name of such Tax Indemnitee, advise such Tax Indemnitee of such fact and prepare such return, statement or report for filing by such Tax Indemnitee or, where such return, statement or report shall be required to reflect items in addition to any obligations of the Lessee under or arising out of subsection (a), provide such Tax Indemnitee at the Lessee's expense with information sufficient to permit such return, statement or report to be properly made with respect to any obligations of the Lessee under or arising out of subsection (a). Such Tax Indemnitee shall, upon the Lessee's request and at the Lessee's expense, provide any data maintained by such Tax Indemnitee (and not otherwise within the control of the Lessee) with respect to the Property which the Lessee may reasonably require to prepare any required tax returns or reports; (e) If directly as a result of the payment or reimbursement by the Lessee of any expenses of the Lessor, the Lessor or any of its Affiliates, shall suffer a net increase ( taking into account any available credits or deductions) in any federal, state or local income tax liability, the Lessee shall indemnify the Lessor or its respective Affiliates (without duplication of any indemnification required by subsection (a)) on an After Tax Basis for the amount of such increase. The calculation of any such net increase shall take into account any current or future tax savings realized or reasonably expected to be realized by the Lessor or such Affiliate, in respect thereof, as well as any interest, penalties and additions to tax payable by the Lessor or such Affiliate, in respect thereof; (f) As between the Lessee and the Lessor, the Lessee shall be responsible for, and the Lessee shall indemnify and hold harmless the Lessor (without duplication of any indemnification required by subsection (a)) on an After Tax Basis against, any obligation for United States withholding taxes imposed in respect of the interest payable on the Notes to the extent, but only to the extent, Lessor has actually paid funds to a taxing authority with respect to such withholding taxes (and, if the Lessor receives a demand for such payment from any taxing authority, the Lessee shall discharge such demand on behalf of the Lessor). Notwithstanding the foregoing, the Lessee shall not be responsible for any obligation for United States withholding taxes imposed in respect of the interest payable on the Notes or in respect of the Lessor Yield to the extent the Lessor is not a United States person for purposes of the Code; (g) (i) If a written claim is made against any Impositions Indemnitee or if any proceeding shall be commenced against such Impositions Indemnitee (including a written notice of such proceeding), for any Impositions, such Impositions Indemnitee shall promptly notify Lessee in writing and shall not take action with respect to such claim or proceeding without the consent of Lessee for thirty (30) days after the receipt of such notice by Lessee; provided, that, in the case of any such claim or proceeding, if action shall be - -------- required by law regulation to be taken prior to the end of such 30-day period, such Impositions Indemnitee shall, in such notice to Lessee, inform Lessee, and no action shall be taken with respect to such claim or proceeding without the consent of Lessee before the end of such shorter period; provided, further, that -------- ------- the failure of such Impositions Indemnitee to give the notices referred to this sentence shall not diminish Lessee's obligation hereunder except to the extent such failure adversely affects the ability of the Lessee to contest all or part of such claim. (ii) If, within thirty (30) days of receipt of such notice from the Impositions Indemnitee (or such shorter period as the Impositions Indemnitee has noticed Lessee is required by law or regulation for the Impositions Indemnitee to commence such contest), Lessee shall request in writing that such Impositions Indemnitee contest such Imposition, the Impositions Indemnitee shall, at the expense of Lessee, in good faith conduct and control such contest (including by pursuit of appeals) relating to the validity, applicability or amount of such impositions (provided, however, that (A) if such contest can be pursued independently from any other proceeding involving a tax liability of such Impositions Indemnitee, the Impositions Indemnitee, at Lessee's request, shall allow Lessee to conduct and control such contest and (B) in the case of any contest that Lessee is not entitled to control, the Impositions Indemnitee may request Lessee to conduct and control such contest if possible or permissible under applicable law or regulation) by, in the sole discretion of the Person conducting and controlling such contest, (1) resisting payment thereof, (2) not paying the same except under protest, if protest is necessary and proper, (3) if the payment be made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, or (4) taking such other action as is reasonably requested by Lessee from time to time. (iii) The party controlling any contest shall consult in good faith with the non-controlling party and shall keep the non-controlling party reasonably informed as to the conduct of such contest; provided that all -------- decisions ultimately shall be made in the sole discretion of the controlling party. The parties agree that an Impositions Indemnitee may at any time decline to take further action with respect to the contest of any Imposition and may settle such contest if such Impositions Indemnitee shall waive its rights to any indemnity from Lessee that otherwise would be payable in respect of such claim (and any future claim by any taxing authority with respect to other taxable periods that are based, in whole or in part, upon the resolution of such claim) and shall pay to Lessee any amount previously paid or advanced by Lessee pursuant to this Section 12.2 by way of indemnification or advance for the payment of an Imposition, and no other then future liability of the Lessee is likely with respect to such Imposition. (iv) Notwithstanding the foregoing provisions of this Section 12.2, an Impositions Indemnitee shall not be required to take any action and Lessee shall not be permitted to contest any Impositions in its own name or that of the Impositions Indemnitee unless (A) Lessee shall pay to such Impositions Indemnitee on demand and on an After Tax Basis all reasonable costs, losses and expenses that such Impositions Indemnitee actually incurs in connection with contesting such Impositions, including, without limitation, all reasonable legal, accounting and investigatory fees and disbursements, (B) in the case of a claim that must be pursued in the name of an Impositions Indemnitee (or an Affiliate thereof), the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in any audit involving such Impositions Indemnitee for which Lessee may be liable to pay an indemnity under this Section 12.2) is less than $1,000,000, unless the pursuit of such contest is in a manner mutually satisfactory to the Imposition Indemnitee and the Lessee, but in no event shall such right prevent the Lessee from prosecuting or continuing such contest, 32 (C) the Impositions Indemnitee shall have reasonably determined that the action to be taken will not result in any material danger of sale, forfeiture or loss of any Property, or any part thereof or interest therein, will not interfere with the payment of Rent, and will not result in risk of criminal liability, (D) if such contest shall involve the payment of the Imposition prior to the contest, Lessee shall provide to the Impositions Indemnitee an interest-free advance in an amount equal to the Imposition that the Impositions Indemnitee is required to pay (with no additional net after-tax cost to such Impositions Indemnitee), (E) in the case of a claim that must be pursued in the name of an Impositions Indemnitee (or an Affiliate thereof), Lessee shall have provided to such Impositions Indemnitee an opinion of independent tax counsel selected by the Lessee and reasonably satisfactory to such Imposition Indemnitee stating that a reasonable basis exists to contest such claim (or, in the case of an appeal of an adverse determination, an opinion of such counsel to the effect that there is substantial authority for the position asserted in such appeal) and (F) no Event of Default shall have occurred and be continuing. SECTION 13. MISCELLANEOUS. 13.1. Survival of Agreements. The representations, warranties, ---------------------- covenants, indemnities and agreements of the parties provided for in the Operative Agreements, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Agreement, the transfer of the Property to the Lessor, the construction of any Improvements, any disposition of any interest of the Lessor in the Property or the Improvements, the payment of the Notes and any disposition thereof and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Agreements. Except as otherwise expressly set forth herein or in other Operative Agreements, the indemnities of the parties provided for in the Operative Agreements shall survive the expiration or termination of any thereof. 13.2. No Broker, etc. Each of the parties hereto represents to the --------------- others that it has not retained or employed any broker, finder or financial adviser to act on its behalf in connection with this Agreement, nor has it authorized any broker, finder or financial adviser retained or employed by any other Person so to act, except for the Arranger, the fees of which shall be paid by the Lessee. Any party who is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. 13.3. Notices. Unless otherwise specifically provided herein, all ------- notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by nationally recognized courier service and any such notice shall become effective five Business Days after being deposited in the mails, certified or registered with appropriate postage prepaid or one Business Day after delivery to a nationally recognized courier service specifying overnight delivery and shall be directed to the address of such Person as indicated: 33 If to the Lessee, to it at: Living Centers Holding Company 15415 Katy Freeway, Suite 800 Houston, Texas 77094 Attn: Mr. Boyd P. Gentry Telecopy No.: (713) 578-4735 with a copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E. Atlanta, Georgia 30303 Attn: David Armitage, Esq. Telecopy No.: (404) 572-6999 If to the Lessor, to it at: FBTC Leasing Corp. Two World Trade Center New York, New York 10048 Attn: Mr. Carl Marcantonio Telecopy No.: (212) 775-7276 If to the Agent, to it at: The Chase Manhattan Bank Agent Lender Services One Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attention: Janet Belden Telecopier: (212) 552-5658 with a copy to: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attention: Dawn Lee Lum Telecopier: (212) 270-3279 34 with a copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attn: C. Tanner Rose, Jr., Esq. Telecopy No.: (212) 455-2502 From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. 13.4. Counterparts. This Agreement may be executed by the parties ------------ hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. 13.5. Amendments and Termination. Neither this Agreement nor any of -------------------------- the terms hereof may be terminated, amended, supplemented, waived or modified except by an instrument in writing signed by the party against which the enforcement of the termination, amendment, supplement, waiver or modification shall be sought. This Agreement may be terminated by an agreement signed in writing by the Lessor, the Lessee, the Agent and the Lenders. 13.6. Headings, etc.. The Table of Contents and headings of the -------------- various Sections and Subsections of this Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 13.7. Parties in Interest. Except as expressly provided herein, none ------------------- of the provisions of this Agreement are intended for the benefit of any Person except the parties hereto. 13.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 13.9. Severability. Any provision of this Agreement that is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13.10. Rights of Lessee. Notwithstanding any provision of the ---------------- Operative Agreements but subject in all respects to the terms of the Collateral Agent Agreement, if at any time all obligations (i) of the Lessor under the Credit Agreement and the Security Documents and (ii) of the Lessee under the Operative Agreements have in each case been satisfied or discharged in full, then the Lessee shall be 35 entitled to (a) terminate the Lease (to the extent not previously terminated) and (b) receive all amounts then held under the Operative Agreements and all proceeds with respect to the Property. Upon the fulfillment of the obligations contained in clauses (i) and (ii) above, the Lessor shall transfer to the Lessee all of its right, title and interest in and to the Property (to the extent not previously transferred to the Lessee in accordance with the Lease) and any amounts or proceeds referred to in the foregoing clause (b) shall be paid over to the Lessee. 13.11. Rights of Lessor. Notwithstanding any provision of the ---------------- Operative Agreements but subject in all respects to the terms of the Collateral Agent Agreement, if a Lease Event of Default continues for a period exceeding 90 days, the Lessor shall be permitted to send notice to Lessee of such default. 13.12. Further Assurances. The parties hereto shall promptly cause ------------------ to be taken, executed, acknowledged or delivered, at the sole expense of the Lessee, all such further acts, conveyances, documents and assurances as the other parties may from time to time reasonably request in order to carry out and effectuate the intent and purposes of this Agreement, the other Operative Agreements and the transactions contemplated hereby and thereby (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Lessee, at its own expense, shall take such action as may be reasonably requested in order to maintain and protect all security interests provided for hereunder or under any other Operative Agreement. 13.13. Successors and Assigns. This Agreement shall be binding upon ---------------------- and inure to the benefit of the parties hereto and their respective successors and assigns. 13.14. No Representation or Warranty. Nothing contained herein, in ----------------------------- any other Operative Agreement or in any other materials delivered to the Lessee in connection with the transactions contemplated hereby or thereby shall be deemed a representation or warranty by the Agent or the Arranger or any of their Affiliates as to the proper accounting treatment or tax treatment that should be afforded to the Lease and the Lessor's ownership of the Properties and the Agent expressly disclaims any representation or warranty with respect to such matters. 13.15. Confidentiality. Each of the Agent, the Lessor and each --------------- Lender agrees that it will use its best efforts not to disclose without the prior consent of Living Centers (other than to its subsidiaries and affiliates conducting business related to the making and syndication of loans and its and such subsidiaries and affiliates' employees, auditors or counsel or to another Lender if the disclosing Lender or the disclosing Lender's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to any Guarantor which is furnished pursuant to this Agreement or any other Operative Agreement and which is designated by such party furnishing such information to the Lenders in writing as confidential, provided that the Agent, the Lessor or any Lender may -------- disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate in any report, statement, or 36 testimony submitted to any municipal, state or federal regulatory body having or claiming to have jurisdiction over such Lender or to the Federal Reserve Board or the FDIC or similar organizations (whether in the United States or elsewhere), (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Lender, and (e) to the prospective transferee or participant in connection with any contemplated transfer of any of the Notes or any interest therein by the Person disclosing such information, provided that such prospective transferee or participant -------- executes an agreement with such Guarantor containing provisions substantially identical to those contained in this Section. 37 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. LIVING CENTERS HOLDING COMPANY, as Lessee By: /s/ Boyd P. Gentry --------------------------------------- Name: Boyd P. Gentry Title: Vice President FBTC LEASING CORP., as Lessor By: /s/ Akihiro Hashimoto --------------------------------------- Name: Akihiro Hashimoto Title: Treasurer THE CHASE MANHATTAN BANK, as Agent and a Lender By: /s/ Dawn Lee Lum --------------------------------------- Name: Dawn Lee Lum Title: Vice President THE FUJI BANK, LIMITED, as Co-Agent and a Lender By: /s/ Philip C. Lavinger III --------------------------------------- Name: Philip C. Lavinger III Title: Vice President & Manager Citibank, N.A., as a Lender By: /s/ Martha Hadeler --------------------------------------- Name: Martha Hadeler Title: Attorney in Fact NATIONSBANK, N.A., as a Lender 38 By: /s/ Larry J. Gordon ----------------------------------- Name: Larry J. Gordon Title: Corporate Banking Officer THE BANK OF NOVA SCOTIA, as a Lender By: /s/ W. J. Brown ----------------------------------- Name: W. J. Brown Title: Vice President BANQUE PARIBAS, as a Lender By: /s/ Glenn E. Mealey ----------------------------------- Name: Glenn E. Mealey Title: Director By: /s/ Timothy A. Dunnon ----------------------------------- Name: Timothy A. Dunnon Title: Managing Director CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By: /s/ Farboud Tavangar ----------------------------------- Name: Farboud Tavangar Title: First Vice President DRESDNER BANK AG, New York and Grand Cayman Branches, as a Lender By: /s/ Felix K. Camacho ----------------------------------- 39 Name: Felix K. Camacho Title: Assistant Treasurer By: /s/ William E. Lambert --------------------------------- Name: William E. Lambert Title: Assistant Vice President FIRST UNION NATIONAL BANK, as a Lender By: /s/ Michael P. Dohertry --------------------------------- Name: Michael P. Dohertry Title: Vice President THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, as a Lender By: /s/ Philip A. Marsden --------------------------------- Name: Philip A. Marsden Title: Senior Vice President TORONTO DOMINION BANK (Texas), Inc., as a Lender By: /s/ Darlene Riedel --------------------------------- Name: Darlene Riedel Title: Vice President THE UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ Jennifer L. Banks --------------------------------- Name: Jennifer L. Banks Title: Vice President MARINE MIDLAND BANK, as a Lender By: /s/ Susan L. LeFeure --------------------------------- Name: Susan L. LeFeure Title: Authorized Signatory Exhibit A-1 ----------- ================================================================================ FORM OF MORTGAGE AND SECURITY AGREEMENT from FBTC LEASING CORP. to THE CHASE MANHATTAN BANK, as Agent Dated as of ______________ ___, _____ When recorded return to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Erin L. Rothfuss, Esq. ================================================================================ MORTGAGE AND SECURITY AGREEMENT MORTGAGE AND SECURITY AGREEMENT, dated as of ______________ ___, ____ (this "Mortgage"), made by FBTC LEASING CORP., a New York corporation (the -------- "Mortgagor"), in favor of THE CHASE MANHATTAN BANK, a New York banking --------- corporation, as collateral agent (in such capacity, the "Mortgagee" or the --------- "Agent") under the Collateral Agent Agreement, dated as of November 4, 1997 (the ----- "Collateral Agent Agreement"), among the Mortgagor, the Mortgagee and the -------------------------- financial institutions from time to time parties thereto (the "Lenders"). ------- Preliminary Statement --------------------- A. Mortgagor has entered into that certain Amended and Restated Credit Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit ------ Agreement") with the several lenders from time to time parties thereto (the - --------- "Lenders") and Mortgagee. ------- B. Mortgagor is the owner of the parcel(s) of real property described on Schedule A attached (such real property, together with all of the buildings, improvements, structures and fixtures now or subsequently located thereon (the "Improvements"), being collectively referred to as the "Real ------------ ---- Estate"). - ------ C. Pursuant to the terms and conditions of the Credit Agreement, the Mortgagee has agreed to make loans to the Mortgagor, in an aggregate principal amount not to exceed $97,000,000 (the "Loans"). Pursuant to the terms and ----- conditions of that certain Amended and Restated Guarantee dated as of the date hereof, Paragon Health Network, Inc. ("Paragon"), as the successor-in-interest ------- to Living Centers of America, Inc. and certain of Paragon's subsidiaries, have agreed to amend and restate its obligations under that certain Guarantee dated as of October 10, 1996 and guarantee the obligations of Mortgagor under the Credit Agreement. D. Paragon has entered into that certain Credit Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified from time to time, the "Corporate Credit Agreement") with the several -------------------------- lenders from time to time parties thereto (the "Corporate Lenders") and The ----------------- Chase Manhattan Bank, as Administrative Agent (in such capacity, "Administrative -------------- Agent"). - ----- E. Pursuant to the terms and conditions of the Corporate Credit Agreement, the Corporate Lenders have agreed to make loans to Paragon in an aggregate principal amount not to exceed $890,000,000 (the "Corporate Loans"). --------------- F. The obligations of (i) the Lenders to make the Loans are conditioned upon, among other things, that the obligations of Mortgagor under the Credit Agreement be secured by a mortgage lien upon the Mortgaged Property and (ii) the Corporate Lenders to make the 2 Corporate Loans are conditioned upon, among other things, that the obligations of Paragon under the Corporate Credit Agreement be secured by a mortgage lien upon the Mortgaged Property. G. In order to induce (i) the Lenders to make the Loans and (ii) the Corporate Lenders to make the Corporate Loans, Mortgagor desires to grant Mortgagee a lien upon the Mortgaged Property upon the terms and conditions hereinafter set forth. H. Capitalized terms used but not otherwise defined in this Mortgage shall have the meanings assigned to them in Annex A attached to the Amended and Restated Participation Agreement dated as of November 4, 1997 among Living Centers Holding Company, Mortgagor, Agent, certain co-agents and the Lenders. The rules of usage and documentary conventions set forth in such Annex are also applicable hereto. Granting Clauses ---------------- For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Mortgagor agrees that to secure: (a) (i) the repayment by Mortgagor of all obligations, liabilities and indebtedness of Mortgagor, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, under, arising out of or in connection with the Credit Agreement, the Notes or the other Operative Agreements, together with all interest and fees payable thereon (collectively, the "Mortgagor Indebtedness") and (ii) the ---------------------- payment of all obligations, liabilities and indebtedness of Paragon, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, under, arising out of or in connection with the Corporate Credit Agreement and the other Loan Documents, together with all interest and fees payable thereon (collectively, the "Paragon Indebtedness"; together with the Mortgagor -------------------- Indebtedness, the "Indebtedness"); and ------------ (b) (i) the performance and observance of all covenants, agreements, obligations and liabilities of Mortgagor (the "Mortgagor Obligations") --------------------- under or pursuant to the provisions of the Operative Agreements and any amendments, supplements, extensions, renewals, restatements, replacements or modifications of any of the foregoing and (ii) the performance and observance of all covenants, agreements, obligations and liabilities of Paragon under the Loan Documents and any amendments, supplements, extensions, renewals, restatements, replacements or modifications of any of the foregoing (the "Paragon Obligations"; together with the Mortgagor ------------------- Obligations, the "Obligations") (the Operative Agreements and the Loan ----------- Documents and all other documents and instruments from time to time evidencing, securing or guaranteeing the payment of the Indebtedness or the performance of the Obligations, as any of the same may be amended, supplemented, extended, renewed, restated, replaced or modified from time to time, are collectively referred to as the "Credit Documents"); ---------------- MORTGAGOR HEREBY GRANTS TO MORTGAGEE A LIEN UPON AND A SECURITY INTEREST IN, AND HEREBY MORTGAGES, GRANTS, ASSIGNS, TRANSFERS AND SETS OVER TO MORTGAGEE: (A) all right, title and interest of Mortgagor whether now owned or hereafter 3 acquired, in and to the parcels of real property described on Schedule A (together with the Land, the Improvements, the Appurtenant Rights and the Fixtures relating thereto being collectively referred to as the "Property"); -------- (B) all the estate, right, title, claim or demand whatsoever of the Mortgagor, in possession or expectancy, in and to the Property or any part thereof; (C) all right, title and interest of Mortgagor whether now owned or hereafter acquired, in and to the Equipment; (D) all right, title and interest of Mortgagor, whether now owned or hereafter acquired, in and to all substitutes and replacements of, and all additions and improvements to, the Property and the Equipment, subsequently acquired by or released to Mortgagor or constructed, assembled or placed by Mortgagor on the Property, immediately upon such acquisition, release, construction, assembling or placement, including, without limitation, any and all building materials whether stored at the Property or offsite, and, in each such case, without any further mortgage, conveyance, assignment or other act by Mortgagor; (E) all right, title and interest of Mortgagor, whether now owned or hereafter acquired, in, to and under all leases, subleases, underlettings, concession agreements, management agreements, licenses and other agreements relating to the use or occupancy of the Property or the Equipment or any part thereof, now existing or subsequently entered into by Mortgagor and whether written or oral and all guarantees of any of the foregoing (collectively, as any of the foregoing may be amended, restated, extended, renewed or modified from time to time, the "Leases"), and all rights of ------ Mortgagor in respect of cash and securities deposited thereunder and the right to receive and collect the revenues, income, rents, issues and profits thereof, together with all other rents, royalties, issues, profits, revenue, income and other benefits arising from the use and enjoyment of the Mortgaged Property (as defined below) (collectively, the "Rents"); ----- (F) all right, title and interest of Mortgagor in and to all unearned premiums under insurance policies now or subsequently obtained by Mortgagor relating to the Property or Equipment and Mortgagor's interest in and to all proceeds of any such insurance policies (including title insurance policies) including the right to collect and receive such proceeds; and all awards and other compensation, including the interest payable thereon and the right to collect and receive the same, made to the present or any subsequent owner of the Property or Equipment for the taking by eminent domain, condemnation or otherwise, of all or any part of the Property or any easement or other right therein; (G) all right, title and interest of Mortgagor in and to (i) all contracts from time to time executed by Mortgagor or any manager or agent on its behalf relating to the ownership, construction, maintenance, repair, operation, occupancy, sale or financing of the Property or Equipment or any part thereof and all agreements relating to the purchase or lease of any portion of the Property or any property which is adjacent or peripheral to the Property, together with the right to exercise such options and all leases of Equipment, (ii) all consents, licenses, building permits, certificates of occupancy and other governmental approvals relating to construction, completion, occupancy, use or operation of the Property or any part thereof and (iii) all drawings, plans, specifications and similar 4 or related items relating to the Property; (H) all right, title and interest of Mortgagor in and to any and all monies now or subsequently on deposit for the payment of real estate taxes or special assessments against the Property or for the payment of premiums on insurance policies covering the foregoing property or otherwise on deposit with or held by Mortgagee as provided in this Mortgage; all capital, operating, reserve or similar accounts held by or on behalf of Mortgagor and related to the operation of the Mortgaged Property, whether now existing or hereafter arising and all monies held in any of the foregoing accounts and any certificates or instruments related to or evidencing such accounts; and (I) all amendments, modifications, substitutions, replacements and additions of any of the foregoing, and all proceeds, both cash and noncash, of any of the foregoing; (All of the foregoing property and rights and interests now owned or held or subsequently acquired by the Mortgagor and described in the foregoing clauses (A) through (I) are collectively referred to as the "Mortgaged --------- Property"); provided that excluded from the Mortgaged Property at all times and - -------- -------- ---- -------- in all respects shall be all Excepted Rights and the Mortgaged Property shall be subject at all times and in all respects to all Shared Rights. TO HAVE AND TO HOLD the Mortgaged Property and the rights and privileges hereby mortgaged unto the Mortgagee, its successors and assigns for the uses and purposes set forth, until all of the Indebtedness is paid and the Obligations are performed, subject however to the matters listed on Schedule B hereto (the "Permitted Encumbrances and Liens"). [PROVIDED, HOWEVER, that this Mortgage secures a principal amount of the Obligations not to exceed $______________ (the "Maximum Secured Amount"); ---------------------- and PROVIDED FURTHER, that payments made on account of the Indebtedness or any portion thereof, whether in due course, as prepayments or otherwise, shall not reduce the Maximum Secured Amount, unless the aggregate principal amount of the Indebtedness is less than the Maximum Secured Amount.]/1/ - Terms and Conditions -------------------- Mortgagor further represents, warrants, covenants and agrees with Mortgagee as follows: 1. Payment of Indebtedness. The Mortgagor shall pay the Mortgagor ----------------------- Indebtedness at the times and places and in the manner specified in the Notes and the Credit Agreement and shall perform all the Mortgagor Obligations. 2. Other Covenants. At any time and from time to time, upon the --------------- written request of the Mortgagee, and at the sole expense of the Mortgagor, the Mortgagor will promptly and __________________________ /1/ This provision should be added in appropriate jurisdictions. - 5 duly execute and deliver such further instruments and documents and take such further actions as the Mortgagee reasonably may request for the purposes of obtaining or preserving the full benefits of this Mortgage and of the rights and powers granted by this Mortgage. 3. Further Assurances. To further assure Mortgagee's rights under ------------------ this Mortgage, Mortgagor agrees upon demand of Mortgagee to do any act or execute any additional documents (including, but not limited to, security agreements on any personalty included or to be included in the Mortgaged Property) as may be reasonably required by Mortgagee to confirm the rights or benefits conferred on Mortgagee by this Mortgage. 4. Mortgagee's Right to Perform. If the Mortgagor fails to perform ---------------------------- or comply with any of its agreements contained in this Mortgage, the Mortgagee, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. The expenses of the Mortgagee incurred in connection with actions undertaken as provided in this Section, together with interest thereon at a rate per annum equal to the Overdue Rate, from the date of payment by the Mortgagee to the date reimbursed by the Mortgagor, shall be payable by the Mortgagor to the Mortgagee on demand; provided, however, that the Mortgagor shall not be liable for payment of any - -------- ------- amount under this Section to the extent the Lessee is responsible for payment of such amount under the Lease, the Participation Agreement or any other Operative Agreement. 5. Mortgagor's Existence, etc. Mortgagor shall do all things --------------------------- necessary to preserve and keep in full force and effect its existence, franchises, rights and privileges under the laws of the state of [ ] and its right to own property and transact business in the state of [ ]. This Mortgage constitutes the legal, valid and binding obligation of Mortgagor, enforceable against Mortgagor in accordance with its terms, except as enforceability may be limited by principles of equity and applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 6. Events of Default. It shall be an event of default under this ----------------- Mortgage (an "Event of Default") if an Event of Default shall occur under any of ---------------- the Credit Documents. 6 7. Remedies. -------- (a) Upon the occurrence of any Event of Default, in addition to any other rights and remedies Mortgagee may have pursuant to the Credit Documents, or as provided by law, and without limitation, (a) if such event triggers an Acceleration under Section 6.1(h) or 6.1(i) of the Credit Agreement, automatically the Indebtedness and all other amounts owing under the Notes, this Mortgage and the other Security Documents immediately shall become due and payable, and (b) if such event is any other Event of Default, by notice to Mortgagor, Mortgagee may declare the Indebtedness (together with accrued interest thereon) and all other amounts payable under the Note, this Mortgage and the other Security Documents to be immediately due and payable. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. In addition, upon the occurrence of any Event of Default, Mortgagee may immediately take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Mortgagor and in and to the Mortgaged Property, including, but not limited to, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such manner as Mortgagee may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Mortgagee: (i) Mortgagee may, to the extent permitted by applicable law, (A) institute and maintain an action of mortgage foreclosure against all or any part of the Mortgaged Property, (B) institute and maintain an action on the Notes, (C) sell all or part of the Mortgaged Property (Mortgagor expressly granting to Mortgagee the power of sale), or (D) take such other action at law or in equity for the enforcement of this Mortgage or any of the Credit Documents as the law may allow. Mortgagee may proceed in any such action to final judgment and execution thereon for all sums due hereunder, together with interest thereon at the rate specified in Section 2.8(c) of the Credit Agreement and all costs of suit, including, without limitation, reasonable attorneys' fees and disbursements. Interest at the rate specified in Section 2.8(c) of the Credit Agreement shall be due on any judgment obtained by Mortgagee from the date of judgment until actual payment is made of the full amount of the judgment. (ii) Mortgagee may personally, or by its agents, attorneys and employees and without regard to the adequacy or inadequacy of the Mortgaged Property or any other collateral as security for the Indebtedness and Obligations enter into and upon the Mortgaged Property and each and every part thereof and exclude Mortgagor and its agents and employees therefrom without liability for trespass, damage or otherwise (Mortgagor hereby agreeing to surrender possession of the Mortgaged Property to Mortgagee upon demand at any such time) and use, operate, manage, maintain and control the Mortgaged Property and every part thereof. Following such entry and taking of possession, Mortgagee shall be entitled, without limitation, (x) to lease all or any part or parts of the Mortgaged Property for such periods of time and upon such conditions as Mortgagee may, in its discretion, deem proper, (y) to enforce, cancel or modify any Lease and (z) generally to execute, do and perform any other act, deed, matter or thing concerning the Mortgaged Property as Mortgagee shall deem appropriate as fully as Mortgagor might do. (b) The holder of this Mortgage, in any action to foreclose it, shall be entitled to the appointment of a receiver. In case of a foreclosure sale, the Mortgaged Property may be sold, 7 at Mortgagee's election, in one parcel or in more than one parcel and Mortgagee is specifically empowered, (without being required to do so, and in its sole and absolute discretion) to cause successive sales of portions of the Mortgaged Property to be held. (c) In the event of any breach of any of the covenants, agreements, terms or conditions contained in this Mortgage, and notwithstanding to the contrary any exculpatory or non-recourse language which may be contained herein, Mortgagee shall be entitled to enjoin such breach and obtain specific performance of any covenant, agreement, term or condition and Mortgagee shall have the right to invoke any equitable right or remedy as though other remedies were not provided for in this Mortgage. (d) The Mortgagor hereby waives the benefit of all appraisement, valuation, stay, extension and redemption laws now or hereafter in force and all rights of marshalling in the event of any sale of the Mortgaged Property or any interest therein. 7A. Application of Proceeds. The proceeds available from the ----------------------- sale of the Mortgaged Property or any part thereof shall be applied as follows: (_)(a) first, to the payment of the costs and expenses of such sale, including attorneys' fees, and to the payment of any protective advances made by the Mortgagee, together with any interest due thereon, in all cases including all amounts to be paid pursuant to clause First of Section 3.4 of the Collateral Agent Agreement; (b) second, an amount up to the amount which, after payments due under clause (a) above, does not exceed the aggregate outstanding principal of and accrued interest on the Tranche B Loans shall be paid to the Collateral Agent to be applied in accordance with the Collateral Agent Agreement; (c) third, an amount equal to the proceeds of the sale available after the payments due pursuant to the clauses (a) and (b) above, reduced by an amount equal to the aggregate unpaid Lessor Contribution and accrued Lessor Yield (which amount shall be retained by Mortgagor), shall be paid to the Collateral Agent to be applied in accordance with the Collateral Agent Agreement; and (d) fourth, the balance, if any, shall be paid to whomever shall be entitled thereto. 8. Successor Mortgagor. In the event ownership of the Mortgaged ------------------- Property or any portion thereof becomes vested in a person other than the Mortgagor herein named, Mortgagee may, without notice to the Mortgagor herein named, whether or not Mortgagee has given written consent to such change in ownership, deal with such successor or successors in interest with reference to this Mortgage and the Indebtedness and the Obligations, and in the same manner as with the Mortgagor herein named, without in any way vitiating or discharging Mortgagor's liability hereunder or under the Indebtedness and the Obligations. 9. Right of Mortgagee to Credit Sale. Upon the occurrence of any --------------------------------- sale made under this Mortgage, whether made under the power of sale or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Mortgagee may bid for and acquire the Mortgaged Property or any part thereof. In lieu of paying cash therefor, Mortgagee may make 8 settlement for the purchase price by crediting upon the Indebtedness or other sums secured by this Mortgage the net sales price after deducting therefrom the expenses of sale and the cost of the action and any other sums which Mortgagee is authorized to deduct under this Mortgage. In such event, this Mortgage, the Note and documents evidencing expenditures secured hereby may be presented to the person or persons conducting the sale in order that the amount so used or applied may be credited upon the Indebtedness as having been paid. 10. Remedies Not Exclusive. The Mortgagee shall be entitled to ---------------------- enforce payment of the Indebtedness and performance of the Obligations and to exercise all rights and powers under this Mortgage or under any of the other Credit Documents or other agreement or any laws now or hereafter in force, notwithstanding some or all of the Obligations may now or hereafter be otherwise secured, whether by mortgage, security agreement, pledge, lien, assignment or otherwise. Neither the acceptance of this Mortgage nor its enforcement, shall prejudice or in any manner affect the Mortgagee's right to realize upon or enforce any other security now or hereafter held by the Mortgagee, it being agreed that the Mortgagee shall be entitled to enforce this Mortgage and any other security now or hereafter held by the Mortgagee in such order and manner as the Mortgagee may determine in its absolute discretion. No remedy herein conferred upon or reserved to the Mortgagee is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Credit Documents to the Mortgagee or to which it may otherwise be entitled, may be exercised, concurrently or independently, from time to time and as often as may be deemed expedient by the Mortgagee. In no event shall the Mortgagee, in the exercise of the remedies provided in this Mortgage (including in connection with the Assignment of Leases, or the appointment of a receiver and the entry of such receiver on to all or any part of the Mortgaged Property), be deemed a "mortgagee in possession," and the Mortgagee shall not in any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies, except for its gross negligence or willful misconduct. 11. Duty of the Mortgagee. The Mortgagee's sole duty with respect to --------------------- the custody, safekeeping and physical preservation of any Mortgaged Property in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Mortgagee deals with similar property for its own account. Neither the Mortgagee, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Mortgaged Property or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Mortgaged Property upon the request of the Mortgagor or any other Person or to take any other action whatsoever with regard to the Mortgaged Property or any part thereof. 12. Powers Coupled with an Interest. All powers, authorizations and ------------------------------- agencies contained in this Mortgage are coupled with an interest and are irrevocable until this Mortgage is terminated and the lien created hereby is released. 13. Execution of Financing Statements. To the extent permitted by --------------------------------- applicable law, pursuant to Section 9-402 of the Uniform Commercial Code, the Mortgagor authorizes the Mortgagee to file financing statements with respect to the Mortgaged Property without the signature of the Mortgagor in such form and in such filing offices as the Mortgagee reasonably determines appropriate to perfect the security interests of the Mortgagee under this Mortgage. 9 To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Mortgage shall be sufficient as a financing statement for filing in any jurisdiction. 14. Appointment of Receiver. If an Event of Default shall have ----------------------- occurred and be continuing, Mortgagee as a matter of right and without notice to Mortgagor, unless otherwise required by applicable law, and without regard to the adequacy or inadequacy of the Mortgaged Property or any other collateral as security for the Indebtedness and Obligations or the interest of Mortgagor therein, shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers or other manager of the Mortgaged Property, without requiring the posting of a surety bond and without reference to the adequacy or inadequacy of the value of the Mortgaged Property or the solvency or insolvency of Mortgagor or any other party obligated for payment of all or any part of the Indebtedness, and whether or not waste has occurred with respect to the Mortgaged Property. Mortgagor hereby irrevocably consents to such appointment and waives notice of any application therefor (except as may be required by law). Any such receiver or receivers shall have all the usual powers and duties of receivers in like or similar cases and all the powers and duties of Mortgagee in case of entry as provided in this Mortgage, including and to the extent permitted by law, the right to enter into leases of all or any part of the Mortgaged Property, and shall continue as such and exercise all such powers until the date of confirmation of sale of the Mortgaged Property unless such receivership is sooner terminated. 15. Extension, Release, etc. (a) Without affecting the encumbrance ------------------------ or charge of this Mortgage upon any portion of the Mortgaged Property not then or theretofore released as security for the full amount of the Indebtedness, Mortgagee may, from time to time and without notice, agree to (i) release any person liable for the Indebtedness, (ii) extend the maturity or alter any of the terms of the Indebtedness or any guaranty thereof, (iii) grant other indulgences, (iv) release or reconvey, or cause to be released or reconveyed at any time at Mortgagee's option any parcel, portion or all of the Mortgaged Property, (v) take or release any other or additional security for any obligation herein mentioned, or (vi) make compositions or other arrangements with debtors in relation thereto. If at any time this Mortgage shall secure less than all of the principal amount of the Indebtedness, it is expressly agreed that any repayments of the principal amount of the Indebtedness shall not reduce the amount of the encumbrance of this Mortgage until the encumbrance amount shall equal the principal amount of the Indebtedness outstanding. (b) No recovery of any judgment by Mortgagee and no levy of an execution under any judgment upon the Mortgaged Property or upon any other property of Mortgagor shall affect the encumbrance of this Mortgage or any liens, rights, powers or remedies of Mortgagee hereunder, and such liens, rights, powers and remedies shall continue unimpaired. (c) If Mortgagee shall have the right to foreclose this Mortgage, Mortgagor authorizes Mortgagee at its option to foreclose the lien of this Mortgage subject to the rights of any tenants of the Mortgaged Property. The failure to make any such tenants parties defendant to any such foreclosure proceeding and to foreclose their rights, or to provide notice to such tenants as required in any statutory procedure governing a sale of the Mortgaged Property by Mortgagee, or to terminate such tenant's rights in such sale, will not be asserted by Mortgagor as a defense to any proceeding instituted by Mortgagee to collect the Indebtedness or to foreclose this Mortgage. (d) Unless expressly provided otherwise, in the event that Mortgagee's interest in this Mortgage and title to the Mortgaged Property or any estate therein shall become vested in the 10 same person or entity, this Mortgage shall not merge in such title but shall continue as a valid charge on the Mortgaged Property for the amount secured hereby. 