-----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, OpVcPsPZcEvOguAftG9fu6uLlIqTKgihTE2dRz9gP+wxsX97wbxVmxky5zohDGhS 3dCyd/0tRCECDGYMOPv9VA== 0000931763-00-000107.txt : 20000203 0000931763-00-000107.hdr.sgml : 20000203 ACCESSION NUMBER: 0000931763-00-000107 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARINER POST ACUTE 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-K405 SEC ACT: SEC FILE NUMBER: 001-10968 FILM NUMBER: 512075 BUSINESS ADDRESS: STREET 1: ONE RAVINA DR STE 1500 STREET 2: STE 800 CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 6784437000 MAIL ADDRESS: STREET 1: ONE RAVINA DRIVE SUITE 1500 STREET 2: SUITE 800 CITY: ATLANTA STATE: GA ZIP: 30346 FORMER COMPANY: FORMER CONFORMED NAME: PARAGON HEALTH NETWORK INC DATE OF NAME CHANGE: 19971104 FORMER COMPANY: FORMER CONFORMED NAME: LIVING CENTERS OF AMERICA INC DATE OF NAME CHANGE: 19930328 10-K405 1 MARINER POST-ACUTE NETWORK, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1999 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10968 --------------- MARINER POST-ACUTE NETWORK, INC. (formerly "Paragon Health Network, Inc.") (Exact Name of Registrant as Specified in its Charter) DELAWARE 74-2012902 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE RAVINIA DRIVE, SUITE 1500 30346 ATLANTA, GEORGIA (Zip Code) (Address of Principal Executive Office) (678) 443-7000 (Registrant's Telephone Number, Including Area Code) --------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
NAME OF EACH EXCHANGE ON WHICH REGISTERED TITLE OF EACH CLASS ------------------------ Common Stock, Par Value $.01 Per Share................. OTCBB
--------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [_] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the outstanding common stock, par value $.01 per share (the "Common Stock"), of the registrant held by non-affiliates of the registrant as of January 12, 2000 was $9,580,431, based on a closing sale price for the Common Stock of $.14 per share as reported on the OTCBB on said date. For purposes of the foregoing sentence only, all directors are assumed to be affiliates. There were 73,758,377 shares of Common Stock of the registrant issued and outstanding as of January 12, 2000. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subject to the distribution of securities under a plan confirmed by a court. Yes [_] No [_] N/A [X] Due to the recent nature of the filings made by the registrant and its subsidiaries under Chapter 11 of the Bankruptcy Code, no plan of reorganization has been confirmed by a bankruptcy court. DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INCORPORATED DOCUMENT ----------------- Proxy Statement for the 2000 Annual Meeting of Stockholders............................... Part III
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PAGE ---- PART I ITEM 1. BUSINESS....................................................... 2 ITEM 2. PROPERTIES..................................................... 17 ITEM 3. LEGAL PROCEEDINGS.............................................. 19 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........................................................ 22 ITEM 6. SELECTED FINANCIAL INFORMATION................................. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 97 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 97 ITEM 11. EXECUTIVE COMPENSATION......................................... 99 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................... 99 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 99 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................................................ 99
ITEM 1. BUSINESS Mariner Post-Acute Network, Inc. (the "Company") was formed through a series of business combinations commencing with the November 4, 1997 merger of Living Centers of America, Inc. ("LCA") with Apollo LCA Acquisition Corp., a Delaware corporation (the "Recapitalization Merger") and subsequent merger of GranCare, Inc., a Delaware corporation ("GranCare") with a wholly-owned subsidiary of LCA (the "GranCare Merger," and collectively with the Recapitalization Merger, the "Apollo/LCA/GranCare Mergers"). On July 31, 1998, a wholly-owned subsidiary of the Company merged with and into Mariner Health Group, Inc., a Delaware corporation ("Mariner Health") with Mariner Health surviving the merger and continuing as a wholly-owned subsidiary of the Company (the "Mariner Merger"). The Company changed its name to "Paragon Health Network, Inc." following the Recapitalization Merger and subsequently changed its name to "Mariner Post-Acute Network, Inc." following the Mariner Merger. All references to "Mariner" or the "Company" are intended to include the operating subsidiaries through which the services described herein are directly provided. The GranCare Merger and the Mariner Merger were both accounted for under the purchase method of accounting and, accordingly, the results of operations of GranCare and Mariner Health have only been included in the Company's results from the respective dates of acquisition. RECENT EVENTS On January 18, 2000, the Company and substantially all of its subsidiaries, including Mariner Health and its subsidiaries, filed voluntary petitions (the "Chapter 11 Filings") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will likely constitute a default under the Company's and such subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic stay that will generally preclude the creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default without prior Bankruptcy Court approval. The Company's need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the Balanced Budget Act of 1997 ("Balanced Budget Act") and its implementation, which reduced the Company's Medicare reimbursement rate by approximately $115 per resident, per day. In connection with the Chapter 11 Filings, the Company obtained a commitment for $100 million in debtor-in-possession ("DIP") financing (the "Company DIP Financing") from a group of banks led by The Chase Manhattan Bank. Mariner Health also obtained a commitment for $50 million in DIP financing from a group of banks led by PNC Bank (the "Mariner Health DIP Financing"; together with the Company DIP Financing, the "DIP Financings"). For a description of the principal terms of the DIP Financings, see "Management's Discussion and Analysis of Operations--Liquidity and Capital Resources." On December 20, 1999, Apollo Management, LP and its affiliates ("Apollo") sold substantially all the Company's common stock, par value $.01 per share ("Common Stock"), beneficially owned by Apollo. In connection with this action, all five of the Apollo designees to the Company's Board of Directors resigned as Directors effective January 2, 2000. The right to designate members of the Company's Board of Directors was not assigned to the purchaser of the Common Stock sold by Apollo. GENERAL The Company is one of the nation's largest providers of post-acute health care services, primarily through the operation of its skilled-nursing facilities. As of September 30, 1999, the Company's significant operations consist of (i) over 400 inpatient and assisted living facilities containing approximately 49,000 beds, (ii) 37 institutional pharmacies servicing more than 2,000 facilities and (iii) 14 long-term acute care hospitals ("LTACs") with approximately 700 licensed beds. In addition, the Company has limited home health, physician management and hospital contract management operations, the majority of which the Company plans to exit in the near future. The Company operates in 40 states with significant concentrations of facilities and beds in eight states and several metropolitan markets. 2 Historically, the Company also (i) operated a large contract rehabilitation therapy business that provided comprehensive therapy programs and services, on a contractual basis, to over 1,200 inpatient healthcare facilities throughout the United States, (ii) operated approximately 170 outpatient rehabilitation therapy clinics in eighteen states, (iii) managed specialty medical programs in acute-care hospitals through more than 100 hospital relationships in nineteen states (the Company has substantially exited this line of business), and (iv) operated more than thirty home health, hospice and private duty nursing branches in seven states (only two of which are still operated by the Company and is in the process of being divested). Primarily as a result of changes in Medicare reimbursement effected under the Balanced Budget Act of 1997 (the "Balanced Budget Act"), these businesses began to generate, or were anticipated to generate, significant operating losses and negative cash flow and have been or are being divested or closed. The Company derives a significant portion of its revenues from the federal Medicare program (21% of consolidated revenues during the fiscal year ended September 30, 1999). These changes in reimbursement result primarily from the Medicare program's recent transition from a cost-based reimbursement system to a prospective payment system ("PPS") for Medicare Part A services, and the adoption of fee screen schedules that limited and capped reimbursement for Medicare Part B therapy services. Historically, the Medicare program utilized a cost-based retrospective reimbursement system for nursing facilities and home health agencies for reasonable direct and indirect allowable costs incurred in providing "routine service" (as defined by the program and subject to certain limits), as well as for capital costs and ancillary costs, primarily therapy and pharmacy costs. Under the historic reimbursement methodology, the Company was reimbursed separately for pharmacy and therapy services provided by the Company's pharmacy and therapy operations to the Company's inpatient operations based on the cost of the services provided, subject to certain "related party," "prudent buyer" and "salary equivalency" adjustments. Pursuant to the Balanced Budget Act, however, Medicare began phasing in PPS for skilled-nursing facilities, starting with cost reporting periods beginning on or after July 1, 1998. Under PPS, Medicare reimbursement for skilled nursing facilities is based on an all-inclusive per diem rate, which varies depending on the level of acuity of the patient. As a result, skilled nursing facilities reimbursed under the Medicare program are paid a federal per diem rate for virtually all covered services, including pharmacy and therapy services, regardless of the actual costs incurred by the provider. The reimbursement rates under PPS were not published until May 12, 1998, less than two months prior to the implementation of PPS, and were significantly lower than anticipated within the industry. In addition, in November 1998, the federal government published certain fee screen schedules for implementation effective January 1, 1999, that limited the amount of reimbursement for Medicare Part B therapy services and capped the total amount of reimbursement at $1,500 per patient, per provider. The Balanced Budget Act has had a material adverse effect on the Company rendering the Company unable to service its debt obligations to its senior lenders and the holders' of its senior subordinated notes while at the same time meeting the operating expenses of the Company's businesses. See "--Regulation" and "Management's Discussion and Analysis of Financial Condition and Results of Operation-- Liquidity and Capital Resources." The Company hopes to use the Chapter 11 Filings to effect a comprehensive financial reorganization to better position the Company to address the changed economics resulting from the implementation of the Balanced Budget Act. The Consolidated Appropriations Act (the "CAA"), enacted in November 1999, makes a number of positive changes to the reimbursement rates for skilled nursing facilities over the next several years. Management believes that the reimbursement changes will not make up for revenue reductions already experienced during the PPS transition, but will serve to partially mitigate the further declines originally anticipated in years two through four of the PPS transition. One objective the Company hopes to achieve in connection with its Chapter 11 Filings is the restructuring of its capital structures such that the Company can operate profitably under PPS. As another means of enhancing its profitability, the Company is also actively reviewing its portfolio of properties and intends to divest marginal and unprofitable facilities. In order to further reduce corporate overhead, the Company recently engaged in an 3 extensive review of its organizational structure, work processes, system capabilities needs and level of spending. As a result of such review, the Company has a plan that it believes will reduce corporate overhead by an additional 20% or more during the period from November 1, 1999 through September 2001. This reduction is in addition to the overhead reduction of approximately 30% achieved during the period from April 1999 through October 1999. All overhead reductions have been and will continue to be at the regional and corporate levels. The Company's goal is to leave operations at the facility level intact. The Company's principal executive offices are located at One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, and the Company's phone number at such address is (678) 443-7000. OPERATIONS The Company's services include three principal product groups, for which the Company commenced segment reporting as of September 30, 1999. These product groups are: (i) Mariner Inpatient Services; (ii) American Pharmaceutical Services; and (iii) Other, which consists primarily of the Company's LTAC operations and corporate overhead. In addition, the Company exited/sold several businesses during the fiscal year ended September 30, 1999, the results of which are included in "Other" below. As previously mentioned, the contract therapy business was disposed of during 1999 and is separately disclosed. See the Consolidated Financial Statements herein and Note 24 to the Consolidated Financial Statements for the segment reporting of the Company's last three fiscal years. MARINER INPATIENT SERVICES Inpatient Services is the largest source of revenue for the Company. The Company operates 413 inpatient facilities including 12 freestanding assisted living facilities encompassing approximately 49,000 beds in 28 states. All of the Company's inpatient facilities are certified by the appropriate state agencies for participation in the Medicaid program and substantially all are certified for participation in the Medicare program. The Company's inpatient facilities provide care to patients requiring access to skilled nursing care at anytime. All patients in the Company's inpatient facilities receive assistance with activities of daily living ("ADL" services) including feeding, bathing, dressing, eating, transportation, toileting and related services. Inpatient care is provided by registered nurses, licensed practical nurses and certified nurses aides under the supervision of a Director of Nursing. Each facility also contracts with a local licensed physician to serve as its Medical Director, and establishes relationships with a number of independent local specialists, who are available to care for the facility's patients. The Company's inpatient facilities provide a broad range of case management services over the course of treatment, including, as appropriate, ongoing medical evaluation, social service needs, specialty equipment requirements, outcomes measurement, discharge planning and arrangement for home care. These basic services are supplemented, in the Company's Medicare certified facilities, by rehabilitation services, including physical, occupational, speech, respiratory and psychological therapies. These services were previously provided, in a majority of the Company's facilities, on a contractual basis between the facility and the Company's rehabilitation services operations. In connection with the exiting by the Company of the contract therapy business and the closure of this business line, many of the Company's therapists became employees of the Company's facilities. In addition, the Company operates specialized units in many of its inpatient facilities, which provide subacute care to patients with medically complex conditions. Within these specialty units, trained staff members offer care for patients as an alternative to treatment in the more expensive acute care hospital setting. In addition to basic therapy services these specialty units offer enteral therapy, intravenous therapy, specialized wound management, ventilator care, tracheostomy care, cancer and HIV care. These specialized units have a higher staffing level per patient than the Company's other inpatient facilities and compete with acute care and rehabilitation hospitals, which management believes typically charge rates higher than those charged by the Company's specialty units. 4 The Company's assisted living facilities provide furnished rooms and suites designed for individuals who are either able to live independently within a sheltered community or who require minimal supervision. For assisted living residents, the Company provides basic ADL assistance combined with easy access to higher acuity settings should the resident's health condition dictate the need for more intensive services. Mariner Inpatient Services also provides services to residents with Alzheimer's disease. Within specially designated and designed portions of certain of its inpatient facilities, the Company operates 83 units with approximately 2,863 beds dedicated to addressing the problems of disorientation and perceptual confusion typically experienced by residents with Alzheimer's disease. The Alzheimer's care units also provide education and support to the residents' families. The Company provides specially trained activity directors and nursing staffs to these units and employs a Director of Alzheimer's Programming to supervise program development and staff training. AMERICAN PHARMACEUTICAL SERVICES The Company's pharmaceutical services product group, American Pharmaceutical Services, Inc. ("APS"), is one of the largest providers of institutional pharmacy services in the United States. Through 37 institutional pharmacies in 17 states, APS provides services and products to more than 1,000 long-term care centers with more than 125,000 beds in 19 states. APS specializes in meeting the needs of healthcare providers in subacute care, long-term care and assisted living settings. APS' primary products are pharmacy dispensing, intravenous (IV) and enteral therapy supplies and orthotics. The Company provides infusion therapies, including hydration, total parenteral nutrition, antibiotic, peritoneal dialysis and pain management therapies. Infusion therapies are often required in treating patients with chronic infections, digestive disorders, cancer and chronic and severe pain. The Company also provides specialized medical equipment and supplies, including ventilators, oxygen concentrators, diagnostic equipment and various types of durable medical equipment. Equipment and supplies are available to patients both in its inpatient facilities and at home. Through contractual agreements, APS provides consultant pharmacists specializing in long-term care drug regimen reviews and regulatory monitoring. Additionally, the division also provides full clinical support for its products and services through long-term care facility staff education and quality assurance programs. Vitalink Pharmacy Services, Inc. ("Vitalink") has the right to provide pharmaceutical supplies and services and related consulting services to the skilled nursing facilities that were operated by GranCare as of the effective time of the February 1997 sale of GranCare's institutional pharmacy business to Vitalink. These agreements expire in February 2002 and limit the ability of other pharmacy providers (including APS) to service these facilities. The Company has hired a new Chief Executive Officer and Chief Financial Officer for APS and they are developing a focused plan to reduce overhead, evaluate institutional pharmacy economies and service and retain customers to reverse the financial performance decline experienced in 1999. In addition, the Company is evaluating the strategic options for APS. OTHER "Other" is comprised of the Company's owned, leased or managed long-term acute care hospitals ("LTACs"), therapy, home health and hospital contract management businesses. Although therapy, home health and results of operations are included in the Company's results of operations for the fiscal year ended September 30, 1999, the Company substantially exited these businesses during the year ended September 30, 1999, primarily as a result of the implementation of the Balanced Budget Act. LTACs. The Company owns, leases or manages 14 LTACs encompassing approximately 700 licensed beds in four states. LTACs provide an intermediate place to which patients can be discharged from a short-term 5 acute care hospital when the patient's condition warrants more intensive care than can be provided in a typical nursing facility. The Company's LTAC's are generally located in areas where the Company has a significant concentration of inpatient facilities to which the LTAC patients can be discharged as their condition improves, thus constituting a key referral source. The Medicare reimbursement of the Company's LTAC was not materially affected by the Balanced Budget Act and the Company's LTAC's continue to be reimbursed on a cost basis. Therapy. The Company's therapy operations consisted primarily of the operation of outpatient rehabilitation clinics and the provision of therapy services to the Company's and third party's skilled nursing facilities. Prism Rehab Systems provided comprehensive rehabilitation programs and services (physical, occupational and speech therapy) to nursing facility residents through contracts with over 1,200 inpatient facilities throughout the United States. This product group also provided a variety of rehabilitation management consulting services to post-acute and long-term care facilities. Rehability Health operated the Company's outpatient rehabilitation clinics, hospital services, network administration and worksite programs. This product group operated 175 outpatient rehabilitation clinics in 18 states, with geographic concentrations of clinics in six major metropolitan areas. In addition, Rehability Health provided inpatient and outpatient rehabilitation services under 43 contractual arrangements with acute-care hospitals. On June 30, 1999 the Company completed a transaction which was effective July 1, 1999. The Company sold its outpatient clinic business to HealthSouth Corporation. On July 29, 1999, the Company sold its acute-care hospital rehabilitation program management business to National Rehab Partners, Inc. During the course of fiscal 1999, the Company terminated all other contractual relationships to provide therapy services to third parties. Therapists provided to the Company's skilled nursing facilities on a contract basis were, in most cases, "in-housed" and employed by one of the Company's facilities. For the year ended September 30, 1999, the Company derived approximately 7% of its consolidated revenue from its third party therapy operations. Home Health. The Company's home health and hospice operations consisted of more than 30 home health, hospice and private duty branches in seven states. Effective September 30, 1998, the Company divested itself of substantially all of its hospice operations and, over the course of the 1999 fiscal year, the Company divested itself of or closed substantially all of its home health and private duty operations. Through these operations, the Company provided skilled nursing, rehabilitation, pharmacy, infusion therapy and respiratory services and durable medical equipment and supplies to individuals needing such services in their homes. For the year ended September 30, 1999, the Company derived less than 2% of its consolidated revenue from its home health operations. Hospital Contract Management. The Company previously managed specialty medical programs in acute care hospitals through more than 100 hospital relationships in 19 states and had substantially exited this business by December 31, 1999. The service offerings for hospital program management included developing and managing specialty geriatric programs on behalf of acute care hospitals, including subacute skilled nursing, rehabilitation therapy, geriatric mental health, respiratory therapy and geriatric primary care networks. The Company was generally responsible for managing the clinical and operational aspects of a prescribed program, including quality control. The Company sold the gero-psych portion of this business to Psychiatric Solution, Inc. in August 1999. For the year ended September 30, 1999, the Company derived less than 1% of its consolidated revenue from these operations. Physician Management. Other also consists of the Company's physician operations (the Company closed this business as of December 31, 1999) which were not material to the Company's results of operations. SOURCES OF REVENUE The Company receives payments for services rendered to patients from the federal government under Medicare, from the various states where the Company operates under Medicaid and from private insurers and the patients themselves. The implementation of PPS and fee screen schedules pursuant to the Balanced Budget Act has had a material adverse effect on the Company's revenues. 6 The sources and amounts of the Company's patient revenues are determined by a number of factors, including licensed bed capacity of its facilities, occupancy rate, the payor mix, the type of services rendered to the patient and the rates of reimbursement among payor categories (private, Medicare and Medicaid). Changes in the mix of the Company's patients among the private pay, Medicare and Medicaid categories as well as changes in the quality mix will significantly affect the profitability of the Company's operations. Historically, private pay patients have been the most profitable and Medicaid patients have been the least profitable. Also, the Company historically derived higher revenues from providing specialized medical services than routine inpatient care. For the year ended September 30, 1999, the Company derived 32%, 21% and 47% of its net patient revenues from private pay, Medicare and Medicaid services, respectively (without giving pro forma effect to the GranCare Merger and Mariner Merger). Although reimbursement for Medicare residents historically generated a higher level of revenue per patient day, with margins that generally exceeded those of Medicaid patients, profitability was not proportionally tied to the revenue growth due to the additional costs associated with providing the higher level of care and other services required by such residents. PPS and fee screens for Part B Medicare therapy services have further eroded the profitability of Medicare patients as compared to Medicaid patients. Under PPS, each patient is evaluated and assigned to one of 44 payment groupings, which determines the per diem reimbursement rate for that patient. The higher the acuity level of the patient, the more services that are required by that patient. Accordingly, a higher acuity patient that requires more services is assigned to a higher payment grouping, resulting in a higher per diem rate. The ability of the Company to offer the ancillary services required by higher acuity patients in a cost effective manner will be critical to the Company's success and will affect the profitability of the Company's Medicare patients. MARKETING In marketing its services, the Company pursues a two-tiered strategy. It markets its facilities, programs and services, first to payors and managed care organizations at the regional level and, second, to professionals responsible for discharging patients at local hospitals at the facility level. At the regional level, the Company's sales personnel seek to establish relationships with payors and managed care organizations, who are increasingly important sources of referrals for subacute patients. The Company develops contractual relationships with such payors and organizations on a local, regional and national basis. Local market sales efforts focus on establishing and maintaining cooperative relationships and networks with physicians, acute care hospitals and other healthcare providers, with an emphasis on specialists who treat ailments involving long-term care and rehabilitation. Sales programs targeting managed care payors are also being implemented at both the local and national level. Ongoing assessment of customer satisfaction with the Company's services allows for improvements in product and sales performance. The Company plans to take advantage of other opportunities for increased profitability, including arrangements with healthcare providers such as health maintenance organizations ("HMOs"). The Company continues to establish relationships with managed care providers, which it believes will increase its subacute care business. Typically, patients referred by managed care providers, including HMOs and preferred provider organizations, generate higher revenues per patient day than Medicaid patients as a result of the higher acuity of the enrollees. Management believes that the Company's ability to provide subacute and specialty medical services at a lower cost than acute care hospitals is a competitive advantage in providing services to managed care providers. COMPLIANCE INITIATIVES The purpose of the compliance program is to address the Company's compliance issues, communicate issues to the Chief Executive Officer and Board of Directors of the Company, monitor the Company's "hotline," assure ethical and legal conduct by the Company's management and employees, and to work with the Human Resources, Legal and Internal Audit Departments on compliance training issues, on quality of care issues and legal matters involving compliance issues. 7 The Company's "hotline" is prominently posted in all of the Company's inpatient facilities and other areas where the Company has operations. Employees, patients and family members are encouraged to call the hotline, either in person or anonymously, to report any potential issues that they might note. Upon receipt of a call, the compliance department investigates the issue and, if necessary, liaisons with the appropriate corporate departments in order to resolve the issue. Employees are assured that any calls to the hotline will not result in any retribution by the Company. Management believes that this program has been highly successful and will help the Company to identify trends and potential problem areas in a timely fashion for quick remediation. The Company has also implemented a comprehensive background check initiative aimed at improving the quality of the Company's workforce and reducing employee turnover. To the best of the Company's knowledge, the design of this program meets or exceeds all state and federal regulatory requirements for background checks. MANAGEMENT INFORMATION SYSTEMS The Company has devoted substantial time and resources towards integrating the information systems of its constituent corporations. The Company has recently completed the installation of a new client-server based financial and payroll/human resource software package. The Company believes that the new software will provide more timely retrieval of financial and operating data and enhanced analytical review capabilities, thereby increasing the utility and functionality of the Company's information systems. The Company expects that the standardized financial reporting, streamlined human resource management and increased access to critical and time-sensitive information across the Company will assist it in operating more efficiently. REGULATION Various aspects of the Company's business are regulated by the federal government and by the states where the Company has operations. Regulatory requirements affect the Company's business activities by controlling growth, requiring licensure and certification for the Company's facilities and healthcare services, and controlling reimbursement for services provided. Although certain proceedings have been brought alleging that the Company has not complied with federal regulatory requirements (see "Legal Proceedings"), the Company believes it materially complies with applicable regulatory requirements. However, there can be no assurance that the Company will be able to maintain such compliance or will not be required to expend significant amounts to do so. Medicare and Medicaid. The Medicare program was enacted in 1965 to provide a nationwide, federally funded health insurance program for the elderly. The Medicaid program is a joint federal-state cooperative arrangement established for the purpose of enabling states to furnish medical assistance on behalf of aged, blind, or disabled individuals, or members of families with dependent children, whose income and resources are insufficient to meet the costs of necessary medical services. All of the Company's nursing facilities are licensed under applicable state law and are certified or approved as providers or suppliers under Medicare and state Medicaid programs, as applicable. Cost Based Reimbursement. The Medicare program historically utilized a cost-based retrospective reimbursement system for nursing facilities and long- term acute care ("LTAC") hospitals for reasonable direct and indirect allowable costs incurred in providing "routine service" (as defined by the program and subject to certain limits) as well as capital costs and ancillary costs. Pursuant to the Balanced Budget Act discussed below, Medicare is transitioning into PPS for skilled nursing facilities. Pursuant to the Consolidated Appropriations Act discussed below, Medicare has been directed to phase-in a PPS for LTAC hospitals effective for cost reporting periods beginning on or after October 1, 2002. Prior to the implementation of PPS, Medicare revenues and Medicaid reimbursement rates were historically determined from annual cost reports filed by the Company which were (and, with respect to cost periods that have not been settled, still are) subject to audit by the respective fiscal intermediaries and agencies administering the programs. The audits generally focus on the reasonableness and necessity of the costs incurred by providers. Some Medicare fiscal intermediaries have made audit adjustments to settle cost reports for some facilities which 8 reduce the amount of reimbursement that was received by the facilities and which the Company is appealing. Significant cost adjustments are based on the intermediaries' denials of the exception to the related organizations principle with regard to services and supplies furnished by the Company's pharmacy and its former rehabilitation subsidiaries to its nursing facilities, and reductions in costs claimed for therapy services for alleged failures to comply with prudent buyer requirements. An unrelated provider received a favorable decision on its prudent buyer appeal based on similar facts. The Company believes it has substantial arguments in support of its position that the contested costs are appropriate, but there can be no assurance that the Company will prevail on all or any appeal issues, nor that it will not be required to expend significant amounts to complete the appeal process. All items under appeal are fully reserved for in the Company's financial statements until such time as there is no uncertainty as to the outcome of the relevant appeal. Prior adjustments to the Company's cost reports historically have had a material adverse effect on its operating results, especially with respect to the operations of Mariner Health. Future adjustments to such cost reports or unsuccessful appeals of current adjustments could have a material adverse effect on the Company's operating results in the future. The Company files routine cost limit exception requests with respect to cost reporting periods prior to the implementation of PPS for the facilities which exceed the limits and fit the criteria as exception candidates. The Company benefits from these exceptions, and generally exception requests have been approved. However, there can be no assurance that any such pending or future requests for the routine cost limit exception will be granted. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." Balanced Budget Act--Medicare. The Balanced Budget Act, enacted on August 5, 1997, made numerous changes to the Medicare and Medicaid programs that affect the Company. With respect to the Medicare program, the new law required the establishment of a PPS system for Medicare Part A skilled nursing facility services, under which facilities are paid a federal per diem rate for virtually all covered services. The PPS system was phased in over three cost reporting periods, and started with cost reporting periods beginning on or after July 1, 1998. The Balanced Budget Act also implemented fee screens with respect to Medicare Part B therapy services, which were effective January 1, 1999. These rates were published in November 1998 and revise the reimbursement methodology with respect to these services from a cost-basis to a set fee. Subsequent legislation (see "--Consolidated Appropriations Act--Medicare" below) will increase the per diem rate for certain higher-acuity patients. The Balanced Budget Act also imposed a per beneficiary cap of $1,500 per provider per therapy service provided, also effective January 1, 1999. This cap was recently suspended by the Consolidated Appropriations Act for 2000 and 2001. The Balanced Budget Act also instituted consolidated billing for skilled nursing facility services, under which all payments for non-physician services to beneficiaries are made to the facility, regardless of whether the item or service was directly furnished by the facility or by others under arrangement. While this provision was to be effective for items or services furnished on or after July 1, 1998, it has been delayed for certain covered services furnished to skilled nursing facility residents no longer eligible for Part A skilled nursing facility care. The Company anticipates that the delayed consolidated billing provisions may be implemented in 2000. Other provisions limited Medicare payments for certain drugs and biologicals, durable medical equipment and parenteral and enteral nutrients and supplies. As of July 1, 1999, all of the Company's Medicare-certified skilled nursing facilities were operating under PPS. PPS has resulted in more intense price competition and lower margins for both the Company's skilled nursing and pharmacy operations. PPS has also resulted in the decision by the Company to divest or discontinue certain businesses formerly operated by the Company where the revenues derived from such businesses under PPS are not sufficient to enable the Company to operate such businesses profitably. See "Business" above. In light of the Company's current capital and overhead structure, there can be no assurance that the Company will be successful in reducing its operating costs below the PPS reimbursement rates or the Medicare Part B therapy fee screen rates. As a result, the Company commenced the Chapter 11 Filings with a view to effecting a comprehensive financial restructuring to facilitate the Company's ability to operate profitably under PPS. Consolidated Appropriations Act--Medicare. On November 29, 1999, President Clinton signed into law H.R. 3194, the "Consolidated Appropriations Act" (the "CAA") (P.L. 106-113), legislation designed to mitigate the effects of the Balanced Budget Act. While the CAA is expected to ameliorate somewhat the adverse effects of the Balanced Budget Act, the Company has not yet evaluated what effect the CAA will have on its 9 operating results. However, the Company does not believe the CAA will have a material positive effect on its operating results. See "Business--Regulation." The CAA, however, temporarily increases the acuity adjusted PPS rates by 20 percent for 15 acuity categories. As evidenced by the language of the CAA, this payment increase is intended to compensate SNFs for the provision of care to medically complex patients, pending appropriate refinements to the PPS system. SNFs providing care to patients falling within every non-rehabilitation acuity category above the presumptive (rebuttable) Medicare eligibility line will benefit from this increase. Three acuity categories falling within the "high" and "medium" rehabilitation category also are subject to the increase. The increased payments will begin on April 1, 2000, and end before the later of (A) October 1, 2000, or (B) the date the Health Care Financing Administration ("HCFA") implements a refined PPS system that better accounts for medically-complex patients. Neither the CAA nor the accompanying Conference Report provides HCFA with specific directions regarding such refinements to the PPS system. In addition, the CAA provides for a four percent increase in the federal per diem payment rates for all acuity categories in both fiscal years 2001 and 2002. This increase will not be built into the base payment rates, however, and therefore future updates to the federal payment rates will be calculated from the initial base rate. Balanced Budget Act--Medicaid. The Balanced Budget Act also contains a number of changes affecting the Medicaid program. Significantly, the law repealed the Boren Amendment, which required state Medicaid programs to reimburse nursing facilities for the costs that are incurred by efficiently and economically operated nursing homes. It is unclear at this time whether state Medicaid programs will adopt changes in their Medicaid reimbursement systems, or, if adopted and implemented, what effect such initiatives would have on the Company. Nevertheless, there can be no assurance that future changes in Medicaid reimbursement rates to nursing facilities will not have an adverse effect on the Company. Further, the Balanced Budget Act allows states to mandate enrollment in managed care systems without seeking approval from the Secretary of HHS for waivers from certain Medicaid requirements as long as certain standards are met. These managed care programs have historically exempted institutional care although some states have instituted pilot programs to provide such care under managed care programs. Effective for Medicaid services provided on or after October 1, 1997, states have considerable flexibility in establishing payment rates. The Company is not able to predict whether any states' waiver provisions will change the Medicaid reimbursement systems for long-term care facilities from cost-based or fee- for-service to managed care negotiated or capitated rates or otherwise affect the level of payments to the Company. Future Reform. Healthcare reform remains an issue for healthcare providers. Many states are currently evaluating various proposals to restructure the healthcare delivery system within their respective jurisdictions. It is uncertain at this time what healthcare reform legislation will ultimately be implemented or whether other changes in the administration or interpretation of governmental healthcare programs will occur. Management anticipates that state legislatures will continue to review and assess various healthcare reform proposals and alternative healthcare systems and payment methodologies. Management is unable to predict the ultimate impact of any future state restructuring of the healthcare system, but such changes could have a material adverse impact on the results of operations, financial condition and prospects of the Company. The Company expects Congress to continue to consider measures to reduce the growth in Medicare and Medicaid expenditures. The Company cannot predict at this time whether any additional measures will be adopted or if adopted and implemented, what effect such proposals would have on the Company. There can be no assurance that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs of patients eligible for reimbursement pursuant to such programs. Survey and Certification. Long-term care facilities must comply with certain requirements to participate either as a skilled nursing facility under Medicare or a nursing facility under Medicaid. Regulations promulgated pursuant to the Omnibus Budget Reconciliation Act of 1987, obligate facilities to demonstrate compliance with requirements relating to resident rights, resident assessment, quality of care, quality of life, physician services, nursing services, pharmacy services, dietary services, rehabilitation services, infection control, physical environment and administration. Regulations governing survey, certification, and enforcement procedures to be 10 used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted by the Health Care Finance Administration ("HCFA") effective July 1, 1995. These regulations require that surveys focus on residents' outcomes of care and state that all deviations from participation requirements will be considered deficiencies, but a facility may have deficiencies and be in substantial compliance with the regulations. The regulations identify alternative remedies (meaning remedies other than termination of a facility from the Medicare or Medicaid programs) against facilities and specify the categories of deficiencies for which they will be applied. The alternative remedies include, but are not limited to: civil money penalties of up to $10,000 per day; facility closure and/or transfer of residents in emergencies; denial of payment for new or all admissions; directed plans of correction; and directed in-service training. HCFA requires long-term care providers to comply with certain standards as a condition to participation in the Medicare and Medicaid programs. Failure to comply may result in termination of the provider's Medicare and Medicaid provider agreements. The Company believes that its facilities and service providers materially comply with applicable regulatory requirements. From time to time, however, the Company receives notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. The Company reviews such notices for factual correctness, and based on such review, either takes appropriate corrective action and/or challenges the stated basis for the allegation of noncompliance. In most cases, the Company and the reviewing agency will agree upon any measures to be taken to bring the facility or service provider into compliance. Under certain circumstances, however, such as repeat violations or perceived severity of the violations, the federal and/or state agencies have the authority to take adverse actions against a facility or provider, including the imposition of monetary fines, the decertification of a facility or provider from participation in the Medicare and/or Medicaid programs, or licensure revocation. No such enforcement action against a facility or provider has had a material adverse impact on the Company in the past, although there can be no assurance that such an enforcement action will not have a material impact on the Company in the future. The Company believes it substantially complies with these regulatory requirements, but there can be no assurance that the Company will be able to maintain such compliance, or will not be required to expend significant amounts to do so. Referral Restrictions and Fraud and Abuse. The Medicare and Medicaid anti- kickback statute, 42 U.S.C. Section 1320a-7(b), prohibits the knowing and willful solicitation or receipt of any remuneration "in return for" referring an individual, or for recommending or arranging for the purchase, lease, or ordering, of any item or service for which payment may be made under Medicare or a state healthcare program. In addition, the statute prohibits the offer or payment of remuneration "to induce" a person to refer an individual, or to recommend or arrange for the purchase, lease, or ordering of any item or service for which payment may be made under the Medicare or state healthcare programs. Violation of the anti-kickback statute, pursuant to the Balanced Budget Act, now carries a civil monetary penalty of $50,000 per act, and treble the remuneration involved without regard to whether any portion of that remuneration relates to a lawful purpose. The statute contains "safe harbor" exceptions including those for certain discounts, group purchasing organizations, employment relationships, management and personal services arrangements, health plans and certain other practices defined in regulatory safe harbors. The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992, generally prohibits physicians from referring Medicare patients to clinical laboratories for testing if the referring physician (or a member of the physician's immediate family) has a "financial relationship," through ownership or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of 1993 contains provisions commonly known as "Stark II" ("Stark II") expanding Stark I by prohibiting physicians from referring Medicare and Medicaid patients to an entity with which a physician has a "financial relationship" for the furnishing of certain items set forth in a list of "designated health services," including physical therapy, occupational therapy, home health services, and other services. Subject to certain exceptions, if such a financial relationship exists, the entity is generally prohibited from claiming payment for such services under the Medicare or Medicaid programs, and civil monetary penalties may be assessed for each prohibited claim submitted. 