16. Security Agreement under Uniform Commercial Code. (a) It is the ------------------------------------------------ intention of the parties hereto that this Mortgage shall constitute a Security Agreement within the meaning of the Uniform Commercial Code (the "UCC") of the --- State in which the Mortgaged Property is located. If an Event of Default shall occur, then in addition to having any other right or remedy available at law or in equity, the Mortgagee shall have the option of either (i) proceeding under the UCC and exercising such rights and remedies as may be provided to a secured party by the Code with respect to all or any portion of the Mortgaged Property which is personal property (including taking possession of and selling such property) or (ii) treating such property as real property and proceeding with respect to both the real and personal property constituting the Mortgaged Property in accordance with the Mortgagee's rights, powers and remedies with respect to the real property (in which event the default provisions of the UCC shall not apply). If the Mortgagee shall elect to proceed under the UCC, then ten days' notice of sale of the personal property shall be deemed reasonable notice and the reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by the Mortgagee shall include, but not be limited to, attorneys' fees and legal expenses. At the Mortgagee's request, the Mortgagor shall assemble the personal property and make it available to the Mortgagee at a place designated by the Mortgagee which is reasonably convenient to both parties. (b) Mortgagor and Mortgagee agree, to the extent permitted by law, that: (i) all of the goods described within the definition of the word "Equipment" are or are to become fixtures on the Property; (ii) this Mortgage upon recording or registration in the real estate records of the proper office shall constitute a financing statement filed as a "fixture filing" within the meaning of Sections 9-313 and 9-402 of the UCC; (iii) Mortgagor is the record owner of the Property; and (iv) the addresses of Mortgagor and Mortgagee are as set forth in Section 19 of this Mortgage. (c) The Mortgagor, upon request by the Mortgagee from time to time, shall execute, acknowledge and deliver to the Mortgagee one or more separate security agreements, in form reasonably satisfactory to the Mortgagee and consistent with the Credit Documents, covering all or any part of the Mortgaged Property and will further execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any financing statement, affidavit, continuation statement or certificate or other document as the Mortgagee may request in order to perfect, preserve, maintain, continue or extend the security interest under and the priority of this Mortgage and such security instrument. The Mortgagor further agrees to pay to the Mortgagee on demand all reasonable costs and expenses incurred by the Mortgagee in connection with the preparation, execution, recording, filing and re-filing of any such document and all reasonable costs and expenses of any record searches for financing statements the Mortgagee shall reasonably require; provided, however, that the Mortgagor -------- ------- shall not be liable for payment of any amount under this Section to the extent that (i) the Lessee is responsible for payment of such amount under the Lease, the Participation Agreement or any other Credit Document or (ii) the Lessee has not paid such amount to the Lessor. If the Mortgagor shall fail to furnish any financing or continuation statement within ten days after request by the Mortgagee, then pursuant to the provisions of the UCC, the Mortgagor hereby authorizes the Mortgagee, without the signature of the Mortgagor, to execute and file any such financing and continuation statements. The filing of any financing or continuation statements in the records relating to personal property or chattels shall not be construed as in any way impairing the right of the Mortgagee to proceed 11 against any personal property encumbered by this Mortgage as real property, as set forth above. 17. Additional Rights. The holder of any subordinate lien or ----------------- subordinate mortgage on the Mortgaged Property shall have no right to terminate any lease affecting the Property whether or not such lease is subordinate to this Mortgage nor shall any holder of any subordinate lien or subordinate deed of trust join any tenant under any lease in any action to foreclose the lien or modify, interfere with, disturb or terminate the rights of any tenant under any lease. By recordation of this Mortgage all subordinate lienholders and the mortgagees under subordinate mortgages are subject to and notified of this provision, and any action taken by any such lienholder contrary to this provision shall be null and void. Upon the occurrence of any Event of Default, Mortgagee may, in its sole discretion and without regard to the adequacy of its security under this Mortgage, apply all or any part of any amounts on deposit with Mortgagee under this Mortgage against all or any part of the Indebtedness. Any such application shall not be construed to cure or waive any Default or Event of Default or invalidate any act taken by Mortgagee on account of such Default or Event of Default. 18. Authority of Mortgagee. The Mortgagor acknowledges that the ---------------------- rights and responsibilities of the Mortgagee under this Mortgage with respect to any action taken by the Mortgagee or the exercise or non-exercise by the Mortgagee of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Mortgage shall, as between the Mortgagee and the Lenders, be governed by the Credit Agreement and the Collateral Agent Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Mortgagee and the Mortgagor, the Mortgagee shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and the Mortgagor shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 19. Notices. Unless otherwise specifically provided herein, all ------- notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service or by hand and any such notice shall become effective five Business Days after being deposited in the mails, certified or registered with appropriate postage prepaid or one Business Day after delivery to a nationally recognized courier service specifying overnight delivery or, if delivered by hand, when received, and shall be directed to the address of such Person as indicated: 12 If to the Mortgagor, to it at: FBTC Leasing Corp. Two World Trade Center New York, New York 10048 Attn: Mr. Carl Marc Antonio If to the Mortgagee, to it at: The Chase Manhattan Bank Agent Lender Services One Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attn: Janet Belden with a copy to: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attn: Dawn Lee Lum From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. 20. Partial Invalidity. In the event any one or more of the ------------------ provisions contained in this Mortgage shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, but each shall be construed as if such invalid, illegal or unenforceable provision had never been included. 21. No Waiver; Cumulative Remedies. (a) No failure to exercise, nor ------------------------------ any delay in exercising, on the part of the Mortgagee or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Mortgagee of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Mortgagee would otherwise have on any future occasion. Mortgagee may release, regardless of consideration and without the necessity for any notice to or consent by the mortgagee of any subordinate mortgage or the holder of any subordinate lien on the Mortgaged Property, any part of the security held for the obligations secured by this Mortgage without, as to the remainder of the security, in anyway impairing or affecting this Mortgage or the priority of this Mortgage over any subordinate lien or deed of trust. (b) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 22. No Oral Modification. This Mortgage may not be changed or -------------------- terminated orally. Any agreement made by Mortgagor and Mortgagee after the date of this Mortgage 13 relating to this Mortgage shall be superior to the rights of the holder of any intervening or subordinate lien, deed of trust or encumbrance. 23. Section Headings. The section headings used in this Mortgage are ---------------- for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 24. Successors and Assigns. All covenants of Mortgagor contained in ---------------------- this Mortgage are imposed solely and exclusively for the benefit of Mortgagee, the Lenders and their respective permitted successors and assigns, and no other person or entity shall have standing to require compliance with such covenants or be deemed, under any circumstances, to be a beneficiary of such covenants, any or all of which may be freely waived in whole or in part by Mortgagee at any time if in the sole discretion of the Mortgagee such waiver is deemed advisable. All such covenants of Mortgagor shall run with the land and bind Mortgagor, the permitted successors and assigns of Mortgagor (and each of them) and all subsequent owners, encumbrances and tenants of the Mortgaged Property, and shall inure to the benefit of Mortgagee, the Lenders and their respective permitted successors and assigns. The word "Mortgagor" shall be construed as if it read "Mortgagors" whenever the sense of this Mortgage so requires and if there shall be more than one Mortgagor, the obligations of the Mortgagors shall be joint and several. 25. Mortgagor's Waiver of Rights. Except as otherwise set forth ---------------------------- herein, to the fullest extent permitted by law, the Mortgagor waives the benefit of all laws now existing or that may subsequently be enacted providing for (i) any appraisement before sale of any portion of the Mortgaged Property, (ii) any extension of the time for the enforcement of the collection of the indebtedness or the creation or extension of a period of redemption from any sale made in collecting such debt and (iii) exemption of the Mortgaged Property from attachment, levy or sale under execution or exemption from civil process. Except as otherwise set forth herein, to the full extent the Mortgagor may do so, the Mortgagor agrees that the Mortgagor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, exemption, extension or redemption, or requiring foreclosure of this Mortgage before exercising any other remedy granted hereunder and the Mortgagor, for the Mortgagor and its successors and assigns, and for any and all Persons ever claiming any interest in the Mortgaged Property, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the secured indebtedness and marshalling in the event of foreclosure of the liens hereby created. 26. Multiple Security. If (a) the Mortgaged Property shall consist ----------------- of one or more parcels, whether or not contiguous and whether or not located in the same county, or (b) in addition to this Mortgage, the Mortgagee shall now or hereafter hold one or more additional mortgages, liens, deeds of trust or other security (directly or indirectly) for the Indebtedness upon other property in the State in which the Mortgaged Property is located (whether or not such property is owned by the Mortgagor or by others) or (c) both the circumstances described in clauses (a) and (b) shall be true, then to the fullest extent permitted by law, the Mortgagee may, at its election, commence or consolidate in a single foreclosure action all foreclosure proceedings against all such collateral securing the Indebtedness (including the Mortgaged Property), which action may be brought or consolidated in the courts of any county in which any of such collateral 14 is located. The Mortgagor acknowledges that the right to maintain a consolidated foreclosure action is a specific inducement to the Mortgagee to extend the Indebtedness and the Mortgagor expressly and irrevocably waives any objections to the commencement or consolidation of the foreclosure proceedings in a single action and any objections to the laying of venue or based on the grounds of forum non conveniens which it may now or hereafter have. The Mortgagor further - ----- --- ---------- agrees that if the Mortgagee shall be prosecuting one or more foreclosure or other proceedings against a portion of the Mortgaged Property or against any collateral other than the Mortgaged Property, which collateral directly or indirectly secures the Indebtedness, or if the Mortgagee shall have obtained a judgment of foreclosure and sale or similar judgment against such collateral, then, whether or not such proceedings are being maintained or judgments were obtained in or outside the State in which the Mortgaged Property is located, the Mortgagee may commence or continue foreclosure proceedings and exercise its other remedies granted in this Mortgage against all or any part of the Mortgaged Property and the Mortgagor waives any objections to the commencement or continuation of a foreclosure of this Mortgage or exercise of any other remedies hereunder based on such other proceedings or judgments, and waives any right to seek to dismiss, stay, remove, transfer or consolidate either any action under this Mortgage or such other proceedings on such basis. Neither the commencement nor continuation of proceedings to foreclose this Mortgage nor the exercise of any other rights hereunder nor the recovery of any judgment by the Mortgagee in any such proceedings shall prejudice, limit or preclude the Mortgagee's right to commence or continue one or more foreclosure or other proceedings or obtain a judgment against any other collateral (either in or outside the State in which the Mortgaged Property is located) which directly or indirectly secures the Indebtedness, and the Mortgagor expressly waives any objections to the commencement of, continuation of, or entry of a judgment in such other proceedings or exercise of any remedies in such proceedings based upon any action or judgment connected to this Mortgage, and the Mortgagor also waives any right to seek to dismiss, stay, remove, transfer or consolidate either such other proceedings or any action under this Mortgage on such basis. It is expressly understood and agreed that to the fullest extent permitted by law, the Mortgagee may, at its election, cause the sale of all collateral which is the subject of a single foreclosure action at either a single sale or at multiple sales conducted simultaneously and take such other measures as are appropriate in order to effect the agreement of the parties to dispose of and administer all collateral securing the Indebtedness (directly or indirectly) in the most economical and least time-consuming manner. 27. Governing Law, etc. This Mortgage shall be governed by and ------------------ construed in accordance with the laws of the State of where the Mortgaged Property is located, except that Mortgagor expressly acknowledges that by its terms the Notes, the Credit Agreement and the Participation Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to principles of conflict of law, and for purposes of consistency, Mortgagor agrees that in any in personam proceeding related to this -- -------- Mortgage the rights of the parties to this Mortgage shall also be governed by and construed in accordance with the laws of the State of New York governing contracts made and to be performed in that State, without regard to principles of conflict of law. 28. Obligations Are Without Recourse. Except as otherwise expressly -------------------------------- provided in any Credit Document or the Participation Agreement, neither the Mortgagor nor any of the Mortgagor's successors or assigns (all such Persons being hereinafter referred to collectively as the "Exculpated Persons"), shall ------------------ be personally liable in any respect for any liability or obligation hereunder or under any other Credit Document including the payment of the principal of, or 15 interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in the Credit Agreement, the Notes, this Mortgage or any of the other Credit Documents. The Lenders and the Mortgagee agree that, in the event any of them pursues any remedies available to them under the Credit Agreement, the Notes, this Mortgage or under any other Credit Document, neither the Lenders nor the Mortgagee shall have any recourse against the Mortgagor, nor any other Exculpated Person, for any deficiency, loss or claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively only against the Mortgaged Property; but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Mortgaged Property or the Guarantee in respect of any and all liabilities, obligations and undertakings contained in the Credit Agreement, the Notes or any other Credit Document. The Lenders and the Mortgagee further agree that the Mortgagor shall not be responsible for the payment of any amounts owing hereunder (excluding principal and interest (other than Overdue Interest) in respect of the Loans) (such non-excluded amounts, "Supplemental Amounts") except -------------------- to the extent that payments of Supplemental Rent applicable to such Supplemental Amounts have been made by the Lessee for application to such Supplemental Amounts (it being understood that the failure by the Lessee for any reason to pay any Supplemental Rent in respect of such Supplemental Amounts shall nevertheless be deemed to constitute a default by the Mortgagor for the purposes of Section 6(a)(ii) of the Credit Agreement). Notwithstanding the foregoing provisions of this Section, nothing in this Mortgage or any other Credit Document shall (a) constitute a waiver, release or discharge of any obligation evidenced or secured by this Mortgage or any other Credit Document, (b) limit the right of any Lenders or the Mortgagee to name the Mortgagor as a party defendant in any action or suit for judicial foreclosure and sale under any Security Document, or (c) affect in any way the validity or enforceability of the Guarantee or any other guaranty (whether of payment and/or performance) given to the Lenders or the Mortgagee, or of any indemnity agreement given by the Mortgagor, in connection with the Loans made under the Credit Agreement. 29. WAIVER OF TRIAL BY JURY. MORTGAGOR AND MORTGAGEE EACH HEREBY ----------------------- IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY ACTION, CLAIM, SUIT OR PROCEEDING RELATING TO THIS MORTGAGE AND FOR ANY COUNTERCLAIM BROUGHT THEREIN. MORTGAGOR HEREBY WAIVES ALL RIGHTS TO INTERPOSE ANY COUNTERCLAIM IN ANY SUIT BROUGHT BY MORTGAGEE HEREUNDER AND ALL RIGHTS TO HAVE ANY SUCH SUIT CONSOLIDATED WITH ANY SEPARATE SUIT, ACTION OR PROCEEDING. 30. Partial Release; Full Release. The Mortgagee may release, for ----------------------------- such consideration or none, as it may require, any portion of the Mortgaged Property without, as to the remainder of the Mortgaged Property, in any way impairing or affecting the lien, security interest and priority herein provided for the Mortgagee compared to any other lien holder or secured party. Further, upon receipt of the Purchase Option Price or the Termination Value and all other amounts which are due under the Credit Documents with respect to the Property and payment of all other amounts due on the Notes with respect to the Property encumbered by this Mortgage, the Mortgagee shall execute and deliver to the Mortgagor such documents and instruments as may be required to release the lien and security interest created by this Mortgage. 31. Priority. This Mortgage shall be subject and subordinate to the -------- Lease and to all presently existing or future Lease Supplements which affect the Property. 16 32. Miscellaneous. (a) This Mortgage is one of several mortgages ------------- and other documents that create liens and security interests that secure payment and performance of the Indebtedness. The Mortgagee, at its election, may commence or consolidate in a single action all proceedings to realize upon all such liens and security interests. The Mortgagor hereby waives (i) any objections to the commencement or continuation of an action to foreclose this Mortgage or exercise of any other remedies hereunder based on any action being prosecuted or any judgment entered with respect to the Indebtedness or any liens or security interests that secure payment and performance of the Obligations and (ii) any objections to the commencement of, continuation of, or entry of a judgment in any such other action based on any action or judgment connected to this Mortgage. In case of a foreclosure sale, the Mortgaged Property may be sold, at Mortgagee's election, in one parcel or in more than one parcel, and the Mortgagee is specifically empowered (without being required to do so, and in its sole and absolute discretion) to cause successive sales of portions of the Mortgaged Property to be held. (b) Except as provided in the Operative Agreements, the Mortgagee, with the express written consent of the Mortgagor, may at any time or from time to time renew or extend this Mortgage, or alter or modify the same in any way, or the Mortgagee may waive any of the terms, covenants or conditions hereof in whole or in part and may release any portion of the Mortgaged Property or any other security, and grant such extensions and indulgences in relation to the Obligations secured hereby as the Mortgagee may determine without the consent of any other person and without any obligation to give notice of any kind thereto and without in any manner affecting the priority of the lien hereof on any part of the Mortgaged Property. 33. Amendments, etc. with respect to the Guaranteed Obligations; ------------------------------------------------------------ Waiver of Rights. This Mortgage shall remain valid and effective and Mortgagor - ---------------- shall remain obligated hereunder notwithstanding that, without any reservation of rights against Mortgagor and without notice to or further assent by such Mortgagor, any demand for payment of any of the Paragon Indebtedness or the Paragon Obligations made by Mortgagee or Administrative Agent or any Corporate Lender may be rescinded by such party and any of the Paragon Indebtedness or the Paragon Obligations continued, and the Paragon Indebtedness or the Paragon Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by Mortgagee, the Administrative Agent or any Corporate Lender, and the Corporate Loan Documents may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Corporate Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by Mortgagee, Administrative Agent or any Corporate Lender for the payment of the Paragon Indebtedness or the Paragon Obligations may be sold, exchanged, waived, surrendered or released. Neither Mortgagee, Administrative Agent nor any Corporate Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Paragon Indebtedness or the Paragon Obligations. Any release of Paragon by Mortgagee, Administrative Agent or any Corporate Lender shall not relieve Mortgagor, and shall not impair or affect this Mortgage or the rights and remedies, express or implied, or as a matter of law, of Mortgagee, Administrative Agent or any Corporate Lender against Mortgagor under this Mortgage. 34. Mortgage Absolute and Unconditional. Mortgagor waives any and ----------------------------------- all notice 17 of the creation, renewal, extension or accrual of any of the Paragon Indebtedness or the Paragon Obligations and notice of or proof of reliance by Mortgagee or any Corporate Lender upon this Mortgage or acceptance of this Mortgage; the Paragon Indebtedness and the Paragon Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Mortgage. Mortgagor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon Paragon with respect to the Paragon Indebtedness and the Paragon Obligations in order for Mortgagee to exercise its rights under this Mortgage. Mortgagor understands and agrees that this Mortgage shall be construed as a continuing, absolute and unconditional mortgage without regard to (a) the validity, regularity or enforceability of the Corporate Loan Documents, any of the Paragon Indebtedness or the Paragon Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Mortgagee or any Corporate Lender, (b) any defense, set-off or counterclaim which may at any time be available to or be asserted by the Paragon against Mortgagee or any Corporate Lender, or (c) any other circumstance whatsoever which constitutes, or might be construed to constitute, an equitable or legal discharge of Paragon for the Paragon Indebtedness or the Paragon Obligations, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against Mortgagor, Mortgagee and any Corporate Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against Paragon or any other Person or against any collateral security or guarantee for the Paragon Indebtedness or the Paragon Obligations or any right of offset with respect thereto, and any failure by Mortgagee or any Corporate Lender to pursue such other rights or remedies or to collect any payments from Paragon or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of Paragon or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve Mortgagor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of Mortgagee under this Mortgage. This Mortgage shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon Mortgagor and the successors and assigns thereof, and shall inure to the benefit of Mortgagee and the Corporate Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations shall have been satisfied by payment in full and the commitments of the Lenders and the Corporate Lenders shall be terminated, notwithstanding that from time to time during the term of the Corporate Loan Documents Paragon may be free from any Paragon Indebtedness or the Paragon Obligations. 35. Reinstatement. This Mortgage shall continue to be effective, or ------------- be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Paragon Indebtedness or the Paragon Obligations is rescinded or must otherwise be restored or returned by the Mortgagee or any Corporate Lender or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Paragon, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, Paragon or any substantial part of its property, or otherwise, all as though such payments had not been made. 36. Receipt of Copy. Mortgagor acknowledges that it has received a --------------- true copy of this Mortgage. IN WITNESS WHEREOF, the undersigned has caused this Mortgage to be duly executed and delivered as of the date first above written. FBTC LEASING CORP. By:____________________________ Name: Title: STATE OF ________ ) ) ss.: COUNTY OF ________ ) On the ___ day of,___________, ___, before me personally came ____________________ to me known, who, being by me duly sworn, did depose and say that he/she resides at------------------------------; that he/she is the ___________________________of FBTC LEASING CORP., the corporation described in and which executed the above instrument; and that he/she signed his/her name thereto by order of the board of directors of said corporation. _______________________________ Notary Public Exhibit A --------- Legal Description of the Property --------------------------------- JOINDER OF LESSEE ----------------- LIVING CENTERS HOLDING COMPANY, a Delaware corporation having its principal office at ______________________________ hereby joins in this Mortgage in order to, and HEREBY GRANTS TO MORTGAGEE A LIEN UPON AND A SECURITY INTEREST IN, AND HEREBY MORTGAGES, GRANTS, ASSIGNS, TRANSFERS AND SETS OVER TO MORTGAGEE; on behalf of the Lenders, all of its right, title and interest in and to the Property and the other Mortgaged Property (the "Lessee Collateral") for the ----------------- purpose of securing the Indebtedness. Lessee acknowledges and agrees that, upon the occurrence of a Credit Agreement Event of Default, the Lenders shall have the right to exercise any and all of its remedies hereunder as against the Lessee Collateral. Lessee agrees that if Lessee has any right, title, estate or interest in the Lessee Collateral, the Lessee is to that extent a guarantor or surety for the benefit of the Agent and the Lenders. In such event, Lessee expressly agrees that the rights of the Agent and the Lenders shall in no way be affected or impaired by reason of the occurrence of any of the following events: (i) the waiver by the Agent or the Lenders of the performance or observance by the Mortgagor, Lessee or any other party of any terms of the Operative Agreements; (ii) the extension, in whole or in part, of the time for payment by Mortgagor of any sums owing or payable under the Operative Agreements; (iii) any failure, delay or inability of the Agent or the Lenders in enforcing any remedies or any other provisions under the Operative Agreements; (iv) the occurrence of any event described in Section 6.1(i) of the Credit Agreement; or (v) the inability of Mortgagor to perform (or the release of Mortgagor's performance) under the Operative Agreements due to any Legal Requirement. This Joinder shall be considered part of the Mortgage to which it is attached, and all references in the Operative Agreements to the Mortgage shall mean the Mortgage together with this Joinder. All capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms in the Mortgage. This Joinder has been duly executed by Lessee on the date first above written. LIVING CENTERS HOLDING COMPANY By: _______________________ Name: Title: EXHIBIT A-2 TO THE PARTICIPATION AGREEMENT ----------------------- ================================================================================ FORM OF DEED OF TRUST AND SECURITY AGREEMENT/1/ - from FBTC LEASING CORP., Grantor to ________________________, Trustee for the use and benefit of THE CHASE MANHATTAN BANK, as Agent Dated as of _______ __, ____ When recorded return to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, New York 10017 Attention: Erin L. Rothfuss, Esq. _______________________ /1/ The form of Deed of Trust in each jurisdiction shall be modified to conform - to documentary conventions and recording statutes and customs of the particular jurisdiction. 1 DEED OF TRUST AND SECURITY AGREEMENT ------------------------------------ DEED OF TRUST AND SECURITY AGREEMENT, dated as of _______ __, ____ (this "Deed of Trust"), made by FBTC LEASING CORP., a New York corporation (the ------------- "Grantor"), to ___________________ (the "Trustee"), for the use and benefit of ------- ------- THE CHASE MANHATTAN BANK, a New York banking corporation, as collateral agent (in such capacity, the "Beneficiary" or the "Agent") under the Collateral Agent ----------- ----- Agreement, dated as of November 4, 1997 (as amended, supplemented, or otherwise modified from time to time, the "Collateral Agent Agreement"), among the -------------------------- Grantor, the Beneficiary and the financial institutions from time to time parties thereto. Preliminary Statement --------------------- A. Grantor has entered into that certain Amended and Restated Credit Agreement dated as of November 4, 1997 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement") ---------------- with the several lenders from time to time parties thereto (the "Lenders") and ------- Beneficiary. B. Grantor is the owner of the parcel(s) of real property described on Schedule A attached (such real property, together with all of the buildings, improvements, structures and fixtures now or subsequently located thereon (the "Improvements"), being collectively referred to as the "Real Estate"). ------------ ----------- C. Pursuant to the terms and conditions of the Credit Agreement, the Beneficiary has agreed to make loans to the Grantor, in an aggregate principal amount not to exceed $97,000,000 (the "Loans"). Pursuant to the terms and ----- conditions of that certain Amended and Restated Guarantee dated as of the date hereof, Paragon Health Network, Inc. ("Paragon"), as the successor-in-interest ------- to Living Centers of America, Inc. and certain of Paragon's subsidiaries, have agreed to amend and restate its obligations under that certain Guarantee dated as of October 10, 1996 and guarantee the obligations of Grantor under the Credit Agreement. D. Paragon has entered into that certain Credit Agreement dated as of November 4, 1997 (as the same may be amended, supplemented or otherwise modified from time to time, the "Corporate Credit Agreement") with the several lenders -------------------------- from time to time parties thereto (the "Corporate Lenders") and The Chase ----------------- Manhattan Bank, as Administrative Agent (in such capacity, "Administrative -------------- Agent"). - ----- E. Pursuant to the terms and conditions of the Corporate Credit Agreement, the Corporate Lenders have agreed to make loans to Paragon in an aggregate principal amount not to exceed $890,000,000 (the "Corporate Loans"). --------------- F. The obligations of (i) the Lenders to make the Loans are conditioned upon, among other things, that the obligations of Grantor under the Credit Agreement be secured by a mortgage lien upon the Trust Property and (ii) the Corporate Lenders to make the Corporate Loans are conditioned upon, among other things, that the obligations of Paragon under the 2 Corporate Credit Agreement be secured by a mortgage lien upon the Trust Property. G. In order to induce (i) the Lenders to make the Loans and (ii) the Corporate Lenders to make the Corporate Loans, Grantor desires to grant Beneficiary a lien upon the Trust Property upon the terms and conditions hereinafter set forth. H. Capitalized terms used but not otherwise defined in this Mortgage shall have the meanings assigned to them in Annex A attached to the Amended and Restated Participation Agreement dated as of November 4, 1997 among Living Centers Holding Company, Grantor, Agent, certain co-agents and the Lenders. The rules of usage and documentary conventions set forth in such Annex are also applicable hereto. Granting Clauses ---------------- For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Grantor agrees that to secure: (a) (i) the repayment by Grantor of all obligations, liabilities and indebtedness of Grantor, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, under, arising out of or in connection with the Credit Agreement, the Notes or the other Operative Agreements, together with all interest and fees payable thereon (collectively, the "Grantor Indebtedness") and (ii) the -------------------- payment of all obligations, liabilities and indebtedness of Paragon, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, under, arising out of or in connection with the Corporate Credit Agreement and the other Loan Documents, together with all interest and fees payable thereon (collectively, the "Paragon Indebtedness"; together with the Grantor -------------------- Indebtedness, the "Indebtedness"); and ------------ (b) (i) the performance and observance of all covenants, agreements, obligations and liabilities of Grantor (the "Grantor Obligations") under or ------------------- pursuant to the provisions of the Operative Agreements and any amendments, supplements, extensions, renewals, restatements, replacements or modifications of any of the foregoing and (ii) the performance and observance of all covenants, agreements, obligations and liabilities of Paragon under the Loan Documents and any amendments, supplements, extensions, renewals, restatements, replacements or modifications of any of the foregoing (the "Paragon Obligations"; together with the Grantor ------------------- Obligations, the "Obligations") (the Operative Agreements and the Loan ----------- Documents and all other documents and instruments from time to time evidencing, securing or guaranteeing the payment of the Indebtedness or the performance of the Obligations, as any of the same may be amended, supplemented, extended, renewed, restated, replaced or modified from time to time, are collectively referred to as the "Credit Documents"); ---------------- GRANTOR HEREBY IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE, IN TRUST, WITH POWER OF SALE, AND RIGHT OF ENTRY AND INSPECTION, THE FOLLOWING: (A) all right, title and interest of Grantor, whether now owned or hereafter 3 acquired, in and to the parcels of real property described on Schedule A (together with the Land, the Improvements, the Appurtenant Rights and the Fixtures relating thereto being collectively referred to herein as the "Property") -------- (B) all the estate, right, title, claim or demand whatsoever of the Grantor, in possession or expectancy, in and to the Property or any part thereof; (C) all right, title and interest of Grantor, whether now owned or hereafter acquired, in and to the Equipment; (D) all right, title and interest of Grantor, whether now owned or hereafter acquired, in and to all substitutes and replacements of, and all additions and improvements to, the Property and the Equipment, subsequently acquired by or released to Grantor or constructed, assembled or placed by Grantor on the Property, immediately upon such acquisition, release, construction, assembling or placement, including, without limitation, any and all building materials whether stored at the Property or offsite, and, in each such case, without any further mortgage, conveyance, assignment or other act by Grantor; (E) all right, title and interest of Grantor, whether now owned or hereafter acquired, in, to and under all leases, subleases, underlettings, concession agreements, management agreements, licenses and other agreements relating to the use or occupancy of the Property or the Equipment or any part thereof, now existing or subsequently entered into by Grantor and whether written or oral and all guarantees of any of the foregoing (collectively, as any of the foregoing may be amended, restated, extended, renewed or modified from time to time, the "Leases"), and all rights of ------ Grantor in respect of cash and securities deposited thereunder and the right to receive and collect the revenues, income, rents, issues and profits thereof, together with all other rents, royalties, issues, profits, revenue, income and other benefits arising from the use and enjoyment of the Trust Property (as defined below) (collectively, the "Rents"); ----- (F) all right, title and interest of Grantor in and to all unearned premiums under insurance policies now or subsequently obtained by Grantor relating to the Property or Equipment and Grantor's interest in and to all proceeds of any such insurance policies (including title insurance policies) including the right to collect and receive such proceeds; and all awards and other compensation, including the interest payable thereon and the right to collect and receive the same, made to the present or any subsequent owner of the Property or Equipment for the taking by eminent domain, condemnation or otherwise, of all or any part of the Property or any easement or other right therein; (G) all right, title and interest of Grantor in and to (i) all contracts from time to time executed by Grantor or any manager or agent on its behalf relating to the ownership, construction, maintenance, repair, operation, occupancy, sale or financing of the Property or Equipment or any part thereof and all agreements relating to the purchase or lease of any portion of the Property or any property which is adjacent or peripheral to the Property, together with the right to exercise such options and all leases of Equipment, (ii) all consents, licenses, building permits, certificates of occupancy and other governmental approvals relating to construction, completion, occupancy, use or operation of the Property or any part thereof and (iii) all drawings, plans, specifications and similar or 4 related items relating to the Property; (H) all right, title and interest of Grantor in and to any and all monies now or subsequently on deposit for the payment of real estate taxes or special assessments against the Property or for the payment of premiums on insurance policies covering the foregoing property or otherwise on deposit with or held by Beneficiary as provided in this Deed of Trust; all capital, operating, reserve or similar accounts held by or on behalf of Grantor and related to the operation of the Trust Property, whether now existing or hereafter arising and all monies held in any of the foregoing accounts and any certificates or instruments related to or evidencing such accounts; and (I) all amendments, modifications, substitutions, replacements and additions of any of the foregoing, and all proceeds, both cash and noncash, of any of the foregoing; (All of the foregoing property and rights and interests now owned or held or subsequently acquired by Grantor and described in the foregoing clauses (A) through (I) are collectively referred to as the "Trust Property"); PROVIDED -------------- THAT EXCLUDED from the Trust Property at all times and in all respects shall be all Excepted Rights and the Trust Property shall be subject at all times and in all respects to all Shared Rights. TO HAVE AND TO HOLD the Trust Property and the rights and privileges hereby granted unto Trustee, its successors and assigns for the uses and purposes set forth, until the Indebtedness is fully paid and the Obligations fully performed, subject however to the matters listed on Schedule B hereto (the "Permitted Encumbrances and Liens"). [PROVIDED, HOWEVER, that this Deed of Trust secures a principal amount of the Obligations not to exceed $______________ (the "Maximum Secured Amount"); ---------------------- and PROVIDED FURTHER, that payments made on account of the Indebtedness or any portion thereof, whether in due course, as prepayments or otherwise, shall not reduce the Maximum Secured Amount, unless the aggregate principal amount of the Indebtedness is less than the Maximum Secured Amount.]/2/ - Terms and Conditions -------------------- Grantor further represents, warrants, covenants and agrees with Trustee and Beneficiary as follows: 1. Payment of Indebtedness. Grantor shall pay the Indebtedness at ----------------------- the times and places and in the manner specified in the Notes and the Credit Agreement and shall perform all the Obligations. 2. Other Covenants. At any time and from time to time, upon the --------------- written request of the Beneficiary, and at the sole expense of the Grantor, the Grantor will promptly and duly ___________________ /2/ This provision should be added in appropriate jurisdictions. - 5 execute and deliver such further instruments and documents and take such further actions as the Beneficiary reasonably may request for the purposes of obtaining or preserving the full benefits of this Deed of Trust and of the rights and powers granted by this Deed of Trust. 3. Further Assurances. To further assure Beneficiary's and Trustee's ------------------ rights under this Deed of Trust, Grantor agrees upon demand of Beneficiary or Trustee to do any act or execute any additional documents (including, but not limited to, security agreements on any personalty included or to be included in the Trust Property) as may be reasonably required by Beneficiary or Trustee to confirm the rights or benefits conferred on Beneficiary or Trustee by this Deed of Trust. 4. Beneficiary's Right to Perform. If the Grantor fails to perform ------------------------------ or comply with any of its agreements contained in this Deed of Trust, the Beneficiary, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. The expenses of the Beneficiary incurred in connection with actions undertaken as provided in this Section, together with interest thereon at a rate per annum equal to the Overdue Rate, from the date of payment by the Beneficiary to the date reimbursed by the Grantor, shall be payable by the Grantor to the Beneficiary on demand; provided, however, that the Grantor shall not be liable -------- ------- for payment of any amount under this Section to the extent the Lessee is responsible for payment of such amount under the Lease, the Participation Agreement or any other Operative Agreement. 5. Grantor's Existence, etc. Grantor shall do all things necessary ------------------------- to preserve and keep in full force and effect its existence, franchises, rights and privileges under the laws of the state of [ ] and its right to own property and transact business in the state of [ ]. This Deed of Trust constitutes the legal, valid and binding obligation of Grantor, enforceable against Grantor in accordance with its terms, except as enforceability may be limited by principles of equity and applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. 6. Events of Default. It shall be an event of default under this ----------------- Deed of Trust (an "Event of Default") if an Event of Default shall occur under ---------------- any of the Credit Documents. 7. Remedies./3/ Upon the occurrence of any Event of Default, in -------- - addition to any other rights and remedies Beneficiary may have pursuant to the Credit Documents, or as provided by law, and without limitation, (a) if such event triggers an Acceleration under Section 6.1(h) or 6.1(i) of the Credit Agreement, automatically the Indebtedness and all other amounts owing under the Notes, this Deed of Trust and the other Security Documents immediately shall become due and payable, and (b) if such event is any other Event of Default, by notice to Grantor, Beneficiary may declare the Indebtedness (together with accrued interest thereon) and all other amounts payable under the Note, this Deed of Trust and the other Security Documents to be immediately due and payable. Except as expressly provided in the Credit Documents presentment, demand, _____________________ /3/ Deed of Trust remedies are a matter of state law and vary from jurisdiction - to jurisdiction. Local counsel will be consulted to be sure that the Deed of Trust covers all remedies available under local law, and that any waivers or other provisions required by state statutes to ensure enforceability of particular remedies are included in the Deed of Trust. 6 protest and all other notices of any kind are hereby expressly waived. In addition, upon the occurrence of any Event of Default, Beneficiary may immediately take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Grantor and in and to the Trust Property, including the following actions, each of which may be pursued concurrently or otherwise, at such time and in such manner as Beneficiary may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Beneficiary: (a) Either in person or by agent, with or without bringing any action or proceeding, or by a receiver appointed by a court and without regard to the adequacy of its security, enter upon and take possession of the Trust Property or any part thereof, with or without legal action, and do any acts which it deems necessary or desirable to preserve the value, marketability or rentability of the Trust Property, or any part thereof or the value of this Deed of Trust (including entering into new leases of all or any part of the Trust Property) and, with or without taking possession of the Trust Property, sue for or otherwise collect the rents, issues and profits thereof, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection including reasonable attorneys' fees, upon the Indebtedness, all in such order as Beneficiary may determine. The entering upon and taking possession of the Trust Property, the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done in response to such default or pursuant to such notice of default and, notwithstanding the continuance in possession of the Trust Property or the collection, receipt and application of rents, issues or profits, Beneficiary shall be entitled to exercise every right provided for in any of the Credit Documents or by law. (b) Bring an action in any court of competent jurisdiction to foreclose this Deed of Trust, to appoint a receiver or to enforce any of the covenants, terms or conditions hereof and Beneficiary shall have the right to specific performance, injunction and any other equitable right or remedy as though other remedies were not provided in this Deed of Trust. (c) Elect to cause the Trust Property or any part thereof to be sold as follows, Grantor hereby expressly waiving any right which it may have to direct the order in which any of the Trust Property may be sold: (i) Beneficiary may proceed as if all of the Trust Property were real property, in accordance with subparagraph (c) below, or Beneficiary may elect to treat any of the Trust Property which consists of personal property, in accordance with the Section of this Deed of Trust entitled "Security Agreement under Uniform Commercial Code", separate and apart from the sale of real property, the remainder of the Trust Property being treated as real property; (ii) Beneficiary may cause any such sale or other disposition to be conducted immediately following the expiration of any grace period, if any, herein provided or Beneficiary may delay any such sale or other disposition for such period of time as Beneficiary deems to be in its best interest. Should Beneficiary desire that more than one such sale or other disposition be conducted, Beneficiary may, at its option, cause the same to be conducted simultaneously, or successively on the same day, or at such different days or times and in such order as Beneficiary may deem to be in its best interest; 7 (iii) Should Beneficiary elect to sell the Trust Property and Beneficiary elects to proceed under the laws governing foreclosure of or sales pursuant to deeds of trust, Beneficiary or Trustee shall give such notice of default and election to sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such notice of sale as may then be required by law, Trustee, at the time and place specified by the notice of sale, shall sell such Trust Property, or any portion thereof specified by Beneficiary, at public auction to the highest bidder for cash in lawful money of the United States, subject, however, to the provisions of the Section of this Deed of Trust entitled "Right of Beneficiary to Credit Sale". Trustee may, and upon request of Beneficiary shall, from time to time, postpone the sale by public announcement thereof at the time and place noticed therefor. If the Trust Property consists of several lots or parcels, Beneficiary may elect to sell the Trust Property either as a whole or in separate lots or parcels. If Beneficiary elects to sell in separate lots or parcels, Beneficiary may designate the order in which such lots or parcels shall be offered for sale or sold. Any person, including Grantor, Trustee or Beneficiary, may purchase at the sale. Upon any sale, Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or implied, whereupon such purchaser or purchasers shall be let into immediate possession; (iv) In the event of a sale or other disposition of any such property, or any part thereof, and the execution of a deed or other conveyance pursuant thereto, the recitals therein of facts, such as an Event of Default, the giving of notice of default and notice of sale, demand that such sale should be made, postponement of sale, terms of sale, sale, purchase, payments of purchase money, and any other fact affecting the regularity or validity of such sale or disposition shall be conclusive proof of the truth of such facts; and any such deed or conveyance shall be conclusive against all persons as to such facts recited therein; (v) Beneficiary and/or Trustee shall apply the proceeds of any sale or disposition hereunder in the order as provided in the Section of this Deed of Trust entitled "Sale of the Properties; Application of Proceeds"; and (d) Exercise all other rights and remedies provided herein, in the other Credit Documents or otherwise available at law of equity. 7A. Application of Proceeds. The proceeds available from the ----------------------- sale of the Trust Property or any part thereof shall be applied as follows: (_)(a) first, to the payment of the costs and expenses of such sale, including attorneys' fees, and to the payment of any protective advances made by the Beneficiary, together with any interest due thereon, in all cases including all amounts to be paid pursuant to clause First of Section 3.4 of the Collateral Agent Agreement; (b) second, an amount up to the amount which, after payments due under clause (a) above, does not exceed the aggregate outstanding principal of and accrued interest on the Tranche B Loans shall be paid to the Collateral Agent to be applied in accordance with the Collateral Agent Agreement; 8 (c) third, an amount equal to the proceeds of the sale available after the payments due pursuant to the clauses (a) and (b) above, reduced by an amount equal to the aggregate unpaid Lessor Contribution and accrued Lessor Yield (which amount shall be retained by Grantor), shall be paid to the Collateral Agent to be applied in accordance with the Collateral Agent Agreement; and (d) fourth, the balance, if any, shall be paid to whomever shall be entitled thereto. 8. Sale of the Properties; Application of Proceeds. Subject to the ----------------------------------------------- requirements of applicable law, the proceeds or avails of any foreclosure sale and all moneys received by Beneficiary pursuant to any right given or action taken under the provisions of this Deed of Trust shall be applied in accordance with Section 8.2 of the Credit Agreement. 9. Successor Grantor. In the event ownership of the Trust Property ----------------- or any portion thereof becomes vested in a person other than the Grantor herein named, Beneficiary may, without notice to the Grantor herein named, whether or not Beneficiary has given written consent to such change in ownership, deal with such successor or successors in interest with reference to this Deed of Trust and the Indebtedness and the Obligations, and in the same manner as with the Grantor herein named, without in any way vitiating or discharging Grantor's liability hereunder or under the Indebtedness and the Obligations. 10. Right of Beneficiary to Credit Sale. Upon the occurrence of any ----------------------------------- sale made under this Deed of Trust, whether made under the power of sale or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale, Beneficiary may bid for and acquire the Trust Property or any part thereof. In lieu of paying cash therefor, Beneficiary may make settlement for the purchase price by crediting upon the Indebtedness or other sums secured by this Deed of Trust the net sales price after deducting therefrom the expenses of sale and the cost of the action and any other sums which Beneficiary is authorized to deduct under this Deed of Trust. In such event, this Deed of Trust, the Notes and documents evidencing expenditures secured hereby may be presented to the person or persons conducting the sale in order that the amount so used or applied may be credited upon the Indebtedness as having been paid. 11. Remedies Not Exclusive. Beneficiary and Trustee shall be ---------------------- entitled to enforce payment of the Indebtedness and performance of the Obligations and to exercise all rights and powers under this Deed of Trust or under any of the other Credit Documents or other agreement or any laws now or hereafter in force, notwithstanding some or all of the Indebtedness and Obligations may now or hereafter be otherwise secured, whether by deed of trust, mortgage, security agreement, pledge, lien, assignment or otherwise. Neither the acceptance of this Deed of Trust nor its enforcement, shall prejudice or in any manner affect Beneficiary's or Trustee's right to realize upon or enforce any other security now or hereafter held by Beneficiary or Trustee, it being agreed that Beneficiary and Trustee shall be entitled to enforce this Deed of Trust and any other security now or hereafter held by Beneficiary or Trustee in such order and manner as Beneficiary may determine in its absolute discretion. No remedy herein conferred upon or reserved to Trustee or Beneficiary is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by any of the Credit Documents to Beneficiary or Trustee or to which either may otherwise be entitled, may be exercised, concurrently or independently, from time to 9 time and as often as may be deemed expedient by Beneficiary or Trustee, as the case may be. In no event shall Beneficiary or Trustee, in the exercise of the remedies provided in this Deed of Trust (including in connection with the Assignment of Leases, or the appointment of a receiver and the entry of such receiver on to all or any part of the Trust Property), be deemed a "mortgagee in possession," and neither Beneficiary nor Trustee shall in any way be made liable for any act, either of commission or omission, in connection with the exercise of such remedies except for its gross negligence or willful misconduct. 12. Duty of the Beneficiary. The Beneficiary's sole duty with ----------------------- respect to the custody, safekeeping and physical preservation of any Trust Property in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Beneficiary deals with similar property for its own account. Neither the Beneficiary, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Trust Property or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Trust Property upon the request of the Grantor or any other Person or to take any other action whatsoever with regard to the Trust Property or any part thereof. 13. Powers Coupled with an Interest. All powers, authorizations and ------------------------------- agencies contained in this Deed of Trust are coupled with an interest and are irrevocable until this Deed of Trust is terminated and the lien created hereby is released. 14. Execution of Financing Statements. To the extent permitted by --------------------------------- applicable law, pursuant to Section 9-402 of the Uniform Commercial Code, the Grantor authorizes the Beneficiary to file financing statements with respect to the Trust Property without the signature of the Grantor in such form and in such filing offices as the Beneficiary reasonably determines appropriate to perfect the security interests of the Beneficiary under this Deed of Trust. To the extent permitted by applicable law, a carbon, photographic or other reproduction of this Deed of Trust shall be sufficient as a financing statement for filing in any jurisdiction. 15. Trustee's Powers and Liabilities. -------------------------------- (a) Powers of Trustee. At any time or from time to time, without ----------------- liability therefor and without notice, upon the written request of Beneficiary and presentation of the Notes and this Deed of Trust for endorsement, without affecting the personal liability of any person for the payment of the indebtedness secured hereby, and without affecting the lien of this Deed of Trust upon the Trust Property for the full amount of all amounts secured hereby, Trustee may (i) reconvey all or any part of the Trust Property, (ii) consent to the making of any map or plat thereof, (iii) join in granting any easement thereon or in creating any covenants or conditions restricting use or occupancy thereof, or (iv) join in any extension agreement or in any agreement subordinating the lien or charge hereof. (b) Reconveyance. Upon written request of Beneficiary stating that ------------ all sums secured hereby have been paid, and upon surrender of this Deed of Trust and the Notes to Trustee for cancellation and retention, and upon payment of its fees, Trustee shall reconvey, without warranty, the property then held hereunder. The recitals in any such reconveyance of any matters or facts shall be conclusive proof of the truth thereof. The grantee in such reconveyance may be described as "the person or persons legally entitled thereto." 10 (c) Trustee Notice. Trustee is not obligated to notify any party -------------- hereto of any pending sale under any other deed of trust or of any action or proceeding in which Grantor, Beneficiary or Trustee shall be a party, unless brought by Trustee. (d) Compensation and Indemnification of Trustee. Trustee shall be ------------------------------------------- entitled to reasonable compensation for all services rendered or expenses incurred in the administration or execution of the trusts hereby created and Grantor hereby agrees to pay the same. Except to the extent caused by Trustee's gross negligence or willful misconduct, Trustee shall be indemnified, held harmless and reimbursed by Grantor for any liability, damage or expense, including reasonable attorneys' fees and amounts paid in settlement, which Trustee may incur or sustain in connection with this Deed of Trust or in the doing of any act which Trustee is required or permitted to do by the terms hereof or by law. (e) Substitute Trustees. Beneficiary may from time to time ------------------- substitute the Trustee hereunder in any manner now or hereafter provided by law, or in lieu thereof, Beneficiary may from time to time, by an instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed and acknowledged by Beneficiary and recorded in the office of the recorder of the county or counties where the Trust Property is situated, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall thereupon, and without conveyance from the predecessor Trustee, succeed to all its title, estate, rights, powers and duties. (f) Acceptance by Trustee. The acceptance by Trustee of this trust --------------------- shall be evidenced when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. (g) Trust Irrevocable; No Offset. The trust created hereby is ---------------------------- irrevocable by Grantor. No offset or claim that Grantor now or may in the future have against Beneficiary shall relieve Grantor from paying the Indebtedness or performing the Obligations. (h) Corrections. Grantor will, upon request of Beneficiary or ----------- Trustee, promptly correct any defect, error or omission which may be discovered in the contents of this Deed of Trust or in the execution or acknowledgement hereof, and will execute, acknowledge and deliver such further instruments and do such further acts as may be necessary or as may be reasonably requested by Beneficiary or Trustee to carry out more effectively the purposes of this Deed of Trust, to subject to the lien and security interests hereby created any of Grantor's properties, rights or interest covered or intended to be covered hereby, and to perfect and maintain such lien and security interest. 16. Appointment of Receiver. If an Event of Default shall have ----------------------- occurred and be continuing, Beneficiary as a matter of right and without notice to Grantor, unless otherwise required by applicable law, and without regard to the adequacy or inadequacy of the Trust Property or any other collateral as security for the Indebtedness and Obligations or the interest of Grantor therein, shall have the right to apply to any court having jurisdiction to appoint a receiver or receivers or other manager of the Trust Property, without requiring the posting of a surety bond and without reference to the adequacy or inadequacy of the value of the Trust Property or the solvency or insolvency of Grantor or any other party obligated for payment of all or any part 11 of the Indebtedness, and whether or not waste has occurred with respect to the Trust Property. Grantor hereby irrevocably consents to such appointment and waives notice of any application therefor (except as may be required by law). Any such receiver or receivers shall have all the usual powers and duties of receivers in like or similar cases and all the powers and duties of Beneficiary in case of entry as provided in this Deed of Trust, including, without limitation and to the extent permitted by law, the right to enter into leases of all or any part of the Trust Property, and shall continue as such and exercise all such powers until the date of confirmation of sale of the Trust Property unless such receivership is sooner terminated. 17. Extension, Release, etc. (a) Without affecting the encumbrance ------------------------ or charge of this Deed of Trust upon any portion of the Trust Property not then or theretofore released as security for the full amount of the Indebtedness, Beneficiary may, from time to time and without notice, agree to (i) release any person liable for the Indebtedness, (ii) extend the maturity or alter any of the terms of the Indebtedness or any guaranty thereof, (iii) grant other indulgences, (iv) release or reconvey, or cause to be released or reconveyed at any time at Beneficiary's option any parcel, portion or all of the Trust Property, (v) take or release any other or additional security for any obligation herein mentioned, or (vi) make compositions or other arrangements with debtors in relation thereto. If at any time this Deed of Trust shall secure less than all of the principal amount of the Indebtedness, it is expressly agreed that any repayments of the principal amount of the Indebtedness shall not reduce the amount of the encumbrance of this Deed of Trust until the encumbrance amount shall equal the principal amount of the Indebtedness outstanding. (b) No recovery of any judgment by Beneficiary and no levy of an execution under any judgment upon the Trust Property or upon any other property of Grantor shall affect the encumbrance of this Deed of Trust or any liens, rights, powers or remedies of Beneficiary or Trustee hereunder, and such liens, rights, powers and remedies shall continue unimpaired. (c) If Beneficiary shall have the right to foreclose this Deed of Trust or to direct the Trustee to exercise its power of sale, Grantor authorizes Beneficiary at its option to foreclose the lien of this Deed of Trust (or direct the Trustee to sell the Trust Property, as the case may be) subject to the rights of any tenants of the Trust Property. The failure to make any such tenants parties defendant to any such foreclosure proceeding and to foreclose their rights, or to provide notice to such tenants as required in any statutory procedure governing a sale of the Trust Property by Trustee, or to terminate such tenant's rights in such sale, will not be asserted by Grantor as a defense to any proceeding instituted by Beneficiary to collect the Indebtedness or to foreclose this Deed of Trust. (d) Unless expressly provided otherwise, in the event that Beneficiary's interest in this Deed of Trust and title to the Trust Property or any estate therein shall become vested in the same person or entity, this Deed of Trust shall not merge in such title but shall continue as a valid charge on the Trust Property for the amount secured hereby. 18. Security Agreement under Uniform Commercial Code. (a) It is the ------------------------------------------------ intention of the parties hereto that this Deed of Trust shall constitute a Security A greement within the meaning of the Uniform Commercial Code (the "UCC") of the State in which the Trust Property is located. If an Event of Default shall occur under this Deed of Trust, then in addition to having any other right or remedy available at law or in equity, Beneficiary shall have the option of either (i) proceeding under the UCC and exercising such rights and remedies as may be provided to a 12 secured party by the UCC with respect to all or any portion of the Trust Property which is personal property (including, without limitation, taking possession of and selling such property) or (ii) treating such property as real property and proceeding with respect to both the real and personal property constituting the Trust Property in accordance with Beneficiary's rights, powers and remedies with respect to the real property (in which event the default provisions of the UCC shall not apply). If Beneficiary shall elect to proceed under the UCC, then ten Business Days' notice of sale of the personal property shall be deemed reasonable notice and the reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by Beneficiary shall include, but not be limited to, attorneys' fees and legal expenses. At Beneficiary's request, Grantor shall assemble the personal property and make it available to Beneficiary at a place designated by Beneficiary which is reasonably convenient to both parties. (b) Grantor and Beneficiary agree, to the extent permitted by law, that: (i) all of the goods described within the definition of the word "Equipment" are or are to become fixtures on the Property; (ii) this Deed of Trust upon recording or registration in the real estate records of the proper office shall constitute a financing statement filed as a "fixture filing" within the meaning of Sections 9-313 and 9-402 of the UCC; (iii) Grantor is the record owner of the Property; and (iv) the addresses of Grantor and Beneficiary are as set forth in Section 17 of this Deed of Trust. (c) Grantor, upon request by Beneficiary from time to time, shall execute, acknowledge and deliver to Beneficiary one or more separate security agreements, in form reasonably satisfactory to Beneficiary and consistent with the Credit Documents, covering all or any part of the Trust Property and will further execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, any financing statement, affidavit, continuation statement or certificate or other document as Beneficiary may reasonably request in order to perfect, preserve, maintain, continue or extend the security interest under and the priority of this Deed of Trust and such security instrument. Grantor further agrees to pay to Beneficiary on demand all reasonable costs and expenses incurred by Beneficiary in connection with the preparation, execution, recording, filing and re-filing of any such document and all reasonable costs and expenses of any record searches for financing statements Beneficiary shall reasonably require; provided, however, that the Grantor shall not be liable for -------- ------- payment of any amount under this Section to the extent that (i) the Lessee is responsible for payment of such amount under the Lease, the Participation Agreement or any other Credit Document or (ii) the Lessee has not paid such amount to Lessor. If Grantor shall fail to furnish any financing or continuation statement within ten days after request by Beneficiary, then pursuant to the provisions of the UCC, Grantor hereby authorizes Beneficiary, without the signature of Grantor, to execute and file any such financing and continuation statements. The filing of any financing or continuation statements in the records relating to personal property or chattels shall not be construed as in any way impairing the right of Beneficiary to proceed against any personal property encumbered by this Deed of Trust as real property, as set forth above. 19. Additional Rights. The holder of any subordinate lien or ----------------- subordinate deed of trust on the Trust Property shall have no right to terminate any lease affecting the Property whether or not such lease is subordinate to this Deed of Trust nor shall any holder of any subordinate lien or subordinate deed of trust join any tenant under any lease in any trustee's sale or action to foreclose the lien or modify, interfere with, disturb or terminate the rights of any tenant under any lease. By recordation of this Deed of Trust all subordinate lienholders and the trustees and beneficiaries under subordinate deeds of trust are subject to and notified of this 13 provision, and any action taken by any such lienholder or trustee or beneficiary contrary to this provision shall be null and void. Upon the occurrence of any Event of Default, Beneficiary may, in its sole discretion and without regard to the adequacy of its security under this Deed of Trust, apply all or any part of any amounts on deposit with Beneficiary under this Deed of Trust against all or any part of the Indebtedness. Any such application shall not be construed to cure or waive any Default or Event of Default or invalidate any act taken by Beneficiary on account of such Default or Event of Default. 20. Authority of Beneficiary. The Grantor acknowledges that the ------------------------ rights and responsibilities of the Beneficiary under this Deed of Trust with respect to any action taken by the Beneficiary or the exercise or non-exercise by the Beneficiary of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Deed of Trust shall, as between the Beneficiary and the Lenders, be governed by the Credit Agreement and the Collateral Agent Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Beneficiary and the Grantor, the Beneficiary shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and the Grantor shall be under no obligation, or entitlement, to make any inquiry respecting such authority. 21. Notices. Unless otherwise specifically provided herein, all ------- notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service or by hand and any such notice shall become effective five Business Days after being deposited in the mails, certified or registered with appropriate postage prepaid or one Business Day after delivery to a nationally recognized courier service specifying overnight delivery or, if delivered by hand, when received, and shall be directed to the address of such Person as indicated: 14 If to the Grantor, to it at: FBTC Leasing Corp. Two World Trade Center New York, New York 10048 Attn: Mr. Carl Marcantonio If to the Beneficiary, to it at: The Chase Manhattan Bank Agent Lender Services One Chase Manhattan Plaza, 8th Floor New York, New York 10081 Attn: Janet Belden with a copy to: The Chase Manhattan Bank 270 Park Avenue New York, New York 10017 Attn: Dawn Lee Lum If to the Trustee, to it at: [ ] _________________________ _________________________ Attn: ________________ From time to time any party may designate a new address for purposes of notice hereunder by notice to each of the other parties hereto. 22. Partial Invalidity. In the event any one or more of the ------------------ provisions contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, but each shall be construed as if such invalid, illegal or unenforceable provision had never been included. 23. No Waiver; Cumulative Remedies. (a) No failure to exercise, nor ------------------------------ any delay in exercising, on the part of the Beneficiary or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Beneficiary of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Beneficiary would otherwise have on any future occasion. Beneficiary may release, regardless of consideration and without the necessity for any notice to or consent by the beneficiary of any subordinate deed of trust or the holder of any subordinate lien on the Trust Property, any part of the security held for the obligations secured by this Deed of Trust without, as to the remainder of the security, in 15 anyway impairing or affecting this Deed of Trust or the priority of this Deed of Trust over any subordinate lien or deed of trust. (b) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 24. No Oral Modification. This Deed of Trust may not be changed or -------------------- terminated orally. Any agreement made by Grantor and Beneficiary after the date of this Deed of Trust relating to this Deed of Trust shall be superior to the rights of the holder of any intervening or subordinate deed of trust, lien or encumbrance. Trustee's execution of any written agreement between Grantor and Beneficiary shall not be required for the effectiveness thereof as between Grantor and Beneficiary. 25. Section Headings. The section headings used in this Deed of ---------------- Trust are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 26. Successors and Assigns. All covenants of Grantor contained in ---------------------- this Deed of Trust are imposed solely and exclusively for the benefit of Beneficiary, the Lenders and Trustee and their respective permitted successors and assigns, and no other person or entity shall have standing to require compliance with such covenants or be deemed, under any circumstances, to be a beneficiary of such covenants, any or all of which may be freely waived in whole or in part by Beneficiary or Trustee at any time if in the sole discretion of either of them such waiver is deemed advisable. All such covenants of Grantor shall run with the land and bind Grantor, the permitted successors and assigns of Grantor (and each of them) and all subsequent owners, encumbrances and tenants of the Trust Property, and shall inure to the benefit of Beneficiary, Trustee and their respective permitted successors and assigns. Without limiting the generality of the foregoing, any successor to Trustee appointed by Beneficiary shall succeed to all rights of Trustee as if such successor had been originally named as Trustee hereunder. The word "Grantor" shall be construed as if it read "Grantors" whenever the sense of this Deed of Trust so requires and if there shall be more than one Grantor, the obligations of the Grantors shall be joint and several. 27. Grantor's Waiver of Rights. Except as otherwise set forth -------------------------- herein, to the fullest extent permitted by law, Grantor waives the benefit of all laws now existing or that may subsequently be enacted providing for (i) any appraisement before sale of any portion of the Trust Property, (ii) any extension of the time for the enforcement of the collection of the indebtedness or the creation or extension of a period of redemption from any sale made in collecting such debt and (iii) exemption of the Trust Property from attachment, levy or sale under execution or exemption from civil process. Except as otherwise set forth herein, to the full extent Grantor may do so, Grantor agrees that Grantor will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, exemption, extension or redemption, or requiring foreclosure of this Deed of Trust before exercising any other remedy granted hereunder and Grantor, for Grantor and its successors and assigns, and for any and all Persons ever claiming any interest in the Trust Property, to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, notice of election to mature or declare due the whole of the secured indebtedness and marshalling in the event of exercise by Trustee or Beneficiary of the power of sale or other rights hereby created. 16 28. Multiple Security. If (a) the Land shall consist of one or more ----------------- parcels, whether or not contiguous and whether or not located in the same county, or (b) in addition to this Deed of Trust, Beneficiary shall now or hereafter hold or be the beneficiary of one or more additional deeds of trust, mortgages, liens or other security (directly or indirectly) for the Indebtedness upon other property in the State in which the Land is located (whether or not such property is owned by Grantor or by others) or (c) both the circumstances described in clauses (a) and (b) shall be true, then to the fullest extent permitted by law, Beneficiary may, at its election, commence or consolidate in a single trustee's sale or foreclosure action all trustee's sale or foreclosure proceedings against all such collateral securing the Indebtedness (including the Trust Property), which action may be brought or consolidated in the courts of, or sale conducted in, any county in which any of such collateral is located. Grantor acknowledges that the right to maintain a consolidated trustee's sale or foreclosure action is a specific inducement to Beneficiary to extend the Indebtedness, and Grantor expressly and irrevocably waives any objections to the commencement or consolidation of the foreclosure proceedings in a single action and any objections to the laying of venue or based on the grounds of forum non ----- --- conveniens which it may now or hereafter have. Grantor further agrees that if - ---------- Trustee or Beneficiary shall be prosecuting one or more foreclosure or other proceedings against a portion of the Trust Property or against any collateral other than the Trust Property, which collateral directly or indirectly secures the Indebtedness, or if Beneficiary shall have obtained a judgment of foreclosure and sale or similar judgment against such collateral (or, in the case of a trustee's sale, shall have met the statutory requirements therefor with respect to such collateral), then, whether or not such proceedings are being maintained or judgments were obtained in or outside the State in which the Land is located, Beneficiary may commence or continue any trustee's sale or foreclosure proceedings and exercise its other remedies granted in this Deed of Trust against all or any part of the Trust Property and Grantor waives any objections to the commencement or continuation of a foreclosure of this Deed of Trust or exercise of any other remedies hereunder based on such other proceedings or judgments, and waives any right to seek to dismiss, stay, remove, transfer or consolidate either any action under this Deed of Trust or such other proceedings on such basis. The commencement or continuation of proceedings to sell the Trust Property in a trustee's sale, to foreclose this Deed of Trust or the exercise of any other rights hereunder or the recovery of any judgment by Beneficiary or the occurrence of any sale by the Trustee in any such proceedings shall not prejudice, limit or preclude Beneficiary's right to commence or continue one or more trustee's sales, foreclosure or other proceedings or obtain a judgment against (or, in the case of a trustee's sale, to meet the statutory requirements for, any such sale of) any other collateral (either in or outside the State in which the Land is located) which directly or indirectly secures the Indebtedness, and Grantor expressly waives any objections to the commencement of, continuation of, or entry of a judgment in such other sales or proceedings or exercise of any remedies in such sales or proceedings based upon any action or judgment connected to this Deed of Trust, and Grantor also waives any right to seek to dismiss, stay, remove, transfer or consolidate either such other sales or proceedings or any sale or action under this Deed of Trust on such basis. It is expressly understood and agreed that to the fullest extent permitted by law, Beneficiary may, at its election, cause the sale of all collateral which is the subject of a single trustee's sale or foreclosure action at either a single sale or at multiple sales conducted simultaneously and take such other measures as are appropriate in order to effect the agreement of the parties to dispose of and administer all collateral securing the Indebtedness (directly or indirectly) in the most economical and least time-consuming manner. 17 29. Governing Law, etc. This Deed of Trust shall be governed ------------------ by and construed in accordance with the laws of the State where the Trust Property is located, except that Grantor expressly acknowledges that by its terms the Notes, the Credit Agreement and the Participation Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to principles of conflict of law, and for purposes of consistency, Grantor agrees that in any in personam proceeding related to this -- -------- Deed of Trust the rights of the parties to this Deed of Trust shall also be governed by and construed in accordance with the laws of the State of New York governing contracts made and to be performed in that State, without regard to principles of conflict of law. 30. Obligations Are Without Recourse. Except as otherwise expressly -------------------------------- provided in any Credit Document or the Participation Agreement, neither the Grantor nor any of the Grantor's successors or assigns (all such Persons being hereinafter referred to collectively as the "Exculpated Persons"), shall be ------------------ personally liable in any respect for any liability or obligation hereunder or under any other Credit Document including the payment of the principal of, or interest on, the Notes, or for monetary damages for the breach of performance of any of the covenants contained in the Credit Agreement, the Notes, this Deed of Trust or any of the other Credit Documents. The Lenders, the Trustee and the Beneficiary agree that, in the event any of them pursues any remedies available to them under the Credit Agreement, the Notes, this Deed of Trust or under any other Credit Document, neither the Lenders, the Trustee nor the Beneficiary shall have any recourse against the Grantor, nor any other Exculpated Person, for any deficiency, loss or claim for monetary damages or otherwise resulting therefrom and recourse shall be had solely and exclusively only against the Trust Property; but nothing contained herein shall be taken to prevent recourse against or the enforcement of remedies against the Trust Property or the Guarantee in respect of any and all liabilities, obligations and undertakings contained in the Credit Agreement, the Notes or any other Credit Document. The Lenders, the Trustee and the Beneficiary further agree that the Grantor shall not be responsible for the payment of any amounts owing hereunder (excluding principal and interest (other than Overdue Interest) in respect of the Loans) (such non-excluded amounts, "Supplemental Amounts") except to the extent that -------------------- payments of Supplemental Rent applicable to such Supplemental Amounts have been made by the Lessee for application to such Supplemental Amounts (it being understood that the failure by the Lessee for any reason to pay any Supplemental Rent in respect of such Supplemental Amounts shall nevertheless be deemed to constitute a default by the Grantor for the purposes of Section 6(a)(ii) of the Credit Agreement). Notwithstanding the foregoing provisions of this Section, nothing in this Deed of Trust or any other Credit Document shall (a) constitute a waiver, release or discharge of any obligation evidenced or secured by this Deed of Trust or any other Credit Document, (b) limit the right of any Lenders, the Trustee or the Beneficiary to name the Grantor as a party defendant in any action or suit for judicial foreclosure and sale under any Security Document, or (c) affect in any way the validity or enforceability of the Guarantee or any other guaranty (whether of payment and/or performance) given to the Lenders, the Trustee or the Beneficiary, or of any indemnity agreement given by the Grantor, in connection with the Loans made under the Credit Agreement. 31. WAIVER OF TRIAL BY JURY. GRANTOR, TRUSTEE AND BENEFICIARY EACH ----------------------- HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY ACTION, CLAIM, SUIT OR PROCEEDING RELATING TO THIS DEED OF TRUST AND FOR ANY COUNTERCLAIM BROUGHT THEREIN. 18 GRANTOR HEREBY WAIVES ALL RIGHTS TO INTERPOSE ANY COUNTERCLAIM IN ANY SUIT BROUGHT BY BENEFICIARY OR TRUSTEE HEREUNDER AND ALL RIGHTS TO HAVE ANY SUCH SUIT CONSOLIDATED WITH ANY SEPARATE SUIT, ACTION OR PROCEEDING. 32. Partial Release; Full Release. The Beneficiary may release, for ----------------------------- such consideration or none, as it may require, any portion of the Trust Property without, as to the remainder of the Trust Property, in any way impairing or affecting the lien, security interest and priority herein provided for the Beneficiary compared to any other lien holder or secured party. Further, upon receipt of the Purchase Option Price or the Termination Value and all other amounts which are due under the Credit Documents with respect to the Property and payment of all other amounts due on the Notes with respect to the Property encumbered by this Deed of Trust, the Beneficiary shall execute and deliver to the Grantor such documents and instruments as may be required to release the lien and security interest created by this Deed of Trust. 33. Priority. This Deed of Trust shall be subject and subordinate to -------- the Lease and to all presently existing or future Lease Supplements which affect the Property. 34. Miscellaneous. (a) This Deed of Trust is one of several deeds ------------- of trust and other documents that create liens and security interests that secure payment and performance of the Indebtedness. The Beneficiary, at its election, may commence or consolidate in a single action all proceedings to realize upon all such liens and security interests. The Grantor hereby waives (i) any objections to the commencement or continuation of an action to foreclose this Deed of Trust or exercise of any other remedies hereunder based on any action being prosecuted or any judgment entered with respect to the Indebtedness or any liens or security interests that secure payment and performance of the Obligations and (ii) any objections to the commencement of, continuation of, or entry of a judgment in any such other action based on any action or judgment connected to this Deed of Trust. In case of a foreclosure sale, the Trust Property may be sold, at Beneficiary's election, in one parcel or in more than one parcel, and the Beneficiary is specifically empowered (without being required to do so, and in its sole and absolute discretion) to cause successive sales of portions of the Trust Property to be held. (b) Except as provided in the Credit Documents, the Beneficiary, with the express written consent of the Grantor, may at any time or from time to time renew or extend this Deed of Trust, or alter or modify the same in any way, or the Beneficiary may waive any of the terms, covenants or conditions hereof in whole or in part and may release any portion of the Trust Property or any other security, and grant such extensions and indulgences in relation to the Obligations secured hereby as the Beneficiary may determine without the consent of any other person and without any obligation to give notice of any kind thereto and without in any manner affecting the priority of the lien hereof on any part of the Trust Property. 35. Amendments, etc. with respect to the Guaranteed Obligations; ------------------------------------------------------------ Waiver of Rights. This Deed of Trust shall remain valid and effective and - ---------------- Grantor shall remain obligated hereunder notwithstanding that, without any reservation of rights against Grantor and without notice to or further assent by such Grantor, any demand for payment of any of the Paragon Indebtedness or the Paragon Obligations made by Beneficiary or Administrative Agent or any Corporate Lender may be rescinded by such party and any of the Paragon Indebtedness or the Paragon Obligations continued, and the Paragon Indebtedness or the Paragon Obligations, or the 19 liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by Beneficiary, the Administrative Agent or any Corporate Lender, and the Corporate Loan Documents may be amended, modified, supplemented or terminated, in whole or in part, as the Administrative Agent (or the Required Corporate Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by Beneficiary, Administrative Agent or any Corporate Lender for the payment of the Paragon Indebtedness or the Paragon Obligations may be sold, exchanged, waived, surrendered or released. Neither Beneficiary, Administrative Agent nor any Corporate Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Paragon Indebtedness or the Paragon Obligations. Any release of Paragon by Beneficiary, Administrative Agent or any Corporate Lender shall not relieve Grantor, and shall not impair or affect this Deed of Trust or the rights and remedies, express or implied, or as a matter of law, of Beneficiary, Administrative Agent or any Corporate Lender against Grantor under this Deed of Trust. 36. Deed of Trust Absolute and Unconditional. Grantor waives any and ---------------------------------------- all notice of the creation, renewal, extension or accrual of any of the Paragon Indebtedness or the Paragon Obligations and notice of or proof of reliance by Beneficiary or any Corporate Lender upon this Deed of Trust or acceptance of this Deed of Trust; the Paragon Indebtedness and the Paragon Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Deed of Trust. Grantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon Paragon with respect to the Paragon Indebtedness and the Paragon Obligations in order for Beneficiary to exercise its rights under this Deed of Trust. Grantor understands and agrees that this Deed of Trust shall be construed as a continuing, absolute and unconditional mortgage without regard to (a) the validity, regularity or enforceability of the Corporate Loan Documents, any of the Paragon Indebtedness or the Paragon Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Beneficiary or any Corporate Lender, (b) any defense, set-off or counterclaim which may at any time be available to or be asserted by the Paragon against Beneficiary or any Corporate Lender, or (c) any other circumstance whatsoever which constitutes, or might be construed to constitute, an equitable or legal discharge of Paragon for the Paragon Indebtedness or the Paragon Obligations, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against Grantor, Beneficiary and any Corporate Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against Paragon or any other Person or against any collateral security or guarantee for the Paragon Indebtedness or the Paragon Obligations or any right of offset with respect thereto, and any failure by Beneficiary or any Corporate Lender to pursue such other rights or remedies or to collect any payments from Paragon or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of Paragon or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve Grantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of Beneficiary under this Deed of Trust. This Deed of Trust shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon Grantor and the successors and assigns thereof, and shall inure to the benefit of Beneficiary and the Corporate Lenders, and their respective successors, indorsees, transferees and assigns, 20 until all the Obligations shall have been satisfied by payment in full and the commitments of the Lenders and the Corporate Lenders shall be terminated, notwithstanding that from time to time during the term of the Corporate Loan Documents Paragon may be free from any Paragon Indebtedness or the Paragon Obligations. 37. Reinstatement. This Deed of Trust shall continue to be ------------- effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Paragon Indebtedness or the Paragon Obligations is rescinded or must otherwise be restored or returned by the Beneficiary or any Corporate Lender or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of Paragon, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, Paragon or any substantial part of its property, or otherwise, all as though such payments had not been made. 38. Receipt of Copy. Grantor acknowledges that it has received a --------------- true copy of this Deed of Trust. 21 This Deed of Trust has been duly executed by Grantor on the date first above written. FBTC LEASING CORP., a New York corporation By: _____________________________ Name: Title: STATE OF ________) ) ss.: COUNTY OF ________ ) On the ____ day of ____________, 199__, before me personally came ____________________________________________ to me known, who, being by me duly sworn, did depose and say that he/she resides at______________________________; that he/she is the ___________________________of FBTC LEASING CORP., the corporation described in and which executed the above instrument; and that he/she signed his/her name thereto by order of the board of directors of said corporation. _______________________________ Notary Public Schedule A ---------- Description of the Land JOINDER OF LESSEE ----------------- LIVING CENTERS HOLDING COMPANY, a Delaware corporation having its principal office at ________________________ hereby joins in this Deed of Trust in order to, and hereby irrevocably, GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE, IN TRUST, WITH POWER OF SALE AND RIGHT OF ENTRY AND INSPECTION, all of its right, title and interest in and to the Property and the other Trust Property (the "Lessee Collateral") for the purpose of securing the Obligations. Lessee ----------------- acknowledges and agrees that, upon the occurrence of a Credit Agreement Event of Default, the Trustee and the Beneficiary shall have the right to exercise any and all of their remedies hereunder as against the Lessee Collateral. Lessee agrees that if Lessee has any right, title, estate or interest in the Lessee Collateral, the Lessee is to that extent a guarantor or surety for the benefit of the Agent and the Lenders. In such event, Lessee expressly agrees that the rights of the Agent and the Lenders shall in no way be affected or impaired by reason of the occurrence of any of the following events: (i) the waiver by the Agent or the Lenders of the performance or observance by the Grantor, Lessee or any other party of any terms of the Operative Agreements; (ii) the extension, in whole or in part, of the time for payment by Grantor of any sums owing or payable under the Operative Agreements; (iii) any failure, delay or inability of the Trustee, the Agent or the Lenders in enforcing any remedies or any other provisions under the Operative Agreements; (iv) the occurrence of any event described in Section 6.1(i) of the Credit Agreement; or (v) the inability of Grantor to perform (or the release of Grantor's performance) under the Operative Agreements due to any Legal Requirement. This Joinder shall be considered part of the Deed of Trust to which it is attached, and all references in the Operative Agreements to the Deed of Trust shall mean the Deed of Trust together with this Joinder. All capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms in the Deed of Trust. 