11 There are other provisions in the Social Security Act and in other federal and state laws authorizing the imposition of penalties, including fines and exclusion from participation in Medicare and Medicaid, for various billing and other offenses. Additionally, the Health Insurance Portability and Accountability Act of 1996 (the "Accountability Act") granted expanded enforcement authority to HHS and the U.S. Department of Justice ("DOJ"), and provided enhanced resources to support the activities and responsibilities of the Office of Inspector General ("OIG") and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to healthcare delivery and payment. The Balanced Budget Act also includes numerous health care fraud provisions, including new civil money penalties for contracting with an excluded provider; new surety bond and information disclosure requirements for certain providers and suppliers including home health agencies; and an expansion of the mandatory and permissive exclusions added by the Accountability Act to any federal healthcare program (other than the Federal Employees Health Benefits Program). In 1995, a major anti-fraud demonstration project, "Operation Restore Trust," was announced by the OIG. A primary purpose for the project was to scrutinize the activities of healthcare providers who are reimbursed under the Medicare and Medicaid programs. Investigative efforts focused on skilled nursing facilities, home health and hospice agencies, and durable medical equipment suppliers as well as several other types of healthcare services. Over the longer term, Operation Restore Trust investigative techniques will eventually be used in all 50 states, and will be applied throughout the Medicare and Medicaid programs. The OIG has issued, and will continue to issue, Special Fraud Alert bulletins identifying "suspect" characteristics of potentially illegal practices by providers, and illegal arrangements between providers. The bulletins contain "Hot Line" numbers and encourage Medicare beneficiaries, health care company employees, competitors, and others to call to report suspected violations. Enforcement actions could include criminal prosecutions, suit for civil penalties, and/or Medicare and Medicaid program exclusion. False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7(b) prohibit filing false claims or making false statements to receive payment or certification under Medicare or Medicaid, or failing to refund overpayments or improper payments; offenses for violation are felonies punishable by up to five years imprisonment, and/or $25,000 fines. Civil provisions at 31 U.S.C. Section 3729 prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment; penalties for violations are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. Suits alleging false claims can be brought by individuals, including employees and competitors. Allegations have been made under the civil provisions of the statute in certain qui tam actions that the Company has filed false claims. See "Legal Proceedings" for a discussion of these allegations. In addition to qui tam actions brought by private parties, the Company believes that governmental enforcement activities have increased at both the federal and state levels. See "Legal Proceedings." There can be no assurance that substantial amounts will not be expended by the Company to cooperate with these investigations and proceedings or to defend allegations arising therefrom. If it were found that any of the Company's practices failed to comply with any of the anti-fraud provisions discussed in the paragraphs above, the Company could be materially adversely affected. Management is unable to predict the effect of future administrative or judicial interpretations of the laws discussed above, or whether other legislation or regulations on the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take, or their impact on the Company. There can be no assurances that such laws will ultimately be interpreted in a manner consistent with the Company's practices. See "Legal Proceedings." Certificates of Need. Certificate of Need ("CON") statutes and regulations control the development and expansion of healthcare services and facilities in certain states. The CON process is intended to promote quality healthcare at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities. CON or similar laws generally require that approval be obtained from the designated state health planning agency for certain acquisitions and capital expenditures, and that such agency determine that a need 12 exists prior to the expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. Additionally, several states have instituted moratoria on new CONs or the approval of new beds. Pharmacy Regulation. Pharmacy operations are subject to regulation by the various states in which the Company conducts its business as well as by the federal government. The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, which is administered by the United States Drug Enforcement Administration ("DEA"), the pharmacies, as dispensers of controlled substances, must register with the DEA, file reports of inventories and transactions and provide adequate security measures. Failure to comply with such requirements could result in civil or criminal penalties. The Company believes that its pharmacy operations are in substantial compliance with such regulations. Nursing Home Enforcement Initiatives. President Clinton has announced initiatives designed to improve the quality of care in nursing homes and to reduce fraud in the Medicare program. On July 21, 1998, the President directed HCFA to ensure that states take tougher enforcement measures in surveying skilled nursing facilities; including the onsite imposition of fines without grace periods, the imposition of fines per violation rather than per day of noncompliance, and increased review of facilities' systems to prevent resident neglect and abuse. On December 7, 1998, the President announced that the Administration would continue its crackdown on providers who commit Medicare program fraud by empowering specialized contractors to track down Medicare scams and program waste, and by requiring providers to report evidence of fraud so patterns of fraud can be identified early and stopped. Senate Hearing. During the week of July 27, 1998, the Senate Special Committee on Aging conducted a hearing concerning nursing home quality issues, which resulted in heightened media attention and increased public scrutiny of the nursing home industry. Since this hearing, there appears to have been increased enforcement actions against nursing homes, including those operated by the Company, by state survey agencies, including threats to terminate facilities from participating in the Medicare and Medicaid programs, and the impositions of fines. Two facilities operated by the Company have had Medicare contracts terminated and a number have had fines imposed. The Company evaluates each termination and fine imposition and either pays the fine as assessed or appeals the assessment. Termination actions are either appealed or settled. See "Survey and Certification." While the Company believes that it substantially complies with applicable regulatory requirements, there can be no assurance that the Company will be able to maintain such compliance, or will not be required to expend significant amounts to pursue appeals of fine impositions, terminations or other sanctions. Draft Compliance Program. On October 28, 1999, the OIG issued draft guidance to help nursing facilities design effective voluntary compliance programs to prevent fraud, waste and abuse in health care programs, including Medicare and Medicaid. The draft guidance, Compliance Program Guidance for Nursing Facilities, was published as a notice in the Oct. 29, 1999, Federal Register. After reviewing and incorporating comments receiving during a comment period, as appropriate, the OIG will publish a final version of the voluntary compliance guidance in the Federal Register. The draft guidance recommends that nursing facilities enact certain procedures and policies in prevention of fraud, waste, and abuse. The Company has a compliance program it adopted voluntarily in early 1998, and believes its compliance program substantially incorporates the guidance which the OIG has proposed to be included in such programs. See "Business--Compliance Initiatives." Possible Increase in Regulatory Oversight. As a result of the Chapter 11 Filings, the Company may experience an increase in regulatory oversight compared to historical levels from both federal and state regulatory bodies. The increased oversight may result from such regulatory bodies' concerns that the Company's current financial difficulties may result in a decrease in the quality of care provided at the Company's inpatient and other facilities. Although the Company believes that it is in substantial compliance with applicable regulatory requirements, no assurance can be given that, if the Company is subject to an increase in regulatory oversight as 13 a result of the concerns described above, such increased oversight will not have a material adverse effect on the Company. OIG Fiscal Year 2000 Work Plan. In October of 1999, the OIG released its fiscal year 2000 Work Plan, which summarizes the major projects the OIG intends to pursue in each of HHS' major operating areas, including HCFA. Initiatives include review of skilled nursing facility coverage after unnecessary hospital stays, hospitals exempt from PPS, home health compliance, implementation of PPS, the role of the nursing home medical director, therapy services in skilled nursing facilities, financing screening and the distinct part rule. While the Company believes that it provides quality care to the patients in its facilities and materially complies with all applicable regulatory requirements, there can be no assurance that the Company will not be required to expend significant sums in connection with increased governmental investigatory activity. COMPETITION The long-term healthcare industry is segmented into a variety of competitive areas which market similar services. These competitors include nursing homes, hospitals, extended care centers, assisted living facilities, retirement centers and communities and home health and hospice agencies. Many operators of acute care hospitals offer or may offer post-acute care services in the future. These operators would have the competitive advantage of being able to offer services to patients at their affiliated post-acute care operations. The Company's facilities historically have competed on a local basis with other long-term care providers, and the Company's competitive position will vary from center to center within the various communities it serves. Significant competitive factors include the quality of care provided, reputation, location and physical appearance of the long-term care facilities and, in the case of private pay residents, charges for services. Since there is little price competition with respect to Medicaid and Medicare residents, the range of services provided by the Company's facilities covered by Medicaid and Medicare as well as the location and physical condition of its facilities will significantly affect its competitive position in its markets. The Company's ability to compete may also be adversely affected by publicity regarding the Company's Chapter 11 Filings. Competition in the institutional pharmaceutical services markets ranges from small local operators to companies that are national in scope and distribution capability. INSURANCE The Company maintains general and professional liability ("GL/PL") insurance coverage on behalf of itself and its subsidiaries. Up until March 31, 1998, for various preceding policy years, the policies carried deductibles or self-insured retentions in varying amounts up to $1 million depending on the subsidiary and its location. From March 31, 1998 through March 31, 1999, the Company maintained GL/PL insurance coverage that provided for a $100,000 self-insured retention per claim in all states in which the Company operated, other than Texas, where the self-insured retention was $1 million. This policy contained a cap on the aggregate self-insured retention that the Company could be required to pay with respect to any covered year. Effective March 31, 1999, the self-insured retention on the Company's former policy was increased to $500,000 for all states except Texas and Florida, where it was $1 million. In June 1999, the Company received notice of cancellation from the former carrier of its GL/PL coverage, based upon claims of underwriting risks. Effective July 31, 1999, the Company obtained a replacement policy with another carrier, which resulted in a $4.4 million increase in annual premium and elimination of former policy's aggregate retention limit and a self-insured retention of $1.0 million with respect to any claim in any state. The elimination of the aggregate retention limit is expected to increase the actuarial cost of GL/PL claims by approximately $42.6 million in the next year. This increased expense will have a delayed negative effect on cash flow as claims develop over the next several years. The increased cost to the Company under the new insurance program could have a material adverse effect on the Company's financial condition. The Company also requires that physicians practicing at its inpatient facilities carry medical malpractice insurance to cover their individual practice. In addition, insurance coverage for punitive damages is not available in certain states in which the Company operates, and proceedings involving claims of punitive damages are 14 pending in certain of these states. Moreover, given the current regulatory enforcement and litigation environment, as well as the recent changes to the Company's insurance coverage, there can be no assurance that costs for obtaining future PL/GL insurance coverage will not continue to increase, or that the Company's current insurance coverages will be adequate to satisfy any future adverse determinations against the Company. See "Business--Regulation," "Legal Proceedings" and Notes 17 and 18 to the Consolidated Financial Statements. EMPLOYEES The Company employs approximately 54,000 employees. The Company depends upon skilled personnel such as nurses as well as unskilled labor to staff its facilities. In some areas in which the Company operates there is a labor shortage that could have a material adverse effect upon the Company's ability to attract or retain sufficient numbers of skilled personnel and the ability to attract or retain sufficient numbers of unskilled labor at reasonable wages. The Company's Chapter 11 Filings could also have a material adverse effect on its ability to attract, retain and motivate a sufficient number of both skilled and unskilled labor. The Company has collective bargaining agreements with unions representing employees at 38 facilities and with employee counsels at two of its facilities. Unions represent employees at three additional facilities and the Company is currently negotiating collective bargaining agreements with unions at two of such facilities. The Company cannot predict the effect continued union representation or organizational activities will have on its future activities. However, the aforementioned organizations have not caused any material work stoppages in the past. RISK FACTORS AND CAUTIONARY STATEMENTS Information provided herein by the Company contains, and from time to time the Company may disseminate materials and make statements which may contain, "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). In particular, the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" contains information concerning the Company's plan to restructure its debt obligations and other financial commitments; and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000" contains information concerning management's belief regarding the impact of the Year 2000 issue. The aforementioned forward looking statements, as well as other forward looking statements made herein, are qualified in their entirety by these cautionary statements, which are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, the following: (i) There can be no assurance that the amounts available to the Company through the DIP Financings will be sufficient to fund the operations of the Company until such time as the Company is able to propose a plan of reorganization that will be acceptable to creditors and confirmed by the court overseeing the Company's Chapter 11 Filings. (ii) There can be no assurance that any plan of reorganization confirmed in connection with the Chapter 11 Filings will allow the Company to operate profitably under PPS or give the Company sufficient liquidity to meet its operational needs. (iii) There can be no assurance regarding the future availability or terms of financing in light of the Company's Chapter 11 Filings. (iv) There can be no assurance regarding any adverse actions which may be taken by creditors or landlords of the Company which may have the effect of preventing or unduly delaying confirmation of a plan of reorganization in connection with the Company's Chapter 11 Filings. (v) The Company may have difficulty in attracting patients or labor as a result of its Chapter 11 Filings. (vi) The Company may be subject to increased regulatory oversight as a result of its Chapter 11 Filings. 15 (vii) In recent years, an increasing number of legislative proposals have been introduced or proposed by Congress and in some state legislatures which would effect major changes in the healthcare system. However, the Company cannot predict the type of healthcare reform legislation which may be proposed or adopted by Congress or by state legislatures. Accordingly, the Company is unable to assess the effect of any such legislation on its business. There can be no assurance that any such legislation will not have a material adverse impact on the future growth, revenues and net income of the Company. (viii) The Company derives substantial portions of its revenues from third-party payors, including government reimbursement programs such as Medicare and Medicaid, and some portions of its revenues from nongovernmental sources, such as commercial insurance companies, health maintenance organizations and other charge-based contracted payment sources. Both governmental and non-governmental payors have undertaken cost-containment measures designed to limit payments to healthcare providers. There can be no assurance that payments under governmental and non-governmental payor programs will be sufficient to cover the costs allocable to patients eligible for reimbursement, especially with the implementation of PPS and fee screens with respect to therapy services. The Company cannot predict whether or what proposals or cost-containment measures will be adopted in the future or, if adopted and implemented, what effect, if any, such proposals might have on the operations and financial condition of the Company. (ix) The Company is subject to extensive federal, state and local regulations governing licensure, conduct of operations at existing facilities, construction of new facilities, purchase or lease of existing facilities, addition of new services, certain capital expenditures, cost-containment and reimbursement for services rendered. The failure to obtain or renew required regulatory approvals or licenses, the failure to comply with applicable regulatory requirements, the delicensing of facilities owned, leased or managed by the Company or the disqualification of the Company from participation in certain federal and state reimbursement programs, or the imposition of harsh enforcement sanctions could have a material adverse effect upon the operations and financial condition of the Company. (x) With respect to the year 2000 disclosure contained in Management's Discussion and Analysis of Financial Position and Results of Operations-Year 2000, management is unable to predict the extent to which its third-party payors will be affected by the Year 2000 Issue. (xi) There can be no assurance that an adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, will not have a material adverse effect on the Company's financial position. In addition, the Company's Chapter 11 Filings may disrupt its operations and may result in a number of other operational difficulties, including the following: (i) The Company's ability to access capital markets will likely be limited; (ii) The Company's senior management may be required to expend a substantial amount of time and effort structuring a plan of reorganization, which could have a disruptive impact on management's ability to focus on the operation of the Company's business; (iii) The Company may be unable to retain top management and other key personnel; (iv) The Company may experience a reduction in the census at its skilled nursing facilities and hospitals; and (v) Suppliers to the Company may stop providing supplies or services to the Company or provide such supplies or services only on "cash on delivery," "cash on order" or other terms that could have an adverse impact on the Company's cash flow. 16 ITEM 2. PROPERTIES As of September 30, 1999, the Company operates 413 long-term care facilities (400 skilled nursing facilities and 13 free standing assisted living facilities) with over 49,000 licensed beds located in 28 states. Of this total, 74 facilities located in 15 states are Mariner Health facilities ("Mariner Health Facilities"). Substantially all of the Mariner Health Facilities serve as collateral for the obligations of Mariner Health under the Mariner Health senior credit facility. In connection with the Chapter 11 Filings, the Company agreed to manage these facilities for the lenders party to Mariner Health's senior credit facility for a management fee equal to 5% of the revenues attributable to the Mariner Health Facilities subject to Mariner Health's Senior Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources. Licensed beds represent the number of beds for which a license has been issued and may vary from the actual beds available for use. The average occupancy rate for the Company's inpatient facilities (excluding LTACs) was 85.2% for the year ended September 30, 1999. The Company operates the following facilities:
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.............. 7 832 31 3,727 4 385 42 4,944 Colorado................ 30 2,974 4 675 -- -- 34 3,649 Connecticut............. 2 250 1 90 -- -- 3 340 Delaware................ -- -- -- -- 1 99 1 99 Florida................. 26 3,225 2 237 -- -- 28 3,462 Georgia................. 5(1) 571 6 740 -- -- 11 1,311 Iowa.................... 1 99 -- -- 6(2) 448 7 547 Illinois................ 14 1,271 5 667 -- -- 19 1,938 Indiana................. -- -- 3 415 -- -- 3 415 Louisiana............... 1 276 5 984 -- -- 6 1,260 Maryland................ 11 1,768 2 368 -- -- 13 2,136 Massachusetts........... 5 576 -- -- 6 809 11 1,385 Michigan................ 13 1,863 -- -- -- -- 13 1,863 Mississippi............. 1 121 10 1,104 -- -- 11 1,225 Nebraska................ 7 585 -- -- -- -- 7 585 North Carolina.......... 27 3,261 7(3) 909 -- -- 34 4,170 Ohio.................... 1 93 1 100 -- -- 2 193 Oklahoma................ -- -- 1 161 -- -- 1 161 Pennsylvania............ 2 205 -- -- -- -- 2 205 South Carolina.......... 3 565 9 964 -- -- 12 1,529 Tennessee............... 2 210 4 479 -- -- 6 689 Texas................... 58 6,935 42 4,447 1 116 101 11,498 Virginia................ -- -- 2 166 1 60 3 226 West Virginia........... 1 186 -- -- -- -- 1 186 Wisconsin............... 6(4) 1,074 9 1,136 -- -- 15 2,210 Wyoming................. 4 417 2(3) 140 -- -- 6 557 --- ------ --- ------ --- ----- --- ------ Total................... 238 28,711 156 18,745 19 1,917 413 49,373 === ====== === ====== === ===== === ======
- -------- (1) One assisted living facility was divested subsequent to September 30, 1999. (2) All of the indicated facilities were divested subsequent to September 30, 1999. (3) One skilled nursing facility was divested subsequent to September 30, 1999. (4) One skilled nursing facility opened subsequent to September 30, 1999. 17 In addition to long-term care facilities, the Company operates 37 institutional pharmacies in 17 states, as follows:
STATE PHARMACIES ----- ---------- Alabama......................................................... 1 Arizona......................................................... 1 Colorado........................................................ 2 Connecticut..................................................... 1 Florida......................................................... 7 Georgia......................................................... 2 Illinois........................................................ 1 Indiana......................................................... 1 Louisiana....................................................... 2 Maryland........................................................ 1 Massachusetts................................................... 1 Mississippi..................................................... 1 New Jersey...................................................... 1 North Carolina.................................................. 2 Tennessee....................................................... 1 Texas........................................................... 11 Wisconsin....................................................... 1 --- Total........................................................... 37 ===
All of the Company's institutional pharmacy locations are leased, substantially all of which are subject to "triple net" leases containing standard market terms. The Company's LTAC business operates 14 owned, leased or managed LTAC's located in the following states:
OWNED OR LEASED MANAGED TOTAL --------------- --------------- --------------- FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS ---------- ---- ---------- ---- ---------- ---- Arizona......................... 1 21 -- -- 1 21 Louisiana....................... 3 172 1 20 4 192 Ohio............................ -- -- 1 45 1 45 Texas........................... 6 377 2 76 8 453 --- --- --- --- --- --- Total........................... 10 570 4 141 14 711 === === === === === ===
The average occupancy rate for the Company's LTACs for the year ended September 30, 1999 was 56.3%. Certain of the above properties serve as collateral for various mortgage debt instruments or capitalized lease obligations. See Notes 12 and 17 to the Consolidated Financial Statements. The Company is in the process of actively reviewing its portfolio of properties and intends to divest those properties that it believes do not meet acceptable quality or financial performance standards or do not fit strategically into the Company's operations. As a result of the Chapter 11 Filings, the Company is in default under certain of the leases and security arrangements pertaining to the facilities listed above. Additionally, certain of the Company's leases contain cross default provisions that may be triggered if certain of the Company's debt obligations are accelerated. The Company has received default notices under its leases from landlords owning a material number of the Company's facilities and security arrangements with certain lenders, primarily as a result of the Company's financial condition. There can be no assurance that the existing defaults and/or defaults that may arise in the future under such leases and security arrangements will not have a material adverse effect on the Company or its attempts to structure a plan of reorganization acceptable to the Company's landlords and other creditors. 18 ITEM 3. LEGAL PROCEEDINGS As is typical in the healthcare industry, the Company is and will be subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which will be greater for higher acuity residents receiving services from the Company than for other long-term care residents. In addition, resident, visitor, and employee injuries will also subject the Company to the risk of litigation. The Company has experienced an increasing trend in the number and severity of litigation claims asserted against the Company. Management believes that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which the Company has significant operations, including California and Florida, insurance coverage for the risk of punitive damages arising from general and professional liability litigation is not available due to state law public policy prohibitions. There can be no assurance that the Company will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available. The Company also believes that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims as well as an increase in enforcement actions resulting from these investigations. While the Company believes that it provides quality care to the patients in its facilities and materially complies with all applicable regulatory requirements, given the Company's current financial difficulties and lack of liquidity, an adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on the Company. From time to time, the Company and its subsidiaries have been parties to various legal proceedings in the ordinary course of their respective businesses. In the opinion of management, except as described below, there are currently no proceedings which, individually, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. Although the Company believes that any of the proceedings not discussed below will not individually have a material adverse impact on the Company if determined adversely to the Company, given the Company's current financial condition, lack of liquidity and change in the Company's GL/PL insurance policy, settling a large number of cases within the Company's $1 million self-insured retention limit could have a material adverse effect on the Company . On August 26, 1996, a class action complaint was asserted against GranCare in the Denver, Colorado District Court, Salas, et al v. GranCare, Inc. and AMS Properties, Inc. d/b/a Cedars Healthcare Center, Inc., case no. 96-CV-4449. On March 15, 1998, the Court entered an Order in which it certified a class action in the matter. On June 10, 1998, the Company filed a Motion to Dismiss all claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and these motions were partially granted by the Court on October 30, 1998. Plaintiffs' Motion for Reconsideration was denied by the Court on November 19, 1998, the Court's decision was certified as a final judgment on December 10, 1998, and plaintiffs then filed a writ with the Colorado Supreme Court and an appeal with the Colorado Court of Appeal. This Supreme Court writ has been denied, the Court of Appeal matter has been briefed and Oral Argument has been set for January 18, 2000. The Company will continue in its opposition to all appeals and further intends to vigorously contest the remaining allegations of class status. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States' Office for the Eastern District of Texas (Beaumont) advising that the office was involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation was the result of a qui tam complaint filed under seal against the Company. On May 3, 1999, the Government advised that it has declined to intervene into this matter, but the case remains under seal. The Company received a letter from the court clerk informing the Company that this case was closed as of September 15, 1999. On March 18, 1998, a complaint was filed under seal by a former employee against the Company, certain of its predecessor entities and affiliates in the United States District Court for the Northern District of Alabama, 19 alleging, inter alia, employment discrimination, wrongful discharge, negligent hiring, violation of the Federal False Claims Act, and retaliation under the False Claims Act. The action is titled Powell, et al. v. Paragon Health Inc., et al., civil action No. CV-98-0630-S. The complaint has been unsealed and the Company has been advised that the government has declined to intervene in this matter under the Federal False Claims Act. The Company is vigorously contesting the alleged claims. On May 18, 1998, a class action complaint was asserted against the Company, certain of its predecessor entities and affiliates and certain other parties in the Tampa, Florida Circuit Court, Wilson, et al, v. Mariner Post-Acute Network, Inc., et al., case no. 98-03779, asserting seven claims for relief, including breach of contract, breach of fiduciary duty, unjust enrichment, violation of Florida Civil Remedies for Criminal Practices Act, violation of Florida Racketeer and Corrupt Organization Act, false advertising and common law conspiracy arising out of quality of care issues at a healthcare facility formerly operated by the Brian Center Health and Rehabilitation/Tampa, Inc. and later by a subsidiary of LCA as a result of the Brian Center Corporation merger. The Company removed this case to Federal Court on June 10, 1998 and the matter was pending in the United States District Court for the Middle District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiff voluntarily dismissed this case on April 16, 1999. On August 25, 1998, a complaint was filed by the United States against the Company's GranCare and International X-Ray subsidiaries and certain other parties under the Civil False Claims Act and in common law and equity. The lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was filed in United States District Court for the Eastern District of Michigan. Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary, International X-Ray, owns a minority partnership interest in defendant Valley X- Ray. The case asserts five claims for relief, including two claims for violation of the Civil False Claims Act, two alternative claims of common law fraud and unjust enrichment, and one request for application of the Federal Debt Collection Procedures Act. The two primary allegations of the complaint are: that the X-Ray company received Medicare overpayments for transportation costs in the amount of $657,767; and that the X-Ray company "upcoded" Medicare claims for EKG services in the amount of $631,090. The United States has requested treble damages as well as civil penalties of $5,000 to $10,000 for each of the alleged 388 submitted Medicare claims. The total damages sought varies from $5.3 to $7.2 million. The Company is vigorously contesting all claims and filed two motions to dismiss on behalf of its subsidiaries on November 23, 1998. The United States has agreed to the motion to dismiss GranCare as a party. The Court has heard a motion to dismiss the Civil False Claims Act and other claims against International X-Ray. The Company is awaiting the Court's decision. On October 1, 1998, a class action complaint was asserted against certain of the Company's predecessor entities and affiliates and certain other parties in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al, case no. 98-7233. The complaint asserted three claims for relief, including breach of fiduciary duty against one group of defendants, breach of fiduciary duty against another group of defendants, and civil conspiracy arising out of issues involving facilities previously operated by the Brian Center Corporation or one of its subsidiaries, and later by a subsidiary of LCA, as a result of the merger with Brian Center Corporation. All defendants submitted Motions to Dismiss which were heard by the Court on September 15, 1999. The Company is awaiting a decision from the Court and is not in a position to evaluate the probability of a favorable outcome or the range of potential loss. The Company intends to vigorously contest the request for class certification, as well as all alleged claims made. On November 16, 1998, a complaint was filed under seal by a former employee against the Company, certain of its predecessor entities and affiliates in the United States District Court for the Southern District of Texas, alleging violation of the Federal False Claims Act. The action is titled United States ex rel. Nelius, et al., v. Mariner Health Group, Inc., et al., civil action No. H-98-3851. The complaint which was unsealed, has been recently amended to add additional relators and allegations under the Federal False Claims Act. The Company has been advised that the government is evaluating its decision not to intervene with regard to the amended complaint and relators. The Company will vigorously contest the alleged claims. In addition, a three judge panel of the United States Court of Appeals for the Fifth Circuit recently held that qui tam lawsuits in which the 20 government does not intervene are unconstitutional under the Take Care Clause of Article II of the United States Constitution. The Court declined to rule whether qui tam suits in which the government does intervene are unconstitutional. The full bench of the U.S. Court of Appeals for the Fifth Circuit agreed November 15, 1999, to review this decision. Riley v. St. Luke's Episcopal Hospital, No. 97-20948, rehearing en banc granted (5th Cir., 1999). A full court determination affirming the court's decisions could favorably effect the outcome of this action, which is currently before a United States District Court located in the Fifth Circuit. On approximately June 8, 1999, OIG issued a subpoena duces tecum to Mariner of Catonsville. The subpoena requests medical records pertaining to eighteen residents. The subpoena also requests other broad categories of documents. The Company has produced a substantial amount of documents responsive to the Subpoena. The Company is cooperating with the investigation and has retained experienced counsel to assist in responding to the subpoena and to advise the Company with respect to this investigation. This investigation is still in its preliminary stages; therefore, the Company is unable to predict the outcome of this matter. On October 27, 1999, the Company was served with a Complaint in United States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA Living Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed in the United States District Court for the Eastern District of Pennsylvania. This action originally was filed under seal on November 5, 1997, by relators Cindy Lee Anderson Rutledge and the Partnership for Fraud Analysis under the Federal False Claims Act and the Florida False Claims Act. The Complaint alleges that the Company is liable under the Federal False Claims Act and the Florida False Claims Act for alleged violations of regulations pertaining to the training and certification of nurse aides at former LCA facilities. After conducting an investigation in which the Company cooperated by producing documents responsive to an administrative subpoena and allowing certain employee interviews, the United States Department of Justice elected not to intervene. The district court unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company filed a motion to dismiss the relators' complaint. The Company intends vigorously to defend this action. On November 10, 1999, suit was filed in the United States District Court for the Western District of Tennessee against the Company and its subsidiary, National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in its complaint seeks declaratory judgment and injunctive relief related to Mid- South's contention that two leases, currently held by National Heritage, for twelve nursing home facilities in Tennessee and Mississippi expire on January 31, 2000, and Mid-South's contention that the nursing home facilities have not been maintained to the levels required by the leases. Mid-South also seeks unspecified damages. On December 16, 1999, the Company and National Heritage answered the complaint and counterclaims were asserted on behalf of National Heritage seeking a declaratory judgment that it properly exercised certain options to extend the leases for five year periods (through January 31, 2005), seeking injunctive relief to prevent interference with its right of possession and seeking damages for Mid-South's breach of its duty of good faith and fair dealing. The dispute involves the interpretation of language in certain lease amendments and whether or not Mid-South, by failing to renew certain ground leases upon which three of the twelve leased facilities are built, can unilaterally extinguish National Heritage's options to extend the leases for an additional five year term. On January 13, 2000, the Company, National Heritage and Mid-South entered into a Lease Amendment Agreement (the "Agreement") to settle and resolve all of the claims pending in the subject litigation. The Agreement requires, inter alia, all parties to release and dismiss their respective claims and counterclaims. In addition, Mid-South will agree that the leases on the Facilities have been extended through January 31, 2005 (with an option term through January 31, 2010), will invest up to $3.0 million in capital improvements to certain of the Facilities and will provide certain consulting services in connection therewith. The Company will pay Mid-South a consulting fee of $1.7 million per year and additional rent contingent on the level of capital expenditures actually made by Mid-South. The Company will also make certain capital improvements to the Facilities. The Company will file the necessary motion with the Bankruptcy Court seeking approval to assume this contract on a post-petition basis. 21 On January 18, 2000, the Company and substantially all of its subsidiaries, including Mariner Health and its subsidiaries, filed voluntary petitions (the "Chapter 11 Filings") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will likely constitute a default under the Company's and such subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic stay that will generally preclude the creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default without prior Bankruptcy Court approval. The Company's need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the Balanced Budget Act of 1997 ("Balanced Budget Act") and its implementation, which reduced the Company's Medicare reimbursement rate by approximately $115 per resident, per day. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKETS AND SALES PRICES OF COMMON EQUITY SECURITIES From November 4, 1997 through July 31, 1998, the Company's common stock was traded on the New York Stock Exchange ("NYSE") under the symbol "PGN." On August 1, 1998, the Company's symbol on the NYSE was changed to "MPN." On November 2, 1999, trading in the Company's common stock was suspended on the NYSE and the common stock commenced trading on the OTCBB under the symbol "MPAN."
1999 1998 --------------- ---------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ----- ----- ------ ------ December 31............................ $ 7 1/8 $ 3 3/16 $ 20 3/4 $ 16 1/4 March 31............................... 5 1/16 2 1/16 21 1/2 17 1/16 June 30................................ 3 3/4 1/2 21 13 7/8 September 30........................... 1 1/16 5/16 17 1/4 4 7/8
NUMBER OF STOCKHOLDERS As of January 12, 2000, there were approximately 1,737 owners of record of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends on its common stock since inception and, in light of the Chapter 11 Filings, does not anticipate paying any such dividends on its common stock in the future. In addition, the terms of the DIP Financings, the Company's Senior Credit Facility, the indenture with respect to the Company's outstanding Senior Subordinated Notes, and various other note agreements contain covenants that effectively limit the ability of the Company to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 12 to the Consolidated Financial Statements. 22 ITEM 6. SELECTED FINANCIAL INFORMATION The following selected financial data are derived from the Company's Consolidated Financial Statements, which have been audited by Ernst & Young LLP, independent auditors. The Consolidated Financial Statements give retroactive effect to the acquisition by merger of the Brian Centers Corporation as though the transaction occurred on October 1, 1994; such transaction has been accounted for using the pooling of interests method of accounting. THE CONSOLIDATED FINANCIAL STATEMENTS GIVE EFFECT TO THE APOLLO/LCA/GRANCARE MERGERS EFFECTIVE NOVEMBER 1, 1997 AND THE MARINER MERGER EFFECTIVE JULY 31, 1998. The information set forth below is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements and the Notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this filing.
YEAR ENDED SEPTEMBER 30, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) INCOME STATEMENT DATA: Net revenues.......... $ 2,272,580 $2,035,529 $1,140,288 $1,114,491 $893,869 Income (loss) from op- erations............. (1,583,135) (94,072) 95,108 89,556 57,005 Interest expense, net................ 195,261 114,302 16,852 12,461 10,817 Equity earnings/minority interests.......... 114 (562) (735) (156) (204) Extraordinary loss.. -- (11,275) -- -- -- Net income (loss)... (1,778,282) (209,652) 43,917 43,180 24,234 Pro forma taxes(1).... -- -- -- -- 599 Pro forma net income (loss)(1)............ (1,778,282) (209,652) 43,917 43,180 23,635 Earnings (loss) per share--basic(2)...... $ (24.21) $ (4.31) $ 0.75 $ 0.72 $ 0.43 Pro forma earnings (loss) per share--ba- sic(1)(2)............ $ (24.21) $ (4.31) $ 0.75 $ 0.72 $ 0.42 Earnings (loss) per share--diluted(2).... $ (24.21) $ (4.31) $ 0.73 $ 0.71 $ 0.42 Pro forma earnings (loss) per share-- diluted(1)(2)........ $(24.21) $ (4.31) $ 0.73 $ 0.71 $ 0.41 Weighted average num- ber of shares out- standing--basic (in thousands)(2)........ 73,459 48,601 58,613 60,372 56,553 Weighted average num- ber of shares out- standing--diluted (in thousands)(2)........ 73,459 48,601 59,808 60,946 57,134 OPERATING STATISTICS: Number of centers (end of period)........... 413 428 202 206 294 Average occupancy rate................. 85.4 % 84.1 % 82.9 % 83.9 % 85.1 % Percentage of patient revenues from: Private............. 31.8 % 29.9 % 33.4 % 31.9 % 25.5 % Medicare............ 21.0 31.5 25.7 25.5 23.9 Medicaid............ 47.2 38.6 40.9 42.6 50.6 Percentage operating margin............... N/M (4.6)% 8.3 % 8.0 % 6.4 % SEPTEMBER 30, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ---------- ---------- ---------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital....... $(1,945,915) $ 350,216 $ 102,104 $ 101,091 $ 34,631 Total assets.......... 1,274,971 3,036,651 874,367 809,612 730,708 Long term debt, in- cluding current por- tion................. 2,141,844 2,024,115 295,959 276,448 216,910 Stockholders' (defi- cit) equity.......... (1,386,019) 397,014 375,283 329,315 303,596 Total capitalization.. 755,825 2,421,129 671,242 605,763 520,506
- -------- (1) Effective July 31, 1995, the Company consummated a merger transaction with The Brian Center Corporation ("BCC") and 16 related S Corporations. The merger was accounted for using the pooling of interest methodology. A pro forma income tax provision has been provided to reflect the estimated federal and state income taxes as if all BCC S Corporations were taxable entities. (2) Earnings per share and number of shares outstanding have been adjusted to reflect the three-for-one stock split. 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Effective July 31, 1998, the Company acquired Mariner Health Group, Inc. ("Mariner Health") in a stock for stock merger (the "Mariner Merger") pursuant to which: (i) Mariner Health became a wholly-owned subsidiary of the Company; and (ii) the Company changed its name to "Mariner Post-Acute Network, Inc." The Mariner Merger was accounted for under the purchase method of accounting and, accordingly, the results of Mariner Health's operations have been included in the Company's consolidated financial statements since the date of acquisition. Effective November 1, 1997 for accounting purposes, the Company completed two merger transactions. First, pursuant to an agreement and plan of merger among Apollo Management, L.P. ("Apollo Management," and together with certain of its affiliates, "Apollo"), Apollo LCA Acquisition Corp. (a corporation owned by certain Apollo affiliates and other investors, "Apollo Sub") and Living Centers of America, Inc. ("LCA"), Apollo Sub was capitalized with $240 million in cash and was merged with and into LCA (the "Recapitalization Merger"). In the Recapitalization Merger, LCA was the surviving corporation and was renamed "Paragon Health Network, Inc." Second, pursuant to an agreement and plan of merger among LCA, GranCare, Inc. "GranCare"), Apollo Management and LCA Acquisition Sub, Inc., a wholly-owned subsidiary of the Company ("LCA Sub"), GranCare merged with LCA Sub with GranCare surviving as a wholly-owned subsidiary of the Company (the "GranCare Merger," and collectively with the Recapitalization Merger, the "Apollo/LCA/GranCare Mergers"). The GranCare Merger was accounted for under the purchase method of accounting and, accordingly, the results of GranCare's operations have been included in the Company's consolidated financial statements since the date of acquisition, which, for accounting purposes, is November 1, 1997. Unless otherwise indicated, the information herein does not give pro forma effect to the Apollo/LCA/GranCare Mergers or the Mariner Merger as if they had been completed as of the beginning of the period presented. The Company also completed other acquisitions in fiscal 1998 including Summit Medical Holdings, Inc. and Professional Rehabilitation, Inc., among others, all of which were accounted for as purchase business combinations and were not material to the Company as a whole. On January 18, 2000, the Company and substantially all of its subsidiaries, including Mariner Health and its subsidiaries, filed voluntary petitions (the "Chapter 11 Filings") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will likely constitute a default under the Company's and such subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic stay that will generally preclude the creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default without prior Bankruptcy Court approval. The Company's need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the Balanced Budget Act of 1997 ("Balanced Budget Act") and its implementation, which reduced the Company's Medicare reimbursement rate by approximately $115 per resident, per day and had a substantial negative effect on its ancillary businesses. In connection with the Chapter 11 Filings, the Company obtained a commitment for $100 million in debtor-in-possession ("DIP") financing (the "Company DIP Financing") from a group of banks led by The Chase Manhattan Bank. Mariner Health also obtained a commitment for $50 million in DIP financing from a group of banks led by PNC Bank (the "Mariner Health DIP Financing"; together with the Company DIP Financing, the "DIP Financings"). For a description of the principal terms of the DIP Financings, see "Management's Discussion and Analysis of Operations--Liquidity and Capital Resources." GENERAL The Company is one of the nation's largest providers of post-acute health care services, primarily through the operation of its skilled-nursing facilities. As of September 30, 1999, the Company's significant operations 24 consist of (i) over 400 inpatient and assisted living facilities containing approximately 49,000 beds, (ii) 37 institutional pharmacies servicing more than 2,000 facilities and (iii) 14 long-term acute care hospitals ("LTACs") with approximately 700 licensed beds. In addition, the Company has limited home health, physician management and hospital contract management operations, the majority of which the Company plans to exit in the near future. The Company operates in 40 states with significant concentrations of facilities and beds in eight states and several metropolitan markets. Historically, the Company also (i) operated a large contract rehabilitation therapy business that provided comprehensive therapy programs and services, on a contractual basis, to over 1,200 inpatient healthcare facilities throughout the United States, (ii) operated approximately 170 outpatient rehabilitation therapy clinics in eighteen states, (iii) managed specialty medical programs in acute-care hospitals through more than 100 hospital relationships in nineteen states (the Company was out of this line of business as of December 31, 1999), and (iv) operated more than thirty home health, hospice and private duty nursing branches in seven states (only two of which are still operated by the Company and are in the process of being divested). Primarily as a result of changes in Medicare reimbursement effected under the Balanced Budget Act of 1997 (the "Balanced Budget Act"), these businesses began to generate, or were anticipated to generate, significant operating losses and negative cash flow and have been or are being divested or closed. The Company's revenues and profitability are affected by ongoing efforts of third-party payors to contain healthcare costs by limiting reimbursement rates, increasing case management review and negotiating reduced contract pricing. The Company's percentage of total net patient revenues derived from Medicare and Medicaid programs were 21.0% and 47.2%, respectively, for the year ended September 30, 1999. Government payors, such as state-administered Medicaid programs and, to a lesser extent, the federal Medicare program, generally provide more restricted coverage and lower reimbursement rates than private pay sources. Private payors accounted for 31.8% of the Company's total net patient revenues for the year ended September 30, 1999. The administrative procedures associated with the Medicare cost reimbursement program, with respect to facilities and periods not subject to PPS, generally preclude final determination of amounts due the Company until annual cost reports are audited or otherwise reviewed and settled with the applicable fiscal intermediaries and administrative agencies. Certain Medicare fiscal intermediaries have made audit adjustments to settle cost reports for some of the Company's facilities that reduce the amount of reimbursement that was previously received by the facilities (see "--Results of Operations"). The Company believes that it has properly recorded revenue under cost reimbursement programs based on the facts and current regulations. If the Company was to receive adverse adjustments that it had not contemplated in recording its revenue in the past, the differences could be significant to the Company's results of operations in the period of final determination. Beginning July 1, 1998, the Company's facilities began to be phased into the PPS System under which nursing home providers are paid a fixed per diem rate for Medicare patients based on their acuity level. Under PPS, the Company is still required to file cost reports; however, the audit and settlement process of Medicare cost reports is not expected to have a material impact on total Medicare revenue. See "--Liquidity and Capital Resources." RESULTS OF OPERATIONS Net revenues totaled $2.3 billion for the year ended September 30, 1999, an increase of $237.1 million as compared to fiscal 1998. Net revenues increased by $412.8 million as a result of the Mariner Merger effective July 31, 1998 and decreased by $167.8 million as a result of the termination of all contracts to provide therapy services effective May 31, 1999 and the divestiture or closure of the Company's outpatient rehabilitation clinics, hospital rehabilitation management contract business, and substantially all home health operations during fiscal year 1999. Net revenues totaled $2.0 billion for the year ended September 30, 1998, an increase of $895.2 million as compared to fiscal 1997. Net revenues increased by $700.4 million as a result of the GranCare Merger effective November 1, 1997 and $129.2 million as a result of the Mariner Merger. Loss from operations, which includes impairment of long-lived assets of $995.9 million, loss on disposal of assets of $242.7 million, and recapitalization, indirect merger and other expenses of $65.4 million, totaled 25 $1.6 billion for the year ended September 30, 1999, an increase of $1.5 billion compared to fiscal 1998. Loss from operations, which includes impairment of long-lived assets of $135.8 million and recapitalization, indirect merger, and other expenses of $87.3 million, totaled $94.1 million for the year ended September 30, 1998. Excluding impairment of long-lived assets, loss on disposal of assets, and recapitalization, indirect merger and other expenses, costs and expenses included in loss from operations primarily consist of salaries, wages, employee benefits and purchased services and supplies. Various federal, state, and local regulations impose, depending on the services provided, a variety of regulatory standards for the type, quality and level of personnel required to provide care or services. These regulatory requirements have an impact on staffing levels, as well as the mix of staff, and therefore impact total costs and expenses. See "Business--Regulation." The cost of ancillary services, which includes pharmaceuticals, is also affected by the level of service provided and patient acuity. General and administrative expenses include the indirect administrative costs associated with operating the Company and its lines of business. Insurance expense includes the costs of the various insurance programs such as automobile, general and professional liability and workers' compensation. Rent expense totaled $103.8 million for the year ended September 30, 1999, an increase of $17.2 million as compared to fiscal 1998. Depreciation and amortization expense totaled $120.5 million for the year ended September 30, 1999, an increase of $45.5 million as compared to fiscal 1998. These increases were primarily a result of the Mariner Merger. Rent expense totaled $86.6 million for the year ended September 30, 1998, an increase of $44.1 million as compared to fiscal 1997. Depreciation and amortization expense totaled $75.0 million for the year ended September 30, 1998, an increase of $35.7 million as compared to fiscal 1997. These increases were primarily a result of the GranCare Merger. Provision for bad debts totaled $142.5 million for the year ended September 30, 1999, an increase of $112.9 million as compared to the year ended September 30, 1998. The increase is due to a full year of operations related to the Mariner Merger and the implementation of PPS by pharmacy's and therapy's customers. PPS reduced the cash flows of pharmacy's and therapy's customers which resulted in an increased aging and uncollectable accounts in both pharmacy's and therapy's accounts receivable. In addition, the Company's accounts receivable continued to deteriorate during the year due to the multiple complexities involved with the change to Medicare PPS billing, system conversions and consolidation, and turnover of facility-level billing and collection personnel. The Company's facilities were phased into PPS based upon their cost report years (20 facilities on July 1, 1998; 105 facilities on October 1, 1998; 189 facilities on January 1, 1999; and 83 facilities on April 1, 1999). At September 30, 1999, all facilities are being paid by Medicare under PPS, and as such, revenue recorded will consist of the aggregate payments expected from Medicare for individual claims at the appropriate payment rates. The PPS billing methodology is extremely complex and its implementation is resource intensive. The claims amendment process lacks procedures and the coordination of certain policies. The Company has a commitment to training and compliance and has established procedures to address PPS issues as they arise. The Company will continue to review the collectability of its accounts receivable which may result in increased provision for bad debts in the future. Provision for bad debts totaled $29.6 million for the year ended September 30, 1998, an increase of $3.3 million as compared to the year ended September 30, 1997. In the fourth quarter of fiscal year 1999 the Company recorded a non-cash charge related to the impairment of certain long-lived assets as required by the Company's accounting policy, which follows the guidelines of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. The revenues recorded by the Company in its nursing facilities under PPS are substantially less than the cost-based reimbursement it received previously. In addition, the implementation of PPS resulted in a greater than expected decline in the demand and market rates for the Company's pharmacy services. Management determined that these revenue declines in its nursing facilities and pharmacy services are other than temporary and are expected to have a material adverse effect on future revenues and cash flow. As a result of these indicators, a detailed analysis of the Company's long-lived assets and their 26 estimated future cash flows was completed. The analysis resulted in the identification and measurement of an impairment loss of $995.9 million principally related to the Company's nursing facilities and pharmacies with either cash flow losses or where projected cash flow was not sufficient to recover the carrying amount of their goodwill, property and equipment, and other intangible assets which primarily include leasehold rights. The following is a summary of the impairment loss by segment for the year ended September 30, 1999:
YEAR ENDED SEPTEMBER 30, 1999 ------------------------------------------ OTHER PROPERTY AND INTANGIBLE GOODWILL EQUIPMENT ASSETS TOTAL --------- ------------ ---------- -------- (IN THOUSANDS) Inpatient Nursing Home Services...... $ 526,411 $306,845 $38,073 $871,329 Pharmacy Services.................... 104,661 11,632 4,546 120,839 Other................................ 3,764 -- -- 3,764 --------- -------- ------- -------- $ 634,836 $318,477 $42,619 $995,932 ========= ======== ======= ========
In the fourth quarter of fiscal year 1998 the Company recorded an impairment charge based on a detailed analysis of the Company's long-lived assets and their estimated future cash flows. The analysis resulted in the identification and measurement of an impairment loss of $135.8 million related to the Company's nursing facilities and home health agencies with either cash flow losses or nursing facilities where management believed an impairment existed. Each analysis included management's estimate of the undiscounted cash flows to be generated by these assets with a comparison to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. Loss on disposal of assets totaled $242.7 million during the year ended September 30, 1999 which primarily reflected the termination of contracts to provide therapy services and the closure of the therapy business effective May 31, 1999. As a result of the therapy closure, the Company recorded a loss on the disposal of the goodwill associated with the therapy business of $228.5 million and a loss of $7.5 million related to the abandonment of certain assets as a result of the terminations. The Company also recorded a loss on disposal of $2.5 million resulting from the sale of the assets of the Company's outpatient rehabilitation clinics to HealthSouth Corporation, which was completed June 30, 1999, and the sale of the hospital rehabilitation management contract business to National Rehab Partners, Inc. for a net loss of $4.9 million. The Company also recorded a net gain of $0.7 million as a result of the divestiture or non-renewal of existing leases for approximately 15 long-term care facilities and the divestiture of substantially all of its home health operations. Recapitalization, indirect merger and other expenses totaled $65.4 million and $87.3 million for the years ended September 30, 1999 and 1998, respectively. The fiscal 1999 amount included approximately $15.6 million of costs incurred and paid related to the Mariner Merger, approximately $15.1 million of costs incurred to outside professionals related to the Company's defaults in connection with its indebtedness, and $34.7 million of other expenses. At September 30, 1999 approximately $54.3 million of these costs had been paid. The Company anticipates incurring additional expenses during fiscal year 2000 to further reduce overhead and complete its strategy to restructure its capital and operating structure such that it can operate profitably under PPS. See "Liquidity and Capital Resources." The fiscal 1998 amount included $66.2 million related to the Apollo/LCA/GranCare Mergers, $12.0 million related to the Mariner Merger and approximately $8.7 million of other expenses. Approximately $79.0 million of these expenses were paid as of September 30, 1999. Interest expense totaled $204.4 million for the year ended September 30, 1999, an increase of $79.0 million as compared to fiscal 1998. The acquisition of Mariner Health contributed $57.4 million of the increase, while the interest expense on the debt entered into on November 3, 1997 in conjunction with the Apollo/LCA/GranCare 27 Merger, increased borrowings under the Company's revolver and term loans and increased interest rates associated with the December Amendment and noncompliance with certain of the financial covenants contained in the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility contributed to the remaining $21.6 million increase. Interest expense totaled $125.4 million for the year ended September 30, 1998, an increase of $103.9 million as compared to fiscal 1997, which was primarily a result of $1.7 billion of additional debt incurred in conjunction with the Apollo/LCA/GranCare Mergers and the Mariner Merger. During the year ended September 30, 1999, the Company established a valuation allowance which completely offsets all net deferred tax assets generated from the Company's net losses. For the year ended September 30, 1998, the provision for income taxes was affected by charges for recapitalization, indirect merger and impairment of long-lived assets that are not deductible for income tax purposes as well as additional non-deductible amortization of goodwill associated with the GranCare Merger. Excluding the effect of the non-recurring, non-deductible items, the effective income tax rate (benefit) for the year ended September 30, 1998 was approximately (5.1%) compared to 43.3% for the same period in 1997. For the year ended September 30, 1998, the Company recognized an extraordinary loss of $11.3 million (net of a $6.0 million income tax benefit) associated with prepayment penalties on the early extinguishment of debt and the write-off of certain deferred financing fees. As a result of the substantial impact of the change to PPS reimbursement and resulting divestiture or closure of the non-nursing home businesses, the Company is focusing only on its continuing Inpatient and Pharmacy operations. The following table provides income (loss) from operations by business segment for the years ended September 30, 1999, 1998 and 1997:
YEARS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 1997 ----------- --------- -------- Inpatient Nursing Home Services.......... $ (910,323) $ 18,482 $ 85,618 Pharmacy Services........................ (159,550) 21,661 27,038 Other.................................... (513,262) (134,215) (17,548) ----------- --------- -------- Total.................................... $(1,583,135) $ (94,072) $ 95,108 =========== ========= ========
INPATIENT NURSING HOME SERVICES Inpatient revenues are a function of occupancy rates in the Company's nursing facilities and payor mix. As identified in the following table, the fiscal 1999 weighted average occupancy rate increased by 1.3% over fiscal 1998, which included a 1.0% improvement as a result of the Mariner Merger. The fiscal 1998 weighted average occupancy rate increased by 1.2% over fiscal 1997, which included a 0.2% improvement as a result of the Mariner Merger and a 0.1% improvement as a result of the GranCare Merger:
YEARS ENDED SEPTEMBER 30, ---------------------- 1999 1998 1997 ------ ------ ------ Weighted average licensed bed count................ 47,269 46,395 23,028 Total average residents............................ 40,389 39,476 19,095 Weighted average occupancy......................... 85.4% 84.1% 82.9%
Payor mix is the source of payment for the services provided and consists of private pay, Medicare and Medicaid. Private pay includes revenue from individuals who pay directly for services without government assistance through the Medicare and Medicaid programs, managed care companies, commercial insurers, health maintenance organizations, Veteran's Administration contractual payments and payments for services provided under contract management programs. Reimbursement rates from government sponsored programs, such as Medicare and Medicaid, are strictly regulated and subject to funding appropriations from federal and state governments. Changes in reimbursement 28 rates, including the implementation of PPS and the fee screen schedules and therapy caps for Part B Medicare patients beginning January 1, 1999, have adversely affected the Company resulting in significantly lower Medicare revenues than the Company would have received under the previous payment methodology. The table below presents the approximate percentage of Inpatient's revenues derived from the various sources of payment for the periods indicated:
YEARS ENDED SEPTEMBER 30, ------------------------- 1999 1998 1997 -------- -------- -------- Private pay.................................. 22.0% 19.4% 19.8% Medicare..................................... 26.5% 35.3% 29.0% Medicaid..................................... 51.5% 45.3% 51.2%
The percentage of revenues derived from all pay sources was impacted by the implementation of PPS which significantly reduced Medicare revenue and increased the percentage of revenue derived from both private pay and Medicaid sources. The percentage of revenues derived from private pay sources also increased in fiscal 1999 as a result of the Mariner Merger. Excluding the impact of the Mariner Merger, the percentage of revenues derived from private pay sources in fiscal 1999 was 20.9%. The Mariner Merger also increased the percentage of revenues derived from Medicare and decreased the percentage of revenues derived from Medicaid sources. Excluding the impact of the Mariner Merger, the percentage of revenues derived from Medicare and Medicaid sources in fiscal 1999 was 25.7% and 53.4%, respectively. The percentage of revenues derived from private pay sources declined for fiscal year 1998, primarily as a result of the GranCare Merger. GranCare historically had a lower percentage of private pay revenue than LCA, while Mariner Health's percentage of private pay revenue for the year ended September 30, 1998 was approximately the same as compared to LCA. Excluding the impact of both the GranCare Merger and Mariner Merger, the percentage of net revenues derived from private pay sources in fiscal 1998 was 20.0%. The GranCare Merger reduced the percentage of private pay revenue by 0.8% while the Mariner Merger increased the percentage of private pay revenue by 0.2%. The GranCare Merger increased the percentage of revenues derived from Medicare in fiscal year 1998 by 5.0%. GranCare's facilities historically had a higher Medicare payor mix than LCA's. In addition, prior to the implementation of PPS, average reimbursement rates for Medicare patients increased more rapidly than for Medicaid residents primarily due to the higher reimbursement rates associated with the increase in acuity levels. Although cost reimbursement for Medicare residents generated a higher level of net revenue per patient day, profitability was not proportionally increased due to the additional costs associated with the required higher level of care and other services for such residents. Inpatient revenue increased by $193.6 million in fiscal 1999 and $751.9 million in fiscal 1998. The increase in fiscal 1999 revenue included $309.5 million related to the Mariner Merger. Excluding the Mariner Merger, Inpatient revenue decreased by $115.9 million which included a decrease in Medicare revenue of $194.4 million which was partially offset by an increase in private and Medicaid revenue of $78.5 million. The decline in Medicare revenue was a result of lower average census, approximately $19.1 million, and lower average per diem rates, approximately $136.2 million and $39.1 million in adjustments to reduce the estimated amount due from third party payors (see below). The fiscal 1998 increase included $628.0 million related to the GranCare Merger and $90.7 million related to the Mariner Merger. With respect to the former LCA facilities, rate increases of $25.3 million and higher ancillary service billings resulting from the improvement in mix, primarily Medicare, of $17.5 million also contributed to the increase, partially offset by a $2.9 million reduction due to a lower average number of residents and a $4.3 million reduction due to divested facilities. During fiscal year 1999, the Company recorded $122.0 million of adjustments to reduce the estimated amount due from third-party payors, of which $39.3 million was recorded to reduce the estimated amount receivable from cost reports filed, remaining open or settled during the year. The remaining $82.7 million of adjustments was recorded to reflect amounts due to the Medicare program for previously received reimbursement and to reduce the estimated amount receivable from all Medicare cost report appeal items and primarily pertains to related party adjustments asserted by Medicare intermediaries (and disputed by the Company) through the 29 intermediaries' May 1999 reopening of certain Mariner Health Medicare cost reports for 1995, 1996, and some of 1997. These reopenings were to incorporate adjustments that reduced the allowable cost of rehabilitation therapy services that were provided to Mariner Health facilities by Mariner Health's rehabilitation subsidiaries. During the three months ended June 30, 1999, Mariner Health received revised notices of program reimbursement ("NPRs") for certain of the cost reports on approximately 50 of its facilities that require Mariner Health to repay approximately $15.9 million to the Medicare program, net of outstanding cost report receivables. On July 27, 1999 Mariner Health reached agreement with HCFA to extend repayment of the $15.9 million net liabilities resulting from the issuance of the revised NPR's. The extended repayment plan requires payment of $1.8 million per month from July through December 1999, and $1.5 million per month from January through May 2000. The current intermediary has notified Mariner Health that it intends to issue revised NPRs for the remaining facility cost reports (1997 through 1999) starting in fiscal year 2000. Should the revised NPRs result in a repayment requirement, the Company and Mariner Health would seek to enter into an extended repayment plan with HCFA at that time. The Company is vigorously disputing the intermediaries' overpayment determinations through the appeal process; however, a favorable outcome cannot be assured at this time. Excluding impairment of long-lived assets of $871.3 million, loss on disposal of assets of $3.5 million, and recapitalization, indirect merger and other expenses of $0.08 million, costs and expenses totaled $1.7 billion for the year ended September 30, 1999, an increase of $338.1 million compared to fiscal 1998. Costs and expenses increased by $377.4 million as a result of the Mariner Merger. Excluding the Mariner Merger, salaries, wages and benefits and provision for bad debts increased by $66.9 million and $30.0 million, respectively, and ancillary expenses decreased by $157.6 million. The increase in provision for bad debts was a result of continued deterioration in the Company's accounts receivable during the year due to the multiple complexities involved with the change to Medicare PPS billing, system conversions and consolidation, and turnover of facility-level billing and collection personnel. See "--Results of Operations". The Company will continue to review the collectability of its accounts receivable which may result in increased provision for bad debts in the future. The decrease in ancillary expenses was primarily a result of the implementation of PPS and the insourcing of previously outsourced contract rehabilitation therapists. Excluding impairment of long-lived assets of $102.6 million, costs and expenses totaled $1.4 billion for the year ended September 30, 1998, an increase of $716.4 million compared to fiscal 1997. Approximately $75.4 million of this increase was due to the Mariner Merger and approximately $589.1 million was due to the GranCare Merger. PHARMACY SERVICES Pharmacy revenues increased by $51.4 million in fiscal 1999 and $9.2 million in fiscal 1998. The Mariner Merger contributed $32.2 million and $5.6 million of this increase, respectively. The remaining fiscal 1999 increase was primarily related to increased sales to new and existing customers. Excluding impairment of long-lived assets of $120.8 million and recapitalization, indirect merger and other expenses of $3.5 million and $8.7 million for fiscal years 1999 and 1998, respectively, Pharmacy operating income decreased by $65.6 million in fiscal 1999 compared to a $3.4 million increase in fiscal 1998. The fiscal 1999 decrease was primarily a result of a lower gross profit margin, higher salaries, wages, and benefits of $9.7 million as a result of increased sales and the Mariner Merger, and a higher provision for bad debts of $31.7 million. The implementation of PPS by Pharmacy's customers starting July 1, 1998 resulted in a significant reduction in the market rates for Pharmacy's services as gross profit margins were lower by 8.7% in fiscal 1999. In addition, PPS also reduced the cash flows of Pharmacy's customers which resulted in an increased aging and uncollectable accounts in Pharmacy's accounts receivable. The fiscal 1998 increase was primarily a result of the Mariner Merger. OTHER OPERATIONS Other operations include the LTAC group, overhead, and the businesses that were divested or closed during fiscal year 1999 such as contract rehabilitation therapy, outpatient rehabilitation therapy clinics, managed 30 specialty medical programs, and home health. Revenues from Other operations decreased by $8.0 million during fiscal year 1999 which included an increase of $71.1 million as a result of the Mariner Merger and a decrease of $79.1 million as a result of the termination of contracts to provide therapy services and closure of the therapy business and the disposal or closure of the outpatient rehabilitation therapy clinics, managed specialty medical programs, and home health. Excluding impairment of long-lived assets of $3.8 million, loss on disposal of assets of $239.2 million, and recapitalization, indirect merger and other expenses of $61.8 million, costs and expenses increased by $194.8 million of which approximately $135.8 million was related to the Mariner Merger. Depreciation and amortization expense increased by $18.1 million primarily as a result of goodwill amortization related to the Mariner Merger and provision for bad debts increased by $7.4 million. The implementation of PPS by therapy customers starting July 1, 1998 resulted in a significant reduction in contract rates for therapy services and reduced cash flows of therapy's customers which resulted in an increased aging and uncollectable accounts in therapy's accounts receivable. Excluding impairment of long-lived assets of $33.1 million and recapitalization, indirect merger and other expenses of $78.6 million and $2.6 million in fiscal years 1999 and 1998, respectively, the operating loss for Other operations increased by $7.5 million in fiscal year 1998, substantially all of which was related to the Mariner Merger. SEASONALITY The Company's revenues and operating income generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, the number of work days in the period and seasonal census cycles. THE YEAR 2000 ISSUE In connection with the Year 2000 ("Y2K") transition, the Company established a project for addressing issues relating to the potential inability of computer programs to recognize dates that follow December 31, 1999 (the "Year 2000 Issue"). The Year 2000 Issue presented potential problems not only for computer hardware and software but also for devices that incorporate embedded chips, such as critical medical devices utilized in the Company's facilities. The Company established a committee with members from the information technology, operations, purchasing, legal, accounting, payroll, and risk management areas of the Company (the "Year 2000 Committee"). This committee reported to the Company's senior management and was responsible for identifying business line specific Year 2000 Issues. The Company additionally established a corporate Y2K Office responsible for project coordination. The Company's Y2K program addressed potential issues in the following areas: information technology and infrastructure; software for corporate and business applications; suppliers and payers; and equipment with date-sensitive embedded chips. Y2K remediation of the technology infrastructure was accomplished in conjunction with a company-wide technology upgrade effort and was completed in December 1999. Software remediation was completed for corporate applications as the Company completed the installation of a new client-server based financial and payroll-human resources package. For the Company's Mariner Health subsidiary, the applications already in place were remediated by the end of September 1999. Conversion of those facilities to the package in use across the remainder of the Company is scheduled to take place after January 2000. Remediation of business applications in connection with the Year 2000 Issue was accomplished through internal software development efforts and through upgrading or replacing of non-compliant externally supplied software. All remediation of business applications software was complete by December 1999. Subject to limited exceptions, verification of Y2K readiness on the part of critical suppliers was complete by August 1999. Verification of the readiness of Medicare and Medicaid fiscal agents continued through December 1999. The Company centralized its research and verification efforts in connection with equipment at risk for embedded chip issues. This effort was completed by July 1999 and remediation was completed by December 1999. Only a minimal amount of equipment replacement or upgrades were required. 31 The Company established a patient-focused contingency planning process geared toward the development of action plans for potential failures to mission critical systems and equipment. A set of guidelines were utilized by each facility to develop local plans. Final drills and contingency preparations were completed in November and December 1999. A plan was established for monitoring and communications over the transition weekend which included: management personnel on duty at each facility before, during and after the rollover to verify and report on, the performance of life-safety and patient care equipment; a communications network of district and regional personnel; and the establishment of a command center to monitor and communicate developments from throughout the Company as well as pertinent Y2K developments from around the country. Y2K issues or problems observed within the Company were minimal. No problems were seen with patient care equipment, life safety systems, information technology infrastructure or utilities. Problems seen included isolated issues with phone and voice mail systems and minor discrepancies with business applications which were repaired within hours of identification. No Y2K related supplier issues have been observed and there are no indications to date of payer or fiscal intermediary issues. Exclusive of expenditures relating to the conversion of corporate financial, payroll and human resource systems approximately $6.9 million was spent to remedy potential problems associated with the Year 2000 Issue. The Company believes that the principal risk for the Company from the Year 2000 Issue is from the potential for delay in the receipt of payments from third-party payors. Currently, the Company's primary source of liquidity is the DIP Financings. If the amounts available under the DIP Financings become exhausted or unavailable, the Company will have minimal access to credit facilities and its operating resources will be limited to invested cash, working capital and proceeds from asset sales not required to be applied to satisfy obligations under the plan of reorganization approved in connection with the Company's Chapter 11 Filings. Given the Company's current and future liquidity sources, a delay in receipts from third party payors could have a material adverse effect on the Company's financial condition and results of operations. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY Cash and cash equivalents were $71.8 million at September 30, 1999. Working capital was a deficit of approximately $2.0 billion, a decrease of approximately $2.3 billion during the year ended September 30, 1999, primarily due to defaults which required substantially all of the Company's debt to be reflected as current obligations. See Notes 2 and 12 to the Consolidated Financial Statements. Cash used in operating activities was $59.6 million in the year ended September 30, 1999, as compared to $15.5 million used in operating activities for the year ended September 30, 1998. Other current assets decreased by $69.6 million primarily as a result of income tax refunds the Company received from federal and state taxing authorities. Accounts payable decreased by $30.7 million and accrued expenses and other current liabilities decreased by $22.0 million, primarily as a result of the divestiture or closure of several of the Company's operations during fiscal 1999. Cash provided by investing activities was $38.0 million in the year ended September 30, 1999, as compared to $211.8 million used in investing activities for the year ended September 30, 1998. Investing activities included the use of $73.3 million related to capital expenditures. Cash provided by investing activities also included $87.0 million of proceeds from the sale of operations, primarily the divestiture of the Company's outpatient rehabilitation clinics and hospital rehabilitation management contracts. Cash provided by financing activities was $90.1 million in the year ended September 30, 1999, as compared to $216.3 million for the year ended September 30, 1998. Cash provided by financing activities included $222.4 million in net draws under the Company's credit line, principal repayments of $105.1 million, and $7.5 million in payments for financing fees associated with certain amendments to the Company's debt agreements. Cash provided by financing activities also included $26.5 million proceeds from the Deficiency Note and $46.7 million repurchase of subordinated debt (see Note 12 to the Consolidated Financial Statements). 