2 This Joinder has been duly executed by Lessee on the date first above written. LIVING CENTERS HOLDING COMPANY By: ________________________________ Name: Title: 3 Add notary page for particular jurisdiction EX-10.51 39 AMENDED AND RESTATED GUARANTY EXHIBIT 10.51 AMENDED AND RESTATED GUARANTEE AMENDED AND RESTATED GUARANTEE dated as of November 4, 1997 made by PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") and the other ------- guarantors which are signatories hereto (Paragon and each such other guarantor, individually, a "Guarantor"; collectively, the "Guarantors"), in favor of THE --------- ---------- CHASE MANHATTAN BANK, as administrative agent (in such capacity, the "Agent") ----- for the lenders (the "Lenders") parties to the Amended and Restated Credit ------- Agreement, dated as of the date hereof (as further amended, supplemented, extended or otherwise modified from time to time, the "Credit Agreement"), among ---------------- FBTC LEASING CORP. (the "Borrower"), the Lenders and the Agent. -------- Preliminary Statement --------------------- Pursuant to that certain Guarantee dated as of October 10, 1996 made by Living Centers of America, Inc. ("LCA") and certain of its subsidiaries in --- favor of the Agent (the "Original Guarantee"), LCA agreed to guarantee the ------------------ prompt and complete performance of the Guaranteed Obligations (as defined in the Original Guarantee). Upon the consummation of the transactions contemplated in the Agreement and Plan of Merger dated as of May 7, 1997 among Apollo Management, L.P., Apollo LCA Acquisition Corporation and LCA and the Agreement and Plan of Merger dated as of May 7 1997 among LCA, GranCare, Inc. and Apollo Management, L.P. (collectively, the "Recapitalization Agreement"), Paragon Health Network, -------------------------- Inc. will succeed to all of the assets and rights, and will assume all of the obligations and liabilities of, LCA. The parties hereto have agreed to amend and restate the Original Guarantee to confirm that the rights and obligations of LCA under the Original Guarantee have been assumed by Paragon and certain of its subsidiaries and to make other modifications to the terms of the Original Guarantee. To evidence the foregoing agreements, the Guarantors and the Agent are amending and restating the terms and conditions of the Original Guarantee upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual agreements herein contained and to induce the Lenders to continue to make their respective Loans to the Borrower under the Credit Agreement, and other good and valuable consideration, receipt of which is hereby acknowledged, each Guarantor hereby agrees with the Agent, for the ratable benefit of the Lenders, that the terms of the Original Guarantee are hereby amended and restated in their entirety as follows: 1. Defined Terms; Calculations and Computations. Capitalized terms -------------------------------------------- not otherwise defined herein shall have the meanings set forth on Annex A to the Amended and Restated Participation Agreement dated as of the date hereof among the Lessee, the Lessor, the Agent and the Lenders. The documentary conventions and rules of usage contained in such Annex A shall also be applicable to this Guarantee. 2. Guarantee (a) Subject to the provisions of Section 2(b) and --------- without duplication, the Guarantors hereby jointly and severally unconditionally and irrevocably guarantee to the Agent, for the ratable benefit of the Lenders and their respective successors, indorsees, transferees and assigns, (i) the prompt and complete payment and performance by the Borrower when due (whether at the stated maturity, by acceleration or otherwise) of each of the following: the unpaid principal of and interest on the Notes and all other obligations and liabilities of the Borrower to the Agent or the Lenders (including interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Notes, the other Operative Agreements or any other document made, delivered or given in connection therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including all reasonable fees and disbursements of counsel to the Agent or to the Lenders that are required to be paid by the Borrower pursuant to the terms of the Credit Agreement or any other Operative Agreement) and (ii) the prompt and complete payment by the Lessee and the Construction Agent when due (whether at stated maturity, by acceleration or otherwise) of all amounts payable by the Lessee and the Construction Agent under any of the Operative Agreements (including indemnities and Facility Fees) to the Agent and/or the Lenders and the Lessor (each and all of the above obligations described in clauses (i) and (ii) above, collectively, the "Guaranteed Obligations"). ---------------------- (b) Anything herein or in any other Operative Agreement to the contrary notwithstanding, no Guarantor shall at any time be required to make any payment hereunder in respect of the principal of any Tranche B Loans or of the Lessor Contribution unless at such time a Lease Event of Default has occurred and is continuing. The maximum liability of each Guarantor hereunder shall in no event exceed the amount which can be guaranteed by each Guarantor under applicable federal and state laws relating to the insolvency of debtors. (c) Each Guarantor further agrees to pay any and all expenses (including all reasonable fees and disbursements of counsel) which may be paid or incurred by the Agent or any Lender in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Guaranteed Obligations and/or enforcing any rights with respect to, or collecting against, such Guarantor under this Guarantee. This Guarantee shall remain in full force and effect until the Guaranteed Obligations and all amounts owing hereunder are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrower or the Lessee may be free from any Guaranteed Obligations. (d) No payment or payments made by the Borrower, any Guarantor or any other Person or received or collected by the Agent or any Lender from the Borrower, any Guarantor or any other Person by virtue of any action or proceeding or any set-off or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment or payments remain liable for the Guaranteed Obligations until the Guaranteed Obligations and all amounts owing hereunder are paid in full and the Commitments are terminated. (e) Each Guarantor agrees that whenever, at any time, or from time to time, it shall make any payment to the Agent or any Lender on account of its liability hereunder, it will notify the Agent in writing that such payment is made under this Guarantee for such purpose. 3. Right of Set-off. In addition to any rights now or hereafter ---------------- granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default, the Agent and each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower, any Guarantor or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other Debt at any time held or owing by the Agent or such Lender (including by branches and agencies of the Agent or such Lender wherever located) to or for the credit or the account of any Guarantor against and on account of the obligations and liabilities of any Guarantor hereunder or under any of the other Operative Agreements, and all other claims of any nature or description arising out of or connected with this Guarantee or any other Operative Agreement, irrespective of whether the Agent or such Lender shall have made any demand hereunder. 4. No Subrogation. Notwithstanding any payment or payments made by -------------- any Guarantor hereunder or any set-off or application of funds of such Guarantor by any Lender, no Guarantor shall be entitled to exercise or enforce any subrogation rights of the Agent or any Lender against the Borrower or any other Guarantor or any collateral security or guarantee or right of offset held by the Agent or any Lender for the payment of the Guaranteed Obligations, nor shall any Guarantor seek or be entitled to seek any contribution or reimbursement from the Borrower or any other Guarantor in respect of payments made by any Guarantor hereunder, until all amounts owing to the Agent and the Lenders by the Borrower on account of the Guaranteed Obligations and all amounts owing hereunder are paid in full and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation rights at any time when all of the Guaranteed Obligations and all amounts owing hereunder shall not have been paid in full or the Commitments shall not have been terminated, such amount shall be held by such Guarantor in trust for the Agent and the Lenders, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Agent in the exact form received by such Guarantor (duly indorsed by such Guarantor to the Agent, if required), to be applied against the Guaranteed Obligations, whether matured or unmatured, in such order as the Agent may determine. 5. Amendments, etc. with respect to the Guaranteed Obligations; ------------------------------------------------------------ Waiver of Rights. Each Guarantor shall remain obligated hereunder - ---------------- notwithstanding that, without any reservation of rights against such Guarantor and without notice to or further assent by such Guarantor, any demand for payment of any of the Guaranteed Obligations made by the Agent or any Lender may be rescinded by such party and any of the Guaranteed Obligations continued, and the Guaranteed Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent or any Lender, and the Credit Agreement, the Participation Agreement and the other Operative Agreements may be amended, modified, supplemented or terminated, in whole or in part, as the Agent (or the Required Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Agent or any Lender for the payment of the Guaranteed Obligations may be sold, exchanged, waived, surrendered or released. Neither the Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Guaranteed Obligations or for this Guarantee or any property subject thereto. When making any demand hereunder against any Guarantor, the Agent or any Lender may, but shall be under no obligation to, make a similar demand on the Borrower or any other Guarantor, and any failure by the Agent or any Lender to make any such demand or to collect any payments from the Borrower or any other Guarantor or any release of the Borrower or any such other Guarantor shall not relieve any Guarantor, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent or any Lender against such Guarantor. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. 6. Guarantee Absolute and Unconditional. Each Guarantor waives any ------------------------------------ and all notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by the Agent or any Lender upon this Guarantee or acceptance of this Guarantee; the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guarantee; and all dealings between the Borrower and each Guarantor, on the one hand, and the Agent and the Lenders, on the other hand, with respect to the Guaranteed Obligations, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guarantee. Each Guarantor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Borrower or such Guarantor with respect to the Guaranteed Obligations. Each Guarantor understands and agrees that this Guarantee shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of the Credit Agreement or any other Operative Agreement, any of the Guaranteed Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Agent or any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Borrower or any Guarantor against the Agent or any Lender, (c) any non-recourse provision contained in any Operative Agreement, or (d) any other circumstance whatsoever (with or without notice to or knowledge of the Borrower or such Guarantor) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Borrower for the Guaranteed Obligations, or of any Guarantor under this Guarantee, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against any Guarantor, the Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Borrower or any other Person or against any collateral security or guarantee for the Guaranteed Obligations or any right of offset with respect thereto, and any failure by the Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Borrower or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Borrower or any such other Person or any such collateral security, guarantee or right of offset, shall not relieve any Guarantor of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Agent and the Lenders against such Guarantor. This Guarantee shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each Guarantor and the successors and assigns thereof, and shall inure to the benefit of the Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Guaranteed Obligations and the obligations of each Guarantor under this Guarantee shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of the Credit Agreement the Borrower may be free from any Guaranteed Obligations. 7. Reinstatement. This Guarantee shall continue to be effective, or ------------- be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Guaranteed Obligations is rescinded or must otherwise be restored or returned by the Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any Guarantor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any Guarantor or any substantial part of its property, or otherwise, all as though such payments had not been made. 8. Payments. Each Guarantor hereby guarantees that payments -------- hereunder will be paid to the Agent without set-off or counterclaim in U.S. Dollars at the office of the Agent located at 270 Park Avenue, New York, New York 10017. 9. Representations, Warranties. In order to induce the Lenders to --------------------------- enter into the Credit Agreement and to make the Loans, each Guarantor hereby represents and warrants to the Agent and each Lender hereto as of the Reorganization Closing Date and as of each Funding Date as follows: Section 9.1. Financial Condition. (a) The unaudited pro forma ------------------- --- ----- consolidated balance sheet of Paragon and its consolidated Subsidiaries as at June 30, 1997 (including the notes thereto) (the "Pro Forma Balance ----------------- Sheet"), a copy of which has heretofore been furnished to each Lender, has ----- been prepared giving effect (as if such events had occurred on such date) to (i) the consummation of the Recapitalization, (ii) this Guarantee being delivered and the Senior Subordinated Notes to be issued on the Reorganization Closing Date and the use of proceeds thereof and (iii) the payment of fees and expenses in connection with the foregoing. The Pro Forma Balance Sheet complies with Regulation S-X of the Securities Act of 1933, as amended, based on the best information available to Paragon as of the date of delivery thereof and consistent in all material respects with the sources and uses of funds for the Recapitalization as previously disclosed to the Lenders and the forecasts and projections previously provided to the Lenders, and presents fairly on a pro forma basis the --- ----- estimated financial position of Paragon and its consolidated Subsidiaries as at June 30, 1997, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of (i) Old GranCare as at December 31, 1996, December 31, 1995 and December 31, 1994 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Ernst & Young LLP and (ii) LCA as at September 30, 1996, September 30, 1995 and September 30, 1994 and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Ernst & Young LLP, in each case present fairly the consolidated financial condition of Old GranCare or LCA, as the case may be, as at such dates, and the consolidated results of their operations and their consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of GranCare as at June 30, 1997, and the related unaudited consolidated statements of income and cash flows for the six-month period ended on such date, present fairly the consolidated financial condition of GranCare as at such date, and the consolidated results of its operations and its consolidated cash flows for the six-month period then ended (subject to normal year-end audit adjustments). The unaudited consolidated balance sheet of LCA as at June 30, 1997, and the related unaudited consolidated statements of income and cash flows for the nine-month period ended on such date, present fairly the consolidated financial condition of LCA as at such date, and the consolidated results of its operations and its consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). No Guarantor has any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, which are not reflected in the most recent financial statements of GranCare or LCA, as the case may be, referred to in this paragraph (b). Except as disclosed in Schedule 9.1, during the period from September 30, 1996 to and including the Reorganization Closing Date there has been no Disposition by LCA of any material part of its business or any of its Corporate Properties and during the period from December 31, 1996 to and including the Reorganization Closing Date there has been no Disposition by Old GranCare prior to February 13, 1997, or by GranCare from and after February 13, 1997, of any material part of its business or Corporate Property. 9.2 No Change. (a) From September 30, 1996 to and including the date --------- hereof there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of LCA and its Subsidiaries taken as a whole; (b) from December 31, 1996 to and including the date hereof there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of Grancare and its Subsidiaries taken as a whole (other than the spin-off by Old GranCare of its interests in TeamCare to Vitalink Pharmacy Services, Inc.); (c) since the date hereof, there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of Paragon and its Subsidiaries taken as a whole; and (d) since the date hereof, there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the validity or enforceability of the Corporate Credit Agreement, any Operative Agreement or any of the documents thereunder or the rights or remedies of the Agent or the Lenders hereunder or thereunder. 9.3 Corporate Existence; Compliance with Law. Each Guarantor (a) is ---------------------------------------- duly organized, validly existing (except to the extent the failure to do so results from a transaction permitted by Section 11.4) and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its Corporate Property, to lease the Corporate Property it operates as lessee and to conduct the businesses in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Corporate Property or the conduct of its business requires such qualification except where failure to so be qualified could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4 Corporate Power; Authorization; Enforceable Obligations. Each ------------------------------------------------------- Guarantor has the corporate power and authority, and the legal right, to make, deliver and perform this Guarantee. Each Guarantor has taken all necessary corporate action to authorize the execution, delivery and performance of this Guarantee. Each consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person required in connection with the Recapitalization or with the execution, delivery, performance, validity or enforceability of this Guarantee or any of the other Operative Agreements, has been obtained or made and is in full force and effect except as set forth on Schedule 9.4. This Guarantee has been duly executed and delivered on behalf of each Guarantor party hereto. This Guarantee constitutes a legal, valid and binding obligation of each Guarantor party hereto, enforceable against each such Guarantor in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 9.5 No Legal Bar. The execution, delivery and performance of this ------------ Guarantee will not violate any Requirement of Law or, except with respect to those leases referred to on Schedule 9.4, any Contractual Obligation of Paragon or any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to Paragon or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 9.6 No Material Litigation. Except as described on Schedule 9.6, no ---------------------- litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of Paragon, LCA or Old GranCare, threatened by or against any Guarantor or against any of their respective properties or revenues (a) with respect to any of the Operative Agreements or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. 9.7 No Default. No Guarantor is in default under or with respect to ---------- any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 9.8 Ownership of Corporate Property; Liens. Each Guarantor has title -------------------------------------- in fee simple to, or a valid leasehold interest in, all its real property, and good title to, or a valid leasehold interest in, all its other Corporate Property, and none of such Corporate Property is subject to any Lien except as permitted by Section 11.3. 9.9 Intellectual Property. Except as described on Schedule 9.9: (a) --------------------- each Guarantor owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted; (b) to the best knowledge of Paragon, no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does Paragon know of any valid basis for any such claim; and (c) to the best knowledge of Paragon, the use of Intellectual Property by Paragon and its Subsidiaries does not infringe on the rights of any Person in any material respect. 9.10 Taxes. Each Guarantor has filed or caused to be filed all ----- Federal, state and other material tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Corporate Property and all other material taxes, fees or other charges imposed on it or any of its Corporate Property by any Governmental Authority (other than any such taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of Paragon or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of Paragon, no claim is being asserted, with respect to any such material tax, fee or other charge. 9.11 Federal Regulations. No part of the proceeds of any Loans will ------------------- be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of the Board. If requested by any Lender or the Agent, Paragon will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 9.12 Labor Matters. There are no strikes or other labor disputes ------------- against Paragon or any of its Subsidiaries pending or, to the knowledge of Paragon, threatened that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of Paragon and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. All payments due from Paragon or any of its Subsidiaries on account of employee health and welfare insurance that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect if not paid have been paid or accrued as a liability on the books of Paragon or the relevant Subsidiary. 9.13 ERISA. Neither a Reportable Event nor an "accumulated funding ----- deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan (other than the American Medical Services Employees' Pension Plan (the "American Plan")) has occurred, and no Lien in favor of ------------- the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither Paragon nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has resulted or could reasonably be expected to result in a material liability under ERISA, and neither Paragon nor any Commonly Controlled Entity would become subject to any material liability under ERISA if Paragon or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. Neither Paragon nor any Commonly Controlled Entity has incurred any liability which remains outstanding to the PBGC by reason of the termination of the American Plan. 9.14 Investment Company Act; Other Regulations. No Guarantor is an ----------------------------------------- "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Guarantor is subject to regulation under any Requirement of Law (other than Regulation X of the Board) which limits its ability to incur Indebtedness of the type incurred or to be incurred under this Guarantee, any other Operative Agreement or any Loan Document. 9.15 Subsidiaries. The Subsidiaries listed on Schedule 9.15(a) ------------ constitute all the Subsidiaries of Paragon at the Reorganization Closing Date. 9.16 Environmental Matters. Except as described on Schedule 9.16 and --------------------- such other matters as, individually or in the aggregate, could not reasonably be expected to result in the payment of a Material Environmental Amount: (a) To the knowledge of Paragon and its Subsidiaries, the facilities and properties owned, leased or operated by Paragon or any of its Subsidiaries (each, a "Corporate Property"; collectively, the "Corporate ------------------ --------- Properties") do not contain, and have not previously contained, any ---------- Materials of Environmental Concern in amounts or concentrations or under circumstances which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law. (b) (i) All operations of Paragon and its Subsidiaries at the Corporate Properties are in compliance and have in the last five years been in compliance with all applicable Environmental Laws, and (ii) to the knowledge of Paragon and its Subsidiaries, there is no contamination at, under or about the Corporate Properties or violation of any Environmental Law with respect to the Corporate Properties or the business operated by Paragon or any of its Subsidiaries (the "Business") which could interfere -------- with the continued operation of the Corporate Properties or impair the fair saleable value thereof. (c) No Guarantor has received or knows of any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Corporate Properties or the Business, nor does Paragon have knowledge or reason to believe that any such notice will be received or is being threatened. (d) To the knowledge of Paragon or any of its Subsidiaries, Materials of Environmental Concern have not been transported or disposed of in violation of, or in a manner or to a location which could give rise to liability of Paragon or any of its Subsidiaries under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any location in violation of, or in a manner that could reasonably be anticipated to give rise to liability of Paragon or any of its Subsidiaries under, any applicable Environmental Law. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of Paragon, threatened, under any Environmental Law to which Paragon or any Subsidiary is or will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements applicable to Paragon or any of its Subsidiaries outstanding under any Environmental Law. (f) To the knowledge of Paragon and its Subsidiaries, there has been no release or threat of release of Materials of Environmental Concern at or from the Corporate Properties, or arising from or related to the operations of Paragon or any Subsidiary in connection with the Corporate Properties or otherwise in connection with the Business, in violation of or that could reasonably be expected to give rise to liability under Environmental Laws. 9.17 Accuracy of Information, etc. No statement or information ---------------------------- contained in this Guarantee, any other Operative Agreement, any Loan Document or any other document, certificate or statement furnished to the Agent or the Lenders or any of them, by or on behalf of any Guarantor for use in connection with the transactions contemplated by the Operative Agreements, contained as of the date such statement, information, document or certificate was so furnished, any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements contained herein or therein not misleading. The projections and pro forma --- ----- financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of Paragon to be reasonable at the time made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. As of the Reorganization Closing Date, the representations and warranties contained in the Recapitalization Agreement are true and correct in all material respects. There is no fact known to any Guarantor that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein or in the other Operative Agreements or in any other documents, certificates and statements furnished to the Agent and the Lenders for use in connection with the transactions contemplated in the Operative Agreements. 9.18 Solvency. Each Guarantor is, and after giving effect to the -------- Recapitalization and the incurrence of the obligations being incurred in connection herewith will be and will continue to be, Solvent. 9.19 Senior Indebtedness. The Guaranteed Obligations constitute ------------------- senior indebtedness of each Guarantor, prior to, or pari passu with, all ---------- other Indebtedness of the Guarantors. 9.20 Health Care Permits. Except as disclosed on Schedule 9.20: ------------------- ------------- (a) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (i) each Guarantor now has (after giving effect to the Recapitalization), and has no reason to believe it will not be able to maintain in effect, all Health Care Permits necessary for the lawful conduct of its business or operations wherever now conducted and as planned to be conducted, including, without limitation, the ownership and operation of its Health Care Facilities pursuant to all Requirements of Law, (ii) all such Health Care Permits are in full force and effect and have not been amended or otherwise modified, rescinded, revoked or assigned, (iii) each Guarantor is substantially complying with the requirements of each such Health Care Permit, and no event has occurred, and no condition exists, which, with the giving of notice, the passage of time, or both, would constitute a violation thereof, (iv) no Guarantor has received any written notice of any violation of any Requirement of Law, (v) to the knowledge of Paragon, no condition exists or event has occurred which in itself or with the giving of notice or the lapse of time, or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such Health Care Permit, (vi) there is no claim filed with any Governmental Authority of which any Guarantor has been notified in writing challenging the validity of any such Health Care Permit and (vii) the continuation, validity and effectiveness of all such Health Care Permits will not be adversely affected by the Recapitalization or the execution and performance of any of the Loan Documents or Operative Agreements. (b) All Health Care Facilities owned, leased, managed or operated by Paragon or any of its Subsidiaries are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government- sponsored program, to the extent that Paragon or any of its Subsidiaries has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto. There are no proceedings pending or, to the knowledge of Paragon, any proceedings threatened or investigations pending or threatened, by any Governmental Authority with respect to Paragon's or any of its Subsidiaries' participation in the Medicare, Medicaid or related reimbursement programs and which could reasonably be expected to have a Material Adverse Effect. 9.21 Operative Agreements Control. Notwithstanding the ---------------------------- foregoing, to the extent a representation or warranty contained in this Guarantee relating in any respect to the Properties is inconsistent with the representations and warranties contained in the Participation Agreement or other Operative Agreement (other than this Guarantee), the representations contained in the Participation Agreement or other Operative Agreement (other than this Guarantee) shall govern. 10. Affirmative Covenants of the Guarantor. Paragon hereby covenants -------------------------------------- and agrees that so long as this Guarantee is in effect and until the Commitments have terminated and the Guaranteed Obligations and all amounts owing hereunder are paid in full, Paragon shall and shall cause each of its Subsidiaries to: 10.1 Financial Statements. Furnish to the Agent (with -------------------- sufficient copies for each Lender): (a) as soon as available, but in any event within 90 days after the end of each fiscal year of Paragon, a copy of the audited consolidated balance sheet of Paragon and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form (for fiscal years 1998 and thereafter) the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Ernst & Young LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of Paragon, the unaudited consolidated balance sheet of Paragon and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments); all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 10.2 Certificates; Other Information. Furnish to each of the ------------------------------- Lenders: (a) concurrently with the delivery of the financial statements referred to in Section 10.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of any financial statements pursuant to Section 10.1, (i) a certificate of a Responsible Officer stating that, to the best of each such Responsible Officer's knowledge, each Guarantor during such period has observed or performed all of its covenants and other material agreements, and satisfied every material condition, contained in this Guarantee and the other Operative Agreements to be observed, performed or satisfied by any Guarantor or Lessee, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) in the case of quarterly or annual financial statements, (x) a Compliance Certificate containing all information necessary for determining compliance by Paragon and its Subsidiaries with the provisions of Section 11.1 referred to therein as of the last day of the fiscal quarter or fiscal year of Paragon, as the case may be, and (y) to the extent not previously disclosed to the Agent, a listing of any county or state within the United States where any Guarantor keeps inventory (excluding immaterial pharmaceutical inventory located in a country where neither Paragon nor any of its Subsidiaries maintains a distribution center) or equipment and of any Intellectual Property acquired by any Guarantor since the date of the most recent list delivered pursuant to this clause (y) (or, in the case of the first such list to be delivered, since the Reorganization Closing Date); (c) as soon as available, and in any event no later than 45 days after the end of each fiscal year of Paragon, a detailed consolidated budget for the following fiscal year (including a projected consolidated balance sheet of Paragon and its Subsidiaries as of the end of the following fiscal year, and the related consolidated statements of projected cash flow, projected changes in financial position and projected income), and, as soon as available, significant revisions, if any, of such budget and projections with respect to such fiscal year (collectively, the "Projections"), which Projections shall in each case be accompanied by a summary of assumptions and a certificate of a Responsible Officer stating that such Projections are based on reasonable estimates, information and assumptions and that such Responsible Officer has no reason to believe that such Projections are incorrect or misleading in any material respect; (d) promptly following the circulation thereof for execution, but prior to the effectiveness thereof, copies of substantially final drafts of any proposed amendment, supplement, waiver or other modification with respect to the Senior Subordinated Note Indenture, the Senior Subordinated Notes or the Recapitalization Agreement; (e) within five days after the same are sent, copies of all financial statements and reports which Paragon sends to the holders of any class of its debt securities or public equity securities and within five days after the same are filed, copies of all financial statements and reports which Paragon may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (f) promptly, such additional financial and other information as any Lender may from time to time reasonably request (through the Agent). 10.3 Payment of Obligations. Pay, discharge or otherwise satisfy at ---------------------- or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of Paragon or its Subsidiaries, as the case may be. 10.4 Conduct of Business and Maintenance of Existence, etc. (a) ------------------------------------------------------ (i) Continue to engage in the business of owning, operating, managing and/or financing Health Care Facilities and providing other services or amenities customarily provided by, or other activities customarily undertaken by, Persons owning, operating, managing and/or financing Health Care Facilities, (ii) preserve, renew and keep in full force and effect its corporate existence (except as otherwise permitted by Section 11.4) and (iii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 11.4 and except, in the case of clause (iii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 10.5 Maintenance of Corporate Property; Insurance. (a) Keep all --------------------------------------------- Corporate Property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted and (b) maintain with financially sound and reputable insurance companies insurance on all its Corporate Property in at least such amounts and against at least such risks (but including in any event public liability, product liability and business interruption) as are usually insured against by companies engaged in the same or a similar business in the same geographic areas. 10.6 Health Care Permits and Approvals. Take all action reasonably ---------------------------------- necessary to (a) maintain in full force and effect all Health Care Permits reasonably necessary for the lawful conduct of its business or operations where now conducted and as planned to be conducted, including the ownership and operation of its Health Care Facilities, pursuant to all Requirements of Law and (b) to ensure that all Health Care Facilities owned, leased, managed or operated by Paragon or any of its Subsidiaries are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent Paragon or any of its Subsidiaries has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, except, in each case, where a failure to do so could not reasonably be expected to have a Material Adverse Effect. 10.7 Inspection of Corporate Property; Books and Records; ---------------------------------------------------- Discussions. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of Paragon and its Subsidiaries with officers and employees of Paragon and its Subsidiaries and with its independent certified public accountants; provided, that the Agent shall -------- use reasonable efforts to coordinate any such visits prior to the occurrence and during the continuance of an Event of Default. 10.8 Notices. Promptly give notice to the Agent and each Lender of: ------- 15 (a) the occurrence of any Default or Event of Default, provided, that in the case of Defaults or Events of Default referred to in Section 8(d) of the Corporate Credit Agreement, Paragon has knowledge thereof; (b) any (i) default or event of default under any Contractual Obligation of Paragon or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between Paragon or any of its Subsidiaries and any Governmental Authority, which in either case could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting Paragon or any of its Subsidiaries in which the amount involved is $10,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after Paragon knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or Paragon or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; (e) the following events, as soon as possible and in any event within five Business Days (i) after obtaining knowledge thereof, the occurrence of any event that would (with the giving of notice, the passage of time, or both) be a violation of any Health Care Permit necessary for the lawful conduct of the business or operations of Paragon or any of its Subsidiaries (other than those Health Care Permits the violation of which could not reasonably be expected to have a Material Adverse Effect), including, without limitation, the ownership and operation of its Health Care Facilities, (ii) after receipt thereof, any notice of any violation of any Requirements of Law which would (with the giving of notice, the passage of time, or both) cause any of the Health Care Permits referred to in clause (i) to be modified, rescinded or revoked and which Paragon does not reasonably expect to be able to cure within a reasonable period of time, (iii) after receipt thereof, any notice, summons, citation or other proceeding seeking to adversely modify in any material respect, revoke, or suspend any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of Paragon or any of its Subsidiaries in any manner which could reasonably be expected to have a Material Adverse Effect, or (iv) after obtaining knowledge thereof, any revocation or involuntary termination of any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of Paragon or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect; (f) as soon as possible and in any event within 10 days of obtaining knowledge thereof, the default, notice of default, event of default or breach by Paragon or any of its Subsidiaries under any Material Lease; (g) any development or event which has had or could reasonably be expected to have a Material Adverse Effect; and 16 (h) as soon as possible and in any event within 10 days of obtaining knowledge thereof, any development, event or condition that, individually or in the aggregate with other developments, events or conditions, could reasonably be expected to result in the payment by Paragon and its Subsidiaries, in the aggregate, of a Material Environmental Amount. Each notice pursuant to this Section 10.8 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action Paragon or the relevant Subsidiary proposes to take with respect thereto. 10.9 Environmental Laws. (a) Comply in all material respects with, ------------------ and use commercially reasonable efforts to ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and use commercially reasonable efforts to ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply with all orders and directives of all Governmental Authorities regarding Environmental Laws, unless such requirement, order or directive is being timely challenged in appropriate proceedings and the pendency of such proceedings could not reasonably be expected to result in payment of a Material Environmental Amount. (c) With respect to any development, event or condition that is (or should have been) the subject of a notice provided pursuant to subsection 10.8(h) of this Guarantee, provide such information to the Agent as may be necessary to give the Agent reasonable assurance that such development, event or condition could not reasonably be expected to result in a Material Adverse Effect. 10.10 Additional Guarantors. With respect to any new Subsidiary --------------------- created or acquired after the Reorganization Closing Date by Paragon (which, for the purposes of this paragraph, shall include any existing Subsidiary that ceases to be either an Excluded Foreign Subsidiary or an Excluded Domestic Subsidiary), Paragon or any of its Subsidiaries shall promptly cause such new Subsidiary to become a party to this Guarantee and to provide such evidence of corporate authority to enter into such Guarantee as the Agent may reasonably request. 10.11 Permitted Acquisitions. (a) Deliver to the Lenders, not less ---------------------- than 10 Business Days prior to the closing of any proposed Acquisition involving a Purchase Price greater than or equal to $10,000,000 (which Purchase Price shall be increased to $25,000,000 if the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0), each of the following: (i) a description of the property, assets and/or equity interest being purchased, in reasonable detail; (ii) a term sheet or other description setting forth the essential terms and the basic structure of the proposed Acquisition (including, Purchase Price and method and structure of payment; in this regard, if the Purchase Price includes a note or other right to payment Paragon shall 17 detail the economic terms thereof and state in writing the balance sheet amount that will be required to be recorded in connection with such consideration; if the proposed Acquisition is approved, the amount of such consideration for purposes of the restrictions set forth in Section 11.8(h) shall be such balance sheet amount); (iii) projected statements of income for the entity that is being acquired (or the assets, if an asset Acquisition) for at least a two-year period following such Acquisition (including a summary of assumptions or pro forma adjustments for such projections); (iv) to the extent made available to Paragon, historical financial statements for the entity that is being acquired (or the assets, if an asset Acquisition) (including balance sheets and statements of income, retained earnings and cash flows for at least a two-year period prior to such Acquisition); and (v) confirmation, supported by detailed calculations, that Paragon and its Subsidiaries (A) would have been in compliance with all the covenants in Section 11.1 for the fiscal quarter ending immediately prior to the consummation of such Permitted Acquisition, with such compliance determined on a pro forma basis as if such Permitted Acquisition had been consummated on the first day of the Reference Period ending on the last day of such fiscal quarter, and (B) will have been in compliance with all the covenants of Section 11.1 for the Reference Period beginning on the first day of the fiscal quarter during which the consummation of such Permitted Acquisition occurs, with such compliance determined on a pro forma basis as if such Permitted Acquisition had been consummated on the first day of such Reference Period. With respect to any proposed Acquisition involving a Purchase Price of $25,000,000 or more, Paragon agrees that in reviewing such compliance and the historical financial statements of the Person or Persons being acquired, the Agent may require a review, at the cost of Paragon, by an independent certified public accountant. (b) Deliver to the Lenders, not later than 45 days after the end of each fiscal quarter of Paragon, the information required pursuant to clause (i) of paragraph (a) above for each Permitted Acquisition which was closed during such fiscal quarter and involves a Purchase Price of at least $3,000,000. 10.12 Operative Agreements Control. Notwithstanding the foregoing, ---------------------------- to the extent an affirmative covenant contained in this Guarantee relating in any respect to the Properties is inconsistent with an affirmative covenant contained in the Participation Agreement or other Operative Agreement (other than this Guarantee), the covenants contained in the Participation Agreement or other Operative Agreement (other than this Guarantee) shall govern. 11. Negative Covenants. Paragon hereby agrees that so long as ------------------ this Guarantee is in effect and until the Commitments have terminated and the Guaranteed Obligations and all amounts owing hereunder are paid in full, Paragon shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 11.1 Financial Condition Covenants. ----------------------------- (a) Consolidated Leverage Ratio. Permit the Consolidated Leverage --------------------------- Ratio as at the last day of any Reference Period ending during any period set forth below to exceed the ratio set forth below opposite such period: 18
Consolidated Period Leverage Ratio ------ -------------- December 31, 1997 through September 30, 1998 6.75 to 1.0 December 31, 1998 through June 30, 1999 6.50 to 1.0 September 30, 1999 through June 30, 2000 6.00 to 1.0 September 30, 2000 through June 30, 2001 5.50 to 1.0 September 30, 2001 through June 30, 2002 5.00 to 1.0 September 30, 2002 through June 30, 2003 4.75 to 1.0 September 30, 2003 (or, if earlier, the Consolidated Leverage Ratio Stepdown Date)and thereafter 4.50 to 1.0
(b) Consolidated Interest Coverage Ratio. Permit the Consolidated ------------------------------------ Interest Coverage Ratio for any Reference Period ending during any period set forth below to be less than the ratio set forth below opposite such period:
Consolidated Period Leverage Ratio ------ -------------- December 31, 1997 through September 30, 1998 1.60 to 1.0 December 31, 1998 through September 30, 1999 1.75 to 1.0 December 31, 1999 through September 30, 2000 2.00 to 1.0 December 31, 2000 through September 30, 2001 2.25 to 1.0 December 31, 2001 through September 30, 2002 2.50 to 1.0 December 31, 2002 and thereafter 2.75 to 1.0
;provided, that for purposes of determining the ratio described above for -------- the fiscal quarters of Paragon ending December 31, 1997, March 31, 1998 and June 30, 1998, Consolidated Interest Expense for the relevant Reference Period shall be deemed to equal Consolidated Interest Expense for such fiscal quarter (and, in the case of the latter two determinations, each previous fiscal quarter commencing after September 30, 1997) multiplied by 4, 2 and 4/3, respectively. (c) Consolidated Fixed Charge Coverage Ratio. Permit the ---------------------------------------- Consolidated Fixed Charge Coverage Ratio for any Reference Period ending during any period set forth below to be less than the ratio set forth below opposite such period:
Consolidated Period Leverage Ratio ------ -------------- December 31, 1997 through September 30, 1998 1.10 to 1.0 December 31, 1998 through September 30, 1999 1.15 to 1.0 December 31, 1999 through September 30, 2001 1.20 to 1.0 December 31, 2001 and thereafter 1.25 to 1.0
;provided, that for purposes of determining the ratio described above for -------- the fiscal quarters of Paragon ending December 31, 1997, March 31, 1998 and June 30, 1998, Consolidated Interest Expense and Capital Expenditures (Maintenance) for the relevant 19 Reference Period shall be deemed to equal Consolidated Interest Expense or Capital Expenditures (Maintenance), as the case may be, for such fiscal quarter (and, in the case of the latter two determinations, each previous fiscal quarter commencing after September 30, 1997) multiplied by 4, 2 and 4/3, respectively. (d) Maintenance of Consolidated Net Worth. Permit Consolidated Net ------------------------------------- Worth at the last day of any fiscal quarter of Paragon ending after December 31, 1997 to be less than the sum of (x) all items which were included on the consolidated balance sheet under shareholders' equity at December 31, 1997 less $50,000,000, (y) 50% of Consolidated Net Income (if positive) for the period from January 1, 1998 to such date and (z) without duplication, 100% of the Net Cash Proceeds of any issuance of Capital Stock by, or capital contribution made to, Paragon or any of its Subsidiaries after the Closing Date. 11.2 Limitation on Indebtedness. Create, incur, assume or suffer to -------------------------- exist (in each case, to "Incur") any Indebtedness, except: ----- (a) Indebtedness of any Guarantor pursuant to the Corporate Credit Agreement, any Operative Agreement or any document relating thereto; (b) Indebtedness of Paragon to any Subsidiary and of any Wholly Owned Subsidiary Guarantor and, if incurred in the ordinary course of business, any other Wholly Owned Subsidiary, to Paragon or any other Subsidiary; (c) Indebtedness referred to in Section 11.3(g), Capital Lease Obligations and Attributable Debt in an aggregate principal amount for all Indebtedness referred to in this paragraph (c) not to exceed $50,000,000 at any one time outstanding, provided, that in no event shall the aggregate -------- principal amount of Attributable Debt exceed $10,000,000 at any one time outstanding; (d) Indebtedness outstanding on the Reorganization Closing Date and listed on Schedule 11.2(d) and any refinancings, refundings, renewals or extensions thereof (without any increase in the principal amount thereof, except to the extent (i) interest, premium and other amounts owing in respect of the Indebtedness being refinanced, refunded, renewed or extended and (ii) customary transaction costs incurred in connection with such refinancings, refundings, renewals or extensions, in each case, are capitalized in connection therewith); (e) (i) guarantees made in the ordinary course of business by Paragon or any of its Subsidiaries of obligations of any Wholly Owned Subsidiary; (ii) guarantees made by Paragon of any Assumed Debt of any Wholly Owned Subsidiary Guarantor; (iii) guarantees by any New PHCMI Subsidiary of PHCMI's obligations to Omega in connection with granting Omega a Lien on any Substitute Omega Property; and (iv) guarantees made by Paragon, GranCare, AMS Properties, Inc. and GCI Health Care Centers, Inc. under the HRPT Transaction Documents as described on Schedule 11.4(e). (f) Indebtedness of Paragon in respect of the Senior Subordinated Notes; provided, that the aggregate gross proceeds thereof do not exceed -------- $500,000,000; (g) additional Indebtedness of Paragon in an aggregate principal amount not to 20 exceed $25,000,000 at any one time outstanding; (h) Assumed Debt Incurred pursuant to an Acquisition consummated in accordance with Section 11.8(h); (i) additional Indebtedness of any of Paragon's Subsidiaries in an aggregate principal amount (for all Subsidiaries) not to exceed $25,000,000 at any one time outstanding; (j) Indebtedness in respect of Interest Rate Protection Agreements with any Lender or any affiliate of any Lender for hedging and not for speculative purposes; and (k) obligations to acquire Capital Stock pursuant to Section 11.6(b). 11.3 Limitation on Liens. Create, incur, assume or suffer to exist ------------------- any Lien upon any of its Corporate Property or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with -------- respect thereto are maintained on the books of Paragon or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which do not in any case materially detract from the value of the Corporate Property subject thereto or materially interfere with the ordinary conduct of the business of Paragon or any of its Subsidiaries; (f) Liens in existence on the Reorganization Closing Date listed on Schedule 11.3(f), securing Indebtedness permitted by Section 11.2(d), provided that no such Lien is spread to cover any additional Corporate -------- Property after the Closing Date and that the amount of Indebtedness secured thereby is not increased (it being understood that if such Indebtedness is refinanced, refunded, renewed or extended in accordance with Section 11.2(d), Liens with respect to the relevant Corporate Property may continue to apply to such Indebtedness as so refinanced, refunded, renewed or extended); (g) Liens securing Indebtedness of Paragon or any other Subsidiary Incurred 21 pursuant to Section 11.2(c) to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially -------- simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any Corporate Property other than the Corporate Property financed by such Indebtedness and (iii) the amount of Indebtedness secured thereby is not increased; (h) Liens created pursuant to the Security Documents; (i) Liens resulting from judgments not constituting an Event of Default so long as no remedies in respect of such Liens have been exercised; (j) any interest or title of a lessor under any lease entered into by Paragon or any other Subsidiary in the ordinary course of its business and covering only the assets so leased; (k) Liens securing Assumed Debt so long as such Liens (i) were not incurred in contemplation of the Acquisition consummated in conjunction with the assumption of such Assumed Debt and (ii) such Liens do not encumber any Corporate Property other than the Corporate Property acquired pursuant to such Acquisition; (l) Liens securing Indebtedness Incurred pursuant to Section 11.2(i) so long as (i) such Indebtedness was Incurred to finance the acquisition of Corporate Property, (ii) recourse for repayment of such Indebtedness is expressly limited to the Corporate Property so acquired and (iii) such Liens do not encumber any Corporate Property other than the Corporate Property so acquired; (m) the creation of Liens by PHCMI and any New PHCMI Subsidiary in favor of Omega with respect to any Substitute Omega Property; (n) the creation of Liens by Paragon, GranCare, AMS Properties, Inc. and GCI Health Care Centers, Inc. in favor of HRPT in connection with the transactions described in Schedule 11.3(n) hereto; (o) Liens not otherwise permitted by this Section 11.3 so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds (as to Paragon and all Subsidiaries) $5,000,000 at any one time; and (p) Permitted Exceptions (as such term is defined in the Corporate Mortgages) in effect on the Reorganization Closing Date. 11.4 Limitation on Fundamental Changes. Enter into any merger, --------------------------------- consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of, all or substantially all of its Corporate Property or business, or make any material change in its present method of conducting business, except: (a) any Subsidiary of Paragon may be merged or consolidated with or into Paragon (provided that Paragon shall be the continuing or surviving -------- corporation) or with or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly -------- Owned Subsidiary Guarantor shall be the continuing or surviving corporation); (b) any Subsidiary of Paragon may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to Paragon or any Wholly Owned Subsidiary Guarantor; (c) any Subsidiary of Paragon may Dispose of one or more Substitute Omega Properties to PHCMI or any of the New PHCMI Subsidiaries in connection with providing substitute collateral to Omega in exchange for the surrender by Omega of the Omega Letter of Credit; (d) any acquisition expressly permitted by Section 11.8 may be structured as a merger with or into Paragon (provided that Paragon shall be the continuing or surviving corporation) or with or into any Wholly-Owned Subsidiary Guarantor (provided that the Wholly Owned Subsidiary Guarantor shall be the continuing or surviving corporation) (e) the Dispositions described in Schedule 11.4(e) hereto and the transactions permitted pursuant to Sections 11.5(e) and 11.5(f). 11.5 Limitation on Sale of Assets. Dispose of any of its Corporate ---------------------------- Property or business (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person, except: (a) the Disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) Dispositions permitted by Section 11.4(b), 11.4(c) or 11.4(e); (d) the sale or issuance of any Subsidiary's Capital Stock to Paragon or any Wholly Owned Subsidiary Guarantor; (e) the exchange by Paragon or any of its Subsidiaries of any of its Health Care Facilities for any Health Care Facility of any third Person other than any exchange described in Schedule 11.4(e) hereto (any such exchange, an "Asset Swap"); provided, that (i) the aggregate amount of ---------- -------- Asset Swaps that may be consummated during the term of this Guarantee shall not exceed $50,000,000, valued at the fair market value thereof, (ii) prior to consummating any Asset Swap Paragon shall have provided evidence reasonably satisfactory to the Agent demonstrating pro forma compliance by Paragon with Section 11.1 both before and after giving effect to such Asset Swap, (iii) the fair market value of the property being received by Paragon or any of its Subsidiaries in connection with any such Asset Swap shall be substantially equivalent to the fair market value of the property being exchanged by Paragon or any of its Subsidiaries, (iv) prior to consummating any Asset Swap Paragon shall have provided evidence reasonably satisfactory to the Agent demonstrating that the net effect of any such Asset Swap on Consolidated EBITDA on a pro forma basis would be substantially equivalent to or greater than the Consolidated EBITDA for such Reference Period and (v) Paragon or the relevant Subsidiary shall take all steps requested by the Agent to provide the Agent on behalf of the Lenders with a fully perfected Lien on or security interest in the property being received by Paragon or any of its Subsidiaries in connection with any such Asset Swap to the same extent as the Lien or security interest which the Agent had in the property being exchanged by Paragon or any of its Subsidiaries; and (f) the sale of other assets having a fair market value not to exceed $50,000,000 in the aggregate for any fiscal year of Paragon; provided, that -------- no such individual sale or series of sales in an aggregate amount in excess of $10,000,000 may be consummated unless Paragon provides a certificate to the Agent demonstrating pro forma compliance with Section 7.1 both before and after consummating such sale or sales; and provided, further, that -------- ------- regardless of the aggregate amount of such individual sale or series of sales, Paragon shall be in pro forma compliance with Section 11.1 both before and after any such sale or series of sales. 11.6 Limitation on Dividends. Declare or pay any dividend (other ----------------------- than dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of Paragon or any Subsidiary or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of Paragon or any Subsidiary (collectively, "Restricted Payments"), except that: (a) any Subsidiary may make Restricted Payments to Paragon or any Wholly Owned Subsidiary Guarantor; and (b) so long as no Default or Event of Default shall have occurred and be continuing, Paragon may purchase its common stock or common stock options (i) from present or former officers or employees of Paragon or any Subsidiary upon the death, disability or termination of employment of such officer or employee or (ii) to the extent deemed necessary by Paragon in connection with employee compensation programs, provided, that after giving -------- effect to any payment under this paragraph (b), the aggregate amount of all payments made pursuant to this paragraph (b) during the term of this Guarantee, when added to the Employee Loan Outstanding Amount then in effect, shall not exceed $10,000,000. 11.7 Limitation on Capital Expenditures. Make or commit to make (by ---------------------------------- way of the acquisition of securities of a Person or otherwise) any Capital Expenditures (Discretionary), except (a) Capital Expenditures (Discretionary) of Paragon and its Subsidiaries in any fiscal year which, when combined with the aggregate amount of Permitted Acquisitions made pursuant to Section 11.8(h) during such fiscal year (excluding the aggregate amount of the Purchase Prices thereof which is made in the form of the consideration referred to in clause (b) of the definition of Purchase Price), shall not exceed $125,000,000; provided that (i) no -------- Default or Event of Default has occurred and is continuing (unless a binding commitment to make such Capital Expenditures was entered into prior to the occurrence of such Default or Event of Default), or would occur after giving effect to any such Capital Expenditures (Discretionary); (ii) any amounts permitted herein for Capital Expenditures (Discretionary) during any fiscal year and not so expended in the fiscal year for which it is permitted may be carried over for expenditure only in the next following fiscal year; (iii) Capital Expenditures (Discretionary) made pursuant to this clause (a) during any fiscal year shall be deemed made, first, in respect of amounts permitted for the then-current fiscal year as provided above and, second, in respect of amounts carried over from the prior fiscal year pursuant to subclause (ii) above and (iv) if the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0 then the amount referred to above shall be increased to $200,000,000 (and if availability under this clause (iv) is utilized the Consolidated Leverage Stepdown Ratio Date shall occur) and (b) Capital Expenditures made with the proceeds of any Reinvestment Deferred Amount. 11.8 Limitation on Investments, Loans and Advances. On or after the --------------------------------------------- Reorganization Closing Date, make any advance, loan, extension of credit (by way of guarantee or otherwise) or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any Acquisition from, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) Guarantee Obligations permitted by Section 11.2; (d) loans and advances ("Employee Loans") to employees of Paragon or -------------- its Subsidiaries in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses), so long as, after giving effect to the making of any Employee Loan, the aggregate amount of Employee Loans made since the Reorganization Closing Date (determined net of amounts actually repaid in cash in respect thereof) (the "Employee Loan Outstanding Amount"), when added to the aggregate amount of -------------------------------- Restricted Payments made since the Reorganization Closing Date pursuant to Section 11.6(b), shall not exceed $10,000,000; (e) the Recapitalization; (f) investments made by Paragon or any of its Subsidiaries with the proceeds of any Reinvestment Deferred Amount; (g) capital contributions or other similar investments by Paragon or any of its Subsidiaries in Paragon or any Person that, prior to any such investment, is a Wholly Owned Subsidiary Guarantor or, if made in the ordinary course of business, any other Wholly Owned Subsidiary; (h) any Acquisition of any Person or business, either through the purchase of the assets (including the goodwill) of such Person or business or the purchase of 100% of the Capital Stock of such Person, if each of the following conditions is satisfied: (i) the requirements of Section 10.11 have been satisfied with respect to such Acquisition and Paragon shall be in pro forma compliance with Section 11.1 both before and after giving effect to such Acquisition; (ii) no Default or Event of Default has occurred and is continuing, or would occur after giving effect to such Acquisition; (iii) the aggregate Purchase Prices (not including clause (b) of the definition thereof) of all such Acquisitions in any fiscal year of Paragon, when combined with the aggregate amount of Capital Expenditures (Discretionary) made during such fiscal year, shall not exceed $125,000,000; (iv) the Purchase Price (or any portion thereof) which is paid in the form of the consideration referred to in clause (b) of the definition of Purchase Price for all such Acquisitions in any fiscal year of Paragon shall not exceed $200,000,000; and (v) any such Acquisition shall have been approved by the Board of Directors or such comparable governing body of the Person or business being acquired; provided, that if -------- the Consolidated Leverage Ratio as of the last day of the most recently completed fiscal quarter for which the relevant financial information is available both before and after giving pro forma effect for such Acquisition as if such Acquisition were consummated on the first day of the Reference Period ending on the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0, then the amounts referred to in clauses (iii) and (iv) above shall be increased to $200,000,000 (and if availability under this proviso is utilized the Consolidated Leverage Ratio Stepdown Date shall occur); and provided, further, that if the Consolidated ----------------- Leverage Ratio as of the last day of the most recently completed fiscal quarter for which the relevant financial information is available after giving pro forma effect for such Acquisition as if such Acquisition were consummated on the first day of the Reference Period ending on the last day of the most recently completed fiscal quarter is less than 4.5 to 1.0, then the amount referred to in clause (iv) shall be increased to $300,000,000 (all such Acquisitions, the "Permitted Acquisitions"); ---------------------- (i) investments by Paragon or any of its Subsidiaries in patient trust accounts; (j) investments representing non-cash consideration in the form of senior notes of the purchasing party pledged by Paragon or the relevant Subsidiary in favor of the Agent for the benefit of the Lenders received by Paragon or any of its Subsidiaries in connection with any Asset Sale; provided that the aggregate amount of any such investments shall not exceed -------- $50,000,000 during the term of this Guarantee; (k) in addition to investments otherwise expressly permitted by this Section 11.8, investments by Paragon or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed $20,000,000 in the aggregate during the term of this Guarantee. 11.9 Limitation on Optional Payments and Modifications of Debt --------------------------------------------------------- Instruments, etc. (a) Make or offer to make any payment, prepayment, ----------------- repurchase or redemption of or otherwise defease or segregate funds with respect to the Senior Subordinated Notes (other than scheduled interest payments required to be made in cash), (b) amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of the Senior Subordinated Indenture or the Senior Subordinated Notes (other than any such amendment, modification, waiver or other change which (i) would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon or (ii) is not adverse to the interests of the Lenders in any respect) or (c) designate any Indebtedness as "Designated Senior Indebtedness" for the purposes of the Senior Subordinated Note Indenture. 11.10 Limitation on Transactions with Affiliates. Enter into any ------------------------------------------ transaction, including, without limitation, any purchase, sale, lease or exchange of Corporate Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than Paragon or any Wholly Owned Subsidiary) unless such transaction is (a) otherwise permitted under this Guarantee, (b) in the ordinary course of business of Paragon or such Subsidiary, as the case may be, and (c) upon fair and reasonable terms no less favorable to Paragon or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 11.11 Limitation on Sales and Leasebacks. Enter into any arrangement ---------------------------------- with any Person providing for the leasing by Paragon or any Subsidiary of real or personal property which has been or is to be sold or transferred by Paragon or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Paragon or such Subsidiary (any such transaction, a "Sale/Leaseback Transaction"), except (a) to the extent -------------------------- expressly permitted by Section 11.2(c), (b) Sale/Leaseback Transactions identified on Schedule 11.2(d) and (c) the Sale/Leaseback Transaction described on Schedule 11.4(e). 11.12 Health Care Permits and Approvals. Engage in any activity that --------------------------------- (a) constitutes or, with the giving of notice, the passage of time, or both, would result in a material violation of any Health Care Permit necessary for the lawful conduct of its business or operations or (b) constitutes or, with the giving of notice, the passage of time, or both, would result in the loss by any Health Care Facility owned, leased, managed or operated by Paragon or any of its Subsidiaries of the right to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that such Guarantor has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, in each case, except where the loss of such Health Care Permit or rights to participate in or receive payments under such programs could not reasonably be expected to have a Material Adverse Effect. 11.13 Limitation on Changes in Fiscal Periods. Permit the fiscal --------------------------------------- year of Paragon to end on a day other than September 30 or change Paragon's method of determining fiscal quarters. 11.14 Limitation on Negative Pledge Clauses. Except as set forth on ------------------------------------- Schedule 11.14, enter into or suffer to exist or become effective any agreement which prohibits or limits the ability of Paragon or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its Corporate Property or revenues, whether now owned or hereafter acquired, other than (a) a Loan Document or Operative Agreement and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). 11.15 Limitation on Restrictions on Subsidiary Distributions. Except ------------------------------------------------------ as set forth on Schedule 11.15, enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of Paragon to (a) pay dividends or make any other distributions in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, Paragon or any other Subsidiary of Paragon, (b) make loans or advances to Paragon or any other Subsidiary of Paragon or (c) transfer any of its assets to Paragon or any other Subsidiary of Paragon, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents or Operative Agreements and (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. 11.16 Limitation on Lines of Business. Enter into any business, ------------------------------- either directly or through any Subsidiary, except for those businesses in which Paragon and its Subsidiaries are engaged on the Reorganization Closing Date or which are reasonably related thereto. 11.17 Limitation on Amendments to Recapitalization Documents, etc.. ------------------------------------------------------------ Amend, supplement or otherwise modify the terms and conditions of the Recapitalization Agreement or any other document delivered by the parties thereto (other than Paragon) or any of their Affiliates in connection therewith except to the extent that any such amendment, supplement or modification could not reasonably be expected to have a Material Adverse Effect. 11.18 Operative Agreements Control. Notwithstanding the foregoing, ---------------------------- to the extent a negative covenant contained in this Guarantee relating in any respect to the Properties is inconsistent with a negative covenant contained in the Participation Agreement or other Operative Agreement (other than this Guarantee), the covenants contained in the Participation Agreement or other Operative Agreement (other than this Guarantee) shall govern. 12. Authority of Agent. Each Guarantor acknowledges that the rights ------------------ and responsibilities of the Agent under this Guarantee with respect to any action taken by the Agent or the exercise or non-exercise by the Agent of any option, right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Guarantee shall, as between the Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Agent and each Guarantor, the Agent shall be conclusively presumed to be acting as agent for the Lenders with full and valid authority so to act or refrain from acting, and no Guarantor shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 13. Notices. All notices, requests and demands to or upon the Agent, ------- any Lender or any Guarantor to be effective shall be in writing (including by telecopy or telex), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, confirmation of receipt received, or, in the case of telex notice, when sent, answerback received, addressed as follows: (a) if to the Agent or any Lender, at its address or transmission number for notices provided in Section 9.2 of the Credit Agreement; and (b) if to any Guarantor, at its address or transmission number for notices set forth below. The Agent, each Lender and each Guarantor may change its address and transmission numbers for notices by notice in the manner provided in this Section 9.2 of the Credit Agreement. 14. Severability. Any provision of this Guarantee which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Integration. This Guarantee represents the agreement of each ----------- Guarantor with respect to the subject matter hereof and there are no promises or representations by the Agent or any Lender relative to the subject matter hereof not reflected herein. 16. Amendments in Writing; No Waiver; Cumulative Remedies (a) None ----------------------------------------------------- of the terms or provisions of this Guarantee may be waived, amended, supplemented or otherwise modified except as provided in Section 9.1 of the Credit Agreement. (b) Neither the Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 16(a) hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Agent or such Lender would otherwise have on any future occasion. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 17. Section Headings. The section headings used in this Guarantee ---------------- are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 18. Successors and Assigns. This Guarantee shall be binding upon the ---------------------- successors and assigns of each Guarantor and shall inure to the benefit of the Agent and the Lenders and their successors and assigns. 19. SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH GUARANTOR HEREBY ----------------------------------- IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ALL LEGAL ACTIONS OR PROCEEDINGS RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK, AND THE APPELLATE COURTS THEREOF AND WAIVES THE RIGHT TO REMOVE ANY SUCH ACTION OR PROCEEDING TO ANY FEDERAL COURT; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURT, WAIVES ANY OBJECTION THAT IT MAY HAVE NOW OR HEREAFTER TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT AND WAIVES ANY OBJECTION THAT SUCH ACTION OR PROCEEDING IN ANY SUCH COURT WAS BROUGHT IN AN INCONVENIENT FORUM AND AGREES NOT TO PLEAD, CLAIM OR ASSERT THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID TO, OR BY PERSONAL SERVICE AT, ITS ADDRESS SET FORTH HEREIN OR SUCH OTHER ADDRESS OF WHICH THE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT HERETO, WHETHER OR NOT SUCH ADDRESS BE WITHIN THE JURISDICTION OF ANY SUCH COURT; (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE AGENT (AND NOT OF GUARANTORS) TO SUE IN ANY OTHER JURISDICTION; AND (v) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION 19 ANY SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES. (b) EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. (c) TO THE EXTENT ANY PROPERTY IS LOCATED IN THE STATE OF CALIFORNIA, EACH GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO ASSERT, ARGUE OR RAISE, IN ANY ACTION BROUGHT BY THE AGENT AGAINST ANY GUARANTOR UNDER THIS GUARANTEE, THAT THE AGENT OR THE LENDERS STRUCTURED THE TRANSACTION CONTEMPLATED BY THE OPERATIVE AGREEMENTS IN SUCH A MANNER PRIMARILY TO CIRCUMVENT THE CALIFORNIA ONE-FORM-OF-ACTION AND ANTI-DEFICIENCY LAWS, INCLUDING CALIFORNIA CODE OF CIVIL PROCEDURE (S)(S) 580a, 580b, 580d AND 726. (d) To the extent any Property is located in the State of California, each Guarantor hereby waives all of such Guarantor's rights of subrogation and reimbursement and any other rights and defenses available to such Guarantor by reason of California Civil Code Sections 2787 to 2855, inclusive, including (a) any defenses such Guarantor may have to the obligations undertaken by such Guarantor in this Guarantee by reason of an election of remedies by Lender, and (b) any rights or defenses such Guarantor may have by reason of protection afforded to Borrower with respect to the obligations guaranteed hereby pursuant to the antideficiency or other laws of the State of California limiting or discharging Borrower's indebtedness, including California Code of Civil Procedure Section 580a, 580b, 580d or 726. Each Guarantor's waiver of defenses under clause (a) above is made even though an election of remedies by Lender, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, destroys such Guarantor's rights of subrogation and reimbursement against Borrower by the operation of California Code of Civil Procedure Section 580d or otherwise. The foregoing waivers shall not be deemed a waiver of the defense that the Obligations have been paid or the Commitments reduced. 20. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND ------------- CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be duly executed and delivered by its duly authorized officer as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By: /s/ Charles B. Caeden ------------------------------- Title: Vice President AMERICAN-CAL MEDICAL SERVICES, INC. AMS GREEN TREE, INC. AMS PROPERTIES, INC. CONNERWOOD HEALTHCARE, INC. COORDINATED HOME HEALTH SERVICES, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE, INC. EVERGREEN HEALTHCARE LTD., L.P. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REALTY, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VALLEY MANOR HEALTH CARE CENTER, INC. GCI VILLAGE GREEN, INC. GCI-CAL HEALTH CARE CENTERS, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE GPO SERVICES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE, INC. GRANCARE NURSING SERVICES AND HOSPICE, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE TRADING, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSTMASTERS, INC. NATIONAL HERITAGE REALTY, INC. OMEGA/INDIANA CARE CORPORATION RENAISSANCE MENTAL HEALTH CENTER, INC. STONECREEK MANAGEMENT COMPANY, INC. By: /s/ M. Henry Day, Jr. ---------------------------------- Title: Assistant Secretary AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY MANAGEMENT, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN SENIOR HEALTH SERVICES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC. DEVCON HOLDING COMPANY EXTENDED ACUTE HOSPITALS OF AMERICA, INC. GULF COAST PHYSICAL THERAPY GROUP, INC. HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC. HOMECARE ASSOCIATES OF AMERICA, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSPICE CARE OF TENNESSEE, INC. HOSPICE MANAGEMENT PARTNERS, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS - EAST, INC. LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. MED-CARE SALES AND RENTALS, INC. MED-THERAPY REHABILITATION SERVICES, INC. PROFESSIONAL RX SYSTEMS, INC. PROGRESSIVE CARE CENTERS OF AMERICA, INC. REHABILITY HEALTH SERVICES, INC. REHABILITY HOSPITAL SERVICES, INC. THERACARE HOME HEALTH AGENCY, INC. THERAPY MANAGEMENT INNOVATIONS, INC. TOICA, INC. WORKHEALTH HEALTHCARE MANAGEMENT INC. By: /s/ Boyd P. Gentry -------------------------------------- Title: Vice President Address for Notices: Paragon Health Network, Inc. One Ravinia Drive, 15th Floor Atlanta, Georgia 30346 Attention: Chief Financial Officer Telecopy: (770) 393-8599 EX-10.52 40 LEASE EXHIBIT 10.52 LEASE between FBTC LEASING CORP., as Lessor, and LIVING CENTERS HOLDING COMPANY as Lessee ___________________________ Dated as of October 10, 1996 ___________________________ ================================================================================ This Lease is subject to a security interest in favor of The Chase Manhattan Bank, as agent (the "Agent"), under a Credit Agreement, dated as of October 10, 1996 among FBTC Leasing Corp., the Lenders, and the Agent, as amended or supplemented. This Lease has been executed in several counterparts. To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code of the State where the Properties are located, no security interest in this Lease may be created through the transfer or possession of any counterpart other than the original counterpart containing the receipt therefor executed by the Agent on the signature page hereof. TABLE OF CONTENTS Page ---- SECTION 1. DEFINITIONS............................... 1 1.1 Defined Terms.................................................... 1 SECTION 2. PROPERTY AND TERM........................ 1 2.1 Property......................................................... 1 2.2 Lease Term....................................................... 1 2.3 Title............................................................ 1 2.4 Lease Supplements................................................ 1 SECTION 3. RENT.............................. 1 3.1 Rent............................................................. 1 3.2 Supplemental Rent................................................ 2 3.3 Performance on a Non-Business Day................................ 2 SECTION 4. UTILITY CHARGES......................... 2 4.1 Utility Charges.................................................. 2 SECTION 5. QUIET ENJOYMENT......................... 3 5.1 Quiet Enjoyment.................................................. 3 SECTION 6. NET LEASE............................ 3 6.1 Net Lease; No Setoff; Etc........................................ 3 6.2 No Termination or Abatement...................................... 4 SECTION 7. OWNERSHIP OF PROPERTY...................... 4 7.1 Ownership of the Property........................................ 4 SECTION 8. CONDITION OF PROPERTY...................... 5 8.1 Condition of the Property........................................ 5 8.2 Possession and Use of the Property............................... 6 SECTION 9. COMPLIANCE........................... 6 9.1 Compliance with Legal Requirements and Insurance Requirements.... 6 SECTION 10.................................. 6 10.1 Maintenance and Repair; Return................................... 6 10.2 Right of Inspection.............................................. 7 10.3 Environmental Inspection......................................... 7 SECTION 11. MODIFICATIONS......................... 8 11.1 Modifications, Substitutions and Replacements.................... 8 -i- SECTION 12. TITLE............................. 9 12.1 Warranty of Title................................................ 9 12.2 Grants and Releases of Easements................................. 9 SECTION 13. PERMITTED CONTESTS....................... 10 13.1 Permitted Contests Other Than in Respect of Impositions.......... 10 SECTION 14. INSURANCE........................... 10 14.1 Public Liability and Workers' Compensation Insurance............. 10 14.2 Hazard and Other Insurance....................................... 11 14.3 Coverage......................................................... 11 SECTION 15. CONDEMNATION AND CASUALTY................... 12 15.1 Casualty and Condemnation........................................ 12 15.2 Environmental Matters............................................ 13 SECTION 16. LEASE TERMINATION....................... 14 16.1 Termination upon Certain Events.................................. 14 16.2 Procedures....................................................... 14 SECTION 17. DEFAULT............................ 14 17.1 Lease Events of Default.......................................... 14 17.2 Final Liquidated Damages......................................... 16 17.3 Lease Remedies................................................... 16 17.4 Waiver of Certain Rights......................................... 18 17.5 Assignment of Rights Under Contracts............................. 18 17.6 Remedies Cumulative.............................................. 18 17.7 Covenant Defaults................................................ 18 SECTION 18. LESSOR'S RIGHT TO CURE..................... 19 18.1 Lessor's Right to Cure Lessee's Lease Defaults................... 19 SECTION 19. LEASE TERMINATION....................... 19 19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise of Purchase Option............................. 19 19.2 Aggregate Tranche A Percentage................................... 20 SECTION 20. PURCHASE OPTION........................ 20 20.1 Purchase Option.................................................. 20 20.2 Maturity Date Purchase Option.................................... 20 20.3 Obligation to Purchase All Properties............................ 20 SECTION 21. SALE OF PROPERTY........................ 20 21.1 Sale Procedure................................................... 21 21.2 Application of Proceeds of Sale.................................. 21 21.3 Indemnity for Excessive Wear..................................... 21 -ii- 21.4 Appraisal Procedure.............................................. 22 21.5 Certain Obligations Continue..................................... 22 SECTION 22. HOLDING OVER.......................... 22 22.1 Holding Over..................................................... 22 SECTION 23. RISK OF LOSS.......................... 23 23.1 Risk of Loss..................................................... 23 SECTION 24. SUBLETTING AND ASSIGNMENT................... 23 24.1 Subletting and Assignment........................................ 23 24.2 Subleases........................................................ 23 SECTION 25. ESTOPPEL CERTIFICATES..................... 23 25.1 Estoppel Certificates............................................ 23 SECTION 26. NO WAIVER........................... 24 26.1 No Waiver........................................................ 24 SECTION 27. ACCEPTANCE OF SURRENDER.................... 24 27.1 Acceptance of Surrender.......................................... 24 SECTION 28. NO MERGER OF TITLE....................... 24 28.1 No Merger of Title............................................... 24 SECTION 29. NOTICES............................ 24 29.1 Notices.......................................................... 24 SECTION 30. MISCELLANEOUS......................... 25 30.1 Miscellaneous.................................................... 25 30.2 Amendments and Modifications..................................... 25 30.3 Successors and Assigns........................................... 26 30.4 Headings and Table of Contents................................... 26 30.5 Counterparts..................................................... 26 30.6 GOVERNING LAW.................................................... 26 30.7 Limitations on Recourse.......................................... 26 30.8 Memorandum of Lease.............................................. 26 30.9 Priority......................................................... 26 31.1 Ground Lease..................................................... 26 Exhibits Exhibit A Lease Supplement Exhibit B Memorandum of Lease -iii- LEASE (this "Lease"), dated as of October 10, 1996, between FBTC LEASING CORP., a New York corporation, having its principal office at Two World Trade Center, New York, New York 10048, as lessor (the "Lessor"), and LIVING CENTERS HOLDING COMPANY, a Delaware corporation, having its principal office at 15415 Katy Freeway, Suite 800, Houston, Texas 77094, as lessee (the "Lessee"). In consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. Capitalized terms used herein but not otherwise defined in this Lease shall have the respective meanings specified in Annex A to the Participation Agreement dated as of the date hereof among Lessee, Lessor, Agent and the Lenders named therein. SECTION 2. PROPERTY AND TERM 2.1 Property. Subject to the terms and conditions hereinafter set forth and contained in the respective Lease Supplement relating to each Property, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, each Property. 2.2 Lease Term. The Property is leased for the Term, unless extended or earlier terminated in accordance with the provisions of this Lease. 2.3 Title. Each Property is leased to Lessee without any representation or warranty, express or implied, by Lessor and subject to the rights of parties in possession, the existing state of title (including the Permitted Exceptions) and all applicable Legal Requirements. Lessee shall in no event be excused in its obligation to pay Rent for any defect in title to the Property. 2.4 Lease Supplements. On each Property Closing Date, Lessee and Lessor shall each execute and deliver a Lease Supplement for the Property to be leased on such date in substantially the form of Exhibit A hereto and thereafter such Property shall be subject to the terms of this Lease. SECTION 3. RENT 3.1 Rent. (a) On each applicable Payment Date occurring after the termination of the Construction Period for a Property and on any date when this Lease shall terminate, Lessee shall pay the Basic Rent attributable to such Property. 2 (b) Basic Rent shall be due and payable in lawful money of the United States and shall be paid by wire transfer of immediately available funds on or before the due date therefor to such account or accounts at such bank or banks or to such other Person or in such other manner as Lessor shall from time to time direct. (c) Neither Lessee's inability or failure to take possession of all, or any portion, of the Property when delivered by Lessor, nor Lessor's inability or failure to deliver all or any portion of the Property to Lessee, whether or not attributable to any act or omission of Lessee or any act or omission of Lessor, or for any other reason whatsoever, shall delay or otherwise affect Lessee's obligation to pay Rent in accordance with the terms of this Lease. 3.2 Supplemental Rent. (a) Lessee shall pay to Lessor or the Person entitled thereto any and all Supplemental Rent promptly as the same shall become due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor as Supplemental Rent, among other things, on demand, to the extent permitted by applicable Legal Requirements, interest at the applicable Overdue Rate on any installment of Basic Rent not paid when due for the period for which the same shall be overdue and on any payment of Supplemental Rent not paid when due or demanded by Lessor for the period from the due date or the date of any such demand, as the case may be, until the same shall be paid. The expiration or other termination of Lessee's obligations to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. Unless expressly provided otherwise in this Lease or any other Operative Agreement, in the event of any failure on the part of Lessee to pay and discharge any Supplemental Rent as and when due, Lessee shall also promptly pay and discharge any fine, penalty, interest or cost which may be assessed or added for nonpayment or late payment of such Supplemental Rent, all of which shall also constitute Supplemental Rent. (b) Lessee shall make a payment of Supplemental Rent equal to the Maximum Residual Guarantee Amount in accordance with Section 21.1(c). 3.3 Performance on a Non-Business Day. If any payment is required hereunder on a day that is not a Business Day, then such payment shall be due on the next succeeding Business Day. SECTION 4. UTILITY CHARGES 4.1 Utility Charges. Lessee shall pay, or cause to be paid, all charges for electricity, power, gas, oil, water, telephone, sanitary sewer service and all other rents and utilities used in or on each Property during the Term. Lessee shall be entitled to receive any credit or refund with respect to any utility charge paid by Lessee and the amount of any credit or refund received by Lessor on account of any utility charges paid by Lessee, net of the costs and expenses incurred by Lessor in obtaining such credit or refund, shall be promptly paid over to Lessee. All charges for utilities imposed with respect to the Property for a billing period during which this Lease expires or terminates shall be adjusted and prorated on a daily basis between 3 Lessor and Lessee, and each party shall pay or reimburse the other for each party's pro rata share thereof. SECTION 5. QUIET ENJOYMENT 5.1 Quiet Enjoyment. So long as no Lease Event of Default shall have occurred and be continuing, Lessee shall peaceably and quietly have, hold and enjoy each Property for the Term, free of any claim or other action by Lessor or anyone rightfully claiming by, through or under Lessor with respect to any matters arising from and after the Lease Commencement Date. SECTION 6. NET LEASE 6.1 Net Lease; No Setoff; Etc. This Lease shall constitute a net lease and, notwithstanding any other provision of this Lease, it is intended that Basic Rent and Supplemental Rent shall be paid without counterclaim, setoff, deduction or defense of any kind and without abatement, suspension, deferment, diminution or reduction of any kind, and Lessee's obligation to pay all such amounts is absolute and unconditional. The obligations and liabilities of Lessee hereunder shall in no way be released, discharged or otherwise affected for any reason, including, without limitation, to the maximum extent permitted by law: (a) any defect in the condition, merchantability, design, construction, quality or fitness for use of any portion of any Property, or any failure of any Property to comply with all Legal Requirements, including any inability to occupy or use any Property by reason of such non-compliance; (b) any damage to, abandonment, loss, contamination of or Release from or destruction of or any requisition or taking of any Property or any part thereof, including eviction; (c) any restriction, prevention or curtailment of or interference with any use of any Property or any part thereof, including eviction; (d) any defect in title to or rights to any Property or any Lien on such title or rights or on any Property; (e) any change, waiver, extension, indulgence or other action or omission or breach in respect of any obligation or liability of or by Lessor, Agent or any Lender; (f) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceedings relating to Lessee, Lessor, Agent, any lender or any other Person, or any action taken with respect to this Lease by any trustee or receiver of Lessee, Lessor, Agent, any lender or any other Person, or by any court, in any such proceeding; (g) any claim that Lessee has or might have against any Person, including Lessor, Agent or any Lender; (h) any failure on the part of Lessor to perform or comply with any of the terms of this Lease, any other Operative Agreement or of any other agreement; (i) any invalidity or unenforceability or disaffirmance against or by Lessee of this Lease or any provision hereof or any of the other Operative Agreements or any provision of any thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k) any action by any court, administrative agency or other Governmental Authority; any restriction, prevention or curtailment of or any interference with the construction on or any use of any Property or any part thereof; or (m) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Lessee shall have notice or knowledge of any of the foregoing. This Lease shall be noncancellable by Lessee for any reason whatsoever except as expressly provided herein, and Lessee, to the extent permitted by Legal Requirements, waives all rights now or hereafter conferred by statute or otherwise to quit, terminate or surrender this Lease, or to any diminution, abatement or reduction of Rent payable 4 by Lessee hereunder. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as otherwise expressly provided herein, Lessee shall, unless prohibited by Legal Requirements, nonetheless pay to Lessor (or, in the case of Supplemental Rent, to whomever shall be entitled thereto) an amount equal to each Rent payment at the time and in the manner that such payment would have become due and payable under the terms of this Lease if it had not been terminated in whole or in part, and in such case, so long as such payments are made and no Lease Event of Default shall have occurred and be continuing, Lessor will deem this Lease to have remained in effect. Each payment of Rent made by Lessee hereunder shall be final and, absent manifest error in the computation of the amount thereof, Lessee shall not seek or have any right to recover all or any part of such payment from Lessor, Agent or any party to any agreements related thereto for any reason whatsoever. Lessee assumes the sole responsibility for the condition, use, operation, maintenance, and management of the Property and Lessor shall have no responsibility in respect thereof and shall have no liability for damage to the property of Lessee or any subtenant of Lessee on any account or for any reason whatsoever. 6.2 No Termination or Abatement. Lessee shall remain obligated under this Lease in accordance with its terms and shall not take any action to terminate, rescind or avoid this Lease, notwithstanding any action for bankruptcy, insolvency, reorganization, liquidation, dissolution, or other proceeding affecting Lessor, or any action with respect to this Lease which may be taken by any trustee, receiver or liquidator of Lessor or by any court with respect to Lessor, except as otherwise expressly provided herein. Lessee hereby waives all right (i) to terminate or surrender this Lease, except as otherwise expressly provided herein, or (ii) to avail itself of any abatement, suspension, deferment, reduction, setoff, counterclaim or defense with respect to any Rent. Lessee shall remain obligated under this Lease in accordance with its terms and Lessee hereby waives any and all rights now or hereafter conferred by statute or otherwise to modify or to avoid strict compliance with its obligations under this Lease. Notwithstanding any such statute or otherwise, Lessee shall be bound by all of the terms and conditions contained in this Lease. SECTION 7. OWNERSHIP OF PROPERTY 7.1 Ownership of the Property. (a) Lessor and Lessee intend that (i) for financial accounting purposes with respect to Lessee (A) this Lease will be treated as an "operating lease" pursuant to Statement of Financial Accounting Standards (SFAS) No. 13, as amended, (B) Lessor will be treated as the owner and lessor of the Property and (C) Lessee will be treated as the lessee of the Property, but (ii) for federal, state and local income tax and all other purposes (A) this Lease will be treated as a financing arrangement, (B) the Lenders will be treated as senior lenders making loans to Lessee in an amount equal to the Loans, which Loans will be secured by the Property, (C) Lessor will be treated as a subordinated lender making a loan to Lessee in an amount equal to the Lessor Contribution, which loan is secured by the Property, and (D) Lessee will be treated as the owner of the Property and will be entitled to all tax benefits ordinarily available to an owner of property like the Property for such tax purposes. (b) Lessor and Lessee further intend and agree that, for the purpose of securing Lessee's obligations for the repayment of the above-described loans, (i) this Lease shall also be 5 deemed to be a security agreement and financing statement within the meaning of Article 9 of the Uniform Commercial Code and a real property mortgage or deed of trust, as applicable; (ii) the Lease provided for in Section 2 shall be deemed a grant of a security interest in and a mortgage lien on the Lessee's right, title and interest in the Properties (including the right to exercise all remedies as are contained in the applicable Mortgage and Memorandum of Lease upon the occurrence of a Lease Event of Default) and all proceeds of the conversion, voluntary or involuntary, of the foregoing into cash, investments, securities or other property, whether in the form of cash, investments, securities or other property, for the benefit of the Lessor to secure the Lessee's payment of all amounts owed by the Lessee under this Lease and the other Operative Agreements and Lessor holds title to the Properties so as to create and grant a first lien and prior security interest in each Property (A) pursuant to this Lease for the benefit of the Agent under the Assignment of Lease, to secure to the Agent the obligations of the Lessee under the Lease and (B) pursuant to the Mortgages to secure to the Agent the obligations of the Lessor under the Mortgages and the Notes; (iii) the possession by Lessor or any of its agents of notes and such other items of property as constitute instruments, money, negotiable documents or chattel paper shall be deemed to be "possession by the secured party" for purposes of perfecting the security interest pursuant to Section 9-305 of the Uniform Commercial Code; and (iv) notifications to Persons holding such property, and acknowledgements, receipts or confirmations from financial intermediaries, bankers or agents (as applicable) of Lessee shall be deemed to have been given for the purpose of perfecting such security interest under applicable law. Lessor and Lessee shall, to the extent consistent with this Lease, take such actions as may be necessary to ensure that, if this Lease were deemed to create a security interest in the Properties in accordance with this Section, such security interest would be deemed to be a perfected security interest of first priority under applicable law and will be maintained as such throughout the Basic Term. Nevertheless, Lessee acknowledges and agrees that none of Lessor, Agent, or any Lender has provided or will provide tax, accounting or legal advice to Lessee regarding this Lease, the Operative Agreements or the transactions contemplated hereby and thereby, or made any representations or warranties concerning the tax, accounting or legal characteristics of the Operative Agreements, and that Lessee has obtained and relied upon such tax, accounting and legal advice concerning the Operative Agreements as it deems appropriate. (c) Lessor and Lessee further intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting Lessee or Lessor, the transactions evidenced by this Lease shall be regarded as loans made by an unrelated third party lender to Lessee. SECTION 8. CONDITION OF PROPERTY 8.1 Condition of the Property. LESSEE ACKNOWLEDGES AND AGREES THAT IT IS RENTING EACH PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE EXISTING STATE OF TITLE, (B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW AND (D) VIOLATIONS OF LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NONE OF LESSOR, 6 THE AGENT AND ANY LENDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING THE CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY ENVIRONMENTAL OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY LIABILITY WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN, OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO ANY PROPERTY (OR ANY PART THEREOF) AND NONE OF LESSOR, THE AGENT AND ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT DEFECT THEREIN OR THE FAILURE OF ANY PROPERTY, OR ANY PART THEREOF, TO COMPLY WITH ANY LEGAL REQUIREMENT. 8.2 Possession and Use of the Property. Each Property shall be used in a manner consistent with the Agency Agreement and, after the Completion Date for the Property, as a skilled nursing or assisted living Facility. Lessee shall pay, or cause to be paid, all charges and costs required in connection with the use of the Properties. Lessee shall not commit or permit any waste of any Property or any part thereof. SECTION 9. COMPLIANCE 9.1 Compliance with Legal Requirements and Insurance Requirements. Subject to the terms of Section 13 relating to permitted contests, Lessee, at its sole cost and expense, shall (a) comply in all material respects with all Legal Requirements (including all Environmental Laws) and Insurance Requirements relating to each Property, including the use, construction, operation, maintenance, repair and restoration thereof, whether or not compliance therewith shall require structural or extraordinary changes in the Improvements or interfere with the use and enjoyment of each Property, and (b) procure, maintain and comply in all material respects with all licenses, permits, orders, approvals, consents and other authorizations required for the construction, renovation, use, maintenance and operation of each Property and for the use, operation, maintenance, repair and restoration of the Improvements. SECTION 10. MAINTENANCE AND REPAIR 10.1 Maintenance and Repair; Return. (a) Lessee, at its sole cost and expense, shall maintain each Property in good condition (ordinary wear and tear excepted) and make all necessary repairs thereto, of every kind and nature whatsoever, whether interior or exterior, ordinary or extraordinary, structural or nonstructural or foreseen or unforeseen, in each case in substantial compliance with all Legal Requirements and Insurance Requirements and on a basis reasonably consistent with the operation and maintenance of commercial properties comparable in type and location to the applicable Property subject, however, to the provisions of Section 15 with respect to Condemnation and Casualty. (b) Lessor shall under no circumstances be required to build any improvements on any Property, make any repairs, replacements, alterations or renewals of any nature or 7 description to any Property, make any expenditure whatsoever in connection with this Lease or maintain any Property in any way. Lessor shall not be required to maintain, repair or rebuild all or any part of any Property, and Lessee waives the right to (i) require Lessor to maintain, repair, or rebuild all or any part of any Property, or (ii) make repairs at the expense of Lessor pursuant to any Legal Requirement, Insurance Requirement, contract, agreement, covenants, condition or restriction at any time in effect. (c) Lessee shall, upon the expiration or earlier termination of the Term with respect to a Property, vacate, surrender and transfer such Property to Lessor, at Lessee's own expense, free and clear of all Liens other than (i) Liens of the types described in clause (i) of the definition of Permitted Liens, (ii) Liens of the type described in clause (ii) of the definition of Permitted Exceptions and (iii) Lessor Liens, in as good condition as they were on the applicable Property Closing Date or, if later, the Completion Date in respect of such Property, ordinary wear and tear excepted, and in compliance with all Legal Requirements and the other requirements of this Lease (and in any event without (x) any asbestos installed or maintained in any part of such Property, (y) any polychlorinated byphenyls (PCBs) in, on or used, stored or located at such Property, and (z) any other Hazardous Substances in violation of Applicable Environmental Laws). Lessee shall cooperate with any independent purchaser of such Property in order to facilitate the ownership and operation by such purchaser of such Property after such expiration or earlier termination of the Term, including providing all books, reports and records regarding the maintenance, repair and ownership of such Property and all data and technical information relating thereto, granting or assigning all licenses necessary for the operation and maintenance of such Property and cooperating in seeking and obtaining all necessary licenses, permits and approvals of Governmental Authorities. Lessee shall have also paid the total cost for the completion of all Modifications commenced prior to such expiration or earlier termination of the Term. The obligation of Lessee under this Section 10.1(c) shall survive the expiration or termination of this Lease. 10.2 Right of Inspection. Lessor may, at reasonable times and with reasonable prior notice, enter upon, inspect and examine at its own cost and expense (unless a Lease Event of Default exists, in which case the out-of-pocket costs and expenses of Lessor shall be paid by Lessee), any Property. Upon request of the Agent, Lessee shall furnish to Lessor statements, no more than once per year, accurate in all material respects, regarding the condition and state of repair of each Property. Lessor shall have no duty to make any such inspection or inquiry and shall not incur any liability or obligation by reason of not making any such inspection or inquiry. 10.3 Environmental Inspection. Upon surrender of possession of each Property, or not more than 120 days nor less than 30 days prior to the Expiration Date (unless Lessee has previously irrevocably exercised the Purchase Option), Lessee shall, at its sole cost and expense, provide to Lessor a report by an environmental consultant selected by Lessee and reasonably satisfactory to Lessor certifying that Hazardous Substances have not at any time during the Term been generated, used, treated or stored on, transported to or from, Released at, on or from or deposited at or on such Property, and no portion of such Property has been used for such purposes other than (i) as necessary to use, operate, maintain, repair and restore such Property and (ii) in full compliance with all Environmental Laws. If such is not the case, the report shall set forth a remedial response plan relating to such Property (which remedial response plan, if required by any Environmental Law or Governmental Authority, shall be approved by the 8 appropriate Governmental Authority). Such remedial response plan shall include, but shall not be limited to, plans for full response, remediation, removal, or other corrective action, and the protection, or mitigative action associated with the protection, of natural resources including wildlife, aquatic species, and vegetation associated with such Property, as required by all applicable Environmental Laws. If such report includes a remedial response plan, Lessee shall promptly deposit funds in escrow with the Agent sufficient to ensure the full execution and implementation of such plan. SECTION 11. MODIFICATIONS 11.1 Modifications, Substitutions and Replacements. (a) So long as no Lease Event of Default has occurred and is continuing, Lessee, at its sole cost and expense, may at any time and from time to time make alterations, renovations, improvements and additions to a Property or any part thereof (collectively, "Modifications"); provided, that: (i) except for any Modification required to be made pursuant to a Legal Requirement or an Insurance Requirement, no Modification, individually, or when aggregated with any (A) other Modification or (B) grant, dedication, transfer or release pursuant to Section 12.2, shall impair the value of such Property or the utility or useful life of such Property from that which existed immediately prior to such Modification; (ii) the Modification shall be performed expeditiously and in a good and workmanlike manner; (iii) Lessee shall comply with all Legal Requirements (including all Environmental Laws) and Insurance Requirements applicable to the Modification, including the obtaining of all permits and certificates of occupancy, and the structural integrity of such Property shall not be adversely affected; (iv) Lessee shall maintain or cause to be maintained builders' risk insurance at all times when a Modification is in progress; (v) subject to the terms of Section 13 relating to permitted contests, Lessee shall pay all costs and expenses and discharge any Liens arising with respect to the Modification; (vi) such Modifications shall comply with Sections 8.2 and 10.1 and shall not change the primary character of such Property; and (vii) no Improvements shall be demolished, except to the extent such demolition does not impair the value, utility or useful life of such Property. All Modifications (other than those that may be readily removed without impairing the value, utility or remaining useful life of such Property) shall remain part of the realty and shall be subject to this Lease, and title thereto shall immediately vest in Lessor. So long as no Lease Event of Default has occurred and is continuing, Lessee may place upon a Property any inventory, trade fixtures, machinery, equipment or other property belonging to Lessee or third parties and may remove the same at any time during the term of this Lease; provided that such inventory, trade fixtures, machinery, equipment or other property, or their respective operations, do not impair the value, utility or remaining useful life of such Property. (b) Following the Completion Date with respect to any Property, Lessee shall notify Lessor of the undertaking of any construction, repairs or alterations to the Property the cost of which is anticipated to exceed $500,000. Prior to undertaking any such construction or alterations costing in excess of such amount, Lessee shall deliver to Lessor (i) a brief narrative of the work to be done and a copy of the plans and specifications relating to such work; and (ii) an Officer's Certificate stating that such work when completed will not impair the value, utility or remaining life of such Property. Lessor, by itself or its agents, shall have the right, but not the 9 obligation, from time to time to inspect such construction to ensure that the same is completed consistent with the plans and specifications. (c) Following the Completion Date with respect to any Property, Lessee shall not without the consent of Lessor undertake any construction or alterations to such Property if such construction or alterations cannot, in the reasonable judgement of Agent, be completed on or prior to the date that is twelve months prior to the Expiration Date. SECTION 12. TITLE 12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise provided herein and subject to the terms of Section 13 relating to permitted contests, Lessee shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, defect, attachment, levy, title retention agreement or claim upon any Property or any Modifications or any Lien, attachment, levy or claim with respect to the Rent or with respect to any amounts held by the Agent pursuant to the Credit Agreement, other than Permitted Liens. Lessee shall promptly notify Lessor in the event it receives knowledge that a Lien (other than a Permitted Lien or a Lessor Lien) exists with respect to the Property unless Lessee promptly removes such Lien. (b) Nothing contained in this Lease shall be construed as constituting the consent or request of Lessor, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, alteration, addition, repair or demolition of or to any Property or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO LESSEE, OR TO ANYONE HOLDING ANY PROPERTY OR ANY PART THEREOF THROUGH OR UNDER LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO ANY PROPERTY. 12.2 Grants and Releases of Easements. Provided that no Lease Event of Default shall have occurred and be continuing and subject to the provisions of Sections 8, 9, 10 and 11, Lessor hereby consents to the following actions by Lessee, in the name and stead of Lessor, but at Lessee's sole cost and expense: (a) the granting (prior to the Lien of the Mortgage) of easements, licenses, rights-of-way and other rights and privileges in the nature of easements reasonably necessary or desirable for the construction, use, repair, renovation or maintenance of any Property as herein provided; (b) the release (free and clear of the Lien of the Mortgage) of existing easements or other rights in the nature of easements which are for the benefit of any Property; (c) the dedication or transfer (prior to the Lien of the Mortgage) of unimproved portions of any Property for road, highway or other public purposes; (d) the execution of petitions to have any Property annexed to any municipal corporation or utility district; and (e) the execution of amendments to any covenants and restrictions affecting any Property; provided, that in each case Lessee shall have delivered to Lessor an Officer's Certificate stating that: (i) such grant, release, dedication or transfer does not impair the value of utility or remaining useful life of the applicable Property, (ii) such grant, release, dedication or transfer is necessary in connection with the construction, use, maintenance, alteration, renovation or improvement of the 10 applicable Property, (iii) Lessee shall remain obligated under this Lease and under any instrument executed by Lessee consenting to the assignment of Lessor's interest in this Lease as security for indebtedness, in each such case in accordance with their terms, as though such grant, release, dedication or transfer, had not been effected and (iv) Lessee shall pay and perform any obligations of Lessor under such grant, release, dedication or transfer. Without limiting the effectiveness of the foregoing, provided that no Lease Event of Default shall have occurred and be continuing, Lessor shall, upon the request of Lessee, and at Lessee's sole cost and expense, execute and deliver any instruments necessary or appropriate to confirm any such grant, release, dedication or transfer to any Person permitted under this Section. SECTION 13. PERMITTED CONTESTS 13.1 Permitted Contests Other Than in Respect of Impositions. Except to the extent otherwise provided for in Section 12.2 of the Participation Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost and expense, may contest, by appropriate administrative or judicial proceedings conducted in good faith and with due diligence, the amount, validity or application, in whole or in part, of any Legal Requirement, or utility charges payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or encroachment, and Lessor agrees not to pay, settle or otherwise compromise any such item, provided that (a) the commencement and continuation of such proceedings shall suspend the collection thereof from, and suspend the enforcement thereof against the applicable Properties, Lessor, the Agent and the Lenders; (b) there shall be no risk of the imposition of a Lien (other than a Permitted Lien) on any Property and no part of any Property nor any Rent would be in any danger of being sold, forfeited, lost or deferred; (c) at no time during the permitted contest shall there be a risk of the imposition of criminal liability or civil liability on Lessor, the Agent or any Lender for failure to comply therewith; and (d) in the event that, at any time, there shall be a material risk of extending the application of such item beyond the earlier of the Maturity Date and the Expiration Date for the applicable Property, then Lessee shall deliver to Lessor an Officer's Certificate certifying as to the matters set forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's sole cost and expense, shall execute and deliver to Lessee such authorizations and other documents as may reasonably be required in connection with any such contest and, if reasonably requested by Lessee, shall join as a party therein at Lessee's sole cost and expense. SECTION 14. INSURANCE 14.1 Public Liability and Workers' Compensation Insurance. During the Term, Lessee shall procure and carry, at Lessee's sole cost and expense, commercial general liability insurance for claims for injuries or death sustained by persons or damage to property while on each Property. Such insurance shall be on terms and in amounts that are no less favorable than insurance maintained by owners of similar properties and that are in accordance with normal industry practice, provided that Lessee shall be permitted to self- insure such liability up to $1,000,000. The policy shall be endorsed to name Lessor, the Agent and the Lenders as additional insureds. The policy shall also specifically provide that the policy shall be considered primary insurance which shall apply to any loss or claim before any contribution by any insurance which Lessor, the Agent or the Lenders may have in force. Lessee shall, in the 11 operation of the Property, comply with the applicable workers' compensation laws and protect Lessor against any liability under such laws. 14.2 Hazard and Other Insurance. (a) During the Term, Lessee shall keep each Property insured against loss or damage by fire and other risks on terms and in amounts that are no less favorable than insurance maintained by owners of similar properties, that are in accordance with normal industry practice, are in amounts equal to the actual replacement cost of the Improvements. So long as no Lease Event of Default exists, any loss payable under the insurance policy required by this Section will be paid to and adjusted solely by Lessee, subject to Section 15. So long as no Lease Event of Default exists, any loss payable under any title insurance policy covering any Property will be paid to and adjusted solely by Lessee, subject to Section 15. (b) If at any time during the Term the area in which any Property is located is designated a "flood-prone" area pursuant to the Flood Disaster Protection Act of 1973 or any amendments or supplements thereto, then Lessee shall comply with the National Flood Insurance Program as set forth in the Flood Disaster Protection Act of 1973, as may be amended. In addition, Lessee will fully comply with the requirements of the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as each may be amended from time to time, and with any other Legal Requirement, concerning flood insurance to the extent that it apply to any Property. 14.3 Coverage. (a) Lessee shall furnish Lessor and the Agent with certificates showing the insurance required under Sections 14.1 and 14.2 to be in effect and naming Agent, the Lenders and the Lessor as an additional insured with respect to liability insurance and showing the mortgagee endorsement required by Section 14.3(c). All such insurance shall be at the cost and expense of Lessee. Such certificates shall include a provision in which the insurer agrees to provide thirty (30) days' advance written notice by the insurer to Lessor and the Agent in the event of cancellation or modification of such insurance. If a Lease Event of Default has occurred and is continuing and Lessor so requests, Lessee shall deliver to Lessor copies of all insurance policies required by this Lease. (b) Lessee agrees that the insurance policy or policies required by this Lease shall include an appropriate clause pursuant to which such policy shall provide that it will not be invalidated should Lessee waive, in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policy. Lessee hereby waives any and all such rights against Lessor, the Agent and the Lenders to the extent of payments made under such policies. (c) All insurance policies required by Section 14.2 shall include a "New York" or standard form mortgagee endorsement in favor of the Agent and, if available, the Lessor. (d) Neither Lessor nor Lessee shall carry separate insurance concurrent in kind or form or contributing in the event of loss with any insurance required under this Lease except that Lessor may carry separate liability insurance so long as (i) Lessee's insurance is designated as primary and in no event excess or contributory to any insurance Lessor may have in force which would apply to a loss covered under Lessee's policy and (ii) each such insurance policy 12 will not cause Lessee's insurance required under this Lease to be subject to a coinsurance exception of any kind. (e) Lessee shall pay as they become due all premiums for the insurance required by this Lease, shall renew or replace each policy prior to the expiration date thereof and shall promptly deliver to Lessor and the Agent certificates for renewal and replacement policies. SECTION 15. CONDEMNATION AND CASUALTY 15.1 Casualty and Condemnation. (a) Subject to the provisions of this Section 15 and Section 16 (in the event Lessee delivers, or is obligated to deliver, a Termination Notice), and prior to the occurrence and continuation of a Lease Default, Lessee shall be entitled to receive (and Lessor hereby irrevocably assigns to Lessee all of Lessor's right, title and interest in) any award, compensation or insurance proceeds to which Lessee or Lessor may become entitled by reason of their respective interests in a Property (i) if all or a portion of such Property is damaged or destroyed in whole or in part by a Casualty or (ii) if the use, access, occupancy, easement rights or title to such Property or any part thereof is the subject of a Condemnation; provided, however, if a Lease Default shall have occurred and be continuing such award, compensation or insurance proceeds shall be paid directly to Lessor or, if received by Lessee, shall be held in trust for Lessor, and shall be paid over by Lessee to Lessor, and provided further that in the event of any Casualty or Condemnation, the estimated cost of restoration of which is in excess of $1,000,000, any such award, compensation or insurance proceeds shall be paid directly to Lessor, or if received by Lessee, shall be held in trust for Lessor and shall be paid over by Lessee to Lessor. (b) So long as no Lease Event of Default has occurred and is continuing, Lessee may appear in any proceeding or action to negotiate, prosecute, adjust or appeal any claim for any award, compensation or insurance payment on account of any such Casualty or Condemnation and shall pay all expenses thereof; provided that if the estimated cost of restoration of the Property or the payment on account of such title defect is in excess of $1,000,000, then Lessor shall be entitled to participate in any such proceeding or action. At Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and the Agent shall participate in any such proceeding, action, negotiation, prosecution or adjustment. Lessor and Lessee agree that this Lease shall control the rights of Lessor and Lessee in and to any such award, compensation or insurance payment. (c) If Lessor or Lessee shall receive notice of a Casualty or a possible Condemnation of a Property or any interest therein, Lessor or Lessee, as the case may be, shall give notice thereof to the other and to the Agent promptly after the receipt of such notice. (d) In the event of a Casualty or receipt of notice by Lessee or Lessor of a Condemnation, Lessee shall, not later than thirty (30) days after such occurrence, deliver to Lessor and the Agent an Officer's Certificate stating that either (i) (x) such Casualty is not a Significant Casualty or (y) such Condemnation is neither a Total Condemnation nor a Significant Condemnation and that this Lease shall remain in full force and effect with respect to the applicable Property and, at Lessee's sole cost and expense, Lessee shall promptly and diligently 13 restore the applicable Property in accordance with the terms of Section 15.1(e) or (ii) this Lease shall terminate with respect to the applicable Property in accordance with Section 16.1. (e) If pursuant to this Section 15.1, this Lease shall continue in full force and effect following a Casualty or Condemnation with respect to the affected Property, Lessee shall, at its sole cost and expense, promptly and diligently repair any damage to the applicable Property caused by such Casualty or Condemnation in conformity with the requirements of Sections 10.1 and 11.1 using the as-built plans and specifications for the applicable Property (as modified to give effect to any subsequent Modifications, any Condemnation affecting the Property and all applicable Legal Requirements) so as to restore the applicable Property to the same condition, operation, function and value as existed immediately prior to such Casualty or Condemnation. In such event, title to the applicable Property shall remain with Lessor. (f) In no event shall a Casualty or Condemnation with respect to which this Lease remains in full force and effect under this Section 15.1 affect Lessee's obligations to pay Rent pursuant to Section 3.1. (g) Notwithstanding anything to the contrary set forth in Section 15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with respect to a Property or Lessee receives notice of a Condemnation with respect to a Property, and following such Casualty or Condemnation, such Property cannot reasonably be restored on or before the date which is twelve months prior to the Maturity Date to substantially the same condition as existed immediately prior to such Casualty or Condemnation or before such day such Property is not in fact so restored, then Lessee shall exercise its Purchase Option with respect to such Property on the next Payment Date or irrevocably agree in writing to exercise the Maturity Date Purchase Option with respect to such Property, and in either such event such remaining Casualty or Condemnation proceeds shall be paid to the Agent, which shall pay such funds to Lessee upon the closing of the purchase of such Property. 15.2 Environmental Matters. (a) Promptly upon Lessee's actual knowledge of the presence of Hazardous Substances in any portion of a Property in concentrations and conditions that constitute an Environmental Violation, Lessee shall notify Lessor in writing of such condition. In the event of such Environmental Violation, Lessee shall, not later than thirty (30) days after Lessee has actual knowledge of such Environmental Violation, either deliver to Lessor and the Agent an Officer's Certificate and a Termination Notice with respect to such Property pursuant to Section 16.1, if applicable, or, at Lessee's sole cost and expense, promptly and diligently undertake any response, clean up, remedial or other action necessary to remove, cleanup or remediate the Environmental Violation in accordance with the terms of Section 9.1. If Lessee does not deliver a Termination Notice with respect to such Property pursuant to Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause to be prepared by an environmental consultant reasonably acceptable to Lessor a report describing the Environmental Violation and the actions taken by Lessee (or its agents) in response to such Environmental Violation, and a statement by the consultant that the Environmental Violation has been remedied in full compliance with applicable Environmental Laws. (b) In addition, Lessee shall provide to Lessor, within five (5) Business Days of receipt, copies of all written communications with any Governmental Authority relating to any 14 Environmental Law in connection with any Property. Lessee shall also promptly provide such detailed reports of any such environmental claims as reasonably may be requested by Lessor and the Agent. SECTION 16. LEASE TERMINATION 16.1 Termination upon Certain Events. (a) If Lessor or Lessee shall have received notice of a Total Condemnation, then Lessee shall be obligated, within thirty (30) days after Lessee receives notice thereof, to deliver a written notice in the form described in Section 16.2(a) (a "Termination Notice") of the termination of this Lease with respect to the applicable Property. (b) If either: (i) Lessee or Lessor shall have received notice of a Condemnation, and Lessee shall have delivered to Lessor an Officer's Certificate that such Condemnation is a Significant Condemnation; or (ii) a Casualty occurs, and Lessee shall have delivered to Lessor an Officer's Certificate that such Casualty is a Significant Casualty; or (iii) an Environmental Violation occurs or is discovered and Lessee shall have delivered to Lessor an Officer's Certificate stating that, in the reasonable, good-faith judgment of Lessee, the cost to remediate the same will exceed 10% of the Property Cost of such Property; then, Lessee shall, simultaneously with the delivery of the Officer's Certificate pursuant to the preceding clause (i), (ii) or (iii), deliver a Termination Notice with respect to the affected Property. 16.2 Procedures. (a) A Termination Notice shall contain: (i) notice of termination of this Lease with respect to the affected Property on a date not more than thirty (30) days after Lessor's receipt of such Termination Notice (the "Termination Date"); (ii) a binding and irrevocable agreement of Lessee to pay the Termination Value and purchase such Property on such Termination Date and (iii) the Officer's Certificate described in Section 16.1(b). (b) On the Termination Date, Lessee shall pay to Lessor the Termination Value for the applicable Property, plus all amounts owing in respect of Rent for such Property (including Supplemental Rent) theretofore accruing and Lessor shall convey such Property to Lessee (or Lessee's designee) all in accordance with Section 19.1. SECTION 17. DEFAULT 17.1 Lease Events of Default. If any one or more of the following events (each a "Lease Event of Default") shall occur: (a) Lessee shall fail to make payment of (i) any Basic Rent or any Supplemental Rent representing amounts owed under the Credit Agreement or the other Credit Documents within five (5) Business Days after the same has become due and payable or (ii) any Maximum Residual Guarantee Amount, Purchase Option Price or Termination Value after the same has become due and payable; or 15 (b) Lessee shall fail to make payment of any other Supplemental Rent due and payable within five (5) Business Days after receipt of notice thereof; or (c) Lessee shall fail to maintain insurance as required by Section 14; or (d) (i) subject to the limitations contained in Section 17.7 as to the Lessee only, Lessee or any Guarantor shall fail to observe or perform any term, covenant or condition of Lessee or such Guarantor, respectively, under this Lease, the Participation Agreement, the Guarantee or any other Operative Agreement to which it is a party (other than those set forth in Section 17.1(a), (b) or (c) hereof) and such default shall remain unremedied for a period of 30 days, provided that such 30 day period shall be extended (up to a maximum period of 180 days) as to defaults which cannot be cured with the payment of money but are curable though not reasonably capable of cure within such 30 day period, provided that Lessee has commenced to cure such default prior to the end of such 30 day period and prosecutes such cure to completion or (ii) any representation or warranty by Lessee or any Guarantor, respectively, set forth in this Lease, the Guaranty or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way; or (e) an Agency Agreement Event of Default shall have occurred and be continuing; or (f) Lessee or any Guarantor shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof, (iii) make a general assignment for the benefit of its creditors, (iv) consent to the appointment of a receiver of itself or the whole or any substantial part of its property, (v) fail to cause the discharge of any custodian, trustee or receiver appointed for Lessee or any such Guarantor or the whole or a substantial part of its property within ninety (90) days after such appointment, or (vi) file a petition or answer seeking or consenting to reorganization under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof; or (g) insolvency proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency law or statute of the United States of America or any State or Commonwealth thereof shall be filed against Lessee or any Guarantor and not dismissed within ninety (90) days from the date of its filing, or a court of competent jurisdiction shall enter an order or decree appointing, without its consent of, a receiver of Lessee or any Guarantor or the whole or a substantial part of its property, and such order or decree shall not be vacated or set aside within ninety (90) days from the date of the entry thereof; or (h) a Credit Agreement Event of Default shall have occurred and be continuing; or 16 (i) an event of default under the Corporate Credit Agreement shall have occurred and be continuing; then, in any such event, Lessor may, in addition to the other rights and remedies provided for in this Section 17 and in Section 18.1, terminate this Lease by giving Lessee five (5) days notice of such termination, and this Lease shall terminate. Lessee shall, to the fullest extent permitted by law, pay as Supplemental Rent all costs and expenses incurred by or on behalf of Lessor, including fees and expenses of counsel, as a result of any Lease Event of Default hereunder. 17.2 Final Liquidated Damages. If a Lease Event of Default shall have occurred and be continuing, Lessor shall have the right to recover, by demand to Lessee and at Lessor's election, and Lessee shall pay to Lessor, as and for final liquidated damages, but exclusive of the indemnities payable under Section 13 of the Participation Agreement, and in lieu of all damages beyond the date of such demand the sum of (a) the Termination Value, plus (b) all other amounts owing in respect of Rent and Supplemental Rent theretofore accruing under this Lease. Upon payment of the amount specified pursuant to the first sentence of this Section 17.2, Lessee shall be entitled to receive from Lessor, at Lessee's request and cost, an assignment of Lessor's right, title and interest in the Properties, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of all mortgages (including the Mortgages) and any Lessor Liens. Lessee (or Lessee's designee) shall execute and deliver to Lessor an assumption of all of Lessor's obligations under the Ground Leases, if any. The Properties shall be conveyed to Lessee (or Lessee's designee) "AS IS" and in their then present physical condition. If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law; provided, that Lessee shall not be entitled to receive an assignment of Lessor's interest under the Ground Leases, if any, or in the Properties unless Lessee shall have paid in full the Termination Value of each of the Properties. 17.3 Lease Remedies. Lessor and Lessee intend that for commercial law and bankruptcy law purposes, this Lease will be treated as a financing arrangement, as set forth in Section 7. If, as a result of applicable state law, which cannot be waived, this Lease is deemed to be a lease of the Properties, rather than a financing arrangement, and Lessor is unable to enforce the remedies set forth in Section 17.2, the following remedies shall be available to Lessor: (a) Surrender of Possession. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written notice, surrender to Lessor possession of the Property and Lessee shall quit the same. Lessor may enter upon and repossess the Property by such means as are available at law or in equity, and may remove Lessee and all other Persons and any and all personal property and Lessee's equipment and personalty and severable Modifications from the Property. Lessor shall have no liability by reason of any such entry, repossession or removal performed in accordance with applicable law. (b) Reletting. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessor may, but shall be under no obligation to, relet all, or any portion, of the Property, for the account of Lessee or otherwise, for such term or terms (which may be greater or less than the 17 period which would otherwise have constituted the balance of the Term) and on such conditions (which may include concessions or free rent) and for such purposes as Lessor may determine, and Lessor may collect, receive and retain the rents resulting from such reletting. Lessor shall not be liable to Lessee for any failure to relet the Property or for any failure to collect any rent due upon such reletting. (c) Damages. None of (i) the termination of this Lease pursuant to Section 17.1; (ii) the repossession of the Property; or (iii) except to the extent required by applicable law, the failure of Lessor to relet all, or any portion, of the Property, the reletting of all or any portion thereof, nor the failure of Lessor to collect or receive any rentals due upon any such reletting shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting. If any Lease Event of Default shall have occurred and be continuing and notwithstanding any termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay to Lessor all Basic Rent and other sums due and payable hereunder to and including the date of such termination. Thereafter, on the days on which the Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or would have been payable under this Lease if the same had not been terminated pursuant to Section 17.1 and until the end of the Term or what would have been the Term in the absence of such termination, Lessee shall pay Lessor, as current liquidated damages (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the Basic Rent and Supplemental Rent that are payable under this Lease or would have been payable by Lessee hereunder if this Lease had not been terminated pursuant to Section 17.1, less the net proceeds, if any, which are actually received by Lessor with respect to the period in question of any reletting of the Property or any portion thereof; provided that Lessee's obligation to make payments of Basic Rent and Supplemental Rent under this Section 17.4 shall continue only so long as Lessor shall not have received the amounts specified in Section 17.5 or Section 17.6. In calculating the amount of such net proceeds from reletting, there shall be deducted all of Lessor's, the Agent's and any Lenders' expenses in connection therewith, including repossession costs, brokerage commissions, fees and expenses for counsel and any necessary repair or alteration costs and expenses incurred in preparation for such reletting. To the extent Lessor receives any damages pursuant to this Section 17.4, such amounts shall be regarded as amounts paid on account of Rent. (d) Acceleration of Rent. If a Lease Event of Default shall have occurred and be continuing, and this Lease shall not have been terminated pursuant to Section 17.1, and whether or not Lessor shall have collected any current liquidated damages pursuant to Section 17.3(c), Lessor may upon written notice to Lessee accelerate all payments of Basic Rent due hereunder and, upon such acceleration, Lessee shall immediately pay Lessor, as and for final liquidated damages and in lieu of all current liquidated damages on account of such Lease Event of Default beyond the date of such acceleration (it being agreed that it would be impossible accurately to determine actual damages) an amount equal to the sum of (a) all Basic Rent (assuming interest at a rate per annum equal to the Overdue Rate), as applicable, due from the date of such acceleration until the end of the Term, plus (b) the Maximum Residual Guarantee Amount that would be payable under Section 21.1(c) assuming the proceeds of the sale pursuant to such Section 21.1(c) are equal to zero, which sum is then discounted to present value at a rate equal to the rate then being paid on United States treasury securities with maturities corresponding to the then remaining Term. Following payment of such amount by Lessee, Lessee will be permitted to stay in possession of the Property for the remainder of the Term, 18 subject to the terms and conditions of this Lease, including the obligation to pay Supplemental Rent, provided that no further Lease Event of Default shall occur and be continuing, following which Lessor shall have all the rights and remedies set forth in this Section 17 (but not including those set forth in this Section 17.3). If any statute or rule of law shall limit the amount of such final liquidated damages to less than the amount agreed upon, Lessor shall be entitled to the maximum amount allowable under such statute or rule of law. 17.4 Waiver of Certain Rights. If this Lease shall be terminated pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law, (a) any notice of re-entry or the institution of legal proceedings to obtain re- entry or possession; (b) any right of redemption, re-entry or repossession; (c) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt; and (d) any other rights which might otherwise limit or modify any of Lessor's rights or remedies under this Section 17. 