32 The primary source of revenues for the Company are the State Medicaid programs and federal Medicare program. The Company receives payment for nursing facility services based on rates that are set by individual state Medicaid programs. Although payment cycles for these programs vary, payments generally are made within 30 to 60 days after services are provided. For Medicare cost reporting periods beginning July 1, 1998 and after, the federal Medicare program converted to PPS for skilled nursing facility services. As of September 30, 1999 all of the Company's skilled nursing facilities are reimbursed under PPS. The prospective payment system provides acuity-based rates that are established at the beginning of the Medicare reporting year. Under PPS, claims are filed monthly and clean claims are paid 14 days after submission. For cost reporting periods that ended before the start of PPS, the facilities were (and to the extent final cost reports for prior periods are not settled, still are) reimbursed under Medicare on the basis of reasonable and necessary cost as determined from annual cost reports. This retrospective settlement system resulted in final cost report settlements that generally were not finally settled until two years after the end of the cost reporting period and that could be further delayed by appeals and litigation. PPS has had a material adverse effect on the Company's financial condition. While the effects of PPS have been somewhat ameliorated by recent legislation, PPS is in large part responsible for the inability of the Company to operate under its existing capital structure. See "Business--Regulation" and "-- Healthcare Regulatory Matters." PPS reduced the cash flows of pharmacy's and therapy's customers which resulted in an increased aging and uncollectable accounts in both pharmacy's and therapy's accounts receivable. In addition, the Company's accounts receivable continued to deteriorate during the year due to the multiple complexities involved with the change to Medicare PPS billing. The Company's facilities were phased into PPS based upon their cost report years (20 facilities on July 1, 1998; 105 facilities on October 1, 1998; 189 facilities on January 1, 1999; and 83 facilities on April 1, 1999). At September 30, 1999, all facilities were being paid by Medicare under PPS, and as such, revenue recorded will consist of the aggregate payments expected from Medicare for individual claims at the appropriate payment rates. The PPS billing methodology is extremely complex and its implementation is resource intensive. The claims amendment process lacks procedures and the coordination of certain policies. The Company has a commitment to training and compliance and has established procedures to address PPS issues as they arise. The Company provides certain services and supplies between subsidiary companies, some of which are charged at cost and others of which are charged at market rates. Subject to certain exceptions, Medicare's "related organization principle" generally requires that services and supplies furnished to nursing facilities by related entities be included in the nursing facility's reimbursable cost at the cost of the supplying entity. The Company believes that the services and supplies furnished to nursing facilities at market rates qualify for exception to the related organization principle. Certain of the Company's Medicare fiscal intermediaries have taken the position that the related party transactions do not qualify for this exception to the related party rules and have made adjustments that reduce Medicare allowable cost to the cost of the supplying entity. During the third quarter of fiscal 1999, the intermediaries for the Mariner Health facilities reopened previously settled cost reports to impose such related party adjustments for services furnished to the facilities by Mariner Health's rehabilitation subsidiary. All related party adjustments have been or will be appealed to the Provider Reimbursement Review Board and through the full appeal process as is warranted. The adjustments effect only periods during which the facilities were reimbursed for Medicare on the basis of reasonable and necessary cost; there would not be any impact for periods that are reimbursed under PPS following transition. During fiscal year 1999, the Company recorded $122.0 million of adjustments to reduce the estimated amount due from third-party payors, of which $39.3 million was recorded to reduce the estimated amount receivable from cost reports filed, remaining open or settled during the year. The remaining $82.7 million of adjustments was recorded to reflect amounts due to the Medicare program for previously received reimbursement and to reduce the estimated amount receivable from all Medicare cost report appeal items. This amount primarily pertains to related party adjustments asserted by Medicare intermediaries (and disputed by the Company) through the intermediaries' May 1999 reopening of certain Mariner Health Medicare cost reports for 1995, 1996 and 33 some of 1997. These reopenings were to incorporate adjustments that reduced allowable cost of rehabilitation therapy services that were provided to Mariner Health facilities by Mariner Health's rehabilitation subsidiaries. During the three months ended June 30, 1999, Mariner Health received revised Notices of Program Reimbursement ("NPRs") for certain of the cost reports on approximately 50 of its facilities that require Mariner Health to repay approximately $15.9 million to the Medicare program, net of outstanding cost report receivables. On July 27, 1999, Mariner Health reached agreement with HCFA to extend repayment of the $15.9 million net liabilities resulting from the issuance of the revised NPRs. The extended repayment plan requires payment of $1.8 million per month from July through December 1999, and $1.5 million per month from January through May 2000. The current intermediary has notified Mariner Health that it intends to issue revised NPRs for the remaining facility cost reports (1997 through 1999) starting in fiscal year 2000. Should the revised NPRs result in a repayment requirement, the Company and Mariner Health would seek to enter into an extended repayment plan with HCFA at that time. The Company is vigorously disputing the intermediaries' overpayment determinations through the appeal process; however, a favorable outcome cannot be assured at this time. In addition to the related party adjustments and cost report settlements discussed above, any plan of reorganization confirmed by the Bankruptcy Court in connection with the Company's Chapter 11 Filings will affect the Company's liquidity in the future and could have a material adverse effect on the Company. Subsequent to September 30, 1999, Mariner Health did not make the October 1, 1999 interest payment on the Mariner Notes (defined below, see "--Mariner Health Senior Subordinated Notes"), and the Company did not make the November 1, 1999 interest payment on the Senior Subordinated Notes (defined below, see "--Senior Subordinated Notes"), did not pay November, December or January rent under the Synthetic Lease (defined below, see "--Other Factors Affecting Liquidity and Capital Resources"), and did not make or any principal or interest payments on the Senior Credit Facility coming due after November 1, 1999 (defined below, see "--Senior Credit Facility"). Also, the Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility (defined below, see "--Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility") matured on January 3, 2000, and Mariner Health did not make the required payments in connection with those obligations. The inability of the Company and Mariner Health to service or restructure their respective debt and other obligations culminated in the Chapter 11 Filings on January 18, 2000. Except as may be otherwise determined by the Bankruptcy Court overseeing the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken by creditors with regard to any defaults under the prepetition obligations of the Company and those of its subsidiaries which are debtors in the Chapter 11 Filings. Senior Credit Facility. In connection with the Recapitalization Merger, the Company entered into the Senior Credit Facility, which originally consisted of a $150.0 million revolving credit facility (the "Revolving Credit Facility"), and three term loan credit facilities: a 6-1/2 year term loan facility in an aggregate principal amount of $240.0 million (the "Tranche A Term Loan Facility"), a 7-1/2 year term loan facility in an aggregate principal amount of $250.0 million (the "Tranche B Term Loan Facility"), and an 8-1/2 year term loan facility in an aggregate principal amount of $250.0 million (the "Tranche C Term Loan Facility"). Loans made under the Tranche A Term Loan Facility ("Tranche A Term Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively referred to herein as "Term Loans." Advances under the Revolving Credit Facility are sometimes referred to as "Revolving Loans." The proceeds from borrowings under the Term Loans were used, along with the proceeds of the Notes (defined below) offering, to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses associated with the Apollo/LCA/GranCare Mergers. In July 1998 the Revolving Credit Facility was increased to $175.0 million and the Tranche A Term Loan Facility to $315.0 million in connection with the Mariner Merger. The proceeds of the $75.0 million increase in the Tranche A Credit Facility and of certain Revolving Credit Loans were used to pay various costs and expenses 34 incurred in connection with the Mariner Merger. As of September 30, 1999, there was $166.4 million borrowed under the Revolving Credit Facility and approximately $8.6 million in letters of credit outstanding. The obligations of the Company under the Senior Credit Facility are guaranteed by substantially all of the Company's subsidiaries other than Mariner Health and its subsidiaries, and are secured by substantially all of the otherwise unencumbered owned assets of the Company and such subsidiaries. Principal amounts outstanding under the Revolving Credit Facility were originally due and payable in April 2005. The Term Loans are amortized in quarterly installments which increase over the term of those loans. (see Note 12 to the Consolidated Financial Statements). Interest on outstanding borrowings under the Senior Credit Facility accrue, at the option of the Company, at the Alternate Base Rate (the "ABR") of The Chase Manhattan Bank ("Chase") or at a reserve-adjusted Eurodollar Rate (the "Eurodollar Rate"), plus, in each case, an Applicable Margin. The term "Applicable Margin" means a percentage that will vary in accordance with a pricing matrix based upon the respective term loan tenor and the Company's leverage ratio (see Note 12 to the Consolidated Financial Statements). The Senior Credit Facility is subject to prepayment, in whole or in part, at the Company's option and in certain minimum increments from time to time, and is also subject to mandatory prepayment from the net cash proceeds received from certain transactions. Those transactions include the sale or issuance of equity by the Company, the incurrence of certain indebtedness by the Company, and the sale of certain assets where the net cash proceeds are not reinvested in the Company's business within 12 months (6 months in certain cases). The Company must also make annual prepayments to the extent of 75% of its excess cash flow for each fiscal year (reduced to 50% of excess cash flow once the Company's leverage ratio as of the last day of any fiscal year is less than or equal to 4.50 to 1.00). Mandatory prepayments will be applied pro rata to the unmatured installments of the Term Loans; provided, however, that holders of Tranche B Term Loans or Tranche C Term Loans may refuse any such mandatory prepayment otherwise allocable to them, in which case the amount so refused will be applied as an additional prepayment of the Tranche A Term Loans. Subject to compliance with customary borrowing conditions, amounts applied as prepayments of the Revolving Credit Facility may be reborrowed; amounts prepaid under the Term Loans may not be reborrowed. The covenants contained in the Senior Credit Facility, among other things, require the Company to maintain certain financial ratios and restrict the ability of the Company to dispose of assets, repay other indebtedness or amend other debt instruments, pay dividends, make investments, and make acquisitions. The Company received the consent of the requisite lenders under the Senior Credit Facility to permit the Mariner Merger and certain covenants in the Senior Credit Facility were modified to accommodate the Mariner Merger. By amendment effective December 22, 1998, certain of the Senior Credit Facility's financial and operating covenants were amended to provide the Company with additional flexibility, in return for which the Applicable Margins were increased. (See Note 12 to the Consolidated Financial Statements.) In May 1999, the Senior Credit Facility was further amended in order to waive non-compliance by the Company with certain financial covenants as of March 31, 1999, to increase loan pricing (see Note 12 to the Consolidated Financial Statements) and, among other things, (i) to prohibit acquisitions, (ii) to eliminate the Company's ability to defer mandatory prepayments with the proceeds from asset sales and other transactions by reinvesting such proceeds in other capital assets, and (iii) to restrict the Company's right to sell assets without administrative agent or lender approval, incur capital expenditures other than for maintenance and repair purposes, or make investments in Mariner Health and the Mariner Health subsidiaries. As of June 30, 1999, and again as of September 30, 1999, the Company was in violation of certain of these financial covenants and as a result has not been able to make additional borrowings under the Senior Credit Facility. The Company was unable to obtain waivers of the June 30, 1999 or September 30, 1999 financial covenant defaults under the Senior Credit Facility. In addition, in order to conserve its liquidity and facilitate a restructuring of its indebtedness and other obligations, the Company did not made the interest payments due on the Senior Credit Facility after October, 1999. The lenders under the Senior Credit Facility signed a forbearance 35 agreement, pursuant to which they temporarily agreed (but without waiving any events of default) not to take any remedial action with respect to such events of default (including acceleration of their debt), subject to no new events of default occurring. The forbearance agreement has expired by its terms. However, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken with regard to any of the defaults under the Senior Credit Facility, except as otherwise may be determined by the Bankruptcy Court. Senior Subordinated Notes. In connection with the Apollo/LCA/GranCare Mergers, on November 4, 1997 the Company completed a private offering to institutional investors of $275 million of its 9.5% Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes"), at a price of 99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value (collectively, the "Notes"). Interest on the Senior Subordinated Notes is payable semi-annually. Interest on the Senior Subordinated Discount Notes will accrete until November 1, 2002 at a rate of 10.57% per annum, compounded semi-annually, and will be cash pay at a rate of 10.5% per annum thereafter. The Notes mature on November 1, 2007. The net proceeds from the offering, along with proceeds from the Senior Credit Facility, were used to fund a portion of the Recapitalization Merger of the Notes, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses associated with the Apollo/LCA/GranCare Mergers. Pursuant to the terms of the indenture with respect to the Notes, in March 1998, the Company completed an exchange offer with respect to the Notes whereby Notes registered under the Securities Act of 1933, as amended, were exchanged for unregistered Notes. The terms of the exchange Notes are identical to the original Notes. Mariner Health and its subsidiaries are "restricted subsidiaries" under the indenture pursuant to which the Notes were issued. The Company did not make its scheduled November 1, 1999 semi-annual interest payment on the Senior Subordinated Notes, and such default was not cured within the applicable grace period. Certain holders of the Senior Subordinated Notes have formed an unofficial committee of holders of the Senior Subordinated Notes, and have engaged counsel to represent their interests in connection with the Company's Chapter 11 Filings. Although the Company is in default with respect to the Notes, unless otherwise determined by the Bankruptcy Court, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken with regard to such defaults. Other Significant Indebtedness and Commitments. The Company, through various of its GranCare subsidiaries, is a party to various agreements (collectively, the "HRPT Agreements") between GranCare and Health and Retirement Properties Trust ("HRPT"). HRPT is the lessor with respect to certain facilities leased by two subsidiaries of GranCare (the "Tenant Entities"). In connection with obtaining HRPT's consent to the Apollo/LCA/GranCare Mergers, GranCare and HRPT executed a Restructure and Asset Exchange Agreement dated October 31, 1997 pursuant to which HRPT and GranCare restructured their relationship (the "HRPT/GranCare Restructuring"). As a part of the HRPT/GranCare Restructuring, HRPT consented to the consummation of the Apollo/LCA/GranCare Mergers and the transactions related thereto, and HRPT has an unlimited guaranty by the Company and all subsidiaries of the Company having an ownership interest in Tenant Entities which guaranty is secured by a cash collateral deposit of $15 million, the earned interest on which is retained by HRPT. The performance by the Tenant Entities of their respective obligations to HRPT continues to be secured by a pledge of one million shares of HRPT common stock beneficially owned by GranCare. The Company does not have the ability to sell these shares to meet any capital requirements. During the Fall of 1999, SPTMNR Properties Trust ("SPTMNR") has succeeded to the interests of HRPT under the HRPT Agreements, and references to HRPT herein are deemed to include SPTMNR in such capacity. Unless otherwise determined by the Bankruptcy Court, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken by HRPT with regard to any defaults that may exist under the HRPT Agreements. In connection with the GranCare Merger, the Company and its GranCare subsidiary became parties to an agreement between GranCare and Omega Healthcare Investors, Inc. ("Omega"). A wholly-owned subsidiary of the Company, Professional Health Care Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note executed on August 14, 1992 (the "Omega Note") in favor of Omega, and under the related Michigan loan agreement dated as of June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding as of September 30, 1999. 36 The Omega Note bears interest at a rate which is adjusted annually based on either (i) changes in the Consumer Price Index or (ii) a percentage of the change in gross revenues of PHCMI and its subsidiaries from year to year, divided by $58.8 million, whichever is higher, but in any event subject to a maximum rate not to exceed 105% of the interest rate in effect for the Omega Note for the prior calendar year. The current interest rate is 15.5% per annum which is paid monthly. Additional interest accrues on the outstanding principal of the Omega Note at the rate of 1% per annum and totaled approximately $4.3 million at September 30, 1999. Such interest is compounded annually and is due and payable on a pro rata basis at the time of each principal payment or prepayment. In addition to the interest on the Omega Note described in the preceding paragraph, and as a condition to obtaining Omega's consent to a February 1997 transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed to pay additional interest to Omega in the amount of $20,500 per month, through and including July 1, 2002. If the principal balance of the Omega Note for any reason becomes due and payable prior to that date, there will be added to the indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest thereon at 11% per annum to the prepayment date; less (iii) the amount of such additional interest paid to Omega prior to the prepayment date. Subsequent to September 30, 1999, PHCMI and GranCare received notice from Omega asserting that PHCMI was in default of its obligation to maintain its required minimum tangible net worth. Omega demanded that such default be cured within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's compliance with such minimum tangible net worth test, or else an event of default would exist under the Omega loan documents. The Company received notice in late December, 1999, declaring an event of default as a result of the alleged breach of the tangible net worth covenants contained in the Omega Loan Documents and accelerating all amounts due under obligations to Omega. Effective January, 2000, PHCMI ceased making its monthly interest payments on the Omega Note. Omega subsequently initiated foreclosure proceedings on three skilled nursing facilities located in North Carolina. Hearings on the foreclosures were scheduled for February 3, 2000; however, unless otherwise determined by the Bankruptcy Court, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken by Omega with regard to any defaults that may exist under the Omega Loan Documents. Debtor-in-Possession Financing for the Company. Among the orders entered by the Bankruptcy Court on the Petition Date in the Company's Chapter 11 case were orders approving on an interim basis (i) the use of cash collateral by the Company and those of its subsidiaries which had filed petitions for reorganization under Chapter 11 of the Bankruptcy Code (excluding Mariner Health and the direct and indirect subsidiaries of Mariner Health, the "Company Debtors"), and (ii) the funding of up to $25.0 million in principal amount at any time outstanding under a debtor-in-possession financing arrangement (the "Company DIP Financing") established pursuant to that certain Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the "Petition Date") (as amended from time to time, the "Company DIP Credit Agreement") by and among the Company, as borrower, the other Company Debtors, as guarantors, the lenders signatory thereto as lenders (the "Company DIP Lenders"), and The Chase Manhattan Bank, as Administrative Agent, Documentation Agent and Collateral Agent (the "Company DIP Agent"). The Bankruptcy Court set a hearing on January 28, 2000 for an interim order (the "Company Interim DIP Order") to increase the approved portion of the Company DIP Financing to $50.0 million, and another hearing on February 16, 2000 for consideration of a final order (the "Final Company DIP Order,") approving the full $100.0 million amount of the Company DIP Financing. The Company DIP Credit Agreement establishes a one-year, $100.0 million secured revolving credit facility to provide funds for working capital and other lawful corporate purposes for use by the Company and the other Company Debtors; provided, however, that amounts outstanding under the Company DIP Financing may not at any time exceed the maximum borrowing amounts established for the Company under the initial DIP order (the "Company Initial DIP Order"), the Company Interim DIP Order or the Final Company DIP Order (collectively, the "Company DIP Orders"), as the case may be, or the Company's borrowing base of eligible accounts receivable (the "Company Borrowing Base"). Up to $10.0 million of the Company DIP Financing may be utilized for the issuance of letters of credit as needed in the businesses of the Company Debtors. Interest accrues 37 on the principal amount outstanding under the Company DIP Financing at a per annum rate of interest equal to the ABR of Chase, plus three percent (3%) and is payable monthly in arrears. During the existence and continuation of a default in the payment of any amount due and payable by the Company Debtors under the Company DIP Credit Agreement, interest will accrue at the default rate of ABR plus five percent (5%) per annum. The outstanding principal of the Company DIP Financing, together with all accrued and unpaid interest and all other obligations thereunder, are due and payable one year from the Petition Date or, if earlier, on the Prepayment Date. The term, "Prepayment Date," is defined as the first business day which is at least 30 days after the entry of the Company First Day DIP Order, if the Company Final DIP Order has not been entered. The Company must also prepay principal to the extent that the principal amount outstanding under the Company DIP Financing at any time exceeds the Company Borrowing Base then in effect. To the extent proceeds of loans under the Company DIP Financing are used to complete the construction of certain healthcare facilities that are part of the Synthetic Lease (which proceeds are not permitted to exceed $8.8 million), proceeds from the sale of any such properties must be used first to repay any portion of the loans made pursuant to the Company DIP Financing, with 75% of any remaining net cash proceeds to be applied as an adequate protection payment to the lenders under the Senior Credit Facility, and the remaining 25% of such excess net cash proceeds to be retained by the Company or its applicable subsidiary as additional working capital. Pursuant to the terms of the Initial DIP Order, 75% of the net cash proceeds of other asset sales approved by the Bankruptcy Court and the requisite Company DIP Lenders are to be applied as an adequate protection payment to the lenders under the prepetition Senior Credit Facility. The Company has the right to make optional prepayments in increments of $1.0 million, and to reduce the commitment under the Company DIP Credit Agreement in increments of $5.0 million. The obligations of the Company under the Company DIP Credit Agreement are jointly and severally guaranteed by each of the other Company Debtors pursuant to the Company DIP Agreement. Under the terms of the Initial Company DIP Order, the obligations of the Company Debtors under the Company DIP Credit Agreement (the "Company DIP Obligations") constitute allowed superpriority administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain professional fees and expenses incurred by the Company Debtors). The Company DIP Obligations will be secured by perfected liens on all or substantially all of the assets of the Company Debtors (excluding bankruptcy causes of action), the priority of which liens (relative to prepetition creditors having valid, non-avoidable, perfected liens in those assets and to any "adequate protection" liens granted by the Bankruptcy Court) is established in the Initial Company DIP Order and the related cash collateral order entered by the Bankruptcy Court (the "Initial Company Cash Collateral Order"). The Bankruptcy Court has also granted certain prepetition creditors of the Company Debtors replacement liens and other rights as "adequate protection" against any diminution of the value of their existing collateral that may result from allowing the Company Debtors to use cash collateral in which such creditors had valid, non-avoidable and perfected liens as of the Petition Date. The discussion contained in this paragraph is qualified in its entirety by reference to the Interim Company DIP Order and the Initial Company Cash Collateral Order, and reference should be made to such orders (which are available from the Bankruptcy Court) for a more complete description of such terms. The Company DIP Credit Agreement contains customary representations, warranties and covenants of the Company Debtors, as well as certain financial covenants relating to minimum EBITDA, maximum capital expenditures, and minimum patient census. The breach of such representations, warranties or covenants, to the extent not waived cured within any applicable grace or cure periods, could result in the Company being unable to obtain further advances under the Company DIP Financing and possibly the exercise of remedies by the Company DIP Lenders, either of which events could materially impair the ability of the Company to successfully reorganize in Chapter 11. Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility. At the time of the Mariner Merger, Mariner Health was the borrower under a $460.0 million revolving credit facility (the "Mariner Health Senior Credit Facility"), by and among Mariner Health, the lenders signatory thereto (the "Mariner Health Lenders"), and PNC Bank, National Association ("PNC Bank"), as agent for the Mariner Health Lenders (the "Mariner Agent"). 38 Outstanding advances under the Mariner Health Senior Credit Facility bear interest based, at the borrower's option, either on PNC Bank's prime rate or on a Eurodollar-based rate, in each case plus an applicable margin which fluctuates based on a pricing matrix related to Mariner Health's leverage ratio. The Mariner Health Senior Credit Facility contains covenants which, among other things, require Mariner Health and its subsidiaries to maintain certain financial ratios and impose certain limitations or prohibitions on Mariner Health with respect to the incurrence of indebtedness, liens and capital leases; the payment of dividends on, and the redemption or repurchase of, its capital stock; investments and acquisitions, including acquisitions of new facilities; the merger or consolidation of Mariner Health with any person or entity; and the disposition of any of Mariner Health's properties or assets. Effective December 23, 1998, Mariner Health amended the Mariner Health Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment") (a) to reduce the amount of the revolving commitment from $460.0 million to $250.0 million, (b) to provide additional financial covenant flexibility for Mariner Health and its subsidiaries, (c) to modify certain of the financial and operating covenants referred to in the immediately preceding paragraph, (d) to increase the applicable interest rate margins (see Note 12 to the Consolidated Financial Statements) and (e) to expand the amount and types of collateral pledged to secure the Mariner Health Senior Credit Facility. Mariner Health's obligations under the Mariner Health Senior Credit Facility are guaranteed by substantially all of its subsidiaries and are secured by substantially all of the otherwise unencumbered assets of Mariner Health and such subsidiary guarantors. Contemporaneously with the effectiveness of the Mariner Health Senior Credit Facility Amendment, Mariner Health entered into a term loan agreement dated as of December 23, 1998 (the "Mariner Health Term Loan Facility") with PNC Bank, as administrative agent, First Union National Bank, as syndication agent, and the financial institutions signatory thereto as lenders (the "Term Lenders"), pursuant to which the Term Lenders made a $210.0 million senior secured term loan to Mariner Health (the "Mariner Health Term Loan"). Proceeds of the Mariner Term Loan were applied to reduce outstanding amounts under the Mariner Health Senior Credit Facility in connection with the Mariner Health Senior Credit Facility Amendment. The interest rate pricing and covenants contained in the Mariner Health Term Loan Agreement are substantially similar to the corresponding provisions of the Mariner Health Senior Credit Facility, as amended by the Mariner Health Senior Credit Facility Amendment. The Mariner Health Term Loan Facility is guaranteed by the same subsidiary guarantors as the Mariner Health Senior Credit Facility and is cross-defaulted and cross- collateralized with the Mariner Health Senior Credit Facility. As of September 30, 1999, approximately $223.3 million of loans and $6.6 million of letters of credit were outstanding under the Mariner Health Senior Credit Facility, and $197.6 million of the Mariner Health Term Loan was outstanding. All but one of the letters of credit were drawn subsequent to September 30, 1999, and the related reimbursement obligations were added to the outstanding revolving loan balance. Mariner Health and its subsidiaries are treated as unrestricted subsidiaries under the Senior Credit Facility. Unlike other subsidiaries of the Company (the "Non-Mariner Subsidiaries"), Mariner Health and its subsidiaries neither guarantee the Company's obligations under the Senior Credit Facility nor pledge their assets to secure such obligations. Correspondingly, the Company and the Non-Mariner Subsidiaries do not guarantee or assume any obligations under the Mariner Health Senior Credit Facility or the Mariner Health Term Loan Facility. Mariner Health and its subsidiaries are not subject to the covenants contained in the Senior Credit Facility, and the covenants contained in the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility are not binding on the Company and the Non- Mariner Subsidiaries. Mariner Health and the Mariner Health subsidiaries are obligated to continue to comply with the covenants contained in the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility without taking into account the revenues, expenses, net income, assets or liabilities of the Company and the Non-Mariner Subsidiaries. The converse is true with respect to the Company, which (together with its Non-Mariner Subsidiaries) must continue to comply with the covenants contained in its Senior Credit Facility without taking into account the revenues, expenses, net income, assets or liabilities of Mariner Health and its subsidiaries. 39 Mariner Health was not in compliance with certain of the financial covenants contained in the Mariner Health Senior Credit Facility and in the Mariner Health Term Loan Facility as of March 31, 1999, and again as of June 30, 1999 and September 30, 1999. Mariner Health has been unable to obtain a waiver of such financial covenant defaults from the Mariner Agent, the Mariner Health Lenders and the Term Lenders. Mariner Health failed to make its October 1, 1999 interest payments due on the Mariner Health Senior Credit Facility and in the Mariner Health Term Loan Facility within the applicable grace period, although it subsequently made such payment with cash collateral previously delivered to the collateral agent for the Mariner Health Lenders, pursuant to amendments to the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility. Finally, Mariner Health did not repay the Mariner Health Term Loan and Mariner Health Senior Credit Facility when they matured by their terms on January 3, 2000. As a result, events of default exist with respect to both the Mariner Health Term Loan and the Mariner Health Senior Credit Facility. However, the automatic stay protection afforded by the Chapter 11 Filings by the Mariner Health Debtors prevents any action from being taken by the Mariner Health Lenders and the Term Lenders with regard to any such events of default unless otherwise determined by the Bankruptcy Court. Mariner Health Senior Subordinated Notes. Mariner Health is also the issuer of $150.0 million of 9% Senior Subordinated Notes due 2006 (the "Mariner Notes") which were issued pursuant to an indenture dated as of April 4, 1996 (the "Mariner Indenture") with Mariner Health as issuer and State Street Bank and Trust Company as trustee (the "Mariner Trustee"). The Mariner Notes are obligations solely of Mariner Health and are not guaranteed by the Company or any of its subsidiaries (other than Mariner Health). Because of the existing, unwaived financial covenant defaults under the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility, the agents under such facilities gave notice to Mariner Health and the Mariner Trustee that they were instituting a 179-day payment blockage period, during which no payments of debt service on the Mariner Notes could be made. Accordingly, Mariner Health did not make the scheduled $7.1 million interest payment due on the Mariner Notes on October 1, 1999. The 30-day grace period having expired without such interest being paid, an event of default exists under the Mariner Indenture. Two holders of substantially all of the Mariner Notes not owned by the Company (see below) have formed an unofficial committee of holders of the Mariner Notes, and have engaged counsel to represent their interests in connection with the Chapter 11 Filings. Unless otherwise determined by the Bankruptcy Court, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken by the Mariner Trustee and any holders of the Mariner Notes with regard to any defaults that may exist under the Mariner Indenture. As a consequence of the Mariner Merger and the resulting change of control at Mariner Health, the holders of the Mariner Notes had the right under the Mariner Indenture to require that their Mariner Notes be purchased (the "Change of Control Purchase") at a purchase price equal to 101% of the outstanding principal amount of the Mariner Notes purchased. Effective on September 11, 1998, Mariner Health and the Mariner Trustee entered into an amendment to the Mariner Indenture which permitted Mariner Health to designate a third-party to purchase any Mariner Notes tendered pursuant to the Change of Control Purchase. Mariner Health designated NationsBank, N.A. (n/k/a Bank of America, N.A., and herein referred to as "Bank of America") as a third-party purchaser, and on September 21, 1998 Bank of America acquired all $40.7 million of the Mariner Notes tendered in connection with the Change of Control Purchase (the "Tendered Mariner Notes"). In agreeing to act as third-party purchaser, Bank of America required the Company to enter into a total return swap agreement (the "Total Return Swap"), with the financial institution as counterparty. See "Quantitative and Qualitative Disclosures about Market Risk." The Company's obligations under the Total Return Swap are guaranteed by Mariner Health and substantially all of the subsidiaries of Mariner Health. During the quarter ended December 31, 1998, an additional $6.0 million of the Mariner Notes were acquired by Bank of America and made a part of the Total Return Swap. The Total Return Swap terminated by its terms on August 16, 1999. Based on the bids for the Tendered Mariner Notes solicited by Bank of America pursuant to the Total Return Swap Agreement, the market value of the Tendered Mariner Notes for purposes of unwinding the Total Return Swap was determined to be approximately $700,000, resulting in capital depreciation of approximately $46.5 million being owed by the Company. The Company was the winning bidder in the auction for the Tendered Mariner Notes. On the 40 August 16, 1999 termination date, Bank of America applied $15.0 million drawn by it under a letter of credit issued pursuant to the Mariner Health Senior Credit Facility and applied $5.0 million of cash collateral previously posted by Mariner Health, to satisfy $20.0 million of the total amount owed to Bank of America under the Total Return Swap, leaving a net deficiency of approximately $26.5 million (the "Net Total Return Swap Deficiency"). Effective August 16, 1999, Bank of America and the Company incorporated the Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note") which generally matures and is payable as to principal and interest on the same terms as the notes evidencing the Revolving Loans. The guarantee of the Total Return Swap obligations of the Company by Mariner Health and its subsidiary guarantors remains in place. Bank of America also waived any default arising from any failure to be paid the Net Deficiency on the termination date of the Total Return Swap, in return for the lenders under the Senior Credit Facility amending the Senior Credit Facility to acknowledge the Deficiency Note as permitted indebtedness and as an "Obligation" that is secured on a pari passu basis with the indebtedness outstanding under the Senior Credit Facility. The $46.7 million of Mariner Notes acquired by Mariner Post-Acute Network, Inc. in connection with the unwinding of the Total Return Swap remain outstanding as an obligation of Mariner Health. The Company did not make the scheduled interest payments due under the Deficiency Note coming due and payable after October 1999 and is in default under the Deficiency Note. Unless otherwise determined by the Bankruptcy Court, however, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken by Bank of America with regard to any defaults that may exist under the Total Return Swap, the Deficiency Note or the related guaranty of the Mariner Health Debtors. Debtor-in-Possession Financing for Mariner Health. Among the orders entered by the Bankruptcy Court on the Petition Date in the Chapter 11 cases of Mariner Health and its subsidiaries (the "Mariner Health Debtors"), were orders approving (a) the use of cash collateral by the Mariner Health Debtors, and (b) the funding of up to $15.0 million in principal amount at any time outstanding under a debtor-in-possession financing arrangement (the "Mariner Health DIP Financing" and together with the Company DIP Financing, the "DIP Financings") pursuant to that certain Debtor-in-Possession Credit Agreement dated as of January 20, 2000 (as amended from time to time, the "Mariner Health DIP Credit Agreement") by and among Mariner Health and each of the other Mariner Health Debtors, as co-borrowers thereunder, the lenders signatory thereto as lenders (the "Mariner Health DIP Lenders"), First Union National Bank, as syndication agent, PNC Capital Markets, Inc. and First Union Securities, Inc., as co-arrangers, and PNC Bank, National Association, as administrative Agent and collateral Agent. The Bankruptcy Court set a hearing on February 16, 2000 to consider Mariner Health's motion for final approval of the full $50.0 million of the Mariner Health DIP Financing. The Mariner Health DIP Credit Agreement establishes a one-year, $50.0 million secured revolving credit facility, which is divided into two tranches--a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment. The tranche b loan commitment is not activated unless and until the holders of at least 75% of the Mariner Health DIP Financing loans or commitments so approve. Advances under the Mariner Health DIP Financing may be used by the Mariner Health Debtors (and to a limited degree, by certain joint venture subsidiaries of Mariner Health that are not debtors in the Mariner Health Chapter 11 cases) for working capital and other lawful corporate purposes. Amounts outstanding under the Mariner Health DIP Financing may not at any time exceed the maximum borrowing amounts established for the Mariner Health Debtors under the initial DIP order (the "Mariner Health Initial DIP Order") or the final DIP order (the "Final Mariner Health DIP Order," and collectively with the Initial Mariner Health DIP Order, the "Mariner Health DIP Orders"), as the case may be. Up to $5.0 million of the Mariner Health DIP Financing may be utilized for the issuance of letters of credit as needed in the businesses of the Mariner Health Debtors. Interest accrues on the principal amount outstanding under the Mariner Health DIP Financing at a per annum rate of interest equal to the "base rate" of PNC Bank (i.e., the higher of the PNC Bank prime rate or a rate equal to the federal funds rate plus 50 basis points) plus the applicable spread, which is 250 basis points for tranche A and 300 basis points for tranche B. Such interest is due and payable monthly in arrears. During the 41 existence and continuation of any event of default under the Mariner Health DIP Credit Agreement, the interest rates normally applicable to tranche A loans and tranche B loans under the Mariner Health DIP Financing will be increased by another 250 basis points per annum. The outstanding principal of the Mariner Health DIP Financing, together with all accrued and unpaid interest and all other obligations thereunder, are due and payable in one year or, if earlier, on the Commitment Termination Date. The term, "Commitment Termination Date," is defined as the first to occur of the following: (i) the first anniversary of the Petition Date, (ii) the effective date of a joint plan of reorganization for the Mariner Health Debtors, (iii) the date of termination of the exclusivity rights of the Mariner Health Debtors to file a plan of reorganization, (iv) the filing by the Mariner Health Debtors of any plan of reorganization (or the modification of any such plan previously filed with the Bankruptcy Court) no previously approved by the holders of at least 66-2/3% of the outstanding loans or commitments under the Mariner Health DIP Financing, (v) the date of termination of the commitments under the Mariner Health DIP Credit Agreement during the continuation of an event of default thereunder, (vi) 30 days after the Petition Date if the Final Mariner Health DIP Order has not been entered (which deadline is subject to extension at the discretion of the holders of at least 66-2/3% of the outstanding loans or commitments under the Mariner Health DIP Financing), or (vii) the date on which all or substantially all of the assets or stock of the Mariner Health Debtors is sold or otherwise transferred. The Mariner Health Debtors must also prepay principal to the extent that the principal amount outstanding under the Mariner Health DIP Financing at any time exceeds the Borrowing Base then in effect. The Mariner Health Borrowing Base for any month is an amount equal to $7.5 million in excess of the "Working Capital Facility" borrowings projected for such month in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit Agreement also provides for mandatory prepayments under the following circumstances: (i) with net cash proceeds from asset sales, the incurrence of certain debt, the issuance of new equity, the receipt of tax refunds exceeding $100,000 in the aggregate, and the receipt of casualty proceeds in excess of $100,000 that are not applied within 60 days after receipt to the repair, rebuilding, restoration or replacement of the assets damaged or condemned (or committed within such period of time to be so applied); and (ii) on each business day, the amount of cash held by the Mariner Health Debtors in excess of the sum of $5.0 million plus the aggregate sum of the minimum amount required by depositary banks to be kept in deposit accounts, concentration accounts and other with such banks. Amounts prepaid pursuant to clause (i) of the immediately preceding sentence will permanently reduce the amount of the Mariner Health DIP Financing commitments on a dollar-for-dollar basis (first tranche A, and then tranche B). Amounts prepaid pursuant to clause (ii) of the same sentence will not permanently reduce such commitments. The Mariner Health Debtors have the right to make optional prepayments in the minimum principal amount of $1.0 million, and in increments of $100,000 in excess thereof, and, on three business days' notice, to reduce the commitments under the Mariner Health DIP Credit Agreement in the minimum amount of $5.0 million, or in increments of $1.0 million in excess thereof. Under the terms of the Initial Mariner Health DIP Order, the obligations of the Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together with certain potential cash management system liabilities secured on a pari passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed superpriority administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain professional fees and expenses incurred by the Mariner Debtors). The Mariner Health DIP Obligations will be secured by perfected liens on all or substantially all of the assets of the Mariner Health Debtors (excluding bankruptcy causes of action), the priority of which liens (relative to prepetition creditors having valid, non-avoidable, perfected liens in those assets and to any "adequate protection" liens granted by the Bankruptcy Court) is established in the Initial Mariner Health DIP Order and the related cash collateral order entered by the Bankruptcy Court (the "Initial Mariner Health Cash Collateral Order"). The Bankruptcy Court has also granted certain prepetition creditors of the Mariner Health Debtors replacement liens and other rights as "adequate protection" against any diminution of the value of their existing collateral that may result from allowing the Mariner Health Debtors to use cash collateral in which such creditors had valid, non- avoidable and perfected liens as of the Petition Date. The discussion contained in this paragraph is qualified in its entirety by reference to the Interim Mariner Health DIP Order and the Initial Mariner Health Cash Collateral Order, and 42 reference should be made to such orders (which are available from the Bankruptcy Court) for a more complete description of such terms. The Mariner Health DIP Credit Agreement contains customary representations, warranties and covenants of the Mariner Health Debtors, as well as certain financial covenants relating to minimum EBITDAR, minimum patient census, minimum eligible accounts receivable, maximum variations from Mariner Health's year 2000 DIP budget and maximum capital expenditures. The breach of such representations, warranties or covenants, to the extent not waived or cured within any applicable grace or cure periods, could result in the Mariner Health Debtors being unable to obtain further advances under the Mariner Health DIP Financing and the possible exercise of remedies by the Mariner Health DIP Lenders, either of which events could materially impair the ability of the Mariner Health Debtors to successfully reorganize in Chapter 11. Among its other restrictive covenants, the Mariner Health DIP Credit Agreement limits affiliate transactions with the Company Debtors, but does contemplate weekly overhead payments to the Company equal to 1.25% of projected net inpatient revenues for such month, subject to a monthly "true- up," such that the payments for such month equal 5% of actual net inpatient revenues of the Mariner Health Debtors. Such payments may be suspended by the Mariner Health Debtors if certain defaults specified in the Mariner Health Credit Agreement occur and are continuing, though such fees will still accrue and will become due and payable if and when the subject default has been cured or waived. Healthcare Regulatory Matters. The Balanced Budget Act contains numerous changes to the Medicare and Medicaid programs with the intent of slowing the growth of payments under these programs by $115.0 billion and $13.0 billion, respectively, through the year ended 2002. Approximately 50% of the savings were to be achieved through a reduction in the growth of payments to providers and physicians. These cuts have had, and will continue to have, a material adverse effect on the Company. The Balanced Budget Act amended the Medicare program by revising the payment system for skilled nursing services. Historically, nursing homes were reimbursed by the Medicare program based on the actual costs of services provided. However, the Balanced Budget Act required the establishment of a PPS system for nursing homes for cost reporting periods beginning on or after July 1, 1998. Under PPS, nursing homes receive a fixed per diem rate for each of their Medicare Part A patients which, during the first three years, is based on a blend of facility specific rates and Federal acuity adjusted rates. Thereafter, the per diem rates will be based solely on Federal acuity adjusted rates. Subsumed in this per diem rate are ancillary services, such as pharmacy and rehabilitation services, which historically have been provided to many of the Company's nursing facilities by the Company's pharmacy and therapy subsidiaries. The inclusion of ancillary services in the PPS per diem has resulted in significantly lower margins in the Company's pharmacy operations as a result of increased pricing competition, a change in buying patterns by customers and the decision by the Company to exit certain businesses previously operated by the Company such as its third party therapy, home health and hospital contract management businesses. On May 12, 1998, HCFA published the "Interim Final Rule" for the skilled nursing facility ("SNF") PPS along with the acuity adjusted federal PPS rates for Part A Medicare patients and the facility specific inflation factors effective from July 1, 1998 through September 30, 1999 and the inflation factors that are used to adjust the facility specific base period cost to the payment rates for periods beginning July 1, 1998 through periods beginning September 1, 1999. On July 30, 1999, HCFA published the "Final Rule" for PPS along with acuity adjusted federal PPS rates that are effective October 1, 1999 through September 30, 2000, and the inflation factors that are used to adjust the specific facility specific base period cost to payment rates for periods beginning October 1, 1999 through periods beginning September 1, 2000. The acuity adjusted federal PPS rates and facility specific inflation factor that are published along with the Final Rule follow the guidance included in the Interim Final Rule and do not provide any long-term relief from the overall effect of PPS on Medicare revenue decreases. On November 29, 1999, President Clinton signed into law H.R. 3194, the "Consolidated Appropriations Act" (the "CAA") (P.L. 106-113), legislation designed to mitigate the effects of the Balanced Budget Act. While the CAA is expected to ameliorate somewhat the adverse effects of the Balanced Budget Act, the Company has not 43 yet evaluated what effect the CAA will have on its operating results. However, the Company does not believe the CAA will have a material positive effect on its operating results. See "Business--Regulation." The CAA, however, temporarily increases the acuity adjusted PPS rates by 20 percent for 15 acuity categories. As evidenced by the language of the CAA, this payment increase is intended to compensate SNFs for the provision of care to medically complex patients, pending appropriate refinements to the PPS system. SNFs providing care to patients falling within every non-rehabilitation acuity category above the presumptive (rebuttable) Medicare eligibility line will benefit from this increase. Three acuity categories falling within the "high" and "medium" rehabilitation category also are subject to the increase. The increased payments will begin on April 1, 2000, and end before the later of (A) October 1, 2000, or (B) the date HCFA implements a refined PPS system that better accounts for medically-complex patients. Neither the CAA nor the accompanying Conference Report provides HCFA with specific directions regarding such refinements to the PPS system. In addition, the CAA provides for a four percent increase in the federal per diem payment rates for all acuity categories in both fiscal years 2001 and 2002. This increase will not be built into the base payment rates, however, and therefore future updates to the federal payment rates will be calculated from the initial base rate. As of July 1, 1999, all of the Company's SNFs are receiving Medicare payment through PPS, although transition PPS rates vary from facility to facility depending on each facility's base period cost that comprises the facility specific component of the rates and the facility's geographic location that defines the wage adjuster that is applied to the acuity adjusted federal component of the rates. For most of the Company's facilities, the facility specific base period cost is higher than the base period cost that was used to develop the acuity adjusted federal rates. For some facilities, however, the facility base period cost is lower than the base period cost used to develop the PPS rates. The CAA allows SNFs to elect transition to the full federal rate at the beginning of their cost reporting periods beginning on or after January 1, 2000. SNFs may make the election up to 30 days after the start of their cost reporting period. The Company will take advantage of this waiver where appropriate. The Balanced Budget Act also repealed the Boren Amendment ("Boren"), which had required state Medicaid programs to reimburse nursing facilities for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. Because of the repeal of Boren, states now have considerable flexibility in establishing Medicaid payment rates. In addition, Boren provided a dispute resolution mechanism whereby providers could challenge Medicaid rates set by the various states, the repeal of which will now make it more difficult to challenge these rates in the future. At least one state, North Carolina, is proposing to change its Medicaid payment rates and/or payment methodology. However, it is unclear how the procedural protections imposed by the Balanced Budget Act will constrain these types of changes. Pending the publication of a final rule implementing the procedural limitations of the Balanced Budget Act, the Company anticipates that other states may attempt to change their payment rate methodologies, and that such changes could result in a reduction in payments to nursing facilities. The Balanced Budget Act also revised the reimbursement methodology for therapy services under Medicare Part B. Historically, Medicare Part B therapy services were reimbursed based on the cost of the services provided, subject to prudent buyer and salary equivalency restrictions. In November 1998, certain fee screen schedules were published setting forth the amounts that can be charged for specific therapy services. Additionally, the Balanced Budget Act set forth maximum per beneficiary limits of $1,500 per provider for physical therapy and speech pathology and $1,500 per provider for occupational therapy. Both the fee screens and per beneficiary limits were effective for services rendered following December 31, 1998. The imposition of fee screens, together with the inclusion of ancillary services in the federal per diem, has had a material adverse effect on the Company's therapy business resulting in the decision by the Company to terminate its contracts to provide therapy services. The CAA temporarily mitigates the Balanced Budget Act limitations by providing that the therapy caps will not apply in 2000 and 2001. The CAA requires the Secretary of Health and Human Services (the "Secretary") to conduct focused medical reviews of therapy services during 2000 and 2001, with an emphasis on claims for services provided to residents of SNFs. The CAA also requires the Secretary to study and to submit recommendations to Congress on therapy utilization patterns in 2000 compared to those in 1998 and 1999. The CAA also excludes certain items and services from the formerly all- inclusive SNF per diem rates. Specifically, the following items and services will become separately reimbursable outside of the PPS rates: 44 (1) ambulance services furnished to an individual in conjunction with renal dialysis services; (2) chemotherapy items and administration services (as identified by certain HCFA Common Procedure Coding System ("HCPCS") codes); (3) radioisotope services (as identified by certain HCPCS codes); and (4) customized prosthetic devices (artificial limbs) and other custom prostheses if provided to a SNF resident and intended to be used after discharge (as identified by certain HCPCS codes and other instances chosen by HCFA). Payment for such items and services, which are "passed-through" the per diem payment rates, will be made under Part B, in conformance with Part B payment rules. Although these items are separately reimbursed from the PPS rate, the CAA also directs HCFA to make appropriate adjustments to the PPS payments rates to reflect the fact that certain items and services have been excluded, and to ensure budget neutrality. Thus, HCFA is directed to make an appropriate proportional reduction in PPS payments at that time. In the process of finalizing certain Medicare cost reports or reopening previously finalized cost reports filed by various of the Company's Medicare provider facilities, certain Medicare fiscal intermediaries have issued NPRs, which include significant audit adjustments that reduce the amount of reimbursement that previously was received by the facilities. The adjustments are based, for the most part, on denials of exception to the related organization principles with regard to services and supplies furnished to the facilities by the Company's pharmacy and rehabilitation companies and reductions to costs claimed for therapy services under the prudent buyer principles. The prudent buyer principle states, in part, "the prudent and cost- conscious buyer not only refuses to pay more than the going price for an item or service, he also seeks to economize by minimizing cost." Certain of the fiscal intermediaries have alleged that the Company was not prudent in its purchase of occupational therapy and speech pathology services prior to HCFA's establishing salary equivalency guidelines, effective April 1998. Fiscal intermediaries calculated facilities' costs to provide services through employed therapists and reduced costs claimed on the cost reports for providing services through contracts and adjusted the cost reports accordingly. Appeals were filed with the Provider Reimbursement and Review Board ("PRRB") and resulted in a favorable outcome. However, on review the Social Security Administrator reversed the PRRB and restored the intermediaries' adjustments. The Company believes that it has substantial arguments to support its position that the contested costs are allowable and the issue is being appealed through judicial review, pursued through the appropriate legal processes. Another unrelated provider received a favorable judicial decision on its prudent buyer appeal based on similar facts. The Company currently is negotiating a settlement with HCFA for all of its prudent buyer appeals and believes that it will have a favorable outcome. However, until the settlement is finalized, there can be no assurance that the Company will prevail or that it will not have to expend significant amounts to complete the appeal process. Contracts between facilities and therapy providers generally provide for the therapy provider to indemnify the nursing facility in the event of denials or cost report disallowances. There can be no assurance that the therapy providers will not contest the triggering of the indemnity provisions of the contracts or that they will be able to fund the indemnity provisions. The related organization principle states, in part, "a provider's allowable cost for services, facilities, and supplies furnished by a party related to the provider are the costs the related party incurred in furnishing the items in question." The regulations provide for an exception to the related organization principle if certain requirements are met and the Company believes that it meets these requirements with respect to services its facilities previously received from related pharmacy and rehabilitation subsidiaries. Some fiscal intermediaries have denied the request for exception and have made adjustments to reduce the allowable cost that is included in nursing facility cost reports to the cost of the related organization. The Company has requested PRRB appeals for these adjustments, but the appeals have not yet been heard. There can be no assurance that the Company will prevail in the appeal process. During the third quarter of fiscal 1999, the Medicare fiscal intermediaries for the subsidiaries operated by Mariner Health reopened approximately 50 1995 and 1996 cost reports and issued revised NPRs imposing prudent buyer or related party adjustments and applying an administrative resolution related to the cost report treatment of admissions cost. The reopenings resulted in reductions in reimbursable cost of approximately $16.9 million. The Company believes that it has substantial arguments for both issues and will appeal the 45 adjustments to the PRRB. In lieu of recoupment by the fiscal intermediary, the Company has reached an agreement with HCFA and the intermediary and has implemented an extended repayment plan. The balance as of the date of the agreement was approximately $15.9 million, which will be repaid over a period of one year. The first six monthly payments of $1.8 million, including interest, have been made. The intermediary has notified Mariner Health that it intends to issue revised NPRs for the remaining facility cost reports (1997 through 1999) starting in fiscal year 2000. As part of the Chapter 11 process, Mariner Health entered into a stipulation with the U.S. Department of Health and Human Services ("DHHS") whereby, among other things, HCFA will not recoup certain pre-petition overpayments for other than the current cost reporting years for the pendancy of Mariner Health's DIP obligations. Accordingly, repayment obligations which may arise from the issuance of revised NPRs may be stayed for an interim period. Should the revised NPRs result in a repayment requirement not within the purview of the stipulation, or after the pendancy of the DIP obligations, the Company and Mariner Health would seek to enter into an extended repayment plan with HCFA at that time. Other Factors Effecting Liquidity and Capital Resources. In addition to principal and interest payments on its long-term indebtedness, the Company has significant rent obligations relating to its leased facilities. Without giving any effect to any potential restructuring of current rent obligations, the Company's estimated rent obligations for fiscal year 2000 are approximately $90 million. In connection with its review of its portfolio of facilities, the Company anticipates divesting itself of under-performing facilities, which will have a favorable impact on the Company's rent obligations. The Company's operations require capital expenditures for renovations of existing facilities in order to continue to meet regulatory requirements, to upgrade facilities for the treatment of subacute patients and to accommodate the addition of specialty medical services, and to improve the physical appearance of its facilities for marketing purposes. In addition, there are capital expenditures required for completion of certain existing facility expansions and new construction projects in process, as well as supporting non-nursing home operations and Year 2000 compliance. The Company estimates that total capital expenditures for the year ending September 30, 2000 will be approximately $38 million. The Company has a lease arrangement, originally providing for up to $100.0 million to be used as a funding mechanism for future skilled nursing facility construction, lease conversions, and other facility acquisitions (the "Synthetic Lease"). This leasing program historically has allowed the Company to complete these projects without committing significant financing resources. The lease is an unconditional "triple net" lease for a period of seven years with the annual lease obligation a function of the amount spent by the lessor to acquire or construct the project, a variable interest rate, and commitment and other fees. The Company guarantees a minimum of approximately 83% of the residual value of the leased property and also has an option to purchase the properties at any time prior to the maturity date at a price sufficient to pay the entire amount financed, accrued interest, and certain expenses. At September 30, 1999, approximately $66.6 million of this leasing arrangement was utilized. The leasing program is accounted for as an operating lease under GAAP. The Synthetic Lease was amended on December 23, 1998 to mirror certain changes made to the Senior Credit Facility and subsequently amended effective March 31, 1999 to reduce the commitment to $80 million. At June 30, 1999 and September 30, 1999, the Company was in violation of certain of these financial covenants and ceased making rent payments under the Synthetic Lease in November 1999. Notwithstanding the expiration of the temporary forbearance by the lessor and its lenders against exercising remedies with respect to such events of default, the automatic stay protection afforded by the Chapter 11 Filings prevents any action from being taken with respect to any defaults that may existing under the Synthetic Lease. One consequence of the defaults under the Synthetic Lease documents was that the lessor under the Synthetic Lease, FBTC Leasing Corp., has been unable to make additional borrowings under the related credit facility and make such proceeds available for the completion of the five facilities currently under construction. Under the terms of the Company DIP Credit Facility, the Company is permitted to borrow and spend up to $8.8 million to complete such facilities. The parties have filed a stipulation with the Bankruptcy Court agreeing that, subject to approval of the Final Company DIP Order, the Synthetic Lease transaction will be treated as a secured financing rather than a true lease for purposes of the reorganization of the Company Debtors. 46 The Company has experienced an increasing trend in the number and severity of litigation claims asserted against the Company. Management believes that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments against long-term care providers in recent years resulting in an increased awareness by plaintiff's lawyers of potentially large recoveries. The Company also believes that there has been, and will continue to be, an increase in governmental investigatory activity of long-term care providers, particularly in the area of false claims. While the Company believes that it provides quality care to the patients in its facilities and materially complies with all applicable regulatory requirements, an adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on the Company. See "Legal Proceedings." The Company currently maintains two captive insurance subsidiaries to provide for reinsurance obligations under workers' compensation, general and professional liability, and automobile liability for periods ended prior to April 1, 1998. These obligations are funded with long-term, fixed income investments which are not available to satisfy other obligations of the Company. By letter dated June 1999, the Company received a 90-day cancellation notice from its former general and professional liability ("GL/PL") carrier. In June, the Company binded a replacement GL/PL policy, effective July 31, 1999, which resulted in a $4.4 million increase in annual premium and elimination of the Royal policy's aggregate retention limit under the former policy. The elimination of the aggregate retention limit is expected to increase the actuarial cost of general and professional liability claims by approximately $42.6 million per year. This increased exposure will have a delayed negative effect on operating cash flow as claims develop over the next several years. See "Business--Insurance." The Company is examining its alternatives with respect to its former insurer. The Mariner Health Senior Credit Facility generally prohibits Mariner Health from paying dividends or making distributions to the Company, except as follows: (a) Mariner Health can make a one-time dividend (which has not yet been utilized) to the Company in an amount not to exceed Mariner Health's consolidated net income for the most recent 12 fiscal months subject to the absence of any default under the Mariner Health Senior Credit Facility or the Mariner Health Term Loan Facility, and subject further to demonstrating pro forma compliance with certain financial covenants; and (b) Mariner Health may reimburse the Company for ordinary course of business expenses paid by the Company on behalf of Mariner Health or its subsidiaries. By amendments effective as of January 19, 1999, the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility were each amended to allow Mariner Health also to make a dividend or distribution of up to $25.0 million to the Company to enable the Company to purchase Mariner Notes pursuant to the Total Return Swap or to otherwise satisfy the Company's obligations under the Total Return Swap, subject to the absence of any default under the Mariner Health Senior Credit Facility or the Mariner Health Term Loan Facility, and subject further to demonstrating pro forma compliance with certain financial covenants thereunder. All such dividends or distributions other than the reimbursement of the Company for ordinary course of business expenses paid by the Company on behalf of Mariner Health or its subsidiaries have since been prohibited by subsequent amendments to the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility, due to Mariner Health's noncompliance with various financial covenants. The Mariner Health DIP Credit Agreement also limits the ability of the Mariner Debtors from engaging in affiliate transactions and making restricted payments, specifically including payments to the Company Debtor. However, the Mariner Health DIP Credit Agreement permits, among other things, weekly overhead payments to the Company (see "--Mariner Health Debtor-in-Possession Financing" above), the purchase of pharmaceutical goods and services from certain Company Debtors, the allocation to, and payment by, the Mariner Health Debtors of their share of certain taxes, insurance obligations and employee benefit obligations paid for and administered on a consolidated basis by the Company, and certain ordinary course transactions which are on terms no less favorable to the subject Mariner Health Debtors than the terms obtainable from a non-affiliate, and for which the approval of the requisite Mariner Health DIP Lenders and the Bankruptcy Court have been obtained. There can be no assurance that the amounts available to the Company Debtors from the Company DIP Financing and cash collateral will be sufficient to fund the operations of the Company Debtors until such time as 47 the Company Debtors are able to take the steps necessary to structure a plan of reorganization that will be acceptable to creditors and confirmed by the Bankruptcy Court. Furthermore, the Company is unable to predict whether the Company Debtors will have sufficient cash flow generated from their operations and cash on hand to fund their working capital needs, anticipated capital expenditures, rent, debt service requirements and other operating expenses in the event the amounts available under the Company DIP Financing are exhausted prior to obtaining confirmation of a plan of reorganization. Finally, there can be no assurance that any plan of reorganization confirmed in connection with the Chapter 11 Filings of the Company Debtors will allow the Company Debtors to operate profitably under PPS or give the Company Debtors sufficient liquidity to meet their operational needs. The ability of the Company Debtors to fund such requirements will depend, among other things, on future economic conditions and on financial, business and other factors, many of which are beyond the control of the Company Debtors. There can be no assurance that the amounts available to the Company Debtors from the Mariner Health DIP Financing and cash collateral will be sufficient to fund the operations of the Mariner Health Debtors until such time as the Mariner Health Debtors are able to take the steps necessary to structure a plan of reorganization that will be acceptable to creditors and confirmed by the Bankruptcy Court. Furthermore, the Company and the Mariner Health Debtors are unable to predict whether the Mariner Health Debtors will have sufficient cash flow generated from their operations and cash on hand to fund their working capital needs, anticipated capital expenditures, rent, debt service requirements and other operating expenses in the event the amounts available under the Mariner Health DIP Financing are exhausted prior to obtaining confirmation of a plan of reorganization. Finally, there can be no assurance that any plan of reorganization confirmed in connection with the Chapter 11 Filings of the Mariner Health Debtors will allow the Mariner Health Debtors to operate profitably under PPS or give the Mariner Health Debtors sufficient liquidity to meet their operational needs. The ability of the Mariner Health Debtors to fund such requirements will depend, among other things, on future economic conditions and on financial, business and other factors, many of which are beyond the control of the Mariner Health Debtors. At September 30, 1999, the Company had approximately $45 million of invested cash for funding operations and servicing debt. Due to the existence of financial covenant defaults under the Senior Credit Facility as of June 30, 1999 and September 30, 1999, and the payment defaults referred to above, the Company has not been able to satisfy the borrowing conditions under the Revolving Credit Facility. Under the terms of the Initial Company DIP Order and the Company DIP Financing, up to $25.0 million is available to fund the Company operations of the Company Debtors, subject to increase upon the order of the Bankruptcy Court and upon satisfaction of the conditions set forth in the documents pertaining to the Company DIP Financing, including borrowing base requirements. No assurance can be given regarding the timing or likelihood that the Bankruptcy Court will approve the Interim Company DIP Order or the Final Company DIP Order, or the terms on which such approval may be conditioned. At September 30, 1999, Mariner Health had $19 million of invested cash for funding operations and servicing debt. The revolving loan commitment under the Mariner Health Senior Credit Facility terminated, and the Mariner Health Senior Credit Facility and Mariner Health Term Loan Facility matured on January 3, 2000. Under the terms of the Initial Mariner health DIP Order and the Mariner Health DIP Financing, up to $15.0 million is available to fund Mariner Health's operations, subject to increase upon the order of the Bankruptcy Court and upon satisfaction of the conditions set forth in the documents pertaining to the Mariner Health DIP Financing, including borrowing base requirements. No assurance can be given regarding the timing or likelihood that the Bankruptcy Court will approve the Final Mariner Health DIP Order, or the terms on which such approval may be conditioned. Impact of Inflation. The health care industry is labor intensive. Wages and other labor-related costs are especially sensitive to inflation. Increases in wages and other labor-related costs as a result of inflation or the increase in minimum wage requirements without a corresponding increase in Medicaid and Medicare reimbursement rates would adversely impact the Company. In certain of the markets where the Company 48 operates there is a labor shortage that could have an adverse effect upon the Company's ability to attract or retain sufficient numbers of skilled and unskilled personnel at reasonable wages. Accordingly, rising wage rates could have an adverse effect on the Company in certain of its markets. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company periodically enters into interest rate swap agreements (the "Swap Agreements") to manage interest rate risk. The Swap Agreements effectively convert a portion of the Company's floating interest rate debt to fixed interest rate debt. Notional amounts of interest rate agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. On August 13, 1999, two Swap Agreements, each with a notional amount of $20 million, were terminated at a loss to the Company of $100,000. As of September 30, 1999, the Company had one Swap Agreements in effect with a notional amount of $20.0 million. This Swap Agreement was terminated effective October 27, 1999 at no cost to the Company. In September 1998 the Company entered into a total return swap agreement relating to approximately $40.7 million face amount of Mariner Notes, subsequently amended to $46.5 million face amount of Mariner Notes (the "Total Return Swap Agreement"). The Total Return Swap Agreement was restructured in August, 1999 resulting in capital depreciation payable by the Company of approximately $46.5 million, of which amount $20.0 million was satisfied from collateral previously provided by Mariner Health and the balance of which has been incorporated into a promissory note. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Mariner Health Senior Subordinated Notes." Accordingly, as of October 27, 1999, the Company did not have any Swap Agreements outstanding. 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Mariner Post-Acute Network, Inc. We have audited the accompanying consolidated balance sheets of Mariner Post-Acute Network, Inc. (formerly Paragon Health Network, Inc., formerly Living Centers of America, Inc.), and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' (deficit) equity and cash flows for each of the three years in the period ended September 30, 1999. Our audits also included the financial statement schedule listed in the index at Item 14. These consolidated financial statements and schedule are the responsibility of the management of Mariner Post-Acute Network, Inc. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mariner Post-Acute Network, Inc., and subsidiaries at September 30, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses, has a working capital deficiency of approximately $2.0 billion and has a capital deficit of approximately $1.4 billion at September 30, 1999. In addition, the Company was not in compliance with certain convenants of various loan agreements at September 30, 1999. As discussed in Note 2 to the accompanying consolidated financial statements, on January 18, 2000, the Company and certain of its subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code. These conditions raise substantial doubts about the Company's ability to continue as a going concern. Management is in the process of developing a plan of reorganization for approval by the U.S. Bankruptcy Court and the Company's creditors. In the event the plan of reorganization is accepted, continuation of the business thereafter is dependent on the Company's ability to achieve successful future operations. The consolidated financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. Ernst & Young LLP Atlanta, Georgia January 19, 2000 50 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, ----------------------- 1999 1998 ----------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents............................ $ 71,817 $ 3,314 Receivables (less allowances of $87,066 and $68,581). 307,571 617,380 Notes receivable, net................................ 3,259 9,656 Supplies............................................. 22,866 31,516 Prepaid expenses..................................... 18,787 11,943 Income tax refund receivable......................... 1,943 57,323 Deferred income taxes................................ -- 58,875 Other (including patient trust funds of $5,021 and $5,399)............................................. 15,413 17,916 ----------- ---------- TOTAL CURRENT ASSETS............................... 441,656 807,923 PROPERTY AND EQUIPMENT: Land, buildings and improvements..................... 532,589 863,451 Furniture, fixtures and equipment.................... 196,875 231,682 Leased property under capital leases................. 63,797 89,718 ----------- ---------- 793,261 1,184,851 Less accumulated depreciation........................ 333,708 257,698 ----------- ---------- 459,553 927,153 GOODWILL, NET......................................... 247,353 1,084,473 RESTRICTED INVESTMENTS................................ 69,188 88,467 NOTES RECEIVABLE, NET................................. 16,792 20,861 OTHER ASSETS.......................................... 40,429 107,774 ----------- ---------- $ 1,274,971 $3,036,651 =========== ========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt................................................ $ 2,028,226 $ 46,250 Accounts payable..................................... 134,829 160,240 Accrued payroll and related expenses................. 111,395 127,774 Accrued property taxes............................... 12,873 12,277 Patient trust funds.................................. 5,021 5,399 Accrued interest..................................... 49,317 35,057 Other accrued expenses............................... 45,910 70,710 ----------- ---------- TOTAL CURRENT LIABILITIES.......................... 2,387,571 457,707 LONG-TERM DEBT, NET OF CURRENT MATURITIES............. 113,618 1,977,865 LONG-TERM INSURANCE RESERVES.......................... 80,899 61,310 DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILI- TIES................................................. 69,733 133,137 MINORITY INTEREST..................................... 9,169 9,618 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' (DEFICIT) EQUITY: Preferred stock, par value $.01; 5,000,000 autho- rized; none issued.................................. -- -- Common stock, par value $.01; 500,000,000 shares au- thorized; 73,695,081 and 73,276,866 shares issued... 737 733 Capital surplus...................................... 980,952 980,142 Accumulated deficit.................................. (2,361,393) (583,111) Accumulated other comprehensive loss................. (6,315) (750) ----------- ---------- TOTAL STOCKHOLDERS' (DEFICIT) EQUITY............... (1,386,019) 397,014 ----------- ---------- $ 1,274,971 $3,036,651 =========== ==========
The accompanying notes are an integral part of these financial statements. 51 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ----------------------------------- 1999 1998 1997 ----------- ---------- ---------- NET REVENUES Nursing home revenue: Net patient services................... $ 1,758,595 $1,513,420 $ 742,046 Other.................................. 33,811 14,645 6,004 Non-nursing home revenue: Pharmacy services...................... 281,718 230,313 196,748 Therapy services....................... 159,575 194,125 179,506 Home health, hospital services, and other................................. 38,881 83,026 15,984 ----------- ---------- ---------- 2,272,580 2,035,529 1,140,288 COSTS AND EXPENSES: Salaries and wages....................... 1,049,860 782,520 438,693 Employee benefits........................ 215,510 158,883 85,712 Nursing, dietary and other supplies...... 130,369 96,462 53,531 Ancillary services....................... 390,622 430,715 224,912 General and administrative............... 301,199 187,701 105,522 Insurance expense........................ 97,285 58,988 26,142 Rent..................................... 103,786 86,625 42,489 Depreciation and amortization............ 120,526 75,044 39,309 Provision for bad debts.................. 142,474 29,544 26,282 Impairment of long-lived assets.......... 995,932 135,783 -- Loss on disposal of assets............... 242,735 -- -- Recapitalization, indirect merger and other expenses.......................... 65,417 87,336 2,588 ----------- ---------- ---------- 3,855,715 2,129,601 1,045,180 ----------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS............ (1,583,135) (94,072) 95,108 OTHER INCOME AND EXPENSE: Interest expense......................... 204,384 125,384 21,492 Interest and dividend income............. (9,123) (11,082) (4,640) ----------- ---------- ---------- 195,261 114,302 16,852 ----------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES, MINOR- ITY INTEREST, AND EXTRAORDINARY LOSS.... (1,778,396) (208,374) 78,256 PROVISION (BENEFIT) FOR INCOME TAXES...... -- (10,559) 33,604 ----------- ---------- ---------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS.................. (1,778,396) (197,815) 44,652 MINORITY INTEREST......................... 114 (562) (735) ----------- ---------- ---------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS.. (1,778,282) (198,377) 43,917 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF $6,034 INCOME TAX BENE- FIT...................................... -- (11,275) -- ----------- ---------- ---------- NET INCOME (LOSS)......................... $(1,778,282) $ (209,652) $ 43,917 =========== ========== ========== EARNINGS (LOSS) PER SHARE: Basic.................................... $ (24.21) $ (4.31) $ 0.75 =========== ========== ========== Diluted.................................. $ (24.21) $ (4.31) $ 0.73 =========== ========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTAND- ING: Basic.................................... 73,459 48,601 58,613 =========== ========== ========== Diluted.................................. 73,459 48,601 59,808 =========== ========== ==========
The accompanying notes are an integral part of these financial statements. 52 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY (DOLLARS AND SHARES IN THOUSANDS)
RETAINED ACCUMULATED COMMON STOCK EARNINGS OTHER TREASURY STOCK --------------- CAPITAL (ACCUMULATED COMPREHENSIVE ------------------ SHARES AMOUNT SURPLUS DEFICIT) INCOME (LOSS) SHARES AMOUNT TOTAL ------- ------ --------- ------------ ------------- ------- --------- ----------- BALANCE, SEPTEMBER 30, 1996................... 60,804 $608 $ 227,766 $ 120,733 $ (18) 2,301 $ (19,774) $ 329,315 Comprehensive income: Net income............. 43,917 43,917 Unrealized gain on securities available- for-sale, net of tax.. 262 262 ----------- Comprehensive income.... 44,179 Funding of employee benefit plans.......... 92 (177) 1,521 1,613 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax....... (15) (21) 191 176 Issuance of treasury stock in exchange for warrants............... (871) (99) 871 -- ------- ---- --------- ----------- ------- ------- --------- ----------- BALANCE, SEPTEMBER 30, 1997................... 60,804 608 226,972 164,650 244 2,004 (17,191) 375,283 Comprehensive (loss): Net (loss)............. (209,652) (209,652) Unrealized loss on se- curities available- for-sale, net of tax.. (994) (994) ----------- Comprehensive (loss).... (210,646) Issuance of shares to Apollo Management, L.P. and affiliates, net of associated costs....... 17,778 178 232,572 232,750 Repurchase of shares in connection with the Recapitalization Merger................. 54,461 (735,223) (735,223) Retirement of treasury stock.................. (55,082) (551) (202,060) (538,109) (55,082) 740,720 -- Issuance of shares and options in exchange for GranCare common stock and options............ 17,440 175 238,814 238,989 Issuance of shares to Professional Rehabilitation, Inc.... 1,147 11 22,575 22,586 Issuance of shares to Summit Medical Holdings, Inc.......... 1,043 10 16,690 16,700 Issuance of shares in exchange for Mariner Health Group, Inc. common stock........... 29,615 296 443,922 444,218 Funding of options exercised or canceled under 1992 Employee Stock Option Plan, net of tax................. (5,918) (1,350) 11,410 5,492 Funding of employee benefit plans ......... 92 (32) 275 367 Issuance of treasury stock in exchange for warrants............... (9) (1) 9 -- Issuance of stock under various stock option plans, net of tax...... 532 6 6,492 6,498 ------- ---- --------- ----------- ------- ------- --------- ----------- BALANCE, SEPTEMBER 30, 1998................... 73,277 733 980,142 (583,111) (750) -- -- 397,014 Comprehensive (loss): Net (loss)............. (1,778,282) (1,778,282) Unrealized loss on se- curities available- for-sale, net of tax.. (5,565) (5,565) ------- ---- --------- ----------- ------- ------- --------- ----------- Comprehensive (loss).... (1,783,847) Issuance of common stock.................. 49 127 127 Funding of employee benefit plan........... 369 4 683 687 ------- ---- --------- ----------- ------- ------- --------- ----------- BALANCE, SEPTEMBER 30, 1999................... 73,695 $737 $ 980,952 $(2,361,393) $(6,315) -- -- $(1,386,019) ======= ==== ========= =========== ======= ======= ========= ===========
The accompanying notes are an integral part of these financial statements. 53 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, -------------------------------- 1999 1998 1997 ----------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................... $(1,778,282) $(209,652) $ 43,917 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............ 120,526 75,044 39,309 Interest expense on discounted debt...... 20,091 16,995 -- Deferred income taxes.................... -- 478 (753) Equity earnings/minority interest........ (114) 562 735 Provision for bad debts.................. 142,474 29,544 26,282 Impairment of long-lived assets.......... 995,932 135,783 -- Change in estimate related to reduction in Medicare reimbursement revenue................... 122,023 -- -- Loss on disposal of assets............... 242,735 -- -- Changes in noncash working capital: Receivables.............................. 11,997 (71,582) (44,362) Supplies................................. 8,650 (11,670) (3,984) Prepayments and other current assets..... 69,601 (3,207) 195 Accounts payable......................... (30,655) (21,538) (2,073) Accrued expenses and other current lia- bilities................................ (22,022) 23,749 (5,673) Changes in long-term insurance reserves.... 19,589 16,308 1,462 Other...................................... 17,897 3,654 (215) ----------- --------- -------- NET CASH PROVIDED BY (USED IN) OPERATING AC- TIVITIES.................................... (59,558) (15,532) 54,840 ----------- --------- -------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Acquisitions and investments............... -- (171,894) (30,548) Purchases of property and equipment........ (73,251) (65,168) (36,961) Disposals of property, equipment and other assets.................................... 87,032 3,289 8,365 Restricted investments..................... 13,714 7,474 (20,543) Net collections on notes receivable........ 10,466 21,844 2,580 Other...................................... -- (7,340) (211) ----------- --------- -------- NET CASH PROVIDED BY (USED IN) INVESTING AC- TIVITIES.................................... 37,961 (211,795) (77,318) ----------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net draws under credit line................ 222,350 114,000 24,560 Repayment of debt.......................... (105,135) (641,924) (9,297) Proceeds from Deficiency Note.............. 26,486 -- -- Repurchase of subordinated debt............ (46,661) -- -- Deferred financing fees.................... (7,538) (30,178) -- Issuance of shares to Apollo Management, L.P....................................... -- 232,750 -- Proceeds from Senior Credit Facility....... -- 815,000 -- Proceeds from Senior Notes................. -- 448,871 -- Repurchase of shares in recapitalization... -- (735,223) -- Other...................................... 598 12,990 176 ----------- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES.... 90,100 216,286 15,439 ----------- --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS....................................... 68,503 (11,041) (7,039) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR. 3,314 14,355 21,394 ----------- --------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR....... $ 71,817 $ 3,314 $ 14,355 =========== ========= ========
The accompanying notes are an integral part of these financial statements. 54 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Mariner Post-Acute Network, Inc. (the "Company") changed its name effective August 1, 1998 from its former name, Paragon Health Network, Inc. ("Paragon"), following the consummation of the merger (the "Mariner Merger") with Mariner Health Group, Inc. ("Mariner Health") on July 31, 1998 pursuant to an agreement and plan of merger dated as of April 13, 1998 (the "Mariner Merger Agreement"). See Note 5. The Company had previously changed its name from Living Centers of America, Inc. ("LCA") to Paragon on November 4, 1997. At the time of the Mariner Merger, Mariner Health operated long-term health care facilities that provided skilled nursing and residential care services in 16 states and comprehensive rehabilitation services. The Company was formed in November 1997 through the recapitalization by merger of LCA with a newly- formed entity owned by certain affiliates of Apollo Management, L.P. and certain other investors (the "Recapitalization Merger"), and the subsequent merger of GranCare, Inc. ("GranCare") with a wholly-owned subsidiary of LCA (the "GranCare Merger" and collectively with the Recapitalization Merger, the "Apollo/LCA/GranCare Mergers") pursuant to an agreement and plan of merger dated as of May 7, 1997, as amended and restated as of September 17, 1997 (the "GranCare Merger Agreement"). See Notes 3 and 4. At the time of the GranCare Merger, GranCare operated long-term health care facilities that provided skilled nursing and residential care services in 15 states, a specialty hospital geriatric services company, and home health operations. At September 30, 1999, the Company's operations consist principally of over 400 inpatient and assisted living facilities, 37 institutional pharmacies and 14 long-term acute care hospitals. The Company operates in 40 states with significant concentrations of facilities and beds in eight states and several metropolitan markets. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and all significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant losses, has a working capital deficiency of approximately $2.0 billion, and has a capital deficit of approximately $1.4 billion at September 30, 1999. In addition, the Company has violated certain covenants of various loan agreements. On January 18, 2000, the Company, Mariner Health and certain of their respective subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (referred to herein as the "Chapter 11 Filings"). See Note 2. CASH MANAGEMENT As a result of separate Senior Credit Facilities (see Note 12), the Company maintains separate centralized cash management systems for Paragon and Mariner Health in which cash receipts are transferred daily from facility and ancillary company depository accounts to a separate cash concentration account for Paragon and Mariner Health. Funds are then used to provide for normal working capital requirements, including reduction of the outstanding credit lines or placement of excess funds in investment grade investments. To the extent that cash transferred from the facility and ancillary company depository accounts is not sufficient to provide for cash disbursement requirements, a cash advance is obtained from one of the Company's sources of liquidity. See Note 12. Cash equivalents consist of temporary investments with original maturities of three months or less. NOTES RECEIVABLE, NET Notes receivable, net, aggregating $20.1 and $30.5 million at September 30, 1999 and 1998, respectively, consist primarily of notes which arose from divestitures of certain operating facilities. These notes, which are generally collateralized by long-term care facilities, have interest rates ranging generally from 6.5% to 12% and maturities through 2012, including approximately $16.8 million due after September 30, 2000. Notes receivable, 55 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) net, at September 30, 1999 and 1998, include reserves for potential uncollectible amounts of $7.5 million and $4.0 million, respectively. Management believes the collateral values are sufficient to recover the net carrying amount of these notes in the event of default. SUPPLIES Supplies, consisting principally of pharmaceutical and medical supplies, are valued at the lower of cost (first-in, first out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Capitalized interest related to funds borrowed to finance construction was not significant for all periods presented. Maintenance and repairs are charged to operations as incurred and replacements and significant improvements are capitalized. Depreciation and amortization are provided over the estimated useful lives of the assets on a straight-line basis as follows: Buildings........................................................ 25-40 years Building improvements............................................ 10-15 years Furniture, fixtures and equipment................................ 3-15 years