17.5 Assignment of Rights Under Contracts. If a Lease Event of Default shall have occurred and be continuing, and whether or not this Lease shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's demand immediately assign, transfer and set over to Lessor all of Lessee's right, title and interest in and to each agreement executed by Lessee in connection with the construction, renovation, development, use or operation of the Property (including all right, title and interest of Lessee with respect to all warranty, performance, service and indemnity provisions), as and to the extent that the same relate to the construction renovation, and operation of the Property. 17.6 Remedies Cumulative. The remedies herein provided shall be cumulative and in addition to (and not in limitation of) any other remedies available at law, equity or otherwise including any mortgage foreclosure remedies contained in the Memorandum of Lease. 17.7 Covenant Defaults. (a) The occurrence of any event which would give rise to a Lease Default or Lease Event of Default pursuant to Section 17.1(d) for the failure by the Lessee to observe or perform any term, covenant or condition of Lessee under this Lease or the Participation Agreement relating to a specific Property (a "Covenant Default") shall not be deemed to be a Lease Default or a Lease Event of Default so long as the following conditions shall be satisfied: (i) such Covenant Default does not relate to the breach by the Lessee of any of its obligations under this Lease or the other Operative Agreements with respect to any environmental matters or Environmental Claims; (ii) such Covenant Default shall not have a Material Adverse Effect; (iii) there is no material risk that such Covenant Default will cause any lien (other than a Permitted Exception) to attach to a Property or subject the Lessor or any Lender to any criminal liability; 19 (iv) there shall not at any time exist Covenant Defaults relating to Properties which have an aggregate Property Cost in excess of the lesser of (a) 10% of the Property Costs of all of the Properties and (b) $7,500,000 and (v) the Lessee shall have delivered to Lessor an Officer's Certificate stating that, in reasonable, good faith judgment of Lessee, (a) the cost to remediate all such Covenant Defaults will not exceed $3,000,000 and (b) the costs to remediate any Covenant Default on a specific Property will not exceed 10% of the Property Cost of such Property. (b) If (i) each of the foregoing conditions set forth in Section 17.7(a) shall not be satisfied or (ii) such Covenant Default shall not be cured prior to the date which is twelve months prior to the Maturity Date, a Lease Event of Default shall be deemed to have occurred. SECTION 18. LESSOR'S RIGHT TO CURE 18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without waiving or releasing any obligation or Lease Event of Default, may (but shall be under no obligation to) remedy any Lease Event of Default for the account and at the sole cost and expense of Lessee, including the failure by Lessee to maintain any insurance required by Section 14, and may, to the fullest extent permitted by law, and notwithstanding any right of quiet enjoyment in favor of Lessee, enter upon any Property for such purpose and take all such action thereon as may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All out-of-pocket costs and expenses so incurred (including the fees and expenses of counsel), together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid by Lessor, shall be paid by Lessee to Lessor on demand as Supplemental Rent. SECTION 19. LEASE TERMINATION 19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise of Purchase Option. In connection with any termination of this Lease with respect to any Property pursuant to the terms of Section 16.2, or in connection with Lessee's exercise of its Purchase Option or Maturity Date Purchase Option, upon the date on which this Lease is to terminate with respect to the applicable Property or upon the Expiration Date with respect to the applicable Property, and upon tender by Lessee of the amounts set forth in Section 16.2(b), 20.1 or 20.2, as applicable: (a) Lessor shall execute and deliver to Lessee (or to Lessee's designee) at Lessee's cost and expense an assignment of Lessor's entire interest in the applicable Properties, in each case in recordable form and otherwise in conformity with local custom and free and clear of the Lien of the applicable Mortgage and any Lessor Liens; and (b) The applicable Property shall be conveyed to Lessee "AS IS" and in then present physical condition. 20 19.2 Aggregate Tranche A Percentage. Notwithstanding any other provision of this Lease or the other Operative Agreements, (i) the Lessee shall not be permitted to terminate this Lease with respect to a Property pursuant to Section 16 or exercise its Purchase Option with respect to a Property pursuant to Section 20.1 and (ii) Lessee shall not permit a Property to be sold pursuant to Section 21.1(b) and Lessor shall not be obligated to accept a bid and sell a Property pursuant to Section 21.1(b) if, in the case of either clause (i) or (ii) above, the Aggregate Tranche A Percentage, after giving effect to the termination of the Lease with respect to such Property, would be less than 82.50%. SECTION 20. PURCHASE OPTION 20.1 Purchase Option. At any time prior to the commencement of the Marketing Period and provided that neither the Agent nor any Lender has commenced foreclosure proceedings or other proceedings initiating a sale of a Property under any of the Mortgages, Lessee shall have the option (exercisable by giving Lessor irrevocable written notice (the "Purchase Notice") of Lessee's election to exercise such option not less than ten (10) days prior to the date of purchase pursuant to such option) to purchase one or more of the Properties on the date specified in such Purchase Notice at a price equal to the Termination Value (the "Purchase Option Price") (which the parties do not intend to be a "bargain" purchase price) of such Property. If Lessee exercises its option to purchase one or more of the Properties pursuant to this Section 20.1 (the "Purchase Option"), Lessor shall transfer to Lessee or Lessee's designee all of Lessor's right, title and interest in and to such Property as of the date specified in the Purchase Notice upon receipt of the Purchase Option Price and all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, in accordance with Section 19.1. 20.2 Maturity Date Purchase Option. Not less than twelve months prior to the Maturity Date, Lessee may give Lessor and Agent irrevocable written notice (the "Maturity Date Election Notice") that Lessee is electing to exercise the Maturity Date Purchase Option. If Lessee does not give a Maturity Date Election Notice on or before the date twelve months prior to the Maturity Date, then Lessee shall be obligated to remarket the Properties pursuant to Section 21.1. If Lessee has elected to exercise the Maturity Date Purchase Option, then on the Maturity Date Lessee shall pay to Lessor an amount equal to the Termination Value for all the Properties (which the parties do not intend to be a "bargain" purchase price) and, upon receipt of such amount plus all Rent and other amounts then due and payable under this Lease and any other Operative Agreement, Lessor shall transfer to Lessee or Lessee's designee all of Lessor's right, title and interest in and to the Properties in accordance with Section 19.1. 20.3 Obligation to Purchase All Properties . If on the date which is twelve months prior to the Maturity Date the then Termination Value of all the Properties (including any Substitute Property) is less than the Maximum Purchase Option Amount, then the Lessee shall be required to exercise its Purchase Option on the Maturity Date with respect to all remaining Properties. SECTION 21. SALE OF PROPERTY 21 21.1 Sale Procedure. (a) With respect to each Property, at the expiration of the Term, unless Lessee shall have elected to purchase such Property and has paid the Purchase Option Price with respect thereto, or otherwise terminated this Lease with respect thereto and paid the Termination Value with respect thereto, Lessee shall (i) pay to Lessor the Maximum Residual Guarantee Amount for such Property, and (ii) sell such Property to one or more third parties for cash in accordance with Section 21.1(b). (b) During the Marketing Period, Lessee, as nonexclusive broker for Lessor, shall use its best efforts to obtain bids for the cash purchase of each Property being sold for the highest price available, shall notify Lessor promptly of the name and address of each prospective purchaser and the cash price which each prospective purchaser shall have offered to pay for such Property and shall provide Lessor with such additional information about the bids and the bid solicitation procedure as Lessor may request from time to time. Lessor may reject any and all bids and may assume sole responsibility for obtaining bids by giving Lessee written notice to that effect; provided, however, that notwithstanding the foregoing, Lessor may not reject a bid if such bid is greater than or equal to the sum of the Limited Recourse Amount and all costs and expenses referred to in Section 21.1(i) and is a bona fide offer by a third party purchaser who is not an Affiliate of Lessee. If the price which a prospective purchaser shall have offered to pay for all or any of the Properties is less than the sum of the Limited Recourse Amount and all costs and expenses referred to in Section 21.1(i), Lessor may elect to retain the Property by giving Lessee at least two Business Days' prior written notice of Lessor's election to retain the Property, and upon receipt of such notice, Lessee shall surrender the Property to Lessor pursuant to Section 10.1(c). Unless Lessor shall have elected to retain the Property pursuant to the preceding sentence, Lessor shall sell the Property free of any Lessor Liens attributable to it, without recourse or warranty, for cash to the purchaser or purchasers identified by Lessee or Lessor, as the case may be. Lessee shall surrender the Property so sold to each purchaser in the condition specified in Section 10.1. (c) On each date during the Marketing Period on which a Property is sold pursuant to Section 21.1(b), and on the Maturity Date with respect to any Properties remaining unsold, Lessee shall pay to Lessor the Maximum Residual Guarantee Amount for such Property. 21.2 Application of Proceeds of Sale. Lessor shall apply the proceeds of sale of each Property in the following order of priority: (i) FIRST, to pay or to reimburse Lessor for the payment of all reasonable costs and expenses incurred by Lessor in connection with the sale; and (ii) SECOND, the balance shall be paid to the Agent to be applied pursuant to the provisions of the Credit Agreement. 21.3 Indemnity for Excessive Wear. If the proceeds of the sale described in Section 21.1(b) with respect to any Property, less all expenses incurred by Lessor in connection with such sale, shall be less than the Limited Recourse Amount for such Property at the time of such sale and if it shall have been determined (pursuant to the Appraisal Procedure) that the Fair Market Sales Value of such Property shall have been impaired by greater than expected wear and tear during the Term, Lessee shall pay to Lessor within ten (10) days after receipt of Lessor's 22 written statement (i) the amount of such excess wear and tear determined by the Appraisal Procedure or (ii) the amount of the Net Sale Proceeds Shortfall, whichever amount is less. 21.4 Appraisal Procedure. For determining the Fair Market Sales Value of a Property or any other amount which may, pursuant to any provision of any Operative Agreement, be determined by an appraisal procedure, Lessor and Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor and Lessee shall endeavor to reach a mutual agreement as to such amount for a period of ten (10) days from commencement of the Appraisal Procedure, and if they cannot agree within ten (10) days, then two qualified appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree thereupon, but if either party shall fail to choose an appraiser within twenty (20) days after notice from the other party of the selection of its appraiser, then the appraisal by such appointed appraiser shall be binding on Lessee and Lessor. If the two appraisers cannot agree within twenty (20) days after both shall have been appointed, then a third appraiser shall be selected by the two appraisers or, failing agreement as to such third appraiser within thirty (30) days after both shall have been appointed, by the American Arbitration Association. The decisions of the three appraisers shall be given within twenty (20) days of the appointment of the third appraiser and the decision of the appraiser most different from the average of the other two shall be discarded and such average shall be binding on Lessor and Lessee; provided that if the highest appraisal and the lowest appraisal are equidistant from the third appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees and expenses of all of the appraisers shall be paid by the Lessee. 21.5 Certain Obligations Continue. During the Marketing Period, the obligation of Lessee to pay Rent with respect to each Property (including the installment of Basic Rent due on the Maturity Date) shall continue undiminished until payment in full to Lessor of the sale proceeds, the Maximum Residual Guarantee Amount, if any, the amount due under Section 21.3, if any, and all other amounts due to Lessor with respect to the Property. Lessor shall have the right, but shall be under no duty, to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise to take action in connection with any such sale, other than as expressly provided in this Section 21. SECTION 22. HOLDING OVER 22.1 Holding Over. If Lessee shall for any reason remain in possession of a Property after the expiration or earlier termination of this Lease (unless the Property is conveyed to Lessee), such possession shall be as a tenancy at sufferance during which time Lessee shall continue to pay Supplemental Rent that would be payable by Lessee hereunder were the Lease then in full force and effect with respect to such Property and Lessee shall continue to pay Basic Rent at an annual rate equal to the rate payable hereunder immediately preceding such expiration or earlier termination; provided, however, that from and after the sixtieth (60th) day Lessee shall remain in possession of such Property after such expiration or earlier termination, Lessee shall pay Basic Rent at an annual rate equal to two hundred percent (200%) of the Basic Rent payable hereunder immediately preceding such expiration or earlier termination. Such Basic Rent shall be payable from time to time upon demand by Lessor. During any period of tenancy at sufferance, Lessee shall, subject to the second preceding sentence, be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights 23 hereunder other than the right, to the extent given by law to tenants at sufferance, to continue its occupancy and use of the Property. Nothing contained in this Section 22 shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease as to any Property and nothing contained herein shall be read or construed as preventing Lessor from maintaining a suit for possession of any Property or exercising any other remedy available to Lessor at law or in equity. SECTION 23. RISK OF LOSS 23.1 Risk of Loss. The risk of loss of or decrease in the enjoyment and beneficial use of the Property as a result of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is assumed by Lessee, and Lessor shall in no event be answerable or accountable therefor. SECTION 24. SUBLETTING AND ASSIGNMENT 24.1 Subletting and Assignment. Lessee may not assign this Lease or any of its rights or obligations hereunder in whole or in part other than to any Guarantor, provided that notwithstanding any such assignment, Lessee shall not be released and shall remain obligated for all of its obligations under this Lease and the other Operative Agreements. Lessee may, without the consent of Lessor, sublease the Property or a portion thereof to any Person. No sublease or other relinquishment of possession of the Property shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder and Lessee shall remain directly and primarily liable under this Lease as to the Property, or any portion thereof, so sublet. Any sublease of the Property shall be made subject to and subordinate to this Lease and to the rights of Lessor hereunder, and shall expressly provide for the surrender of the Property after a Lease Event of Default hereunder and such sublease shall expressly provide for termination at or prior to the Expiration Date. 24.2 Subleases. Promptly following the execution and delivery of any sublease permitted by this Section 24, Lessee shall deliver a copy of such executed sublease to Lessor and the Agent. SECTION 25. ESTOPPEL CERTIFICATES 25.1 Estoppel Certificates. At any time and from time to time upon not less than twenty (20) days' prior request by Lessor, the Lessee shall furnish to the Lessor a certificate signed by an individual having the office of vice president or higher in the Certifying Party certifying that this Lease is in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications); the dates to which the Basic Rent and Supplemental Rent have been paid; to the best knowledge of the signer of such certificate, whether or not the Lessor is in default under any of its obligations hereunder (and, if so, the nature of such alleged default); and such other matters under this Lease as the Lessor may reasonably request. Any such certificate furnished pursuant to this Section 25 may be relied 24 upon by the Lessor, and any existing or prospective mortgagee, purchaser or lender, and any accountant or auditor, of, from or to the Lessor (or any Affiliate thereof). SECTION 26. NO WAIVER 26.1 No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy upon a default hereunder, and no acceptance of full or partial payment of Rent during the continuance of any such default, shall constitute a waiver of any such default or of any such term. To the fullest extent permitted by law, no waiver of any default shall affect or alter this Lease, and this Lease shall continue in full force and effect with respect to any other then existing or subsequent default. SECTION 27. ACCEPTANCE OF SURRENDER 27.1 Acceptance of Surrender. Except as otherwise expressly provided in this Lease, no surrender to Lessor of this Lease or of all or any portion of the Property or of any interest therein shall be valid or effective unless agreed to and accepted in writing by Lessor and, prior to the payment or performance of all obligations under the Credit Documents, the Agent, and no act by Lessor or the Agent or any representative or agent of Lessor or the Agent, other than a written acceptance, shall constitute an acceptance of any such surrender. SECTION 28. NO MERGER OF TITLE 28.1 No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly, in whole or in part, (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate, (b) the fee estate in the Property, except as may expressly be stated in a written instrument duly executed and delivered by the appropriate Person, or (c) a beneficial interest in Lessor. SECTION 29. NOTICES 29.1 Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by nationally recognized courier service and any such notice shall become effective one Business Day after delivery to such nationally recognized courier service specifying overnight delivery and shall be directed to the address of such Person as indicated: If to Lessee: Living Centers Holding Company 25 15415 Katy Freeway, Suite 800 Houston, Texas 77094 Attn: Mr. Boyd Gentry Telecopy No.: (713) 578-4735 If to Lessor: FBTC Leasing Corp. Two World Trade Center New York, New York 10048 Attn: Mr. Carl Marcantonio Telecopy No.: (212) 321-9408 with a copy to the Agent: The Chase Manhattan Bank 270 Park Avenue New York, New York Attn: Global Lease Finance Telecopy No.: (212) 270-2132 or such additional parties and/or other address as such party may hereafter designate. SECTION 30. MISCELLANEOUS 30.1 Miscellaneous. Anything contained in this Lease to the contrary notwithstanding, all claims against and liabilities of Lessee or Lessor arising from events commencing prior to the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. If any term or provision of this Lease or any application thereof shall be declared invalid or unenforceable, the remainder of this Lease and any other application of such term or provision shall not be affected thereby. If any right or option of Lessee provided in this Lease, including any right or option described in Sections 15, 16, 22 or 21, would, in the absence of the limitation imposed by this sentence, be invalid or unenforceable as being in violation of the rule against perpetuities or any other rule of law relating to the vesting of an interest in or the suspension of the power of alienation of property, then such right or option shall be exercisable only during the period which shall end twenty-one (21) years after the date of death of the last survivor of the descendants of Franklin D. Roosevelt, the former President of the United States, Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the founder of the Standard Oil Company, known to be alive on the date of the execution and delivery of this Lease. 30.2 Amendments and Modifications. Neither this Lease nor any provision hereof may be amended, waived, discharged or terminated except by an instrument in writing signed by Lessor and Lessee. 26 30.3 Successors and Assigns. All the terms and provisions of this Lease shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 30.4 Headings and Table of Contents. The headings and table of contents in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 30.5 Counterparts. This Lease may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 30.6 GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS 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, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS LOCATED. 30.7 Limitations on Recourse. The parties hereto agree that the Lessor shall have no personal liability whatsoever to the Lessee or its respective successors and assigns for any claim based on or in respect of this Lease or any of the other Operative Agreements or arising in any way from the transactions contemplated hereby or thereby; provided, however, that the Lessor shall be personally liable (a) for its own willful misconduct or gross negligence, (b) for liabilities that result from its breach of any of its covenants, agreements or obligations set forth in or from any misrepresentation of Lessor in any of the Operative Agreements, (c) for any Tax based on or measured by any fees, commission or compensation received by it for acting as the Lessor as contemplated by the Operative Agreements or (d) as the other Operative Agreements expressly provide that the Lessor shall have personal liability. It is understood and agreed that, except as provided in the preceding proviso: (i) the Lessor shall have no personal liability under any of the Operative Agreements as a result of acting pursuant to and consistent with any of the Operative Agreements; (ii) all obligations of the Lessor to the Lessee are solely nonrecourse obligations and shall be enforceable solely against the interest of the Lessor in the Properties; and (iii) all such personal liability of the Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Agreements by the Lessor. 30.8 Memorandum of Lease. This Lease shall not be recorded, but Lessor and Lessee shall, upon the execution and delivery of each Lease Supplement, execute and deliver a memorandum of this Lease (a "Memorandum of Lease") substantially in the form of Exhibit B and otherwise in form suitable for recording under the laws of the jurisdiction in which the Property covered by such Memorandum of Lease is located, which memorandum shall be recorded at Lessee's sole cost and expense. 27 30.9 Priority. On and prior to the Maturity Date, the Mortgages shall be subject and subordinate to this Lease and following the Maturity Date, the Mortgages, at the sole election of the Agent, shall be senior to this Lease without any further act by any Person. SECTION 31. 31.1 Ground Lease. During the Basic Term, Lessee shall observe and perform all of the obligations of Lessor under any Ground Lease (including the payment of all rent and other amounts thereunder) and, in connection therewith, shall, prior to the occurrence and continuation of a Lease Event of Default, have the benefit of all of Lessor's rights as lessee under any Ground Lease. 28 IN WITNESS WHEREOF, the parties have caused this Lease be duly executed and delivered as of the date first above written. LIVING CENTERS HOLDING COMPANY By: /s/ Boyd P. Gentry ---------------------------- Name: Boyd P. Gentry Title: Vice President FBTC LEASING CORP. By: ____________________________________ Name: Title: 29 Receipt of this original counterpart of the foregoing Lease is hereby acknowledged on this ____ day of October, 1996. THE CHASE MANHATTAN BANK, as the Agent for the Lenders By: ____________________________________ Name: Title: 1 Exhibit A --------- LEASE SUPPLEMENT NO. __ THIS LEASE SUPPLEMENT NO. __ (this "Lease Supplement") dated as of _____________, between FBTC LEASING CORP., a New York corporation, as lessor (the "Lessor"), and LIVING CENTERS HOLDING COMPANY, a Delaware corporation, as lessee (the "Lessee"). WHEREAS, the Lessor is the owner of the Property described on Schedule I hereto (the "Leased Property") and wishes to lease the same to the Lessee; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions; Rules of Usage. For purposes of this Lease Supplement, capitalized terms used herein and not otherwise herein shall have the meanings assigned to them in Annex A to the Participation Agreement, dated as of October ___, 1996, among the Lessee, the Lessor, the Agent, and the Lenders. 2. The Properties. Attached hereto as Schedule I is the description of the Leased Property. Effective upon the execution and delivery of this Lease Supplement by the Lessor and the Lessee, the Leased Property shall be subject to the terms and provisions of the Lease. 3. Ratification. Except as specifically modified hereby, the terms and provisions of the Lease are hereby ratified and confirmed and remain in full force and effect. 4. Original Lease Supplement. The single executed original of this Lease Supplement marked "THIS COUNTERPART IS THE ORIGINAL EXECUTED COUNTERPART" on the signature page thereof and containing the receipt of the Agent therefor on or following the signature page thereof shall be the Original Executed Counterpart of this Lease Supplement (the "Original Executed Counterpart"). To the extent that this Lease Supplement constitutes chattel paper, as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction, no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the Original Executed Counterpart. 5. GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN ALL RESPECTS 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, EXCEPT AS TO 2 MATTERS RELATING TO THE CREATION, PERFECTION AND ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE IN WHICH THE APPLICABLE PROPERTY IS LOCATED. 6. Counterpart Execution. This Lease Supplement may be executed in any number of counterparts and by each of the parties hereto in separate counterparts, all such counterparts together constituting but one and the same instrument. 7. Recordation. The Lessor and the Lessee agree that a memorandum of this Lease Supplement No. __ shall be recorded at the Lessee's sole cost and expense as required by the Lease. 3 IN WITNESS WHEREOF, the parties have caused this Lease Supplement No.__ be duly executed and delivered as of the date first above written. LIVING CENTERS HOLDING COMPANY By: ____________________________________ Name: Title: FBTC LEASING CORP. By: ______________________________ Name: Title: 4 Receipt of this original counterpart of the foregoing Lease is hereby acknowledged on this ____ day of _________, ____. THE CHASE MANHATTAN BANK, as the Agent for the Lenders By: ____________________________________ Name: Title: EX-10.53 41 AMENDMENT TO LEASE EXHIBIT 10.53 AMENDMENT TO LEASE AMENDMENT TO LEASE dated as of November 4, 1997 (this "Amendment") between FBTC LEASING CORP., a New York corporation (the "Lessor") and LIVING CENTERS HOLDING COMPANY, a Delaware corporation (the "Lessee"). Background A. The Lessor and the Lessee are parties to that certain Lease (as amended, supplemented or otherwise modified from time to time, the "Lease") dated as of October 10, 1996. B. The Lessor and the Lessee have agreed to amend the Lease to modify certain terms and conditions all as hereinafter set forth. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the Lessor and the Lessee hereby agree for themselves, their successors and assigns as follows: 1. Amendments. (a) Section 1.1 to the Lease is hereby deleted and the following inserted in its place: "1.1 Defined Terms. Capitalized terms used but not otherwise defined in this Agreement shall have the meanings set forth in Annex A to the Amended and Restated Participation Agreement dated as of November 4, 1997 among Lessor, Lessee, Agent and the Lenders (as such parties are defined in such Annex A)." (b) Section 17.1(d) to the Lease is hereby deleted and the following inserted in its place: "(d) (i) subject to the limitations contained in Section 17.7 as to the Lessee only, Lessee or any Guarantor shall fail to observe or perform any term, covenant or condition of Lessee or such Guarantor, respectively, under this Lease, the Participation Agreement, the Guarantee, the Completion Guarantee or any other Operative Agreement to which it is a party (other than those set forth in Section 17.1(a), (b) or (c) hereof) and such default shall remain unremedied for a period ending after the earlier of 30 days from the occurrence of such default and the Maturity Date, provided that such period shall be extended (up to a maximum period of 180 days but in no event beyond the Maturity Date) as to defaults which cannot be cured with the payment of money but are curable though not reasonably capable of cure within such period, provided that Lessee has commenced to 2 cure such default prior to the end of such period and prosecutes such cure to completion or (ii) any representation or warranty by Lessee or any Guarantor or Completion Guarantor, respectively, set forth in this Lease, the Guarantee, the Completion Guaranty or in any other Operative Agreement or in any document entered into in connection herewith or therewith or in any document, certificate or financial or other statement delivered in connection herewith or therewith shall be false or inaccurate in any material way; or" (c) Section 17.2 to the Lease is hereby amended by deleting paragraph (a) and replacing it with the following in its place: "(a) the aggregate Termination Value of all of the Properties, plus" 2. Lease Supplements. This Amendment shall operate as an amendment to the Lease as supplemented by each Lease Supplement executed on or prior to the date hereof. 3. Counterparts. This Amendment may be executed in separate counterparts and such counterparts, taken together, shall be deemed to constitute one and the same instrument. 3 IN WITNESS WHEREOF, this Amendment has been duly executed by the Lessor and the Lessee on the date first above written. FBTC LEASING CORP. By:_____________________________ Name: Title: LIVING CENTERS HOLDING COMPANY By:____________________________ Name: Title: EX-10.59 42 TERMINATION AGREEMENT EXHIBIT 10.59 AGREEMENT RESPECTING TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIP THIS AGREEMENT Regarding Termination of Employee-Employer Relationship (this "Agreement") is made as of the 6th day of November, 1997, by and between PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") (as used herein, the term "Company" includes Paragon and all its Affiliates (as defined below), including, without limitation, GranCare, Inc., a Delaware corporation ("GranCare"), and all its subsidiaries), and KEITH KREIN, an individual resident of the State of Texas (the "Employee"). STATEMENT OF FACTS Pursuant to the terms of an employment agreement executed by the Employee on December 22, 1995 and by Living Centers of America, Inc. ("LCA"), and LC Management Company (the "Employment Agreement") on December 27, 1995, Employee has served in an executive capacity with LCA, a predecessor to Paragon. The Employment Agreement has been modified by the Board of Directors of LCA and through other oral understandings. In light of the fact that the Company and the Employee have agreed that the Employee's employment with the Company terminated as of November 4, 1997, the Company and Employee wish to clarify the terms of the Employment Agreement. In terminating the employee-employer relationship between the Company and the Employee, the Company recognizes that the Employee possesses valuable information and skills, which if used in competition with the Company would have a significant and detrimental effect on the Company's business and prospects. The Company also owns or has access or rights to certain confidential and proprietary information, which information is vital to the success of the Company. The Company wishes to protect and maintain this information, which has been developed by or which has become known to Employee during Employee's employment by the Company and which, if disclosed to the Company's competitors or if used in a competitive way, would be detrimental to the Company's business. Furthermore, the Company employs individuals and engages other employees and consultants in which it has invested or will invest substantial time and money in training in ways to make the Company competitive and successful, and such employees and consultants possess important skills and knowledge which have been obtained by them during their employment or engagement, and the Company wishes to protect and maintain its relationships with its employees and consultants in order to further its business. In recognition of these facts, the Company and the Employee wish to clarify and supercede the terms of the Employment Agreement to better reflect the parties understanding of their relative rights and duties with respect to their post-employment relationship. STATEMENT OF TERMS In consideration of the covenants and undertakings and the releases contained in this Agreement, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Employee and the Company agree as follows: 1. SEPARATION. Employee acknowledges that his last day of employment with the Company was November 4, 1997. Employee's employment records will show that he resigned from the Company. 2. CONSIDERATION. (a) In consideration of the termination of the Employment Agreement and in consideration of Employee's past services to the Company, the Company will pay to Employee the following: (i) The sum of $430,000.00, payable in one lump sum immediately following the execution of this Agreement; (ii) The payment of $22,000.00 in lieu of Company provided medical and life insurance benefit continuation in one lump sum immediately upon the execution of this Agreement; (iii) Employee may retain medical journals, periodicals and textbooks in his office; (iv) All stock options granted to Employee under the Living Centers of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), will be cashed out as provided in the merger agreement among LCA, GranCare, Inc., and Apollo Advisors, L.P., (v) If the Employee is liable for the payment of any excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or a successor or similar provisions, with respect to any payments for benefits received or to be received from the Company, whether provided under this Agreement or otherwise, the Company shall pay the Employee an amount (the "Special Reimbursement") which, after payment by the Employee, (or on the Employee's behalf) of any federal, state and local taxes applicable thereto, including, without limitation, any further excise tax under such Section 4999 of the Code, on, with respect to or resulting from the Special Reimbursement, equals the amount of the Basic Excise Tax. The Employee shall not take any position inconsistent with the Company's treatment of any payment to the Employee pursuant to this Agreement or otherwise from the Company, its affiliates, predecessors and successors, for purposes of the excise tax imposed pursuant to Code Section 4999 or a successor or similar provision. In the event 2 that the Employee receives actual notice from the Internal Revenue Service of an audit, deficiency, assessment or other challenge (a "Dispute") relating to the treatment under Code Section 280G or 4999 of the amounts paid to the Employee pursuant to this Agreement or any other payments he receives from the Company, its predecessors or successors, the Employee shall promptly notify the Company of such Dispute. The Company shall promptly appoint qualified legal and/or accounting representatives to represent the Employee in connection with the Dispute and shall pay their fees and expenses, and shall have the right to control all matters with respect to the Dispute. Notwithstanding the foregoing, the Company reserves the right to settle the Dispute at its discretion. The Employee covenants and agrees that he shall pay the amount of the Special Reimbursement to the appropriate taxing authorities as soon a possible following his receipt of the Special Reimbursement payment from the Company; and (vi) THE COMPANY AGREES TO DEFEND THE EMPLOYEE WITH RESPECT TO THE DISPUTE AND TO INDEMNIFY AND HOLD THE EMPLOYEE HARMLESS FROM ANY AND ALL TAXES, INTEREST AND PENALTIES THAT THE EMPLOYEE MAY INCUR IN CONNECTION WITH ANY DISPUTE THAT IS DIRECTLY RELATED TO THE PAYMENT (OR NONPAYMENT) OF A SPECIAL REIMBURSEMENT AND/OR THE BASIC EXCISE TAX, IF THE EMPLOYEE'S POSITION IN SUCH DISPUTE IS CONSISTENT WITH THE COMPANY'S TREATMENT OF THE PAYMENTS MADE PURSUANT TO THIS AGREEMENT. SUCH INDEMNIFICATION SHALL APPLY IN THE CIRCUMSTANCES DESCRIBED ABOVE EVEN IF SUCH ACTION OR INACTION IS CONSIDERED A NEGLIGENT ACT OR OMISSION OF THE EMPLOYEE. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, IN NO EVENT SHALL THE COMPANY INDEMNIFY THE EMPLOYEE FOR ANY TAXES, PENALTIES OR INTEREST WHICH ARE ATTRIBUTABLE TO THE BREACH BY THE EMPLOYEE OF THE COVENANT CONTAINED IN THE LAST SENTENCE OF PARAGRAPH (V) HEREOF REGARDING THE PROMPT PAYMENT OF THE AMOUNT OF THE SPECIAL REIMBURSEMENT PAYMENT TO APPROPRIATE TAXING AUTHORITIES. (b) In consideration for the covenant contained in Sections 3 and 17 hereof, the Company will pay to Employee the following amounts: $240,000.00 immediately after the execution of the Agreement and $50,000.00 on November 1, 1998. 3. RESTRICTIVE COVENANTS. (a) Agreement Not to Solicit Employees or Consultants. For a period ------------------------------------------------- of two (2) years following the date hereof, Employee shall not, either directly or indirectly, on Employee's own behalf or on behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, any person employed by the Company, whether or not such 3 employee is a full-time or temporary employee of the Company and whether or not such employment is pursuant to a written agreement for a determined period of time or at will, or any consultant engaged by the Company. (b) Noncompetition. During the period of one hundred eighty (180) -------------- days following the November 4, 1997, Employee shall not, directly or indirectly, undertake, engage in or perform for any Competing Business in the Territory any of the same types of services which have been performed by Employee on behalf of the Company. The provisions hereof shall not prevent Employee from owning as much as three percent (3%) of the issued and outstanding publicly traded shares of any Competing Business. (c) Restrictions on Use and Disclosure of Company Information. --------------------------------------------------------- Employee agrees that, with respect to Confidential Information, for a period of one (1) year following the date hereof and, with respect to Trade Secrets, for so long as such Company Information qualifies as a trade secret under applicable law: (i) Employee will receive and hold all the Company Information in trust and in strictest confidence; (ii) Employee will protect the Company Information from disclosure and will in no event take any action causing any of the Company Information to lose its character as Company Information, or fail to take the action necessary in order to prevent any Company Information from losing its status as Company Information; and (iii) Employee will not, directly or indirectly, use, publish, disseminate or otherwise disclose any Company Information to any third party without the prior written consent of the Company, which may be withheld in the Company's absolute discretion. (d) Return of Materials. All Materials are the property of the ------------------- Company. Employee will not remove from the Company's premises or copy or reproduce any Materials (except as Employee's employment by the Company shall require), and Employee will leave with the Company, or immediately return to the Company, all Materials or copies or reproductions thereof in Employee's possession, power or control. (e) Copyrights. ---------- (i) Employee agrees that any Works created by Employee in the course of Employee's duties as an employee of the Company are subject to the "Work for Hire" provisions contained in Sections 101 and 201 of the United States Copyright Law, Title 17 of the United States Code. All right, title and interest to copyrights in all Works that have been or will be prepared by Employee within the scope of Employee's employment with the Company will be the property of the Company. Employee acknowledges and agrees that, to the extent the provisions of Title 17 of 4 the United States Code do not vest in the Company the copyrights to any Works, Employee hereby assigns to the Company all right, title and interest to copyrights which Employee may have in the Works. (ii) Employee must disclose to the Company all Works referred to in Section 4(e) and will execute and deliver all applications, registrations, and documents relating to the copyrights to the Works and will provide assistance to secure the Company's title to the copyrights in the Works. The Company will be responsible for all expenses incurred in connection with the registration of all such copyrights that it decides to register. (iii) Employee has no ownership rights in any Works. (f) Definitions. As used in this Section 3, the following terms shall ----------- have the following meanings: (i) "Affiliate" means any business entity that controls, is --------- controlled by, or is under common control with Paragon. (ii) "Business of the Company" means the business of owning ----------------------- and/or operating skilled nursing facilities, an institutional pharmacy business and the provisions of management services to physician practices. (iii) "Company Information" means Confidential Information and ------------------- Trade Secrets. (iv) "Competing Business" means the skilled nursing facility ------------------ business, institutional pharmacy business or the provision of management services to physician practices business; provided, however, the activities of American Geriatric Management Services, Inc., which is seventy-five percent (75%) owned by a subsidiary of the Company shall not be deemed to be a Competing Business. (v) "Confidential Information" means confidential data and ------------------------ confidential information relating to the business of the Company (which does not rise to the status of a trade secret under applicable law) which is or has been disclosed to Employee or of which Employee became aware as a consequence of or through Employee's employment with the Company and which has value to the Company and is not generally known to its competitors and which is designated by the Company as confidential. Confidential Information shall not include any data or information that (i) has been voluntarily disclosed to the general public by the Company, (ii) has been independently developed and disclosed to the general public by others, or (iii) otherwise enters the public domain through lawful means. 5 (vi) "Materials" means all documents or tangible or intangible --------- materials, including computer data, provided to or obtained by Employee during the course of employment by the Company which contain the Company Information. (vii) "Territory" means any state in the United States of --------- America where the Company has operations. (viii) "Trade Secrets" means information of the Company, without ------------- regard to form, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product or service plans or lists of actual or potential customers or suppliers which is not commonly known by or available to the public and which information (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (ix) "Work" means a copyrightable work of authorship, including ---- without limitation, any technical descriptions for products, user's guides, illustrations, advertising materials, computer programs (including the contents of read only memories) and any contribution to such materials. (g) Remedies. Employee agrees that the covenants contained in -------- Subsections (a), (b), (c), (d) and (e) of this Section are of the essence of this Agreement; that each of such covenants is reasonable and necessary to protect and preserve the business, interests and properties of the Company, and that irreparable loss and damage will be suffered by the Company should Employee breach any of such covenants. Therefore, Employee agrees and consents that, in addition to all other remedies provided at law or in equity, the Company shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of such covenants, and Employee shall be obligated to return to the Company that portion of the consideration provided in Section 4 which is attributable to the covenant which was breached and which is prorated based on the period during which such breach was in effect. The existence of any claim, demand, action or cause of action of Employee against the Company shall not constitute a defense to the enforcement by the Company of any of the covenants or agreements herein. No action or monetary penalty (other than injunctive relief or a temporary restraining order) may be taken against the Employee, however, until the Company has provided the Employee with notice of breach of such provisions and a five (5) day opportunity to cure such alledged breach. 