Depreciation expense, including amortization of assets under capital leases, related to property and equipment for the years ended September 30, 1999, 1998, and 1997 was $77.5 million, $49.1 million, and $32.0 million, respectively. GOODWILL, NET Goodwill represents the excess of purchase price over fair market value of assets acquired in various purchase transactions and is amortized on a straight-line basis with lives ranging from 30 to 40 years. Accumulated amortization at September 30, 1999 and 1998 was $67.5 million and $43.3 million, respectively. Amortization of goodwill charged to expense was $43.0 million, $23.0 million and $7.3 million for the years ended September 30, 1999, 1998 and 1997, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of these assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of carrying value over fair value written off. Fair value is based on market prices where available, an estimate of market value, or determined by various valuation techniques including discounted cash flow. See Note 15. RESTRICTED INVESTMENTS Restricted investments represent cash, other investments, and common stock holdings that have been designated to (i) pay insurance claims of the Company's wholly-owned insurance subsidiaries, (ii) serve as partial collateral for the Company's bank agreements, and (iii) serve as partial collateral for the Company's lease 56 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) agreements with Health and Retirement Properties Trust ("HRPT") (See Notes 11 and 12). These restricted investments have been classified as available-for- sale securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are recorded at their estimated fair value. See Note 19. INCOME TAXES Noncurrent deferred income taxes arise primarily from timing differences resulting from using accelerated depreciation for tax purposes and reserves for uninsured losses not deductible in the current period. Current deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes which are expected to reverse within one year. See Note 16. The Company files a consolidated federal income tax return. Federal and state income tax payments made for the years ended September 30, 1999, 1998 and 1997 were $3.0 million, $1.0 million and $40.0 million, respectively. The Company received $78.1 and $8.7 million in tax refunds during the years ended September 30, 1999 and 1998, respectively, in addition to the tax payments made by the Company. TREASURY STOCK During fiscal year 1996, the Company acquired 2,327,220 shares of treasury stock (775,740 shares prior to the three-for-one stock split, see Note 6) on the open market for a total cost of $20.0 million. The shares repurchased were primarily intended to be used as part of a plan to fund the employer's contributions to the Company's 401(k) Plan and Deferred Retirement Incentive Plan and to fund employee purchases made under the Company's Employee Stock Purchase Plan. All treasury stock was retired effective November 4, 1997 in connection with the Company's recapitalization. NET REVENUES Net patient service revenue includes patient revenues payable by patients, amounts reimbursable by third party payors under contracts, rehabilitation therapy service revenues from management contracts to provide services to non- affiliated skilled nursing facilities and other entities and revenues from the Company's medical products and home health care services. Patient revenues payable by patients at the Company's facilities are recorded at established billing rates. Patient revenues to be reimbursed by contracts with third-party payors are recorded at the amount estimated to be realized under these contractual arrangements. Revenues from Medicare and Medicaid are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants or, for cost reporting periods beginning July 1, 1998, determined under a prospective payment system. The Company separately estimates revenues due from each third party with which it has a contractual arrangement and records anticipated settlements with these parties in the contractual period during which services were rendered. The amounts actually reimbursable under Medicare and Medicaid under cost reimbursement programs are determined by filing cost reports which are then subject to audit and retroactive adjustment by the payor. Legislative changes to state or federal reimbursement systems may also retroactively affect recorded revenues. Changes in estimated revenues due in connection with Medicare and Medicaid may be recorded by the Company subsequent to the year of origination and prior to final settlement based on improved estimates. Such adjustments and final settlements with third party payors are reflected in operations at the time of the adjustment or settlement. Medicare revenues represented 21%, 32% and 26% and Medicaid revenues represented 47%, 39% and 41% of net revenue for the years ended September 30, 1999, 1998 and 1997, respectively. In addition, indirect costs reimbursed under the Medicare program are subject to regional limits. The Company's costs generally exceed these limits and accordingly, the Company is required to submit exception requests to recover such excess costs. 57 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On July 1, 1998, the Company began phasing in its facilities to a Prospective Payment System ("PPS") for services to Medicare patients. The Company's facilities were phased into PPS based upon their cost report years (20 facilities on July 1, 1998; 105 facilities on October 1, 1998; 189 facilities on January 1, 1999; and 83 facilities on April 1, 1999). At September 30, 1999, all facilities are being paid by Medicare under PPS, and as such, revenue recorded will consist of the aggregate payments expected from Medicare for individual claims at the appropriate payment rates, which include reimbursement for ancillary services. The PPS billing methodology is extremely complex and its implementation is resource intensive. The claims amendment process lacks procedures and the coordination of certain policies. The Company has a commitment to training and compliance and has established procedures to address PPS issues as they arise. The Company terminated substantially all of its contracts to provide therapy services to both unaffiliated third-parties and to the Company's skilled nursing facilities effective May 31, 1999. See Note 10. The Company's rehabilitation management contracts which were terminated in fiscal 1999 typically had a term of one year but frequently included automatic renewals and were in general terminable on notice of 30 to 90 days by either party. Under certain contracts, the Company billed Medicare or another third- party payor directly. Under other contracts, the Company was compensated on a fee for service basis and in general directly billed the skilled nursing facility, which in turn received reimbursement from Medicare, Medicaid, private insurance or the patient. The Company recognized payments under these latter contracts as payments from private payors. Under these latter contracts, the Company also generally indemnified its customers against reimbursement denials by third-party payors for services determined not to be medically necessary. The Company had established internal documentation standards and systems to minimize denials and typically has the right to appeal denials at its expense. Historically, reimbursement denials under these contracts have been insignificant; however, an increase in denials could materially and adversely affect the Company. Under arrangements in which the Company billed a skilled nursing facility for its rehabilitation services on a fee for service basis, Medicare reimbursed the facility based on a reasonable cost standard. Specific guidelines existed for evaluating the reasonable cost of physical, occupational and speech therapy services. Medicare applied salary-equivalency guidelines in determining the reasonable cost of physical therapy services, which was the cost that would be incurred if the therapist were employed by a nursing facility, plus an amount designed to compensate the provider for certain general and administrative overhead costs. Medicare paid for occupational and speech therapy services on a reasonable cost basis, subject to the so-called "prudent buyer" rule for evaluating the reasonableness of the costs. The Company's gross margins for its physical therapy services under the salary equivalency guidelines were significantly less than for its speech and occupational therapy services under the "prudent buyer" rule. In addition, the Company provided certain services between subsidiary companies, some of which were charged at cost and others of which are charged at market rates. The Company believes that the services which were charged at market rates qualify for an exception to Medicare's related organization principle. There can be no assurance, however, that the Health Care Finance Administration ("HFCA") will endorse the Company's position and the Medicare reimbursement received for such services may be subject to audit and recoupment in future years. In April 1995, HCFA issued a memorandum to its Medicare fiscal intermediaries as a guideline to assess costs incurred by inpatient providers relating to payment of occupational and speech language pathology services furnished under arrangements that include contracts between therapy providers and inpatient providers. While not binding on the fiscal intermediaries, the memorandum suggested certain rates to assist the fiscal intermediaries in making annual "prudent buyer" assessments of speech and occupational therapy rates paid by inpatient providers. In addition, HCFA has promulgated new salary equivalency guidelines effective April 1, 1998 which updated the then current physical therapy and respiratory therapy rates and established new guidelines for occupational therapy and speech therapy. These new payment guidelines were in effect until the 58 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) client skilled nursing facility transitioned to PPS, at which time payment for therapy services were included in the PPS rate. HCFA, through its intermediaries, is also subjecting physical therapy, occupational therapy and speech therapy to a heightened level of scrutiny resulting in increasing audit activity. A majority of the Company's provider and rehabilitation contracts provided for indemnification of the facilities for potential liabilities in connection with reimbursement for rehabilitation services. There can be no assurance that actions ultimately taken by HCFA with regard to reimbursement rates for such therapy services will not materially adversely affect the Company's results of operations. After July 1, 1998, as the Company's pharmacy customers transitioned to PPS, the Company amended the relationships with certain of its customers to provide pharmaceutical services at a fixed per diem price. During the year ended September 30, 1999, the Company recorded $122.0 million of adjustments to reduce the estimated amount due from third-party payors, of which $39.3 million was recorded to reduce the estimated amount receivable from cost reports filed, remaining open or settled during the period. The remaining $82.7 million of adjustments was recorded to reflect amounts due to the Medicare program for previously received reimbursement and to reduce the estimated amount receivable from all Medicare cost report appeal items and primarily pertains to related party adjustments asserted by Medicare intermediaries (and disputed by the Company) through the intermediaries' May 1999 reopening of certain Mariner Health Medicare cost reports for 1995, 1996, and 1997. These reopenings were to incorporate adjustments that reduced the allowable cost of rehabilitation therapy services that were provided to Mariner Health facilities by Mariner Health's rehabilitation subsidiaries. During the three months ended June 30, 1999, Mariner Health received revised notices of program reimbursement ("NPRs") for certain of the cost reports on approximately 50 of its facilities that require Mariner Health to repay approximately $15.9 million to the Medicare program, net of outstanding cost report receivables. On July 27, 1999 Mariner Health reached agreement with HCFA to extend repayment of the $15.9 million net liabilities resulting from the issuance of the revised NPRs. The extended repayment plan requires payment of $1.8 million per month from July through December 1999, and $1.5 million per month from January through May 2000. The current intermediary has notified Mariner Health that it intends to issue revised NPRs for the remaining facility cost reports (1997 through 1999) starting in fiscal year 2000. Should the revised NPRs result in a repayment requirement, the Company and Mariner Health would seek to enter into an extended repayment plan with HCFA at that time. The Company is vigorously disputing the intermediaries' overpayment determinations through the appeal process; however, a favorable outcome cannot be assured at this time. The loss per share of this $122.0 million change in estimate was approximately ($1.66) for the year ended September 30, 1999. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company is aware of certain current investigations and additional possible investigations involving allegations of potential wrongdoing with respect to Medicare and Medicaid. See Notes 17 and 18. While the Company believes that it is in compliance with all applicable laws and regulations, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), was issued in June 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS 130 effective October 1, 1998; the adoption of this statement did not have a material impact on the Company's financial position or results of operations. Comprehensive income includes net income (loss), as well as charges and credits directly to stockholders' (deficit) equity which are excluded from net income (loss). 59 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEGMENT REPORTING The Company also adopted Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131, which supersedes FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise", establishes standards for the way that public business enterprises report information about operating segments in financial statements. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect results of operations or financial position. See Note 24. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion 25 "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for the stock option grants. In October 1995 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies the option to retain the current accounting approach for recognizing stock-based expense in the financial statements or to adopt a new accounting method based on the estimated fair value of the employee stock options. Companies that do not follow the new fair-value based method are required to provide pro forma disclosures of net income and earnings per share as if the fair-value method of accounting had been applied. See Note 23 for the pro forma effects on the Company's reported net income (loss) and earnings (loss) per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS 123. EARNINGS PER SHARE In February 1997 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 is designed to simplify the standards for computing earnings per share and increase the comparability of earnings per share data on an international basis. The Company implemented SFAS 128 in the first quarter of fiscal year 1998. The earnings (loss) per share impact of this implementation was not significant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's knowledge of current events, they may ultimately differ from actual results. RECENT ACCOUNTING PRONOUNCEMENTS In February 1998 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132"). SFAS 132 standardizes disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets, and eliminates certain existing disclosure requirements. The Company adopted SFAS 132 effective October 1, 1998. The adoption of SFAS 132 did not affect results of operations or financial position. 60 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In March 1998 the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance as to whether certain costs for internal-use software should be capitalized or expensed when incurred. This SOP is effective for fiscal years beginning after December 15, 1998, but earlier application is encouraged. The Company does not expect the adoption of SOP 98-1 to have a material impact on its financial statements. In June 1998 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In June 1999 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 for one year which is now effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 will become effective in the Company's fiscal year ending September 30, 2001. The adoption of this statement is not expected to have a material impact on the Company's financial statements. In June 1998 the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs. It requires costs of start-up activities to be expensed as incurred. SOP 98-5is effective for fiscal years beginning after December 15, 1998, but earlier application is encouraged. The Company does not expect the adoption of this SOP to have a material impact on its financial statements. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1999 financial statement presentation. NOTE 2. GOING CONCERN AND ISSUES EFFECTING LIQUIDITY The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has experienced significant losses, has a working capital deficiency of approximately $2.0 billion, and has a capital deficit of approximately $1.4 billion at September 30, 1999. In addition, as more fully described below, the Company has violated certain covenants of various loan agreements. On January 18, 2000, the Company, Mariner Health and certain of their respective subsidiaries filed separate voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in the District of Delaware. These matters, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management is in the process of developing a plan of reorganization that will be submitted to the U.S. Bankruptcy Court, the Company's and Mariner Health's creditors for their approval. In the event the plan of reorganization is accepted, continuation of the business thereafter is dependent on the Company's ability to achieve successful future operations. Mariner Health was not in compliance with certain of the financial covenants contained in the Mariner Health Senior Credit Facility (see Note 12) and the Mariner Health Term Loan Facility (see Note 12) as of March 31, 1999, June 30, 1999, and September 30, 1999. The Company has been operating without a waiver of noncompliance for these credit facilities and paying a default rate of interest of 200 basis points above the credit facility rates. The maturity date of the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility was January 3, 2000, and therefore such debt is classified as a current obligation of the Company at September 30, 1999. Mariner Health did not make the interest payments due on the Mariner Health Senior Credit 61 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Facility and the Mariner Health Term Loan Facility (see Notes 12 and 26). Mariner Health did not make the interest payment due October 1, 1999 on the Mariner Notes (see Notes 12 and 26). At September 30, 1999, Mariner Health had invested cash of $22.6 million for supporting its operations. The Company obtained a waiver under the Senior Credit Facility (see Note 12) with respect to certain financial covenant defaults existing at March 31, 1999. However, at June 30, 1999 and September 30, 1999, the Company was not in compliance with certain financial covenants under the Senior Credit Facility, and such default has not been waived. The Company did not make the scheduled interest and principal payments due on or subsequent to November 19, 1999 on its Senior Credit Facility (see Notes 12 and 26). Due to the covenant violations, the Company is not permitted to borrow additional cash under the Senior Credit Facility. The Company did not make the interest payment due November 1, 1999 on the Senior Subordinated Notes (see Notes 12 and 26). At September 30, 1999, the Company had invested cash of $50.4 million for supporting operations covered by the Senior Credit Facility. The Company has also defaulted on certain covenants relating to the Deficiency Note, Omega Note and various agreements with HRPT (see Note 12). Except as may be otherwise determined by the Bankruptcy Court overseeing the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11 Filings prevents any creditors or other third parties from taking any action in connection with any defaults under prepetition obligations of the Company and those of its subsidiaries which are debtors in the Chapter 11 Filings. In connection with the Chapter 11 Filings, the Company must develop a plan of reorganization that will be approved by its creditors, including those described above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11 Filings. In connection with the Chapter 11 Filings, the Company obtained a commitment for $100 million in debtor-in-possession ("DIP") financing (the "Company DIP Financing") from a group of banks led by The Chase Manhattan Bank. Mariner Health also obtained a commitment for $50 million in DIP financing from a group of banks led by PNC Bank (the "Mariner Health DIP Financing"; together with the Company DIP Financing, the "DIP Financings"). The accompanying consolidated financial statements have been prepared on the basis of accounting principles applicable to going concerns and contemplate the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include adjustments, if any, to reflect the possible future effects on the recoverability and classification of recorded assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties. In addition, since the Company filed for protection under the Bankruptcy Code subsequent to September 30, 1999, the accompanying consolidated financial statements have not been prepared in accordance with SOP 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code," ("SOP 90-7") and do not include disclosures of liabilities subject to compromise. Financial statements prepared subsequent to the filings under Chapter 11 will be prepared reflecting such amounts subject to compromise. NOTE 3. RECAPITALIZATION MERGER During 1997 the Company entered into the Recapitalization Merger which was completed effective November 1, 1997 for accounting purposes. In connection with the Recapitalization Merger, certain affiliates of Apollo and certain other investors (the "Apollo Investors") invested $240 million to purchase approximately 17.8 million shares (adjusted for the three-for-one stock split, see Note 6) of newly issued common stock of LCA. Concurrent with the Recapitalization Merger, LCA changed its name to Paragon Health Network, Inc. 62 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On November 4, 1997, the Company sold $275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of 99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value (collectively the "Notes"), in a private offering to institutional investors. Concurrent with the private Notes offering, the Company entered into a new Senior Credit Facility which is composed of $740 million in Term Loans and a Revolving Credit Facility which provides for borrowings of up to an additional $150 million. See Note 12. The Company used the $240 million invested by the Apollo Investors and the $1.189 billion of net proceeds provided by the Notes offering and the Term Loans to (i) purchase approximately 90.5% of the issued and outstanding common stock of the Company for a per share price of $13.50 (adjusted for the three- for-one stock split, see Note 6), (ii) to repay substantially all amounts outstanding under the Company's and under GranCare's (see Note 4 for description of the GranCare Merger) previous credit facilities and (iii) pay for certain costs associated with the Apollo/LCA/GranCare Mergers. NOTE 4. GRANCARE MERGER Effective November 1, 1997 for accounting purposes, and subsequent to the Company's recapitalization, the Company completed the merger acquisition of GranCare pursuant to the GranCare Merger Agreement. In the GranCare Merger approximately 17.4 million shares (adjusted for the three-for-one stock split, see Note 6) of the Company's common stock were exchanged for GranCare common stock and approximately 1.3 million options (adjusted for the three-for-one stock split, see Note 6) to purchase shares of the Company's common stock were exchanged for options to purchase GranCare common stock. The Company's total purchase price of the acquisition was approximately $250.6 million including legal, consulting and other direct costs. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of GranCare's operations are included in the Company's consolidated financial statements since the date of acquisition. The assets and liabilities of GranCare have been recorded at fair market value based on the total purchase price allocation as follows (in thousands): Current assets.................................................. $ 225,617 Property and equipment.......................................... 215,455 Goodwill........................................................ 368,741 Restricted investments.......................................... 40,987 Other long-term assets.......................................... 40,066 Current liabilities............................................. (117,669) Long-term debt.................................................. (369,871) Other non-current liabilities................................... (152,767) --------- Total purchase price............................................ $ 250,559 =========
In the quarter ended June 30, 1998, an adjustment was made to record GranCare's property and equipment at its fair value, assign a purchase price to unfavorable operating leases for property and equipment and other unfavorable contract rights, and assign a value to identifiable intangible assets. The unfavorable operating lease obligation in the amount of $36.4 million is amortized over the lives of the respective leases and is reflected in the accompanying consolidated balance sheet as other liabilities. Goodwill resulting from the GranCare Merger is being amortized on a straight-line basis over 30 years. The Omega Note (see Note 12) assumed by the Company in the GranCare Merger has been recorded at its fair value. Such amount is being amortized using the effective interest method over the expected life of the note. Amortization, which was approximately $3.9 million and $4.0 million for the years ended September 30, 1999 and 1998, respectively, was recorded as a reduction to interest expense. 63 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5. MARINER MERGER Effective July 31, 1998 the Company completed merger with Mariner Health pursuant to the terms of the previously announced Mariner Merger Agreement. In the Mariner Merger approximately 29.6 million shares of the Company's common stock were exchanged for Mariner Health common stock. The Company's total purchase price of the acquisition was approximately $542.7 million including cash payments for options, legal, consulting and other direct costs. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of Mariner Health's operations are included in the Company's consolidated financial statements since the date of acquisition. The assets and liabilities of Mariner Health have been recorded at fair market value based on the total purchase price allocation as follows (in thousands): Current assets.................................................. $ 213,862 Property and equipment.......................................... 320,604 Goodwill........................................................ 677,737 Restricted investments.......................................... 3,227 Other long-term assets.......................................... 34,006 Current liabilities............................................. (55,853) Long-term debt.................................................. (600,202) Other non-current liabilities................................... (50,710) --------- Total purchase price............................................ $ 542,671 =========
In the quarter ended September 30, 1999, an adjustment was made to record Mariner Health's property and equipment at its fair value, assign a purchase price to unfavorable operating leases for property and equipment, and assign a value to identifiable intangible assets. Goodwill resulting from the Mariner Health Merger is being amortized on a straight-line basis over 30 years. NOTE 6. STOCK SPLIT On November 24, 1997, the Board of Directors of the Company declared a three-for-one stock split in the form of a stock dividend to stockholders of record as of December 15, 1997 that was paid on December 30, 1997. In all instances throughout the financial statements and footnotes, common stock and additional paid-in capital have been restated to reflect this split. NOTE 7. RECAPITALIZATION, INDIRECT MERGER, AND OTHER EXPENSES For the year ended September 30, 1999, recapitalization, indirect merger, and other expenses total approximately $65.4 million and include approximately $15.6 million of costs incurred and paid related to the Mariner Health Merger, approximately $15.1 million of costs incurred to outside professionals related to the Company's defaults in connection with its indebtedness and $34.7 million of other expenses. As of September 30, 1999, approximately $54.3 million of these expenses were paid. For the year ended September 30, 1998, recapitalization, indirect merger, and other expenses include approximately $66.2 million of costs related to the Apollo/LCA/GranCare Mergers, approximately $12.0 million of costs related to the Mariner Health Merger, and approximately $8.7 million of other expenses. Approximately $9.7 million and $69.3 million of these costs were paid during the years ended September 30, 1999 and 1998, respectively. 64 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8. PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information (in thousands, except per share data) presents the consolidated results of operations of LCA, GranCare, and Mariner Health as if the Apollo/LCA/GranCare Mergers and the Mariner Merger had occurred effective October 1, 1996, after giving effect to certain adjustments, including amortization of goodwill, increased interest expense on debt related to the Mergers, and related income tax effects. Such adjustments exclude a $12.0 million charge, net of a $7.0 million income tax benefit, for termination fees paid by GranCare to Vitalink Pharmacy Services, Inc. and Manor Care, Inc. in conjunction with the GranCare Merger. The results of operations for the year ended September 30, 1997 include a $30.0 million charge, net of a $6.0 million income tax benefit, recorded by GranCare in February 1997 in connection with the spin-off of its institutional pharmacy business. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved had the Apollo/LCA/GranCare Mergers and the Mariner Merger been consummated as of those dates, nor are they necessarily indicative of future operating results.
YEAR ENDED SEPTEMBER 30 ---------------------- 1998 1997 ---------- ---------- Net revenues...................................... $2,776,514 $2,732,372 ========== ========== Loss before extraordinary item.................... $ (229,768) $ (40,112) Extraordinary item................................ (11,275) (4,831) ---------- ---------- Net (loss)........................................ $ (241,043) $ (44,943) ========== ========== Basic loss per share: Net loss before extraordinary item.............. $ (3.14) $ (0.55) Extraordinary item.............................. (0.15) (0.06) ---------- ---------- Net loss........................................ $ (3.29) $ (0.61) ========== ========== Diluted loss per share: Net loss before extraordinary item.............. $ (3.14) $ (0.55) Extraordinary item.............................. (0.15) (0.06) ---------- ---------- Net loss........................................ $ (3.29) $ (0.61) ========== ==========
Pro forma information for 1997 and other 1998 acquisitions (see Note 9) is not presented because their operating results, either individually or in the aggregate, do not have a material effect on the pro forma operating results presented above. NOTE 9. ACQUISITIONS FISCAL YEAR 1999 ACQUISITIONS The Company made no acquisitions during fiscal year 1999. FISCAL YEAR 1998 ACQUISITIONS In addition to the Apollo/LCA/GranCare Mergers and Mariner Merger discussed in Notes 3, 4, and 5 during fiscal year 1998 the Company acquired through merger Professional Rehabilitation, Inc., a provider of rehabilitation services, in a stock-for-stock transaction. Approximately 1.1 million shares of the Company's common stock and $27.0 million in cash were exchanged for Professional Rehabilitation, Inc.'s common stock. In connection with this transaction, approximately $45.3 million was recorded as goodwill. 65 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company also acquired Summit Medical Holdings, Ltd., a provider of long-term acute care services, during fiscal 1998 in exchange for $10.0 million in cash and approximately 1.0 million shares of the Company's common stock. In connection with this transaction, $17.4 million was recorded as goodwill. In addition, the Company acquired several institutional pharmacies and long-term care centers as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. FISCAL YEAR 1997 ACQUISITIONS The Company acquired institutional pharmacies, home health agencies, hospice and therapy operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. NOTE 10. DIVESTITURES FISCAL YEAR 1999 DIVESTITURES The Company terminated substantially all of its contracts to provide therapy services to both unaffiliated third-parties and to the Company's skilled nursing facilities effective May 31, 1999. As a result of the contract terminations and the closure of the therapy business, the Company recorded a loss on the disposal of the goodwill associated with the therapy business of $228.5 million and a loss on disposal of related assets of $7.5 million. On June 30, 1999 the Company completed the sale of the assets of its outpatient rehabilitation clinics to HealthSouth Corporation which resulted in a loss on sale of $2.5 million. On July 29, 1999 the Company completed the sale of the hospital rehabilitation management contract business to National Rehab Partners, Inc. which resulted in a loss on sale of $4.9 million. The Company also disposed of substantially all of its home health, contract management operations, and approximately 15 skilled nursing facilities during the year ended September 30, 1999 and recorded a net gain on disposal of $0.7 million. FISCAL YEAR 1998 DIVESTITURES In September 1998, the Company divested its Hospice operations, which provided care for terminal patients, for a cash sales price of $6.0 million. 66 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11. RESTRICTED INVESTMENTS Restricted investments at September 30, 1999 and 1998 included the following (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 1999 COST GAINS LOSSES VALUE - ------------------ --------- ---------- ---------- --------- Restricted by self insurance pro- grams: U.S. Treasury Notes............... $ 11,031 $ 3 $ (232) $10,802 Asset-backed securities........... 2,976 3 (37) 2,942 Corporate debt securities......... 23,078 9 (483) 22,604 Mortgage-backed securities........ 1,334 -- (36) 1,298 Repurchase Pooling Arrangement.... 64 -- -- 64 Cash.............................. 8,219 -- -- 8,219 -------- ------ ------- ------- TOTAL........................... 46,702 15 (788) 45,929 Restricted by bank agreements: Cash Collateral Accounts.......... 12,009 -- -- 12,009 Restricted by lease agreements: HRPT common stock................. 18,813 -- (7,563) 11,250 -------- ------ ------- ------- $ 77,524 $ 15 $(8,351) $69,188 ======== ====== ======= ======= GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 1998 COST GAINS LOSSES VALUE - ------------------ --------- ---------- ---------- --------- Restricted by self insurance pro- grams: U.S. Treasury Notes............... $ 24,596 $ 761 $ -- $25,357 Asset-backed securities........... 2,402 85 -- 2,487 Corporate debt securities......... 30,716 948 -- 31,664 Mortgage-backed securities........ 3,455 854 -- 4,309 Repurchase Pooling Arrangement.... 587 -- -- 587 Cash.............................. 7,250 -- -- 7,250 -------- ------ ------- ------- TOTAL........................... 69,006 2,648 -- 71,654 Restricted by lease agreements: HRPT common stock................. 18,813 -- (2,000) 16,813 -------- ------ ------- ------- $ 87,819 $2,648 $(2,000) $88,467 ======== ====== ======= =======
Proceeds from the sale and maturities of investments were $32.3 million, $95.4 million, and $19.1 million for the three years ended September 30, 1999, 1998 and 1997, respectively. Gross gains (losses) were not significant for all periods presented. 67 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The amortized cost and estimated fair value of debt securities and other investments at September 30, 1999 by contractual maturity are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less................................ $ 6,415 $ 6,412 Due after one year through five years.................. 13,416 13,186 Due after five years through ten years................. 13,780 13,316 Due after ten years.................................... 498 492 ------- ------- 34,109 33,406 Asset-backed securities................................ 2,976 2,942 Mortgage-backed securities............................. 1,334 1,298 Repurchase Pooling Arrangement......................... 64 64 HRPT Common Stock...................................... 18,813 11,250 Cash and Collateral Account............................ 20,228 20,228 ------- ------- TOTAL.................................................. $77,524 $69,188 ======= =======
The Repurchase Pooling Arrangement is subject to market risk associated with changes in the value of the underlying financial instruments as well as the risk of loss of appreciation if a counter party fails to perform. NOTE 12. DEBT Long-term debt at September 30, 1999 and 1998 is summarized in the following table (in thousands):
SEPTEMBER 30, ----------------------- 1999 1998 ----------- ---------- Senior Debt: Senior Credit Facilities: Revolving Credit Facility................... $ 166,350 $ 21,000 Term Loans.................................. 746,440 815,000 Mariner Health Senior Credit Facility....... 223,000 356,000 Mariner Health Term Loan Facility........... 197,597 -- Deficiency Note............................... 26,486 -- Mortgage notes (6% to 11% due through 2014)... 49,864 55,918 Other notes payable (8% to 10% due through 2008)........................................ 81,665 91,346 Subordinated Debt: Senior Subordinated Notes (due 2007).......... 274,009 274,287 Senior Subordinated Discount Notes (due 2007). 204,459 183,968 Mariner Health Senior Subordinated Notes (due 2006)........................................ 103,121 149,749 ----------- ---------- 2,073,248 1,947,268 Obligations under capital leases................ 68,853 76,847 ----------- ---------- 2,141,844 2,024,115 Less short-term notes payable and current por- tion........................................... (2,028,226) (46,250) ----------- ---------- TOTAL LONG-TERM DEBT............................ $ 113,618 $1,977,865 =========== ==========
68 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest paid on the above debt was $175.8 million, $74.5 million, and $21.8 million during the years ended September 30, 1999, 1998, and 1997, respectively. SENIOR CREDIT FACILITY The Senior Credit Facility consists of four components: a 6 1/2 year term loan facility in an aggregate principal amount of $315 million (the "Tranche A Term Loan Facility"); a 7 1/2 year term loan facility in an aggregate principal amount of $250 million (the "Tranche B Term Loan Facility"); an 8 1/2 year term loan facility in an aggregate principal amount of $250 million (the "Tranche C Term Loan Facility"); and a 6 1/2 year revolving credit facility in the maximum amount of $175 million (the "Revolving Credit Facility"). Loans made under the Tranche A Term Loan Facility ("Tranche A Term Loans"), the Tranche B Term Loan Facility ("Tranche B Term Loans") and the Tranche C Term Loan Facility ("Tranche C Term Loans") are collectively referred to herein as "Term Loans." Advances under the Revolving Credit Facility are sometimes referred to as "Revolving Loans." The proceeds from borrowings under the Term Loans were used, along with the proceeds of the Notes offering, to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness, and to pay costs and expenses associated with the Apollo/LCA/GranCare Mergers. As of September 30, 1999, outstanding indebtedness under the Revolving Credit Facility was $166.4 million (out of a possible $175.0 million) which excluded $8.6 million of letters of credit. In addition, $272.7 million of the Tranche A Term Loan Facility, $236.9 million of the Tranche B Term Loan Facility, and $236.9 million of the Tranche C Term Loan Facility were outstanding. The aggregate principal amounts of the Tranche A Term Loans and the Revolving Credit Facility reflect increases to those facilities of $75.0 million and $25.0 million, respectively, as part of the First Amendment to the Senior Credit Facility effective on July 31, 1998 (the "July 1998 Amendments"), in connection with the consummation of the Mariner Merger. As a result of the July 1998 Amendments, aggregate amortization of the Term Loans increased to the following approximate quarterly amounts: $8.4 million (formerly $6.6 million), $15.8 million (formerly $12.3 million), $16.6 million (formerly $12.9 million), $16.6 million (formerly $12.9 million), $18.2 million (formerly $14.1 million), $48.5 million (formerly $46.5 million), $59.8 million (unchanged) and $20.0 million (unchanged) in fiscal years 1999 through 2006, respectively. Principal amounts outstanding under the Revolving Credit Facility will be due and payable in April 2005. Interest on outstanding borrowings under the Revolving Credit Facility accrue, at the option of the Company, at the Alternate Base Rate (the "ABR") of The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the "Eurodollar Rate") plus, in each case, an Applicable Margin. The term "Applicable Margin" means a percentage that will vary in accordance with a pricing matrix based upon the respective term loan tenor and the Company's leverage ratio. Prior to the effectiveness of the December 22, 1998 amendment to the Senior Credit Facility (the "December 1998 Amendment"), the Applicable Margins for the Revolving Credit Facility and the Tranche A Term Loan Facility in the pricing matrix ranged from 0% to 1.25% for ABR loans and 0.08% to 1.25% for loans under the Eurodollar rate. The applicable interest rate margin for Tranche B Term Loans was 1.50% for loans under the ABR and 2.50% for Eurodollar loans. The applicable interest rate margin for Tranche C Term Loans was 1.75% for loans under the ABR and 2.75% for Eurodollar loans. Immediately prior to the December 1998 Amendment, the Applicable Margins for ABR Loans and Eurodollar Loans under the Revolving Credit Facility and the Tranche A Term Loan Facility were 1.25% and 2.25%, respectively. Following the December 1998 Amendment, the Applicable Margins in the pricing matrix pertaining to the Revolving Credit Facility and Tranche A Term Loans range from 0.25% to 1.25% for ABR loans and 1.75% to 69 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2.75% for loans under the Eurodollar. The applicable interest rate margin for Tranche B Term Loans is 2.25% for loans under the ABR and 3.25% for Eurodollar loans. The applicable interest rate margin for Tranche C Term Loans is 2.25% for loans under the ABR and 3.50% for Eurodollar loans. In connection with the May 11, 1999 amendment (the "May 1999 Amendment") to the Senior Credit Facility, all of the Applicable Margins were increased by 50 basis points. Following the May 1999 Amendment, the Applicable Margins in the pricing matrix pertaining to Revolving Loans and Tranche A Term Loans range from 0.75% to 1.75% for ABR loans and 2.25% to 3.25% for loans under the Eurodollar. The applicable interest rate margin for Tranche B Term Loans is 2.75% for loans under the ABR and 3.75% for Eurodollar loans. The applicable interest rate margin for Tranche C Term Loans is 3.00% for loans under the ABR and 4.00% for Eurodollar loans. The resultant interest rates under the Senior Credit Facility (in each case first for ABR Loans and then for Eurodollar Loans) as of September 30, 1999 were as follows: for Revolving Loans and Tranche A Term Loans, 10.00% and 9.33%; for Tranche B Term Loans, 11.00% and 9.83%; and for Tranche C Term Loans, 11.25% and 10.08%. The Senior Credit Facility contains customary covenants which, among other things, require maintenance of certain financial ratios and limit amounts of additional debt and repurchases of common stock. The Company obtained a waiver under the Senior Credit Facility with respect to certain financial covenant defaults existing at March 31, 1999. At September 30, 1999, the Company was in violation of all financial covenants. In addition, in order to conserve its liquidity, the Company did not make the November 1999 interest payments due on the Senior Credit Facility. The lenders under the Senior Credit Facility signed a forbearance agreement, pursuant to which they agreed not to take any remedial action with respect to events of default (including acceleration of their debt), subject to no new events of default occurring. The forbearance agreement did not waive any events of default, and it expired on January 14, 2000. Based on the financial covenant defaults and the Company's current projected operating results for the year ended September 30, 2000 indicating continued non-compliance with certain financial covenants, the Senior Credit Facility is classified as a current obligation at September 30, 1999. Due to the covenant violations, the Company is not permitted to borrow additional cash under the Senior Credit Facility. At September 30, 1999, the Company had $50.4 million of invested cash for funding operations and satisfying obligations under the Senior Credit Facility. SENIOR SUBORDINATED NOTES Also in connection with the Apollo/LCA/GranCare Mergers, on November 4, 1997 the Company completed a private offering to institutional investors of $275 million of its 9.5% Senior Subordinated Notes due 2007, at a price of 99.5% of face value and $294 million of its 10.5% Senior Subordinated Discount Notes due 2007, at a price of 59.6% of face value (collectively, the "Notes"). Interest on the Senior Subordinated Notes is payable semi-annually. Interest on the Senior Subordinated Discount Notes will accrete until November 1, 2002 at a rate of 10.57% per annum, compounded semi-annually, and were to be cash pay at a rate of 10.5% per annum thereafter. The Notes will mature on November 1, 2007. The net proceeds from these offerings, along with proceeds from the Senior Credit Facility, were used to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness, and to pay costs and expenses associated with the Apollo/LCA/GranCare Mergers. The Company did not make the scheduled interest payment of approximately $13.2 million due on the Senior Subordinated Notes in November 1999 and such default was not cured within the applicable grace period. Certain holders of the Senior Subordinated Notes have formed an unofficial committee of holders of the Senior Subordinated Notes, and have engaged counsel to represent their interests in connection with the Company's efforts to restructure the indebtedness evidenced by the Senior Subordinated Notes. The Senior Subordinated Notes and Senior Subordinated Discount Notes are classified as current obligations at September 30, 1999. 70 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MARINER HEALTH SENIOR CREDIT FACILITY AND MARINER HEALTH TERM LOAN FACILITY Mariner Health is the borrower under a $460.0 million senior secured revolving loan facility (the "Mariner Health Senior Credit Facility"), by and among Mariner Health, the lenders signatory thereto (the "Mariner Health Lenders"), and PNC Bank, National Association, as agent for the Mariner Health Lenders (the "Mariner Health Agent"). The Mariner Health Senior Credit Facility terminated on January 3, 2000, without the scheduled maturity payment being made. The borrowing availability and rate of interest varied depending upon specified financial ratios, with applicable interest rate margins ranging between 0% and 0.25% for prime-base borrowings, and between 0.50% and 1.75% for Eurodollar-based advances. As of September 30, 1998, the applicable margins were 0% for prime-based revolving loans and 1.25% for Eurodollar-based loans. Effective December 23, 1998, Mariner Health amended the Mariner Health Senior Credit Facility (the "Mariner Health Senior Credit Facility Amendment") to (a) reduce the amount of the revolving commitment from $460 million to $250 million, (b) to provide additional financial covenant flexibility for Mariner Health and its subsidiaries, (c) to increase the applicable interest rate margins so that they range from 0.25% to 1.25% for prime-based loans, and from 1.75% to 2.75% for Eurodollar-based advances, (d) to modify certain of the operating covenants referred to in the immediately preceding paragraph, and (e) to expand the amount and types of collateral pledged to secure the Mariner Health Senior Credit Facility. Immediately after giving effect to the Mariner Health Senior Credit Facility Amendment, the applicable interest rate margin for prime-based advances increased to 0.75%, and the applicable interest rate margin for Eurodollar-based borrowings increased to 2.25%. Accordingly, the applicable interest rates on prime-based loans were initially 7.8%, and for Eurodollar-based advances, 7.6%. Mariner Health's obligations under the Mariner Health Senior Credit Facility are guaranteed by substantially all of its subsidiaries. The Mariner Health Senior Credit Facility and related guarantees are secured by pledges of the stock of substantially all of Mariner Health's direct and indirect subsidiary guarantors, by mortgages on all wholly owned, unencumbered inpatient facilities of Mariner Health and its subsidiaries, by leasehold mortgages on certain inpatient facilities leased by Mariner Health or its subsidiaries, and by security interests in substantially all other property and assets of Mariner Health and its subsidiaries. As the owner of 100% of the capital stock of Mariner Health, the Company has pledged such capital stock to Chase as additional collateral to secure the Company's obligations in connection with the Senior Credit Facility and the Synthetic Lease. Contemporaneously with the effectiveness of the Mariner Health Senior Credit Facility Amendment, Mariner Health entered into a term loan agreement dated as of the same date (the "Mariner Term Loan Agreement") with PNC Bank, as administrative agent, First Union National Bank, as syndication agent, and the financial institutions signatory thereto as lenders (the "Term Lenders"), pursuant to which the Term Lenders made a $210 million senior secured term loan to Mariner Health (the "Mariner Health Term Loan"). Proceeds of the Mariner Health Term Loan were applied to reduce loan amounts under the Mariner Health Senior Credit Facility in connection with the Mariner Health Senior Credit Facility Amendment. The interest rate pricing and covenants contained in the Mariner Health Term Loan Agreement are substantially similar to the corresponding provisions of the Mariner Health Senior Credit Facility, as amended by the Mariner Health Senior Credit Facility Amendment. The Mariner Health Term Loan matured on January 3, 2000, is guaranteed by the same subsidiary guarantors as the Mariner Health Senior Credit Facility, and is cross-defaulted and cross-collateralized with the Mariner Health Senior Credit Facility. As of September 30, 1999, approximately $223.0 million of loans and $6.6 million of letters of credit were outstanding under the Mariner Health Senior Credit Facility, and $197.6 million of the Mariner Health Term Loan was outstanding. The Mariner Health Senior Credit Facility matured on January 3, 2000. Mariner Health and its subsidiaries are treated as unrestricted subsidiaries under the Senior Credit Facility. Unlike subsidiaries of the Company other than Mariner Health and its subsidiaries (the "Non-Mariner 71 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Subsidiaries"), Mariner Health and its subsidiaries neither guarantee the Company's obligations under the Senior Credit Facility nor pledge their assets to secure such obligations. Correspondingly, the Company and the Non-Mariner Subsidiaries do not guarantee or assume any obligations under the Mariner Health Senior Credit Facility. Mariner Health and its subsidiaries are not subject to the covenants contained in the Senior Credit Facility, and the covenants contained in the Mariner Senior Credit Facility are not binding on the Company and the Non-Mariner Subsidiaries. Mariner Health and the Mariner Health subsidiaries are obligated to continue to comply with the covenants contained in the Mariner Senior Credit Facility without taking into account the revenues, expenses, net income, assets or liabilities of the Company and the Non-Mariner Subsidiaries. The converse is true with respect to the Company, which (together with its Non-Mariner Health Subsidiaries) must continue to comply with the covenants contained in its Senior Credit Facility without taking into account the revenues, expenses, net income, assets or liabilities of Mariner Health and its subsidiaries. Mariner Health was not in compliance with certain of the financial covenants contained in the Mariner Health Senior Credit Facility and in the Mariner Health Term Loan Facility as of March 31, 1999, and again as of June 30, 1999 and September 30, 1999. In addition, Mariner Health failed to make its October 1, 1999 interest payments due on the Mariner Health Senior Credit Facility and on the Mariner Health Term Loan Facility within the applicable grace period, although it was ultimately able to satisfy such obligations through amendments to those credit facilities which permitted cash collateral held by the Collateral Agent to be applied for such purpose. Finally, Mariner Health did not make the required payments with regard to the Mariner Health Term Loan and Mariner Health Senior Credit Facility at their respective January 3, 2000 maturity dates. MARINER HEALTH SENIOR SUBORDINATED NOTES Mariner Health is also the issuer of $150.0 million of 9 1/2% Senior Subordinated Notes due 2006 (the "Mariner Notes") which were issued pursuant to an indenture dated as of April 4, 1996 (the "Mariner Indenture") with Mariner Health as issuer and State Street Bank and Trust Company as trustee (the "Mariner Trustee"). The Mariner Notes are obligations solely of Mariner Health and are not guaranteed by the Company or any of its subsidiaries (other than Mariner Health). Because of the existing, unwaived financial covenant defaults under the Mariner Health Senior Credit Facility and the Mariner Health Term Loan Facility, the agents under such facilities gave notice to Mariner Health and the Mariner Trustee that they were instituting a 179-day payment blockage period, during which no payments of debt service on the Mariner Notes could be made. Accordingly, Mariner Health did not make the scheduled $7.1 million interest payment due on the Mariner Notes on October 1, 1999. The 30-day grace period having expired without such interest being paid, an event of default exists under the Mariner Indenture. The Mariner Health Senior Subordinated Notes are classified as current obligations at September 30, 1999. Two holders of substantially all of the Mariner Notes not owned by the Company (see below) have formed an unofficial committee of holders of the Mariner Notes, and have engaged counsel to represent their interests in connection with Mariner Health's efforts to restructure the indebtedness evidenced by the Mariner Notes. DEFICIENCY NOTE As a consequence of the Mariner Merger and the resulting change of control at Mariner Health, the holders of the Mariner Notes had the right under the Mariner Indenture to require that their Mariner Notes be purchased (the "Change of Control Purchase") at a purchase price equal to 101% of the outstanding principal amount of the Mariner Notes purchased. Effective on September 11, 1998, Mariner Health and the Mariner Trustee entered into an amendment to the Mariner Indenture which permitted Mariner Health to designate a third-party to purchase any Mariner Notes tendered pursuant to the Change of Control Purchase. Mariner Health designated NationsBank, N.A. (n/k/a Bank of America, N.A., and herein referred to as "Bank of America") as a third-party purchaser, and on September 21, 1998 Bank of America acquired all $40,661,000 of the Mariner Notes tendered 72 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) in connection with the Change of Control Purchase (the "Tendered Mariner Notes"). In agreeing to act as third-party purchaser, Bank of America required the Company to enter into a total return swap agreement (the "Total Return Swap"), with the financial institution as counterparty. See "Quantitative and Qualitative Disclosures about Market Risk." The Company's obligations under the Total Return Swap were guaranteed by Mariner Health and substantially all of the subsidiaries of Mariner Health. During the quarter ended December 31, 1998, an additional $6.0 million of the Mariner Notes were acquired by Bank of America and made a part of the Total Return Swap. The Total Return Swap terminated by its terms on August 16, 1999. Based on the bids for the Tendered Mariner Notes solicited by Bank of America pursuant to the Total Return Swap Agreement, the market value of the Tendered Mariner Notes for purposes of unwinding the Total Return Swap was determined to be approximately $0.7 million, resulting in capital depreciation of approximately $46.5 million being owed by the Company. The Company was the winning bidder in the auction for the Tendered Mariner Notes. On the August 16, 1999 termination date, Bank of America applied $15.0 million drawn by it under a letter of credit issued pursuant to the Mariner Health Senior Credit Facility and applied $5.0 million of cash collateral previously posted by Mariner Health, to satisfy $20.0 million of the total amount owed to Bank of America under the Total Return Swap, leaving a net deficiency of approximately $26.5 million (the "Net Total Return Swap Deficiency"). Effective August 16, 1999, Bank of America and the Company incorporated the Net Total Return Swap Deficiency into a promissory note (the "Deficiency Note") which generally matures and is payable as to principal and interest on the same terms as the notes evidencing the Revolving Loans. The guarantee of the Total Return Swap obligations of the Company by Mariner Health and its subsidiary guarantors remains in place. Bank of America also waived any default arising from any failure to be paid the Net Deficiency on the termination date of the Total Return Swap, in return for the lenders under the Senior Credit Facility amending the Senior Credit Facility to acknowledge the Deficiency Note as permitted indebtedness and as an "Obligation" that is secured on a pari passu basis with the indebtedness outstanding under the Senior Credit Facility. The $46.7 of Mariner Notes acquired by Mariner Post- Acute Network, Inc. in connection with the unwinding of the Total Return Swap remain outstanding as an obligation of Mariner Health. The Company did not make the scheduled November 1999 interest payments due under the Deficiency Note. The terms of the Deficiency Note provide that the forbearance by the lenders under the Senior Credit Facility with respect to the failure to pay interest and certain other defaults under the Senior Credit Facility automatically bind the holder of the Deficiency Note as well. The forbearance period expired on January 14, 2000. The Deficiency Note is classified as a current obligation at September 30, 1999. OTHER SIGNIFICANT INDEBTEDNESS The Company and its GranCare, Inc. subsidiary are parties to an agreement with Omega Healthcare Investors, Inc. ("Omega"). A wholly-owned subsidiary of the Company, Professional Health Care Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note executed on August 14, 1992 (the "Omega Note") in favor of Omega, and under a loan agreement dated as of June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding as of September 30, 1999. The Omega Note bears interest at a rate which is adjusted annually based on either (i) changes in the Consumer Price Index or (ii) a percentage of the change in gross revenues of PHCMI and its subsidiaries from year to year, divided by 58.8 million, whichever is higher, but in any event subject to a maximum rate not to exceed 105% of the interest rate in effect for the Omega Note for the prior calendar year. The current interest rate is 15.5% per annum which is paid monthly. Additional interest accrues on the outstanding principal of the 73 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Omega Note at the rate of 1% per annum and totaled $4.3 million at September 30, 1999. Such interest is compounded annually and is due and payable on a pro rata basis at the time of each principal payment or prepayment. In addition to the interest on the Omega Note described in the preceding paragraph, and as a condition to obtaining Omega's consent to a February 1997 transaction between Vitalink Pharmacy Services, Inc. and GranCare, PHCMI agreed to pay additional interest to Omega in the amount of $20,500 per month, through and including July 1, 2002. If the principal balance of the Omega Note for any reason becomes due and payable prior to that date, there will be added to the indebtedness owed by PHCMI: (i) the sum of $1.0 million, plus (ii) interest thereon at 11% per annum to the prepayment date; less (iii) the amount of such additional interest paid to Omega prior to the prepayment date. Beginning October 1, 2002, quarterly amortizing installments of principal in the amount of $1.5 million will also become due and payable on the first day of each calendar quarter. The entire outstanding principal amount of the Omega Note is due and payable on August 13, 2007. The Omega Note may be prepaid without penalty during the first 100 days following August 14, 2002. The Omega Loan Agreement obligates PHCMI, among other things, to maintain a minimum tangible net worth of at least $10 million, which may be increased or decreased under certain circumstances but may not be less than $10 million. The Company must contribute additional equity to PHCMI, if and when necessary, to assure that such minimum tangible net worth test is met. Subsequent to September 30, 1999, PHCMI and GranCare received notice from Omega asserting that PHCMI was in default of its obligation to maintain its required minimum tangible net worth. Omega demanded that such default be cured within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's compliance with such minimum tangible net worth test, or else an event of default would exist under the Omega loan documents. The Company received notice in late December, 1999, declaring an event of default as a result of the alleged breach of the tangible net worth covenants contained in the Omega Loan Documents and accelerating all amounts due under obligations to Omega. Effective January, 2000, PHCMI ceased making its monthly interest payments on the Omega Note. Omega subsequently initiated foreclosure proceedings on three skilled nursing facilities located in North Carolina. Hearings on the foreclosures are scheduled for February 3, 2000. At September 30, 1999, the Omega Note is classified as a current obligation. The Company, through its GranCare subsidiaries, is a party to various agreements between GranCare and Health and Retirement Properties Trust ("HRPT"). HRPT is the lessor with respect to certain facilities leased by two subsidiaries of GranCare (the "Tenant Entities"). In 1999, HRPT spun off its health care portfolio, including the Tenant Entities, into a new publicly- traded company. HRPT has an unlimited guaranty by the Company and all subsidiaries of the Company having an ownership interest in Tenant Entities which guaranty is secured by a cash collateral deposit of $15 million, the earned interest on which is retained by HRPT. The performance by the Tenant Entities of their respective obligations to HRPT continues to be secured by a pledge of one million shares of HRPT common stock beneficially owned by GranCare. The Company does not have the ability to sell these shares to meet any capital requirements. During the Fall of 1999, SPTMNR Properties Trust ("SPTMNR") succeeded to the interests of HRPT under the HRPT Agreements, and references to HRPT herein are deemed to include SPTMNR in such capacity. DEBTOR-IN-POSSESSION FINANCING FOR THE COMPANY Among the orders entered by the Bankruptcy Court on the Petition Date in the Company's Chapter 11 case were orders approving on an interim basis (i) the use of cash collateral by the Company and those of its subsidiaries which had filed petitions for reorganization under Chapter 11 of the Bankruptcy Code (excluding 74 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Mariner Health and the direct and indirect subsidiaries of Mariner Health, the "Company Debtors"), and (ii) the funding of up to $25.0 million in principal amount at any time outstanding under a debtor-in-possession financing arrangement (the "Company DIP Financing") established pursuant to that certain Revolving Credit and Guaranty Agreement dated as of January 18, 2000 (the "Petition Date") (as amended from time to time, the "Company DIP Credit Agreement") by and among the Company, as borrower, the other Company Debtors, as guarantors, the lenders signatory thereto as lenders (the "Company DIP Lenders"), and The Chase Manhattan Bank, as Administrative Agent, Documentation Agent and Collateral Agent (the "Company DIP Agent"). The Bankruptcy Court set a hearing on January 28, 2000 for an interim order (the "Company Interim DIP Order") to increase the approved portion of the Company DIP Financing to $50.0 million, and another hearing on February 16, 2000 for consideration of a final order (the "Final Company DIP Order,") approving the full $100.0 million amount of the Company DIP Financing. The Company DIP Credit Agreement establishes a one-year, $100.0 million secured revolving credit facility to provide funds for working capital and other lawful corporate purposes for use by the Company and the other Company Debtors; provided, however, that amounts outstanding under the Company DIP Financing may not at any time exceed the maximum borrowing amounts established for the Company under the initial DIP order (the "Company Initial DIP Order"), the Company Interim DIP Order or the Final Company DIP Order (collectively, the "Company DIP Orders"), as the case may be, or the Company's borrowing base of eligible accounts receivable (the "Company Borrowing Base"). Up to $10.0 million of the Company DIP Financing may be utilized for the issuance of letters of credit as needed in the businesses of the Company Debtors. Interest accrues on the principal amount outstanding under the Company DIP Financing at a per annum rate of interest equal to the ABR of Chase, plus three percent (3%) and is payable monthly in arrears. During the existence and continuation of a default in the payment of any amount due and payable by the Company Debtors under the Company DIP Credit Agreement, interest will accrue at the default rate of ABR plus five percent (5%) per annum. The outstanding principal of the Company DIP Financing, together with all accrued and unpaid interest and all other obligations thereunder, are due and payable one year from the Petition Date or, if earlier, on the Prepayment Date. The term, "Prepayment Date," is defined as the first business day which is at least 30 days after the entry of the Company First Day DIP Order, if the Company Final DIP Order has not been entered. The Company must also prepay principal to the extent that the principal amount outstanding under the Company DIP Financing at any time exceeds the Company Borrowing Base then in effect. To the extent proceeds of loans under the Company DIP Financing are used to complete the construction of certain healthcare facilities that are part of the Synthetic Lease (which proceeds are not permitted to exceed $8.8 million), proceeds from the sale of any such properties must be used first to repay any portion of the loans made pursuant to the Company DIP Financing, with 75% of any remaining net cash proceeds to be applied as an adequate protection payment to the lenders under the Senior Credit Facility, and the remaining 25% of such excess net cash proceeds to be retained by the Company or its applicable subsidiary as additional working capital. Pursuant to the terms of the Initial DIP Order, 75% of the net cash proceeds of other asset sales approved by the Bankruptcy Court and the requisite Company DIP Lenders are to be applied as an adequate protection payment to the lenders under the prepetition Senior Credit Facility. The Company has the right to make optional prepayments in increments of $1.0 million, and to reduce the commitment under the Company DIP Credit Agreement in increments of $5.0 million. The obligations of the Company under the Company DIP Credit Agreement are jointly and severally guaranteed by each of the other Company Debtors pursuant to the Company DIP Agreement. Under the terms of the Initial Company DIP Order, the obligations of the Company Debtors under the Company DIP Credit Agreement (the "Company DIP Obligations") constitute allowed superpriority administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain professional fees and expenses incurred by the Company Debtors). The Company DIP Obligations will be secured by perfected liens 75 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) on all or substantially all of the assets of the Company Debtors (excluding bankruptcy causes of action), the priority of which liens (relative to prepetition creditors having valid, non-avoidable, perfected liens in those assets and to any "adequate protection" liens granted by the Bankruptcy Court) is established in the Initial Company DIP Order and the related cash collateral order entered by the Bankruptcy Court (the "Initial Company Cash Collateral Order"). The Bankruptcy Court has also granted certain prepetition creditors of the Company Debtors replacement liens and other rights as "adequate protection" against any diminution of the value of their existing collateral that may result from allowing the Company Debtors to use cash collateral in which such creditors had valid, non-avoidable and perfected liens as of the Petition Date. The discussion contained in this paragraph is qualified in its entirety by reference to the Interim Company DIP Order and the Initial Company Cash Collateral Order, and reference should be made to such orders (which are available from the Bankruptcy Court) for a more complete description of such terms. The Company DIP Credit Agreement contains customary representations, warranties and covenants of the Company Debtors, as well as certain financial covenants relating to minimum EBITDA, maximum capital expenditures, and minimum patient census. The breach of such representations, warranties or covenants, to the extent not waived cured within any applicable grace or cure periods, could result in the Company being unable to obtain further advances under the Company DIP Financing and possibly the exercise of remedies by the Company DIP Lenders, either of which events could materially impair the ability of the Company to successfully reorganize in Chapter 11. DEBTOR-IN-POSSESSION FINANCING FOR MARINER HEALTH Among the orders entered by the Bankruptcy Court on the Petition Date in the Chapter 11 cases of Mariner Health and its subsidiaries (the "Mariner Health Debtors"), were orders approving (a) the use of cash collateral by the Mariner Health Debtors, and (b) the funding of up to $15.0 million in principal amount at any time outstanding under a debtor-in-possession financing arrangement (the "Mariner Health DIP Financing" and together with the Company DIP Financing, the "DIP Financings") pursuant to that certain Debtor-in-Possession Credit Agreement dated as of January 20, 2000 (as amended from time to time, the "Mariner Health DIP Credit Agreement") by and among Mariner Health and each of the other Mariner Health Debtors, as co-borrowers thereunder, the lenders signatory thereto as lenders (the "Mariner Health DIP Lenders"), First Union National Bank, as syndication agent, PNC Capital Markets, Inc. and First Union Securities, Inc., as co-arrangers, and PNC Bank, National Association, as administrative Agent and collateral Agent. The Bankruptcy Court set a hearing on February 16, 2000 to consider Mariner Health's motion for final approval of the full $50.0 million of the Mariner Health DIP Financing. The Mariner Health DIP Credit Agreement establishes a one-year, $50.0 million secured revolving credit facility, which is divided into two tranches--a $40.0 million tranche A commitment, and a $10.0 million tranche B commitment. The tranche B loan commitment is not activated unless and until the holders of at least 75% of the Mariner Health DIP Financing loans or commitments so approve. Advances under the Mariner Health DIP Financing may be used by the Mariner Health Debtors (and to a limited degree, by certain joint venture subsidiaries of Mariner Health that are not debtors in the Mariner Health Chapter 11 cases) for working capital and other lawful corporate purposes. Amounts outstanding under the Mariner Health DIP Financing may not at any time exceed the maximum borrowing amounts established for the Mariner Health Debtors under the initial DIP order (the "Mariner Health Initial DIP Order") or the final DIP order (the "Final Mariner Health DIP Order," and collectively with the Initial Mariner Health DIP Order, the "Mariner Health DIP Orders"), as the case may be. Up to $5.0 million of the Mariner Health DIP Financing may be utilized for the issuance of letters of credit as needed in the businesses of the Mariner Health Debtors. Interest accrues on the principal amount outstanding under the Mariner Health DIP Financing at a per annum rate of interest equal to the "base rate" of PNC Bank (i.e., the higher of the PNC Bank prime rate or a 76 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) rate equal to the federal funds rate plus 50 basis points) plus the applicable spread, which is 250 basis points for tranche A and 300 basis points for tranche B. Such interest is due and payable monthly in arrears. During the existence and continuation of any event of default under the Mariner Health DIP Credit Agreement, the interest rates normally applicable to tranche A loans and tranche B loans under the Mariner Health DIP Financing will be increased by another 250 basis points per annum. The outstanding principal of the Mariner Health DIP Financing, together with all accrued and unpaid interest and all other obligations thereunder, are due and payable in one year or, if earlier, on the Commitment Termination Date. The term, "Commitment Termination Date," is defined as the first to occur of the following: (i) the first anniversary of the Petition Date, (ii) the effective date of a joint plan of reorganization for the Mariner Health Debtors, (iii) the date of termination of the exclusivity rights of the Mariner Health Debtors to file a plan of reorganization, (iv) the filing by the Mariner Health Debtors of any plan of reorganization (or the modification of any such plan previously filed with the Bankruptcy Court) no previously approved by the holders of at least 66-2/3% of the outstanding loans or commitments under the Mariner Health DIP Financing, (v) the date of termination of the commitments under the Mariner Health DIP Credit Agreement during the continuation of an event of default thereunder, (vi) 30 days after the Petition Date if the Final Mariner Health DIP Order has not been entered (which deadline is subject to extension at the discretion of the holders of at least 66-2/3% of the outstanding loans or commitments under the Mariner Health DIP Financing), or (vii) the date on which all or substantially all of the assets or stock of the Mariner Health Debtors is sold or otherwise transferred. The Mariner Health Debtors must also prepay principal to the extent that the principal amount outstanding under the Mariner Health DIP Financing at any time exceeds the Borrowing Base then in effect. The Mariner Health Borrowing Base for any month is an amount equal to $7.5 million in excess of the "Working Capital Facility" borrowings projected for such month in Mariner Health's year 2000 DIP budget. The Mariner Health DIP Credit Agreement also provides for mandatory prepayments under the following circumstances: (i) with net cash proceeds from asset sales, the incurrence of certain debt, the issuance of new equity, the receipt of tax refunds exceeding $100,000 in the aggregate, and the receipt of casualty proceeds in excess of $100,000 that are not applied within 60 days after receipt to the repair, rebuilding, restoration or replacement of the assets damaged or condemned (or committed within such period of time to be so applied); and (ii) on each business day, the amount of cash held by the Mariner Health Debtors in excess of the sum of $5.0 million plus the aggregate sum of the minimum amount required by depositary banks to be kept in deposit accounts, concentration accounts and other with such banks. Amounts prepaid pursuant to clause (i) of the immediately preceding sentence will permanently reduce the amount of the Mariner Health DIP Financing commitments on a dollar-for-dollar basis (first tranche A, and then tranche B). Amounts prepaid pursuant to clause (ii) of the same sentence will not permanently reduce such commitments. The Mariner Health Debtors have the right to make optional prepayments in the minimum principal amount of $1.0 million, and in increments of $100,000 in excess thereof, and, on three business days' notice, to reduce the commitments under the Mariner Health DIP Credit Agreement in the minimum amount of $5.0 million, or in increments of $1.0 million in excess thereof. Under the terms of the Initial Mariner Health DIP Order, the obligations of the Mariner Health Debtors under the Mariner Health DIP Credit Agreement (together with certain potential cash management system liabilities secured on a pari passu basis therewith, the "Mariner Health DIP Obligations") constitute allowed superpriority administrative expense claims pursuant to Section 364(c)(1) of the Bankruptcy Code (subject to a carve-out for certain professional fees and expenses incurred by the Mariner Debtors). The Mariner Health DIP Obligations will be secured by perfected liens on all or substantially all of the assets of the Mariner Health Debtors (excluding bankruptcy causes of action), the priority of which liens (relative to prepetition creditors having valid, non-avoidable, perfected liens in those assets and to any "adequate protection" liens granted by the Bankruptcy Court) is established in the Initial Mariner Health DIP Order and the related cash collateral order entered by the Bankruptcy Court (the "Initial Mariner Health Cash Collateral Order"). The Bankruptcy Court has also granted certain prepetition creditors of the Mariner Health Debtors replacement liens and other rights as 77 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) "adequate protection" against any diminution of the value of their existing collateral that may result from allowing the Mariner Health Debtors to use cash collateral in which such creditors had valid, non-avoidable and perfected liens as of the Petition Date. The discussion contained in this paragraph is qualified in its entirety by reference to the Interim Mariner Health DIP Order and the Initial Mariner Health Cash Collateral Order, and reference should be made to such orders (which are available from the Bankruptcy Court) for a more complete description of such terms. The Mariner Health DIP Credit Agreement contains customary representations, warranties and covenants of the Mariner Health Debtors, as well as certain financial covenants relating to minimum EBITDAR, minimum patient census, minimum eligible accounts receivable, maximum variations from Mariner Health's year 2000 DIP budget and maximum capital expenditures. The breach of such representations, warranties or covenants, to the extent not waived or cured within any applicable grace or cure periods, could result in the Mariner Health Debtors being unable to obtain further advances under the Mariner Health DIP Financing and the possible exercise of remedies by the Mariner Health DIP Lenders, either of which events could materially impair the ability of the Mariner Health Debtors to successfully reorganize in Chapter 11. Among its other restrictive covenants, the Mariner Health DIP Credit Agreement limits affiliate transactions with the Company Debtors, but does contemplate weekly overhead payments to the Company equal to 1.25% of projected net inpatient revenues for such month, subject to a monthly "true- up," such that the payments for such month equal 5% of actual net inpatient revenues of the Mariner Health Debtors. Such payments may be suspended by the Mariner Health Debtors if certain defaults specified in the Mariner Health Credit Agreement occur and are continuing, though such fees will still accrue and will become due and payable if and when the subject default has been cured or waived. Except as may be otherwise determined by the Bankruptcy Court overseeing the Chapter 11 Filings, the automatic stay protection afforded by the Chapter 11 Filings prevents any lenders or other third parties from taking any action in connection with any defaults under prepetition obligations of the Company and those of its subsidiaries which are debtors in the Chapter 11 Filings. In connection with the Chapter 11 Filings, the Company must develop a plan of reorganization that will be approved by its creditors, including those described above and confirmed by the Bankruptcy Court overseeing the Company's Chapter 11 Filings. Long-term debt, including capital lease obligations, maturing in the next five fiscal years is presented below (in thousands):
SEPTEMBER 30 ------------ 2000......................................................... $2,028,226 2001......................................................... 18,079 2002......................................................... 7,915 2003......................................................... 7,706 2004 and thereafter.......................................... 79,918 ---------- Total........................................................ $2,141,844 ==========
The Company periodically enters into interest rate swap agreements (the "Swap Agreements") to manage its interest rate risk. The Swap Agreements effectively convert a portion of the Company's floating interest rate debt to fixed interest rate debt. Notional amounts of interest rate agreements are used to measure interest to be paid or received relating to such agreements and do not represent an amount of exposure to credit loss. Two Swap Agreements with a notional amount of $40.0 million were terminated in fiscal year 1999 at a cost of approximately $0.1 million. At September 30, 1999, the Company had one Swap Agreements in effect totaling $20.0 million notional amount. Under this Swap Agreement, the Company pays interest at an average fixed rate 78 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of 6.805% and receives interest at a rate of three-month LIBOR. At September 30, 1999, the fair market value of the remaining Swap Agreement would represent a loss of approximately $0.3 million for the Company. The Swap Agreement was terminated on October 27, 1999 at no cost to the Company. During the quarter ended December 31, 1997, the Company recognized an extraordinary charge of $11.3 million, net of a $6.0 million income tax benefit, associated with prepayment penalties incurred on the early extinguishment of debt and the write-off of certain deferred financing fees in conjunction with the Apollo/LCA/GranCare Mergers. NOTE 13. PROVISION FOR BAD DEBTS The Company's provision for bad debts in fiscal 1999 was approximately $142.5 million. The Company's collection experience for its services deteriorated principally due to PPS. PPS reduced the cash flows of the Company's pharmacy and therapy customers which resulted in increased aging and uncollectable accounts in both pharmacy and therapy accounts receivable. The Company's accounts receivable also continued to deteriorate during the year due to the multiple complexities involved with the change to Medicare PPS billing, system conversions and consolidation, and turnover of facility-level billing and collection personnel. The Company's facilities were phased into PPS based upon their cost report years (20 facilities on July 1, 1998; 105 facilities on October 1, 1998; 189 facilities on January 1, 1999; and 83 facilities on April 1, 1999). At September 30, 1999, all facilities are being paid by Medicare under PPS, and as such, revenue recorded will consist of the aggregate payments expected from Medicare for individual claims at the appropriate payment rates. The PPS billing methodology is extremely complex and its implementation is resource intensive. NOTE 14. EMPLOYEE RETIREMENT PLANS The Company's employees are eligible to participate in various defined contribution retirement plans sponsored by the Company. Company contributions to these plans represent a matching percentage of certain employee contributions which for certain plans, is subject to management's discretion based upon consolidated financial performance. Total combined expense recognized by the Company under all its defined contribution retirement plans was $4.6 million, $3.8 million, and $3.5 million for the years ended September 30, 1999, 1998, and 1997, respectively. The Company does not provide post-retirement health care or life insurance benefits to employees. Accordingly, the Company is not subject to the requirements of Statement of Financial Accounting Standards No. 106, "Employers Accounting for Post Retirement Benefits Other Than Pensions." NOTE 15. IMPAIRMENT OF LONG-LIVED ASSETS SFAS 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. The revenues recorded by the Company in its nursing facilities under PPS are substantially less than the cost-based reimbursement it received previously. The implementation of PPS resulted in a greater than expected decline in reimbursement for inpatient services and in the demand and market rates for the Company's pharmacy services. Approximately 272 of the Company's nursing facilities began receiving PPS reimbursement on or after January 1, 1999. Management determined that these revenue declines in its nursing facilities and pharmacy services are other than temporary and are expected to have a material adverse effect on future revenues and cash flow. As a result of these indicators, in the fourth quarter of fiscal year 1999 a detailed analysis of the Company's long-lived assets and their estimated future cash flows was completed. The analysis resulted in the identification and measurement of an impairment loss of $995.9 million principally related to the Company's nursing facilities and pharmacies with either cash flow losses or where projected cash flow was not sufficient to recover the 79 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) carrying amount of their goodwill, property and equipment, and other intangible assets which primarily include leasehold rights. The following is a summary of the impairment loss by segment for the year ended September 30, 1999 (in thousands):
OTHER PROPERTY AND INTANGIBLE GOODWILL EQUIPMENT ASSETS TOTAL --------- ------------ ---------- -------- Inpatient Nursing Home Services...... $ 526,411 $306,845 $38,073 $871,329 Pharmacy Services.................... 104,661 11,632 4,546 120,839 All Other............................ 3,764 -- -- 3,764 --------- -------- ------- -------- $ 634,836 $318,477 $42,619 $995,932 ========= ======== ======= ========
In the fourth quarter of fiscal year 1998 the Company recorded an impairment charge based on a detailed analysis of the Company's long-lived assets and their estimated future cash flows. The analysis resulted in the identification and measurement of an impairment loss of $135.8 million related to the Company's nursing facilities and home health agencies with either cash flow losses or nursing facilities where management believed an impairment existed. Each analysis included management's estimate of the undiscounted cash flows to be generated by these assets with a comparison to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. NOTE 16. INCOME TAXES The provision (benefit) for income taxes is presented in the table below (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------ 1999 1998 1997 ------ -------- ------- Current: Federal........................................ -- $(10,266) $34,214 State & Local.................................. -- (772) 5,370 ------ -------- ------- -- (11,038) 39,584 Deferred: Federal........................................ -- 440 (4,922) State & Local.................................. -- 39 (1,058) ------ -------- ------- -- 479 (5,980) ------ -------- ------- Total........................................ -- $(10,559) $33,604 ====== ======== =======
80 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax income as a result of the following:
YEAR ENDED SEPTEMBER 30, ------------------------------ 1999 1998 1997 -------- -------- -------- Federal statutory income tax rate......... (35.0%) (35.0%) 35.0% Increase (decrease) in taxes resulting from: State & local taxes, net of federal tax benefits............................... (1.0%) (0.2%) 3.6% Permanent book/tax differences, primar- ily resulting from Goodwill amortiza- tion 0.6% 2.9% 2.4% Goodwill disposal....................... 3.8% -- -- Impairment of assets.................... 12.3% 10.1% -- Non-deductible merger and acquisition costs.................................. -- 2.2% 1.0% Other, net................................ 0.1% 0.1% 1.3% Change in valuation allowance............. 19.2% 14.8% -- -------- -------- ------- Effective tax rate........................ (0.0%) (5.1%) 43.3% ======== ======== =======
The components of the net deferred tax asset are as follows (in thousands):
SEPTEMBER 30, ------------------- 1999 1998 --------- -------- Deferred tax liabilities: Amounts relating to property and equipment......... -- $(25,457) Insurance.......................................... -- (3,752) --------- -------- Total deferred tax liabilities................... -- (29,209) --------- -------- Deferred tax assets: Asset valuation.................................... 17,930 35,993 Amounts related to property and equipment.......... 68,875 -- Payroll and benefits............................... 20,422 12,142 Intangibles........................................ 36,235 15,716 NOL carryforwards.................................. 270,558 35,282 Other miscellaneous................................ 10,672 4,226 Accrued expenses................................... 25,613 14,693 Tax credits........................................ 6,302 730 Insurance.......................................... 2,277 -- Medicare timing differences........................ 11,673 1,628 --------- -------- Total deferred tax assets........................ 470,557 120,410 Less valuation allowance............................. (470,557) (70,252) --------- -------- Net deferred tax asset........................... $ -- $ 20,949 ========= ========
The Company has established a valuation allowance which completely offsets all net deferred tax assets generated from the Company's net losses. The net change in the valuation allowance for deferred tax assets was an increase of $400.3 million and $68.4 million at September 30, 1999 and 1998, respectively. The GranCare Merger and Mariner Merger resulted in the addition of deferred taxes and a corresponding valuation allowance in the amount of $58.2 million and $37.4 million during the years ended September 30, 1999 and 1998, respectively. 81 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has net operating loss carryforwards of $714.4 million expiring at various dates through 2019. The net operating losses are subject to various limitations due to changes in ownership of the Company's subsidiary corporations during the year the associated losses were generated. NOTE 17. COMMITMENTS AND CONTINGENCIES LEASES Certain of the Company's facilities are held under operating or capital leases. All capital leases will expire by 2009. Certain of these leases also contain provisions allowing the Company to purchase the leased assets during the term or at the expiration of the lease, at fair market value. Facilities operating under capital leases are summarized as follows (in thousands):
SEPTEMBER 30, ----------------- 1999 1998 -------- ------- Facilities operating under capital leases............... $ 63,797 $89,718 Less accumulated amortization........................... (10,419) (6,838) -------- ------- $ 53,378 $82,880 ======== =======
The Company previously entered into a $100 million leasing program (the "Synthetic Lease") to be used as a funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions. The Synthetic Lease is an unconditional "triple net" lease for a period of seven years (beginning in September 1996) with the annual lease obligation a function of the amount spent by the lessor to acquire or construct the project, a variable interest rate, and commitment and other fees. The Company guarantees a minimum of approximately 83% of the residual value of the leased property and also has an option to purchase the properties at any time prior to the maturity date at a price sufficient to pay the entire amount financed, accrued interest, and certain expenses. At September 30, 1999 approximately $66.6 million of the Synthetic lease was utilized. The Synthetic Lease is accounted for as an operating lease. The Synthetic Lease was amended on December 23, 1998 to mirror certain changes made to the Senior Credit Facility and subsequently amended in May 1999 to reduce the commitment from $100 million to $80 million. The Synthetic Lease Facility contains customary covenants which, among other things, require maintenance of certain financial ratios and limit amounts of additional debt and repurchases of common stock. At June 30, 1999 and September 30, 1999, the Company was in violation of certain of these financial covenants and as a result cannot currently make additional borrowings under the Synthetic Lease Facility. Rental expense, net of sublease rent income and amortization of unfavorable lease obligation, for all operating leases was $103.8 million, $86.6 million and $42.5 million for the years ended September 30, 1999, 1998 and 1997, respectively. Certain of the capital and operating leases contain at least one renewal option (which could extend the term of the leases by five to twenty years), purchase options, and provisions for payments by the Company of real state taxes, insurance and maintenance costs. Certain leases also contain increases based on the Consumer Price Index, Medicaid reimbursement rates, or at amounts specified in the lease agreement. Sublease rent income was $11.6 million, $7.1 million and $6.5 million for the years ended September 30, 1999, 1998 and 1997, respectively. Contingent rent based primarily on revenues was $3.2 million, $2.3 million and $1.8 million for the years ended September 30, 1999, 1998 and 1997, respectively. 82 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The table below presents a schedule of the future minimum rental commitments and sublease income under all noncancellable leases as of September 30, 1999 (in thousands):
SUBLEASE OPERATING INCOME CAPITAL --------- -------- -------- 2000......................................... $ 70,548 $ (6,755) $ 9,512 2001......................................... 64,751 (6,731) 12,955 2002......................................... 59,044 (6,091) 10,566 2003......................................... 54,627 (5,892) 9,949 2004......................................... 49,065 (5,495) 27,565 Subsequent years............................. 313,341 (41,347) 17,963 -------- -------- -------- Total minimum rental obligations............. $611,376 $(72,311) 88,510 ======== ======== Less amount representing interest............................... (19,657) -------- Present value of capital leases................................. 68,853 Less current portion............................................ (5,060) -------- Long-term obligations under capital leases...................... $ 63,793 ========