4. SEVERABILITY. The parties agree that each of the provisions included in this Agreement is separate, distinct and severable from the other and remaining provisions of this Agreement, and that the invalidity or unenforceability of any Agreement provision shall not affect the validity and enforceability of any other provision or provisions of this Agreement. Further, if 6 any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between such provision and any applicable law or public policy, such provision shall be valid and enforceable to the extent such provision is consistent with such law or public policy. 5. CONSULTING SERVICES. Employee agrees that following the date hereof, other than death or a permanent disability that prevents Employee's cooperation, Employee shall, upon reasonable notice from the Company, (i) furnish such information and give such assistance to the Company in any controversy or matter involving any controversy or actual or potential litigation as may reasonably be requested by the Company, (ii) discuss with the Company's personnel or advisors any events that involved LCA and its subsidiaries during Employee's employment by the Company, and (iii) help the Company in its search for a new Director of Medical Services and to establish the office of Chief Medical Officer. Employee shall not be required to perform more than twenty (20) hours per month in the performance of consulting services hereunder. In consideration for Employee's services pursuant to this Section 5, the Company shall pay to Employee the sum of $100,000.00, payable in four quarterly installments of $25,000 each, with the first installment being payable on or before November 7, 1997 and subsequent installments payable on January 31, 1998, April 30, 1998 and July 31, 1998. The Company shall compensate Employee for all reasonable expenses incurred while so assisting the Company. Employee is not obligated to assist in any controversy or litigation between the Company and Employee. 6. NOVATION AND WAIVER. This Agreement supercedes and replaces the Employment Agreement, as well as any other amendments or modifications thereto, all of which shall be and become null and void as to all parties thereto. The Company shall have no obligation to pay any other consideration to Employee except as provided in this Agreement. 7. FURTHER ACTION. The parties agree to perform all further acts and execute, acknowledge and deliver any documents that may be reasonably necessary, appropriate or desirable to carry out the provisions of this Agreement. 8. NOTICES. Any notice, request, demand, or other communication required to be given hereunder shall be made in writing and shall be deemed to have been fully given if personally delivered or if mail by overnight delivery to the parties at the following addresses, or at such other addresses as shall be given in writing by either party to the other party hereto: If to the Company: Paragon Heath Network, Inc. One Ravinia Drive Suite 1500 Atlanta, Georgia 30346 Attn: Susan Whittle, Esq. 7 With a copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E. Sixteenth Floor Atlanta, Georgia 30303-1740 Attn: Richard Miller, Esq. If to Employee: Keith Krein 963 Enclave Parkway Houston, Texas 77077 9. ASSIGNMENT. This Agreement and the rights and obligations of the Company hereunder may be assigned by the Company and shall inure to the benefit of, shall be binding upon, and shall be enforceable by any such assignee. This Agreement and the rights and obligations of Employee hereunder may not be assigned by Employee. 10. WAIVER. No consent or waiver by a party with respect to any breach or default by the other party hereunder shall be effective unless in writing, and no such waiver or consent shall be deemed or construed to be a consent or waiver with respect to any other breach or default by such party of the same provision or any other provision of this Agreement. Failure on the part of a party to complain of any act or failure to act of the other party or to declare such other party in default shall not be deemed or constitute a waiver of any rights hereunder. 11. GOVERNING LAW. This Agreement shall be governed and construed as to both substantive and procedural matters in accordance with the laws of the State of Texas, without regard to the conflict of laws principles thereof. 12. INTERPRETATION. Should any provision of this Agreement require a judicial interpretation, it is agreed that the judicial body interpreting or construing this Agreement shall not apply the assumption that the terms of this Agreement shall be more strictly construed against one party by reason of the rule of legal construction that an instrument is to be construed more strictly against the party which itself or through its agents prepared the agreement. The parties acknowledge and agree that they and their agents have each participated equally in the negotiations and preparation of this Agreement, and Employee acknowledges that Employee has had the opportunity to consult legal counsel regarding the terms hereof. 13. CONSENT TO JURISDICTION. Each party (i) submits to personal jurisdiction in the State of Texas for the enforcement of this Agreement, and (ii) waives any and all rights under the laws of any state to object to jurisdiction within the State of Texas for the purposes of litigation to enforce this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement shall prevent a party from bringing any action against the other party within any other state or country. Initiating such proceeding or taking such action in any jurisdiction shall not constitute a 8 waiver of the agreement that the laws of the State of Texas shall govern or of the submission made by a party to personal jurisdiction within the State of Texas. 14. HEADINGS. Titles and captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or extend or describe the scope of this Agreement or the intent of any provision contained in this Agreement. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of the parties on the subject matter herein. No amendment or modification of this Agreement shall be valid or binding upon the Company or Employee unless made in writing and signed by the parties hereto. All prior understandings and agreements relating to the subject matter of this Agreement are hereby expressly terminated. 16. NON-ADMISSION. Employee agrees and acknowledges that neither this Agreement nor the Company's offer to enter into this Agreement should be construed as an admission by the Company that it has acted wrongfully towards Employee or anyone else, and that the Company expressly denies any liability to or having engaged in any wrongful acts or omissions against Employee. 17. STATEMENTS REGARDING THE COMPANY. Employee and the Company agree not to make any written or verbal statements in any form concerning the other or as to the Company, its predecessors, Living Centers of America, Inc. and GranCare, Inc., the Employee's employment with the Company and its predecessors, or the termination of his employment with the Company to any person or entity if such statements are injurious or inimical to the best interests of the Company or Employee. Employee acknowledges that he has no knowledge of any actions or inactions by any current or former directors, officers, employees or agents of the Company (or any related entity) which he believes could possibly constitute a basis for a claimed violation of any federal, state or local law, any common law or any rule promulgated by an administrative body which might have jurisdiction over the Company. The Company acknowledges that it has no knowledge of any actions or inactions by the Employee which it believes could possible constitute a basis for a claimed violation of any federal, state or local law, any common law or any rule promulgated by an administrative body which might have jurisdiction over the Employee or the Company. 18. CONFIDENTIALITY. Employee agrees to keep the terms, conditions and fact of this Agreement completely confidential and not to disclose any information concerning this Agreement to any other person, except Employee's immediate family, personal financial advisor, tax advisor and attorney, provided they agree to keep this information confidential. Without limiting the generality of the foregoing, Employee will not respond to or in any way participate in or contribute to any public discussion, notice or publicity concerning or in any way related to the execution of this Agreement or the events (including any negotiations) which led to its execution. In addition, without limiting the generality of the foregoing, Employee specifically agrees not to disclose information regarding this Agreement or the fact of this Agreement to any other current or former employee of the Company. Employee agrees that the disclosure by him of the fact of 9 this Agreement or any of its terms and conditions in violation of the foregoing will constitute a breach of this Agreement. 19. MERGER OF UNDERSTANDING. This Agreement constitutes and contains the entire agreement and understanding concerning Employee's employment, the termination thereof and the other matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matter hereof. This Agreement shall not be modified, altered, changed or amended in any respect unless in writing and signed by both parties. Notwithstanding the foregoing, in no event shall this Agreement be construed to change, alter or limit the Company's obligations to the Employee; (i) under any existing employee benefit plan or programs, the benefits under which shall continued to be governed in accordance with their terms; (ii) for payment to the Employee of his base salary through his last day of employment with the Company; (iii) the payment of accrued, but unused, vacation of the Employee through the Employee's last day of employment; (iv) for the payment of a prorated bonus for the fiscal year of termination; and (v) for the bonus which is owed to the Employee under the Company's bonus plan for the 1997 fiscal year. 20. EXPENSES. The Company shall reimburse Employee for his reasonable legal expenses incurred in connection with his entering into this Agreement within ten (10) days of presentation to the Company of invoice for such expenses. Additionally, the Company shall reimburse the Employee up to $500 for independent professional fees related to the review of any Special Reimbursement payment described in Section 2(a)(vi) hereof. 21. EMPLOYEE'S FURTHER ACKNOWLEDGMENTS. EMPLOYEE ACKNOWLEDGES AND REPRESENTS THAT HE HAS READ AND ACCEPTS AND AGREES TO THE PROVISIONS OF THIS AGREEMENT AND HAS HAD SUFFICIENT TIME AND OPPORTUNITY TO CONSULT WITH INDIVIDUALS OF EMPLOYEE'S OWN CHOICE. EMPLOYEE EXECUTES THIS AGREEMENT VOLUNTARILY WITH FULL UNDERSTANDING OF ITS CONSEQUENCES. 10 IN WITNESS WHEREOF, Paragon and Employee have each executed and delivered this Agreement as of the date first shown above. EMPLOYEE: /s/ Keith Krein -------------------------------------- Print Name: Keith Krein --------------------------- THE COMPANY: PARAGON HEALTH NETWORK, INC. /s/ KEITH B. PITTS By:___________________________________ Print Name: Keith B. Pitts Title: Chief Executive Officer 11 EX-10.60 43 TERMINATION AGREEMENT EXHIBIT 10.60 AGREEMENT RESPECTING TERMINATION OF EMPLOYEE-EMPLOYER RELATIONSHIP THIS AGREEMENT Regarding Termination of Employee-Employer Relationship (this "Agreement") is made as of the 4th day of November, 1997, by and between PARAGON HEALTH NETWORK, INC., a Delaware corporation ("Paragon") (as used herein, the term "Company" includes Paragon and all its Affiliates (as defined below), including, without limitation, GranCare, Inc. a Delaware corporation ("GranCare"), and all its subsidiaries), and EDWARD L. KUNTZ, an individual resident of the State of Texas (the "Employee"). STATEMENT OF FACTS Pursuant to the terms of an employment agreement dated March 24, 1995, by and among the Employee, Living Centers of America, Inc. ("LCA"), and LC Management Company (the "Employment Agreement"), Employee has served in an executive capacity with LCA, a predecessor to the Paragon. The Employment Agreement has been modified by the Board of Directors of LCA and through other oral understandings. In light of the fact that the Company and the Employee have agreed that the Employee's employment with the Company will terminate as of the closing of the merger of GranCare, Inc and Living Centers of America, Inc. (the "Closing"), the Company and Employee wish to clarify the terms of the Employment Agreement. In terminating the employee-employer relationship between the Company and the Employee, the Company recognizes that the Employee possesses valuable information and skills, which if used in competition with the Company would have a significant and detrimental effect on the Company's business and prospects. The Company also owns or has access or rights to certain confidential and proprietary information, which information is vital to the success of the Company. The Company wishes to protect and maintain this information, which has been developed by or which has become known to Employee during Employee's employment by the Company and which, if disclosed to the Company's competitors or if used in a competitive way, would be detrimental to the Company's business. Furthermore, the Company employs individuals and engages other employees and consultants in which it has invested or will invest substantial time and money in training in ways to make the Company competitive and successful, and such employees and consultants possess important skills and knowledge which have been obtained by them during their employment or engagement, and the Company wishes to protect and maintain its relationships with its employees and consultants in order to further its business. In recognition of these facts, the Company and the Employee wish to clarify and supercede the terms of the Employment Agreement to better reflect the parties understanding of their relative rights and duties with respect to their post-employment relationship. STATEMENT OF TERMS In consideration of the covenants and undertakings and the releases contained in this Agreement, and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Employee and the Company agree as follows: 1. SEPARATION. Employee acknowledges that his last day of employment with the Company will be as of the Closing. Employee's employment records will show that he resigned from the Company. 2. CONSIDERATION. (a) In consideration of the waiver of the obligations under the Employment Agreement and in consideration of Employee's past services to the Company, the Company will pay to Employee the following: (i) The sum of $1,000,000.00, payable in one lump sum at the closing of the merger of LCA with GranCare, Inc. (the "Closing"); (ii) The transfer of the title to the Cadillac Seville presently used by the Employee; and (iii) The payment of $24,000.00 in lieu of Company provided welfare benefit continuation; (iv) All stock options granted to Employee under the Living Centers of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), will be cashed out as provided in the merger agreement among LCA, GranCare, Inc., and Apollo Advisors, L.P., and (v) If the Employee is liable for the payment of any excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or a successor or similar provisions, with respect to any payments for benefits received or to be received from the Company, whether provided under this Agreement or otherwise, the Company shall pay the Employee an amount (the "Special Reimbursement") which, after payment by the Employee, (or on the Employee's behalf) of any federal, state and local taxes applicable thereto, including, without limitation, any further excise tax under such Section 4999 of the Code, on, with respect to or resulting from the Special Reimbursement, equals the amount of the Basic Excise Tax. The Employee shall not take any position inconsistent with the Company's treatment of any payment to the Employee pursuant to this Agreement or otherwise from the Company, its affiliates, predecessors and successors, for purposes of the excise tax imposed pursuant to Code Section 4999 or a successor or similar provision. In the event that the Employee receives notice from the Internal Revenue Service of an audit, 2 deficiency, assessment or other challenge (a "Dispute") relating to the treatment under Code Section 280G or 4999 of the amounts paid to the Employee pursuant to this Agreement or any other payments he receives from the Company, its predecessors or successors, the Employee shall promptly notify the Company of such Dispute. The Company shall be entitled to appoint representatives for the Employee in connection with the Dispute and to control all matters with respect to the Dispute. The Company agrees to indemnify and hold the Employee harmless from any and all taxes, interest and penalties that the Employee may incur in connection with any such Dispute which are directly related to the payment (or nonpayment) of a Special Reimbursement; provided, however, that the Company shall not indemnify the Employee for any taxes, penalties or interest due to the failure of the Employee to report or to pay taxes and/or excise taxes on any Special Reimbursement relating to any period following the payment of the Special Reimbursement by the Company to the Employee. The Employee covenants and agrees that he shall pay the amount of the Special Reimbursement to the appropriate taxing authorities as soon a possible following his receipt of such payment. (b) In consideration for the covenants contained in Sections 3 and 17 hereof, the Company will pay to Employee the following amounts: $1,800,000.00 at the Closing, $575,000.00 on November 1, 1998 and $75,000 on November 1, 1999. 3. RESTRICTIVE COVENANTS. (a) Agreement Not to Solicit Employees or Consultants. For a period ------------------------------------------------- of two (2) years following the date hereof, Employee shall not, either directly or indirectly, on Employee's own behalf or on behalf of others, solicit, divert or hire away, or attempt to solicit, divert or hire away, any person employed by the Company, whether or not such employee is a full- time or temporary employee of the Company and whether or not such employment is pursuant to a written agreement for a determined period of time or at will, or any consultant engaged by the Company. (b) Noncompetition. During the period of ninety (90) days following -------------- the Closing, Employee shall not, directly or indirectly, undertake, engage in or perform any of the same types of services which have been performed by Employee on behalf of the Company for any Competing Business in the Territory. The provisions hereof shall not prevent Employee from owning as much as three percent (3%) of the issued and outstanding publicly-traded shares of any Competing Business. (c) Restrictions on Use and Disclosure of Company Information. --------------------------------------------------------- Employee agrees that, with respect to Confidential Information, for a period of three (3) years following the date hereof and, with respect to Trade Secrets, for so long as such Company Information qualifies as a trade secret under applicable law: 3 (i) Employee will receive and hold all the Company Information in trust and in strictest confidence; (ii) Employee will in no event take any action causing any of the Company Information to lose its character as Company Information, or fail to take the action necessary in order to prevent any Company Information from losing its status as Company Information; and (iii) Except as may be required by applicable laws, Employee will not, directly or indirectly, use, publish, disseminate or otherwise disclose any Company Information to any third party without the prior written consent of the Company, which may be withheld in the Company's absolute discretion,. (d) Return of Materials. All Materials are the property of the ------------------- Company. Employee will not remove from the Company's premises or copy or reproduce any Materials (except as Employee's employment by the Company shall require), and Employee will leave with the Company, or immediately return to the Company, all Materials or copies or reproductions thereof in Employee's possession, power or control. (e) Copyrights. ---------- (i) Employee agrees that any Works created by Employee in the course of Employee's duties as an employee of the Company are subject to the "Work for Hire" provisions contained in Sections 101 and 201 of the United States Copyright Law, Title 17 of the United States Code. All right, title and interest to copyrights in all Works that have been or will be prepared by Employee within the scope of Employee's employment with the Company will be the property of the Company. Employee acknowledges and agrees that, to the extent the provisions of Title 17 of the United States Code do not vest in the Company the copyrights to any Works, Employee hereby assigns to the Company all right, title and interest to copyrights which Employee may have in the Works. (ii) Employee must disclose to the Company all Works referred to in Section 3(e) and will execute and deliver all applications, registrations, and documents relating to the copyrights to the Works and will provide assistance to secure the Company's title to the copyrights in the Works. The Company will be responsible for all expenses incurred in connection with the registration of all such copyrights that it decides to register. (iii) Employee has no ownership rights in any Works. (f) Definitions. As used in this Section 3, the following terms shall ----------- have the following meanings: 4 (i) "Affiliate" means any business entity that controls, is --------- controlled by, or is under common control with the Paragon. (ii) "Business of the Company" means the business of owning and/or ----------------------- operating skilled nursing facilities or an institutional pharmacy business. (iii) "Company Information" means Confidential Information and Trade ------------------- Secrets. (iv) "Competing Business" means the skilled nursing facility ------------------ business or institutional pharmacy business. (v) "Confidential Information" means confidential data and ------------------------ confidential information relating to the business of the Company (which does not rise to the status of a trade secret under applicable law) which is or has been disclosed to Employee or of which Employee became aware as a consequence of or through Employee's employment with the Company and which has value to the Company and is not generally known to its competitors and which is designated by the Company as confidential. Confidential Information shall not include any data or information that (i) has been voluntarily disclosed to the general public by the Company, (ii) has been independently developed and disclosed to the general public by others, or (iii) otherwise enters the public domain through no violation of the covenants contained in this Section by the Employee. (vi) "Materials" means all documents or tangible or intangible --------- materials, including computer data, provided to or obtained by Employee during the course of employment by the Company which contain the Company Information. (vii) "Territory" means any state in the United States of America --------- where the Company has operations. (viii) "Trade Secrets" means information of the Company, without ------------- regard to form, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product or service plans or lists of actual or potential customers or suppliers which is not commonly known by or available to the public and which information (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (ix) "Work" means a copyrightable work of authorship, including ---- without limitation, any technical descriptions for products, user's guides, 5 illustrations, advertising materials, computer programs (including the contents of read only memories) and any contribution to such materials. (g) Remedies. Employee agrees that the covenants contained in -------- Subsections (a), (b), (c), (d) and (e) of this Section are of the essence of this Agreement; that each of such covenants is reasonable and necessary to protect and preserve the business, interests and properties of the Company, and that irreparable loss and damage will be suffered by the Company should Employee breach any of such covenants. Therefore, Employee agrees and consents that, in addition to all other remedies provided at law or in equity, the Company shall be entitled to a temporary restraining order and temporary and permanent injunctions to prevent a breach or contemplated breach of any of such covenants, and Employee shall be obligated to return to the Company a portion of the consideration provided in Section 4 which is attributable to the covenant which was breached and which is prorated based on the period during which such breach was in effect. The existence of any claim, demand, action or cause of action of Employee against the Company shall not constitute a defense to the enforcement by the Company of any of the covenants or agreements herein. 4. SEVERABILITY. The parties agree that each of the provisions included in this Agreement is separate, distinct and severable from the other and remaining provisions of this Agreement, and that the invalidity or unenforceability of any Agreement provision shall not affect the validity and enforceability of any other provision or provisions of this Agreement. Further, if any provision of this Agreement is ruled invalid or unenforceable by a court of competent jurisdiction because of a conflict between such provision and any applicable law or public policy, such provision shall be valid and enforceable to the extent such provision is consistent with such law or public policy. 5. CONSULTING SERVICES. Employee agrees that following the date hereof, other than death or a permanent disability that prevents Employee's cooperation, Employee shall, upon reasonable notice, (i) furnish such information and give such assistance to the Company in any controversy or matter involving any controversy or actual or potential litigation as may reasonably be requested by the Company and (ii) discuss with the Company's personnel or advisors any events that involved LCA and its subsidiaries during Employee's employment by the Company. Employee also agrees to serve as Paragon's representative to the multi-facility committee of the American Health Care Association (the "AHCA"). Employee shall provide the services described in this Section 5 for a period of three (3) years; provided that the Company may terminate Employee's appointment as Paragon's representative to the multi-facility committee of the AHCA at any time upon thirty (30) days notice to Employee, but his other obligations pursuant to this Section 5 shall continue. In consideration for Employee's services pursuant to this Section 6, the Company shall pay to Employee the sum of $100,000.00 per year, payable in advance at the beginning of each one-year period hereunder. The Company shall compensate Employee for all reasonable expenses incurred while so assisting the Company for the services hereunder. Employee is not obligated to assist in any controversy or litigation between the Company and Employee or any of the Employee's future employers. 6 6. NOVATION AND WAIVER. This Agreement supercedes and replaces the Employment Agreement, as well as any other amendments or modifications thereto, all of which shall be and become null and void as to all parties thereto. The Company shall have no obligation to pay any other consideration to Employee except as provided in this Agreement. 7. FURTHER ACTION. The parties agree to perform all further acts and execute, acknowledge and deliver any documents that may be reasonably necessary, appropriate or desirable to carry out the provisions of this Agreement. 8. NOTICES. Any notice, request, demand, or other communication required to be given hereunder shall be made in writing and shall be deemed to have been fully given if personally delivered or if mail by overnight delivery to the parties at the following addresses, or at such other addresses as shall be given in writing by either party to the other party hereto: If to the Company: Paragon Heath Network, Inc. One Ravinia Drive Suite 1500 Atlanta, Georgia 30346 Attn: Henry Day, Esq. With a copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E. Sixteenth Floor Atlanta, Georgia 30303-1740 Attn: Richard Miller, Esq. If to Employee: Edward L. Kuntz 8807 Stable Crest Boulevard Houston, Texas 77024 9. ASSIGNMENT. This Agreement and the rights and obligations of the Company hereunder may be assigned by the Company and shall inure to the benefit of, shall be binding upon, and shall be enforceable by any such assignee. This Agreement and the rights and obligations of Employee hereunder may not be assigned by Employee. 10. WAIVER. No consent or waiver by a party with respect to any breach or default by the other party hereunder shall be effective unless in writing, and no such waiver or consent shall be deemed or construed to be a consent or waiver with respect to any other breach or default by 7 such party of the same provision or any other provision of this Agreement. Failure on the part of a party to complain of any act or failure to act of the other party or to declare such other party in default shall not be deemed or constitute a waiver of any rights hereunder. 11. GOVERNING LAW. This Agreement shall be governed and construed as to both substantive and procedural matters in accordance with the laws of the State of Texas, without regard to the conflict of laws principles thereof. 12. INTERPRETATION. Should any provision of this Agreement require a judicial interpretation, it is agreed that the judicial body interpreting or construing this Agreement shall not apply the assumption that the terms of this Agreement shall be more strictly construed against one party by reason of the rule of legal construction that an instrument is to be construed more strictly against the party which itself or through its agents prepared the agreement. The parties acknowledge and agree that they and their agents have each participated equally in the negotiations and preparation of this Agreement, and Employee acknowledges that Employee has had the opportunity to consult legal counsel regarding the terms hereof. 13. CONSENT TO JURISDICTION. Each party (i) submits to personal jurisdiction in the State of Texas for the enforcement of this Agreement, and (ii) waives any and all rights under the laws of any state to object to jurisdiction within the State of Texas for the purposes of litigation to enforce this Agreement. Notwithstanding the foregoing, nothing contained in this Agreement shall prevent a party from bringing any action against the other party within any other state or country. Initiating such proceeding or taking such action in any jurisdiction shall not constitute a waiver of the agreement that the laws of the State of Texas shall govern or of the submission made by a party to personal jurisdiction within the State of Texas. 14. HEADINGS. Titles and captions contained in this Agreement are inserted only as a matter of convenience and for reference and in no way define, limit or extend or describe the scope of this Agreement or the intent of any provision contained in this Agreement. 15. ENTIRE AGREEMENT. This Agreement embodies the entire agreement of the parties on the subject matter herein. No amendment or modification of this Agreement shall be valid or binding upon the Company or Employee unless made in writing and signed by the parties hereto. All prior understandings and agreements relating to the subject matter of this Agreement are hereby expressly terminated. 16. NON-ADMISSION. Employee agrees and acknowledges that neither this Agreement nor the Company's offer to enter into this Agreement should be construed as an admission by the Company that it has acted wrongfully towards Employee or anyone else, and that the Company expressly denies any liability to or having engaged in any wrongful acts or omissions against Employee. 17. STATEMENTS REGARDING THE COMPANY. Except as may be required by applicable law, Employee agrees not to make any written or verbal statements in any form concerning the Company, its predecessors, Living Centers of America, Inc. and GranCare, Inc., his employment 8 with the Company and its predecessors, or the termination of his employment with the Company to any person or entity if such statements are intentionally designed to be injurious or inimical to the best interests of the Company or Employee. 18. CONFIDENTIALITY. Employee agrees to keep the terms, conditions and fact of this Agreement completely confidential and not to disclose any information concerning this Agreement to any other person, except Employee's immediate family, personal financial advisor, tax advisor and attorney, provided they agree to keep this information confidential, and except as may be required by law. Without limiting the generality of the foregoing, Employee will not respond to or in any way participate in or contribute to any public discussion, notice or publicity concerning or in any way related to the execution of this Agreement or the events (including any negotiations) which led to its execution. In addition, without limiting the generality of the foregoing, Employee specifically agrees not to disclose information regarding this Agreement or the fact of this Agreement to any other current or former employee of the Company 19. PARTICIPATION IN OTHER ACTIONS. Employee agrees not to participate in any legal action of any kind by any other employee or former employee of the Company and will not testify or otherwise provide evidence in any investigation, hearing, or trial of any such action, except under subpoena. Employee also agrees not to solicit, counsel, advise, suggest, assist, or encourage any claims, demands, rights, or causes of action of any kind of other persons against the Company. 20. MERGER OF UNDERSTANDING. This Agreement constitutes and contains the entire agreement and understanding concerning Employee's employment, the termination thereof and the other matters addressed herein between the parties, and supersedes and replaces all prior negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matter hereof. This Agreement shall not be modified, altered, changed or amended in any respect unless in writing and signed by both parties. Notwithstanding the foregoing, in no event shall this Agreement be construed to change, alter or limit the Company's obligations to the Employee; (i) under any existing employee benefit plan or programs, the benefits under which shall continued to be governed in accordance with their terms; (ii) for payment to the Employee of his base salary through his last day of employment with the Company; (iii) the payment of accrued, but unused, vacation of the Employee through the Closing, which shall be paid at Closing; (iv) for the payment of a prorated bonus for the fiscal year of termination (which through October 31, 1997 was $18,667), which shall be paid at Closing; and 9 (v) for the bonus in the amount of $275,520 which is owed to the Employee under the Company's bonus plan for the 1997 fiscal year, which shall be paid at Closing. 21. EXPENSES. The Company shall reimburse Employee for his reasonable legal expenses incurred in connection with his entering into this Agreement. 22. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. 23. EMPLOYEE'S FURTHER ACKNOWLEDGMENTS. EMPLOYEE ACKNOWLEDGES AND REPRESENTS THAT HE HAS READ AND ACCEPTS AND AGREES TO THE PROVISIONS OF THIS AGREEMENT AND HAS HAD SUFFICIENT TIME AND OPPORTUNITY TO CONSULT WITH INDIVIDUALS OF EMPLOYEE'S OWN CHOICE. EMPLOYEE EXECUTES THIS AGREEMENT VOLUNTARILY WITH FULL UNDERSTANDING OF ITS CONSEQUENCES. IN WITNESS WHEREOF, Paragon and Employee have each executed and delivered this Agreement as of the date first shown above. EMPLOYEE: /s/ Edward L. Kuntz -------------------------------------------------- Print Name: Edward L. Kuntz -------------------------------------- THE COMPANY: PARAGON HEALTH NETWORK, INC. /s/ KEITH B. PITTS By:_______________________________________________ Print Name: Keith B. Pitts Title: Chief Executive Officer 10 EX-11 44 PER SHARE EARNINGS STATEMENT EXHIBIT 11 PARAGON HEALTH NETWORK, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
1997 1996 1995 ------- ------- ------- ASSUMING FULL DILUTION (a) Net Income............................................. $43,917 $43,180 $24,234 Pro forma taxes (b).................................... 0 0 599 ------- ------- ------- Pro forma net income................................... $43,917 $43,180 $23,635 ======= ======= ======= APPLICABLE COMMON SHARES: Weighted average shares outstanding during the period.............................................. 58,614 60,372 56,553 Weighted average shares issuable upon exercise of common stock options using the treasury stock method.............................................. 1,194 573 579 Weighted average shares issuable upon exercise of warrants using the treasury stock method............ -- -- -- ------- ------- ------- Total shares......................................... 59,808 60,945 57,132 ======= ======= ======= Earnings per share (fully diluted)..................... $ 0.73 $ 0.71 $ 0.42 ======= ======= ======= Pro forma earnings per share (fully diluted)........... $ 0.73 $ 0.71 $ 0.41 ======= ======= =======
- -------- (a) This calculation is submitted in accordance with Regulation S-K, item 601 (b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in less than 3% dilution. (b) The pro forma provision is included to reflect the estimated taxes that would have been incurred on the BCC Entities S corporations EX-21 45 SUBSIDIARIES EXHIBIT 21 PARAGON HEALTH NETWORK, INC. DIRECT AND INDIRECT SUBSIDIARIES
STATE/COUNTRY INCORPORATED ------------- Living Centers of America, Inc.................................... DE SUBSIDIARIES Beaver Properties/Newco, Inc.................................... NC LCA Acquisition Sub, Inc........................................ DE LC Management Company........................................... DE LCR, Inc........................................................ DE LCA Insurance Co., Ltd.......................................... Cayman Islands LCA Operational Holding Company................................. DE Living Centers--Southeast, Inc................................ NC Living Centers Southeast Development Corporation............ NC Brian Center of Asheboro, Inc............................... NC Brian Center Health & Retirement/Alleghany, Inc............. NC Brian Center Health & Retirement/Bastian, Inc............... NC Brian Center Nursing Care/Fincastle, Inc.................... NC Brian Center Nursing Care/Austell, Inc...................... GA Living Centers of Texas, Inc.................................. DE DevCon Holding Company...................................... DE Living Centers--Rocky Mountain, Inc........................... NV Living Centers--East, Inc..................................... DE TOICA, Inc.................................................... DE Brian Center Health & Rehabilitation/Tampa, Inc............... AL American Pharmaceutical Services, Inc......................... DE American Pharmaceutical Services of Georgia, LLC............ GA Allied Pharmacy Management, Inc............................. TX APS Holding Company, Inc.................................. TN Nann-Dan Corporation.................................... FL Professional RX Systems, Inc............................ FL Progressive Care Centers of America, Inc...................... DE Brian Center Health & Retirement/Wallace, Inc................. NC Brian Center Nursing Care/Powder Springs, Inc................. NC Brian Center Nursing Care/Hickory, Inc........................ NC Brian Center of Central Columbia, Inc......................... NC Brian Center Management Corporation........................... NC Med-Care Sales and Rentals, Inc............................... NC American Rehabilitation Services, Inc......................... UT American Rehabilitation Management, Inc..................... TN Rehability Hospital Services, Inc......................... TN Workhealth Healthcare Management, Inc..................... DE Therapy Management Innovations, Inc....................... NV Med-Therapy Rehabilitation Services, Inc.................. NC Rehability Health Services, Inc........................... TX Gulf Coast Physical Therapy Group, Inc.................. MS Metro Physical Therapy (51%)........................ MS Industrial Therapy Center (50%)..................... MS TheraCare Home Health Agency, Inc....................... TN
STATE/COUNTRY INCORPORATED ------------- Living Centers LTCP Development Company....................... DE American Geriatric Management Service, Inc. (75%)........... TX Hospice Associates of America, Inc............................ DE Heart of America Hospice, LLC............................... KS Hospice Care of Louisiana, LLC.............................. LA Hospice Management Partners, Inc............................ DE American Geriatric Management Services, Inc................... DE Living Centers Holding Company................................ DE Hospice of Houston, LP (50%).................................. TX American Senior Health Services, Inc............................ DE Homecare Associates of America, Inc........................... DE Home Health Management Associates of America, Inc............. DE GranCare, Inc................................................... DE AMS Properties, Inc........................................... DE Cornerstone Health Management Corporation..................... DE StoneCreek Management Company, Inc.......................... MO Evergreen Healthcare, Inc..................................... GA Omega/Indiana Care Corporation.............................. DE Connerwood Healthcare, Inc.................................. IN Heritage of Louisiana, Inc.................................. LA National Heritage Realty, Inc............................... LA EH Acquisition Corp......................................... GA EH Acquisition Corp. II................................... GA EH Acquisition Corp. III.................................... GA Evergreen Healthcare Ltd., L.P. ( EHI-Limited Partner; Omega/Indiana Care Corporation-General Partner)............. IN GranCare Trading, Inc......................................... GA GranCare GPO Services, Inc.................................... GA American-Cal Medical Services, Inc............................ CA AMS Green Tree, Inc........................................... WI Renaissance Mental Health Center, Inc......................... WI GCI Palm Court, Inc........................................... CA GranCare South Carolina, Inc.................................. SC GCI Rehab, Inc................................................ CA GCI -Cal Therapies Company.................................. CA GCI Therapies, Inc.......................................... CA HMI Convalescent Care, Inc.................................... CA GranCare of Michigan, Inc..................................... MI GranCare Home Health Services, Inc............................ CA Coordinated Home Health Services, Inc....................... CA GranCare Nursing Services and Hospice, Inc.................. WI GCI-Cal Health Care Centers, Inc.............................. CA GCI Realty, Inc............................................... DE GCI Jolley Acres, Inc......................................... SC GCI Prince George, Inc........................................ SC GCI Springdale Village, Inc................................... SC GCI Village Green, Inc........................................ SC GCI Faith Nursing Home, Inc................................... SC GCI East Valley Medical & Rehabilitation Center, Inc.......... AZ GCI-Wisconsin Properties, Inc................................. WI
STATE/COUNTRY INCORPORATED ------------- GranCare of Northern California, Inc.......................... CA GranCare of North Carolina, Inc............................... NC GCI Colter Village, Inc....................................... AZ GCI Bella Vita, Inc........................................... CO GCI Health Care Centers, Inc.................................. DE GC Services, Inc.............................................. CA HostMasters, Inc.............................................. CA Professional Health Care Management, Inc...................... MI Cambridge Bedford, Inc...................................... MI Cambridge East, Inc......................................... MI Cambridge North, Inc........................................ MI Cambridge South, Inc........................................ MI ClintonAire Nursing Home, Inc............................... MI Crestmont Health Center, Inc................................ MI Frenchtown Nursing Home, Inc................................ MI Heritage Nursing Home, Inc.................................. MI International Health Care Management, Inc................... MI International X-Ray, Inc.................................... MI Madonna Nursing Center, Inc................................. MI Middlebelt-Hope Nursing Home, Inc........................... MI Middlebelt Nursing Home, Inc................................ MI Nightingale East Nursing Center, Inc........................ MI St. Anthony Nursing Home, Inc............................... MI GCI Camellia Care Center, Inc................................. CO GCI Indemnity, Inc............................................ VT GCI Valley Manor, Inc......................................... CO
EX-23 46 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-39485) pertaining to the Paragon Health Network, Inc., Long- Term Incentive Plan, GranCare, Inc., 401(k) Savings Plan, GranCare, Inc., 1996 Stock Incentive Plan, GranCare, Inc., 1996 Replacement Stock Option Plan, GranCare, Inc., Outside Directors' Stock Incentive Plan of our report dated December 10, 1997, with respect to the consolidated financial statements and schedule of Paragon Health Network, Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 1997, filed with the Securities and Exchange Commission. ERNST & YOUNG LLP Houston, Texas December 26, 1997 EX-24 47 DIRECTOR'S POWERS OF ATTORNEY EXHIBIT 24 PARAGON HEALTH NETWORK, INC. DIRECTORS' POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors of Paragon Health Network, Inc., a Delaware corporation (the "Company"), does hereby make, constitute and appoint Charles B. Carden, Susan Thomas Whittle, and Stefano M. Miele, or any of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute, deliver and file an Annual Report on Form 10-K for the fiscal year ended September 30, 1997 for the Company with the Securities and Exchange Commission, together with any and all amendments thereto, with all exhibits thereto and other documents in connection therewith or supplemental thereto, hereby granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing as said attorneys and agents may deem necessary or advisable to carry out fully the intents and purposes of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which each of said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney effective December 29, 1997. /s/ Keith B. Pitts /s/ Baltej S. Maini - ------------------------- -------------------------------- Keith B. Pitts Baltej S. Maini, M.D. /s/ Donald C. Beaver /s/ Williams G. Petty - ------------------------- -------------------------------- Donald C. Beaver Williams G. Petty, Jr. /s/ Laurence M. Berg /s/ Robert L. Rosen - ------------------------- -------------------------------- Laurence M. Berg Robert L. Rosen /s/ Gene E. Burleson - ------------------------- Gene E. Burleson /s/ Peter P. Copses - ------------------------- Peter P. Copses /s/ Jay M. Gellert - ------------------------- Jay M. Gellert /s/ Joel S. Kanter - ------------------------- Joel S. Kanter /s/ John H. Kissick - ------------------------- John H. Kissick EX-27 48 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1997 SEP-30-1997 14,355 0 245,127 33,138 21,237 287,229 512,500 210,117 874,367 185,125 252,763 0 0 608 374,675 874,367 1,140,288 1,140,288 0 1,045,180 0 0 16,852 78,256 33,604 43,917 0 0 0 0 0.74 0.73
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