LITIGATION As is typical in the healthcare industry, the Company is and will be subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which will be greater for higher acuity residents receiving services from the Company than for other long-term care residents. The Company is, from time to time, subject to such negligence claims and other litigation. In addition, resident, visitor, and employee injuries will also subject the Company to the risk of litigation. The Company has experienced an increasing trend in the number and severity of litigation claims asserted against the Company. Management believes that this trend is endemic to the long-term care industry and is a result of the increasing number of large judgments, including large punitive damage awards, against long-term care providers in recent years resulting in an increased awareness by plaintiff's lawyers of potentially large recoveries. In certain states in which the Company has significant operations, including California and Florida, insurance coverage for the risk of punitive damages arising from general and professional liability litigation is not available due to state law public policy prohibitions. There can be no assurance that the Company will not be liable for punitive damages awarded in litigation arising in states for which punitive damage insurance coverage is not available. The Company also believes that there has been, and will continue to be, an increase in governmental investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims as well as an increase in enforcement actions resulting from the investigation. While the Company believes that it provides quality care to the patients in its facilities and materially complies with all applicable regulatory requirements, given the Company's current financial difficulties and lack of liquidity, an adverse determination in a legal proceeding or governmental investigation, whether currently asserted or arising in the future, could have a material adverse effect on the Company. From time to time, the Company and its subsidiaries have been parties to various legal proceedings in the ordinary course of their respective businesses. In the opinion of management, except as described below, there are currently no proceedings which, individually, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. Although the Company believes that any of the proceedings not discussed below will not individually have a material adverse impact on the Company if determined adversely to the Company, given the Company's current financial condition, lack of liquidity and change in the Company's GL/PL insurance policy, settling a large number of cases within the Company's $1 million self-insured retention limit could have a material adverse effect on the Company. 83 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On August 26, 1996, a class action complaint was asserted against GranCare in the Denver, Colorado District Court, Salas, et al v. GranCare, Inc. and AMS Properties, Inc. d/b/a Cedars Healthcare Center, Inc., case no. 96-CV-4449. On March 15, 1998, the Court entered an Order in which it certified a class action in the matter. On June 10, 1998, the Company filed a Motion to Dismiss all claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds and these motions were partially granted by the Court on October 30, 1998. Plaintiffs' Motion for Reconsideration was denied by the Court on November 19, 1998, the Court's decision was certified as a final judgment on December 10, 1998, and plaintiffs then filed a writ with the Colorado Supreme Court and an appeal with the Colorado Court of Appeal. This Supreme Court writ has been denied, the Court of Appeal matter has been briefed and Oral Argument has been set for January 18, 2000. The Company will continue in its opposition to all appeals and further intends to vigorously contest the remaining allegations of class status. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States' Office for the Eastern District of Texas (Beaumont) advising that the office was involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation was the result of a qui tam complaint filed under seal against the Company. On May 3, 1999, the Government advised that it has declined to intervene into this matter, but the case remains under seal. The Company received a letter from the Court clerk informing the Company that this case was closed as of September 15, 1999. On March 18, 1998, a complaint was filed under seal by a former employee against the Company, certain of its predecessor entities and affiliates in the United States District Court for the Northern District of Alabama, alleging, inter alia, employment discrimination, wrongful discharge, negligent hiring, violation of the Federal False Claims Act, and retaliation under the False Claims Act. The action is titled Powell, et al. v. Paragon Health Inc., et al., and is civil action No. CV-98-0630-S. The complaint has been unsealed and the Company has been advised that the government has declined to intervene in this matter under the Federal False Claims Act. The Company is vigorously contesting the alleged claims. On May 18, 1998, a class action complaint was asserted against the Company, certain of its predecessor entities and affiliates and certain other parties in the Tampa, Florida Circuit Court, Wilson, et al, v. Mariner Post-Acute Network, Inc., et al., case no. 98-03779, asserting seven claims for relief, including breach of contract, breach of fiduciary duty, unjust enrichment, violation of Florida Civil Remedies for Criminal Practices Act, violation of Florida Racketeer and Corrupt Organization Act, false advertising and common- law conspiracy arising out of quality of care issues at a health care facility formerly operated by the Brian Center Health and Rehabilitation/Tampa, Inc. and later by a subsidiary of LCA as a result of the Brian Center Corporation merger. The Company removed this case to Federal Court on June 10, 1998 and the matter was pending in the United States District Court for the Middle District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiff voluntarily dismissed this case on April 16, 1999. On August 25, 1998, a complaint was filed by the United States against the Company's GranCare and International X-Ray subsidiaries and certain other parties under the Civil False Claims Act and in common law and equity. The lawsuit, U.S. v. Sentry X-Ray, Ltd., et al., civil action no. 98-73722, was filed in United States District Court for the Eastern District of Michigan. Valley X-Ray operates a mobile X-Ray company in Michigan. A Company subsidiary, International X-Ray, owns a minority partnership interest in defendant Valley X- Ray. The case asserts five claims for relief, including two claims for violation of the Civil False Claims Act, two alternative claims of common law fraud and unjust enrichment, and one request for application of the Federal Debt Collection Procedures Act. The two primary allegations of the complaint are: that the X-Ray company received Medicare overpayments for transportation costs in the amount of $657,767; and that the X-Ray company "upcoded" Medicare claims for EKG services in the amount of $631,090. The United States has 84 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) requested treble damages as well as civil penalties of $5,000 to $10,000 for each of the alleged 388 submitted Medicare claims. The total damages sought varies from $5.3 to $7.2 million. The Company is vigorously contesting all claims and filed two motions to dismiss on behalf of its subsidiaries on November 23, 1998. The United States has agreed to the motion to dismiss GranCare as a party. The court has heard a motion to dismiss the Civil False Claims Act and other claims against International X-Ray. The Company is awaiting the court's decision. On October 1, 1998, a class action complaint was asserted against certain of the Company's predecessor entities and affiliates and certain other parties in the Tampa, Florida, Circuit Court, Ayres, et al v. Donald C. Beaver, et al, case no. 98-7233. The complaint asserted three claims for relief, including breach of fiduciary duty against one group of defendants, breach of fiduciary duty against another group of defendants, and civil conspiracy arising out of issues involving facilities previously operated by the Brian Center Corporation or one of its subsidiaries, and later by a subsidiary of LCA, as a result of the merger with Brian Center Corporation. All defendants submitted Motions to Dismiss which were heard by the Court on September 15, 1999. The Company is awaiting a decision from the Court and is not in a position to evaluate the probability of a favorable outcome or the range of potential loss. The Company intends to vigorously contest the request for class certification, as well as all alleged claims made. On November 16, 1998, a complaint was filed under seal by a former employee against the Company, certain of its predecessor entities and affiliates in the United States District Court for the Southern District of Texas, alleging violation of the Federal False Claims Act. The action is titled United States ex rel. Nelius, et al., v. Mariner Health Group, Inc., et al., and is civil action No. H-98-3851. The complaint which was unsealed, has been recently amended to add additional relators and allegations under the Federal False Claims Act. The Company has been advised that the government is evaluating its decision not to intervene with regard to the amended complaint and relators. The Company will vigorously contest the alleged claims. In addition, a three judge panel of the United States Court of Appeals for the Fifth Circuit recently held that qui tam lawsuits in which the government does not intervene are unconstitutional under the Take Care Clause of Article II of the United States Constitution. The court declined to rule whether qui tam suits in which the government does intervene are unconstitutional. The full bench of the U.S. Court of Appeals for the Fifth Circuit agreed November 15, 1999, to review this decision. Riley v. St. Luke's Episcopal Hospital, No. 97-20948, rehearing en banc granted (5th Cir., 1999). A full court determination affirming the court's decisions could favorably effect this outcome of this action, which is currently before a United States District Court located in the Fifth Circuit. On approximately June 8, 1999, OIG issued a subpoena duces tecum to Mariner of Catonsville. The subpoena requests medical records pertaining to eighteen residents. The subpoena also requests other broad categories of documents. The Company has produced a substantial amount of documents responsive to the Subpoena. The Company is cooperating with the investigation and has retained experienced counsel to assist in responding to the subpoena and to advise it with respect to this investigation. This investigation is still in its preliminary stages; therefore, the Company is unable to predict the outcome of this matter. On October 27, 1999, the Company was served with a Complaint in United States ex rel. Cindy Lee Anderson Rutledge and Partnership for Fraud Analysis and State of Florida ex rel. Cindy Lee Anderson Rutledge Group, Inc., ARA Living Centers, Inc. and Living Centers of America, Inc., No. 97-6801, filed in the United States District Court for the Eastern District of Pennsylvania. This action originally was filed under seal on November 5, 1997,, by relators Cindy Lee Anderson Rutledge and the Partnership for Fraud Analysis under the Federal False Claims Act and the Florida False Claims Act. The Complaint alleges that the Company is liable under the Federal False Claims Act and the Florida False Claims Act for alleged violations of regulations pertaining to the training and certification of nurse aides at former Living Centers of America, Inc. facilities. After conducting an investigation in which the Company cooperated by producing documents 85 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) responsive to an administrative subpoena and allowing certain employee interviews, the United States Department of Justice elected not to intervene. The district court unsealed the Complaint on October 15, 1999. On December 14, 1999, the Company filed a motion to dismiss the relators' complaint. The Company intends vigorously to defend this action. On November 10, 1999, suit was filed in the United States District Court for the Western District of Tennessee against the Company and its subsidiary, National Heritage Realty, Inc. ("National Heritage") by Mid-South Healthcare Associates, L.L.C. ("Mid-South"), civil action No. 99-299-MIA. Mid-South in its complaint seeks declaratory judgment and injunctive relief related to Mid- South's contention that two leases, currently held by National Heritage, for twelve nursing home facilities in Tennessee and Mississippi expire on January 31, 2000, and Mid-South's contention that the nursing home facilities have not been maintained to the levels required by the leases. Mid-South also seeks unspecified damages. On December 16, 1999, the Company and National Heritage answered the complaint and counterclaims were asserted on behalf of National Heritage seeking a declaratory judgment that it properly exercised certain options to extend the leases for five year periods (through January 31, 2005), seeking injunctive relief to prevent interference with its right of possession and seeking damages for Mid-South's breach of its duty of good faith and fair dealing. The dispute involves the interpretation of language in certain lease amendments and whether or not Mid-South, by failing to renew certain ground leases upon which three of the twelve leased facilities are built, can unilaterally extinguish National Heritage's options to extend the leases for an additional five year term. On January 13, 2000, the Company, National Heritage and Mid-South entered into a Lease Amendment Agreement (the "Agreement") to settle and resolve all of the claims pending in the subject litigation. The Agreement requires, inter alia, all parties to release and dismiss their respective claims and counterclaims. In addition, Mid-South will agree that the leases on the Facilities have been extended through January 31, 2005 (with an option term through January 31, 2010), will invest up to $3.0 million in capital improvements to certain of the Facilities and will provide certain consulting services in connection therewith. The Company will pay Mid-South a consulting fee of $1.7 million per year and additional rent contingent on the level of capital expenditures actually made by Mid-South. The Company will also make certain capital improvements to the Facilities. The Company will file the necessary motion with the Bankruptcy Court seeking approval to assume this contract on a post-petition basis. NOTE 18. INSURANCE COVERAGES The Company insures automobile, general, and professional liability and workers' compensation risks through insurance policies with third parties. Some of these third-party policies are subject to reinsurance agreements between the insurer and MPN Insurance Company, Ltd. (formerly LCA Insurance Company, Ltd.), a wholly-owned subsidiary of the Company, and GCI Indemnity, Ltd., a wholly-owned subsidiary of the Company. The business written by MPN Insurance Company, Ltd. is the reinsurance of policies providing coverage for nursing home professional liability, automobile liability, and workers' compensation. All of these are occurrence policies which cover only portions of the Company and its subsidiaries and their employees. Pursuant to the reinsurance agreements, MPN Insurance Company, Ltd. is responsible to pay all losses which are incurred by the company issuing the policies. The maximum loss exposure with respect to these policies is $0.5 million per occurrence (policy periods prior to July 1, 1996) and $1.0 million per occurrence (policy periods subsequent to July 1, 1996) for nursing home professional liability; $0.25 million per occurrence for automobile liability; and $0.5 million per occurrence for workers' compensation liability. The business written by GCI Indemnity, Ltd. is also the reinsurance of policies providing coverage for nursing home professional liability, automobile liability, and workers' compensation. All of these are occurrence policies which cover only portions of the Company and its subsidiaries and their employees. Pursuant to the reinsurance agreements, GCI Indemnity, Ltd. is responsible to pay all losses which are incurred by the company issuing the policies. The maximum loss exposure with 86 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) respect to these policies is $0.10 million per occurrence for nursing home professional liability; and $0.35 million per occurrence for workers' compensation liability. The liabilities for incurred losses are estimated by independent actuaries on an undiscounted basis. The obligations of MPN Insurance Company, Ltd. and GCI Indemnity, Ltd. under the reinsurance agreements are collateralized through a security trust account which has been designated as restricted investments to pay for future claims experience applicable to policy periods. Restricted investments at September 30, 1999 and 1998 designated to pay such claims had an estimated fair value of $40.9 million and $71.7 million, respectively. In 1998, the Company purchased a fully-insured workers' compensation policy with no deductible or retention, except in the state of Texas where the Company is a non-subscriber to workers' compensation, with a catastrophic policy in place to cover any loss above $0.5 million per occurrence. In Texas, the Company has in place an employee benefit plan providing for employer-paid benefits comparable to those provided under the Texas workers' compensation program. The Company has obtained insurance that limits the Company's exposure for any individual injury under this benefit plan to $0.5 million. The Company has a trust in which it funds the amount applicable to actuarially determined claims to be incurred. Additionally, in 1998 the Company purchased general and professional liability insurance through a third party insurance company. The maximum loss exposure with respect to this policy is $0.1 million per occurrence in every state except for Texas, in which the maximum loss exposure is $1.0 million per occurrence. For the policy year beginning March 31, 1998 the Company's total exposure for general and professional liability claims is limited to $21.5 million. For the policy period beginning March 31, 1999 and ending July 31, 1999 the maximum loss exposure with respect to this policy was increased to $0.5 million per occurrence in all states except Texas and Florida, in which the maximum loss exposure is $1.0 million per occurrence. The Company's total exposure for general and professional liability claims for the policy period March 31, 1999 through July 31, 1999 is limited to $23.5 million. Restricted investments designated to pay such claims had an estimated fair value of $5.0 million at September 30, 1999. In June 1999, the Company received a 90-day cancellation notice from its general and professional liability ("GL/PL") carrier, Royal Surplus Lines ("Royal"). In July 1999 the Company binded a replacement GL/PL policy with AIG, which resulted in a $4.4 million increase in annual premium and elimination of the Royal policy's aggregate retention limit. The elimination of the aggregate retention limit increased the cost of GL/PL claims by approximately $13.0 million for the period from March 31, 1999 through September 30, 1999. For pre-1998 workers' compensation claims, Mariner Health was insured under various types of insurance and financial plans, certain of which are loss- sensitive in nature and design, which subject Mariner Health to additional future costs for losses incurred in a prior year, but paid in subsequent fiscal periods, as losses develop. Mariner Health's prior workers' compensation carriers hold letters of credit from Mariner Health totaling $5.1 million and $5.5 million at September 30, 1999 and 1998, respectively. Total insurance reserves at September 30, 1999 include short-term reserves of $28.3 million which are included in accrued payroll and related expenses in the accompanying consolidated balance sheet and, $80.9 million of long-term insurance reserves. 87 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 19. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value because of the short maturity of those instruments. NOTES RECEIVABLE Fair value for each significant note receivable was estimated based on the net present value of cash flows that would be received on each note over the remaining note term using current market interest rates rather than stated interest rates. The discount factor was the estimated rate for long-term debt in effect at September 30, 1999 and 1998. Further adjustments were made to the value of the notes based on management's opinion of the credit risk of the note obligee. RESTRICTED INVESTMENTS Fair values for the Company's restricted investments were based on quoted market rates. LONG-TERM DEBT Fair values for each significant fixed or variable rate debt instrument were estimated based on market quotes, where available, or the net present value of cash flows that would be paid on each note over the remaining note term using the Company's current incremental borrowing rate rather than the stated interest rates on the notes. See Note 12. INTEREST RATE SWAP AGREEMENTS Fair values for the Company's various interest rate swap agreements were based on market quotes which would be required to terminate the agreement. The estimated values of the Company's financial instruments as of September 30, 1999 and 1998 are as follows (in thousands):
SEPTEMBER 30, -------------------------------------------- 1999 1998 --------------------- --------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------- ---------- ---------- ---------- Cash and cash equivalents... $ 71,817 $ 71,817 $ 3,314 $ 3,314 Notes receivable............ 20,051 15,767 30,517 32,160 Restricted investments...... 69,188 69,188 88,467 88,467 Long-term debt.............. 2,141,844 1,587,140 2,024,115 1,981,561 Interest rate swap agree- ments...................... -- (269) -- (6,196)
NOTE 20. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade receivables. There have been, and the Company expects that there will continue to be, a number of proposals to limit reimbursement allowable to skilled nursing facilities. In addition, the pharmacy group provides 88 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) services to unaffiliated skilled nursing facilities, many of which receive their revenue from the Medicare or Medicaid programs and have been impacted by the implementation of PPS. Should the related government agencies suspend or significantly reduce contributions to the Medicare or Medicaid programs, the Company's ability to collect on its receivables would be adversely affected. Management believes that the remaining receivable balances from various payors, including individuals involved in diverse activities, subject to differing economic conditions, do not represent a concentration of credit risk to the Company. Management continually monitors and adjusts its allowance for doubtful accounts and contractual allowances associated with its receivables. See Note 13. Federal law limits the degree to which states are permitted to alter Medicaid programs. NOTE 21. RELATED PARTY TRANSACTIONS The Company leases 14 facilities under operating and capital leases from certain organizations in which a board member of the Company has a significant interest. For the period from August 1, 1998 to September 30, 1998, the Company made cash payments on such lease obligations of approximately $1.2 million. During the year ended September 30, 1999 the Company made cash payments on such lease obligations of approximately $7.5 million. Lease obligations include approximately $88.8 million of minimum lease payments due over the remaining lease terms. At September 30, 1999 the Company had total receivables due from these organizations of approximately $5.3 million, primarily as a result of working capital advances and unpaid management fees. In addition the Company had two promissory notes due from organizations associated with the board member totaling $1.6 million, which were guaranteed by the board member. On October 13, 1999 the Company presented a demand notice to the board member for collection of the amount currently due, under one of the promissory notes of approximately $1.0 million in principal plus accrued interest. The board member is disputing all amounts owed. 89 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 22. EARNINGS PER COMMON SHARE In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 was designed to simplify the standards for computing earnings per share and increase the comparability of earnings per share data on an international basis. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the statement of income of all entities with complex capital structures. The Company adopted SFAS 128 during the first quarter of fiscal 1998 and, accordingly, earnings per share for all prior periods presented have been restated to conform to the requirements of this new standard. The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share data):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1999 1998 1997 ----------- --------- ------- Numerator for Basic and Diluted Earnings Per Share: Net income (loss) before extraordinary item................................... $(1,778,282) $(198,377) $43,917 Extraordinary item...................... -- (11,275) -- ----------- --------- ------- Net income (loss)....................... $(1,778,282) $(209,652) $43,917 =========== ========= ======= Denominator: Denominator for basic earnings per share-weighted average shares.......... 73,459 48,601 58,613 Effect of dilutive securities--Stock op- tions.................................. -- -- 1,195 ----------- --------- ------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions................ 73,459 48,601 59,808 =========== ========= ======= Basic Earnings (Loss) Per Share: Net income (loss) before extraordinary item................................... $ (24.21) $ (4.08) $ 0.75 Extraordinary item...................... -- (0.23) -- ----------- --------- ------- Net income (loss) per common share...... $ (24.21) $ (4.31) $ 0.75 =========== ========= ======= Diluted Earnings (Loss) Per Share: Net income (loss) before extraordinary item................................... $ (24.21) $ (4.08) $ 0.73 Extraordinary item...................... -- (0.23) -- ----------- --------- ------- Net income (loss) per common share...... $ (24.21) $ (4.31) $ 0.73 =========== ========= =======
The effect of dilutive securities for the years ended September 30, 1999 and 1998 have been excluded because the effect is antidilutive as a result of the net loss for the periods. NOTE 23. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS The Company established an Employee Stock Option Plan in 1997 which authorizes the granting of incentive stock options, nonqualified options, or any combination of the foregoing to purchase up to 6,000,000 shares (2,000,000 shares prior to the three-for-one stock split) of the Company's common stock. An additional 4,000,000 shares were authorized in July, 1998 in connection with the Mariner Merger. See Note 5. The exercise price per share of common stock with respect to each incentive stock option is the fair market value of a share of common stock (defined as the closing price per share of the common stock on the New York Stock Exchange) on the date such option is granted while the exercise price per share of common stock with respect to a nonqualified option is the fair market value of a share of common stock on the date such option is granted or on a subsequent date or as otherwise provided in any agreement with the recipient, but in no event will the 90 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) exercise price with respect to a nonqualified option be less than 50% of the fair market value of a share of common stock on the date of the grant. The options have a term as fixed by the Stock Option Committee, but, in no event, longer than ten years after the date of grant. Options are exercisable only by the optionee and only while the optionee is an employee or nonemployee director of the Company or, unless such optionee's employment is terminated for cause, within three months after the optionee ceases to be an employee or director of the Company. Options are exercisable for 12 months after the death or permanent disability of an optionee. The option exercise price must be paid in cash or, at the discretion of the Stock Option Committee, may be paid in whole or in part in shares of common stock valued at fair market value on the date of exercise. As of September 30, 1999 and 1998, there were 4,624,264 and 7,091,957, respectively, options granted and outstanding. All shares outstanding as of September 30, 1997 that were not exercised prior to November 4, 1997, were cancelled and reissued as applicable in conjunction with the new Plan. Similarly, Mariner Health Plan options were converted as of July 31, 1998. The following is a summary of the stock option activity and related information which has been adjusted to reflect the three-for-one stock split:
YEAR ENDED SEPTEMBER 30, -------------------------------------------------------------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------------ -------- ------------ -------- ------------ -------- Outstanding at beginning of Year................ 7,091,957 $ 13.97 3,901,404 $ 8.95 3,778,644 $ 9.18 Granted................. 2,091,500 3.07 7,877,856 13.74 645,972 8.30 Exercised............... -- -- (4,423,153) 9.05 (21,831) 6.86 Forfeited............... (4,559,193) 13.87 (264,150) 16.15 (501,381) 9.95 ------------ ------- ------------ ------ ------------ ------ Outstanding at end of year................... 4,624,264 $ 9.14 7,091,957 $13.97 3,901,404 $ 8.95 ============ ======= ============ ====== ============ ====== Exercisable at end of year................... 1,329,014 $ 10.99 974,457 $ 9.63 1,567,092 $ 7.71 ============ ======= ============ ====== ============ ====== Price range............. $0.75-$46.45 $0.84-$46.45 $4.42-$12.92 ============ ============ ============ Weighted average fair value of options granted during the year............... $ 2.12 $ 7.84 $ 5.00 ======= ====== ======
AVERAGE REMAINING EXERCISE CONTRACTUAL RANGE OPTIONS PRICE LIFE (YEARS) ----- --------- -------- ----------- $ 0.75-$ 0.84............................. 30,411 $ 0.75 9.68 $ 2.19-$ 2.50............................. 1,096,000 $ 2.30 9.57 $ 4.19-$ 5.40............................. 621,876 $ 4.68 9.17 $ 7.05-$ 9.91............................. 489,260 $ 7.82 8.16 $11.00-$16.35.............................. 2,228,191 $13.50 8.55 $17.88-$46.45.............................. 158,526 $18.48 8.48 --------- 4,624,264 =========
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 91 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pro forma information regarding net income and earnings per share is required by SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997 risk-free interest rates ranging from 4.61% to 6.11%; a dividend yield of 0%; volatility factors of the expected market price of the Company's common stock ranging from 0.42 to 1.21; and a weighted-average expected life of the options ranging from three to eight years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
YEAR ENDED SEPTEMBER 30, ------------------------------- 1999 1998 1997 ----------- --------- ------- Pro forma net income (loss).................... $(1,778,494) $(212,251) $42,489 Pro forma earnings per share--basic............ $ (24.21) $ (4.37) $ 0.72 Pro forma earnings per share--diluted.......... $ (24.21) $ (4.37) $ 0.71
The Company established an Employee Stock Purchase Plan effective October 1998 which was suspended effective April 1, 1999. A total of 4,000,000 shares of the Company's common stock are authorized for purchase by eligible employees. The provisions of the plan include eligibility for all full time employees regularly working 20 or more hours per week, employee contributions up to 15% of base pay, the purchase price being equal to 85% of the stock price at the end of each semi-annual offering period, and an option to purchase shares of stock or withdraw all payroll deductions at the end of the purchase period. As of September 30, 1999 a total of 369,298 shares had been issued under the plan and an additional 3,630,702 shares had been reserved for future issuance. NOTE 24. SEGMENT INFORMATION Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") requires certain descriptive information to be provided about an enterprise's reportable segments. This information includes the factors that management uses to identify the reportable segments of an enterprise, the types of products and services from which each reportable segment derives its revenues, and how management measures segment profit and loss and segment assets. The following paragraphs provide these disclosures for the Company. DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH EACH OPERATING SEGMENT DERIVES ITS REVENUES At September 30, 1999, the Company was organized into three reportable segments: inpatient nursing services, pharmacy services and other. Prior to the year ended September 30, 1999, the Company operated a therapy segment. The operations relating to the therapy segment were divested or closed in 1999. The Company's inpatient nursing home services business unit provides post- acute care services to the public from its various nursing home sites in the United States. The Company's pharmacy services business unit provides pharmaceutical goods and services to affiliated and unaffiliated long-term and post-acute care facilities from various pharmacy sites in the United States. 92 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS The Company evaluates the performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. The Company accounts for intersegment revenues at market prices. FACTORS MANAGEMENT USED TO IDENTIFY THE ENTERPRISE'S REPORTABLE SEGMENTS The Company's reportable segments are business units that offer different services and products. The reportable segments are each managed separately because they provide distinct services and products using different service and production processes. The following tables exhibit the segment reporting of the Company for the years ended September 30, 1999, 1998 and 1997 (in thousands):
INPATIENT THERAPY NURSING HOME PHARMACY ALL (SEGMENT 1999 SERVICES SERVICES OTHER DISPOSED OF) TOTAL ---- ------------ --------- -------- ------------ ----------- Revenues from external customers.............. $1,697,029 $ 281,717 $ 80,851 $ 205,367 $ 2,264,964 Intersegment revenues... -- 52,654 -- 101,265 153,919 Depreciation and amorti- zation expense......... 55,619 13,020 1,476 10,364 80,479 Impairment of long-lived assets................. 871,329 120,839 -- 3,764 995,932 Loss on disposal of as- sets................... 3,518 -- -- 108,868 112,386 Recapitalization, indi- rect merger, and other expenses............... 80 3,516 -- 18,674 22,270 Interest expense (in- come), net............. 19,111 89 (3,309) (39) 15,852 Segment net income (loss)................. (928,610) (160,296) 1,521 (154,631) (1,242,016) Segment total assets.... 728,807 94,808 111,109 73,628 1,008,352
INPATIENT THERAPY NURSING HOME PHARMACY ALL (SEGMENT 1998 SERVICES SERVICES OTHER DISPOSED OF) TOTAL ---- ------------ -------- -------- ------------ ---------- Revenues from external customers.............. $1,503,415 $230,313 $ 35,508 $267,484 $2,036,720 Intersegment revenues... -- 34,617 14,799 103,144 152,560 Depreciation and amorti- zation expense......... 42,492 8,785 615 11,964 63,856 Impairment of long-lived assets................. 102,617 28 -- 32,611 135,256 Recapitalization, indi- rect merger, and other expenses............... 8 8,700 -- 41 8,749 Interest expense (in- come), net............. 9,379 15 (5,756) 37 3,675 Segment net income (loss)................. 9,584 21,279 (7,600) (7,921) 15,342 Segment total assets.... 1,708,866 254,918 126,116 382,889 2,469,289
INPATIENT THERAPY NURSING HOME PHARMACY ALL (SEGMENT 1997 SERVICES SERVICES OTHER DISPOSED OF) TOTAL ---- ------------ -------- ------- ------------ ---------- Revenues from external customers.............. $751,549 $196,748 $ 121 $195,368 $1,143,786 Intersegment revenues... -- 24,369 29,592 66,786 120,747 Depreciation and amorti- zation expense......... 23,646 6,714 26 7,862 38,248 Interest expense (in- come), net............. (729) 66 (3,087) 151 (3,599) Segment net income...... 86,347 26,261 3,570 14,661 130,839 Segment total assets.... 458,869 175,665 84,088 179,143 897,765
93 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following tables reconcile the Company's segment reporting to the totals on the Company's consolidated financial statements for the years ended September 30, 1999, 1998, and 1997 (in thousands):
YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 ----------- ----------- ---------- Revenues: External revenues for reportable seg- ments................................. $ 2,264,964 $ 2,036,720 $1,143,786 Intersegment revenues for reportable segments.............................. 153,919 152,560 120,747 Corporate overhead..................... 7,616 5,226 (3,498) Elimination of intersegment revenue.... (153,919) (158,977) (120,747) ----------- ----------- ---------- Consolidated revenues................... $ 2,272,580 $ 2,035,529 $1,140,288 =========== =========== ========== Net income (loss): Net income for reportable segments..... $(1,242,016) $ 15,342 $ 130,839 Corporate overhead..................... (536,266) (224,994) (86,922) ----------- ----------- ---------- Consolidated net income (loss).......... $(1,778,282) $ (209,652) $ 43,917 =========== =========== ========== SEPTEMBER 30, ------------------------------------ 1999 1998 1997 ----------- ----------- ---------- Assets: Assets for reportable segments......... $ 1,008,352 $ 2,469,289 $ 897,765 Corporate overhead assets.............. 1,525,942 1,836,279 578,219 Elimination of intersegment assets..... (1,259,323) (1,268,917) (601,617) ----------- ----------- ---------- Consolidated assets..................... $ 1,274,971 $ 3,036,651 $ 874,367 =========== =========== ========== YEAR ENDED SEPTEMBER 30, ------------------------------------ 1999 1998 1997 ----------- ----------- ---------- Depreciation and amortization expense: Reportable segments.................... $ 80,479 $ 63,856 $ 38,248 Corporate overhead..................... 40,047 11,188 1,061 ----------- ----------- ---------- Consolidated depreciation and amortiza- tion expense........................... $ 120,526 $ 75,044 $ 39,309 =========== =========== ========== Impairment of long-lived assets: Reportable segments.................... $ 995,932 $ 135,256 -- Corporate overhead..................... -- 527 -- ----------- ----------- ---------- Consolidated impairment of long-lived assets................................. $ 995,932 $ 135,783 -- =========== =========== ========== Loss on disposal of assets: Reportable segments.................... $ 112,386 -- -- Corporate overhead..................... 130,349 -- -- ----------- ----------- ---------- Consolidated loss on disposal of assets. $ 242,735 -- -- =========== =========== ========== Recapitalization, indirect merger, and other expenses: Reportable segments.................... $ 22,270 $ 8,749 -- Corporate overhead..................... 43,147 78,587 $ 2,588 ----------- ----------- ---------- Consolidated recapitalization, indirect merger, and other expenses............. $ 65,417 $ 87,336 $ 2,588 =========== =========== ========== Interest expense (income), net: Reportable segments.................... $ 15,852 $ 3,675 $ (3,599) Corporate overhead..................... 179,409 110,627 20,451 ----------- ----------- ---------- Consolidated interest expense (income), net.................................... $ 195,261 $ 114,302 $ 16,852 =========== =========== ========== Purchases of property and equipment: Inpatient nursing home services........ $ 51,539 $ 46,243 $ 21,492 Pharmacy services...................... 10,978 13,367 9,445 All other.............................. 81 4,167 5,377 Corporate overhead..................... 10,653 1,391 647 ----------- ----------- ---------- Consolidated purchases of property and equipment.............................. $ 73,251 $ 65,168 $ 36,961 =========== =========== ==========
94 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The table below sets forth summarized quarterly financial data for the years ended September 30, 1999 and 1998 (in thousands, except per share amounts):
FOURTH THIRD SECOND FIRST 1999 QUARTER QUARTER QUARTER QUARTER ---- ----------- --------- -------- -------- Net revenues............ $ 498,055 $ 487,135 (b) $614,710 $672,680 Income (loss) from oper- ations................. (1,199,096)(a) (358,641)(c) (31,786)(d) 6,388 (e) Loss before income taxes and minority interest.. (1,255,181) (406,604) (78,713) (37,898) Minority interest....... (601) 880 460 (625) Net loss................ $(1,254,782) $(405,724) $(78,753) $(39,023) =========== ========= ======== ======== Loss per share: Basic and diluted..... $ (17.03) $ (5.51) $ (1.07) $ (0.53) =========== ========= ======== ======== Weighted average common and common equivalent shares outstanding: Basic and diluted..... 73,695 73,581 73,333 73,277 =========== ========= ======== ========
- -------- (a) Includes $65.4 million indirect merger and other expenses; $995.9 million impairment charge; $11.2 million loss on disposal of assets; $24.6 million additional provision for bad debts; and $27.6 million for change in estimate and adjustments related to reduction in Medicare reimbursement revenue. (b) Includes $94.4 million adjustment for change in estimate related to reduction in Medicare reimbursement revenue. (c) Includes $231.5 million for loss on disposal of assets and $25.0 million in indirect merger and other expenses. (d) Includes $5.1 million for indirect merger and other expenses and $29.6 provision for bad debts. (e) Includes $2.0 million for indirect merger and other expenses and $24.3 provision for bad debts.
FOURTH THIRD SECOND FIRST 1998 QUARTER QUARTER QUARTER QUARTER ---- --------- -------- -------- -------- Net revenues...................... $ 632,697 $494,065 $487,161 $421,606 Income (loss) from operations (132,570)(a) 29,728 22,591 (13,821) Income (loss) before income taxes and minority interest............ (171,455) 1,601 (5,371) (33,149) Minority interest................. (16) (247) (127) (172) Loss before extraordinary loss.... (164,144) (242) (4,473) (29,518) Extraordinary loss on early extin- guishment of debt................ -- -- -- (11,275) Net Loss.......................... $(164,144) $ (242) $ (4,473) $(40,793) ========= ======== ======== ======== Loss per share: Basic........................... $ (2.60) $ (0.01) $ (0.11) $ (0.86) ========= ======== ======== ======== Diluted......................... $ (2.60) $ (0.01) $ (0.11) $ (0.86) ========= ======== ======== ======== Weighted average common and common equivalent shares outstanding: Basic........................... 63,150 42,223 41,208 47,590 ========= ======== ======== ======== Diluted......................... 63,150 42,223 41,208 47,590 ========= ======== ======== ========
- -------- (a) Includes $21.5 million recapitalization, indirect merger and other expenses and $135.8 million impairment charge. 95 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 26. SUBSEQUENT EVENTS On October 1, 1999 the Company announced that Mariner Health did not make the interest payments due October 1, 1999 on the Mariner Health Senior Credit Facility, the Mariner Health Term Loan Facility or the Mariner Health Senior Subordinated Notes. The Company also announced that it would not make the interest payment due November 1, 1999 on the Senior Subordinated Notes. Also on October 1, 1999 the Company announced that it was notified by the New York Stock Exchange ("NYSE") that it had fallen below its continued listing criteria and would be delisted. The Company ceased trading on the NYSE on November 2, 1999 and commenced trading on the over-the-counter bulletin board. On October 13, 1999 the Company presented a demand notice to a board member for non-payment of a promissory note. The board member is disputing all amounts owed as presented on the demand notice. On November 19, 1999 the Company announced that it did not make the interest payments due on its Senior Credit Facility. The lenders under the Senior Credit Facility signed a forbearance agreement, pursuant to which they have agreed not to take any remedial action with respect to such events of default (including acceleration of their debt), subject to no new events of default occurring. The forbearance agreement did not waive any events of default and expired on January 14, 2000. Subsequent to September 30, 1999, PHCMI and GranCare received notice from Omega asserting that PHCMI was in default of its obligation to maintain its required minimum tangible net worth. Omega demanded that such default be cured within 30 days, either by PHCMI or by GranCare under its guaranty of PHCMI's compliance with such minimum tangible net worth test, or else an event of default would exist under the Omega loan documents. The Company received notice in late December, 1999, declaring an event of default as a result of the alleged breach of the tangible net worth covenants contained in the Omega Loan Documents and accelerating all amounts due under obligations to Omega. Effective January, 2000, PHCMI ceased making its monthly interest payments on the Omega Note. Omega subsequently initiated foreclosure proceedings on three skilled nursing facilities located in North Carolina. Hearings on the foreclosures are scheduled for February 3, 2000. On January 18, 2000, the Company and substantially all of its subsidiaries, including Mariner Health and its subsidiaries, filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101, et seq. (the "Bankruptcy Code"). While this action will likely constitute a default under the Company's and such subsidiaries various financing arrangements, Section 362 of the Bankruptcy Code imposes an automatic stay that will generally preclude the creditors and other interested parties under such arrangements from taking any remedial action in response to any such resulting default without prior Bankruptcy Court approval. The Company's need to seek relief afforded by the Bankruptcy Code is due, in part, to the significant financial pressure created by the Balanced Budget Act of 1997 and its implementation, which reduced the Company's Medicare reimbursement rate by approximately $115 per resident, per day. In connection with the Chapter 11 Filings, the Company obtained a commitment for $100 million in debtor-in-possession financing from a group of banks led by The Chase Manhattan Bank. Mariner Health also obtained a commitment for $50 million in DIP financing from a group of banks led by PNC Bank. On December 20, 1999, Apollo Management, LP and its affiliates sold substantially all the Company's common stock, par value $.01 per share, beneficially owned by Apollo. In connection with this action, all five of the Apollo designees to the Company's Board of Directors resigned as Directors effective January 2, 2000. The right to designate members of the Company's Board of Directors was not assigned to the purchaser of the Common Stock sold by Apollo. 96 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth information concerning the executive management and directors of the Company, including each person's name, age as of December 1, 1999 and principal occupation or employment during the past five years.
NAME AGE POSITION - ---- --- -------- Francis W. Cash......... 57 Chairman of the Board, Chief Executive Officer, President and Director George D. Morgan........ 47 Executive Vice President and Chief Financial Officer C. Christian Winkle..... 36 Executive Vice President Susan Thomas Whittle.... 52 Senior Vice President, General Counsel and Secretary Gene E. Burleson........ 59 Director Joel S. Kanter.......... 43 Director Samuel B. Kellett....... 54 Director William G. Petty, Jr.... 54 Director
Francis W. Cash is Chairman of the Board, Chief Executive Officer, President and a director of the Company and has served in this capacity since September 8, 1999. From July 1995 to August 1999, Mr. Cash served as President and Chief Executive of Officer of Red Roof Inns, Inc. ("Red Roof Inns"). He also served as Chairman of the Board of Red Roof Inns from June 1996 to August 1999. Prior to his service at Red Roof Inns, Mr. Cash served as President and Chief Operating Officer of NovaCare, Inc. from October 1992 to June 1995. Prior to that, Mr. Cash served in a number of senior executive positions for 18 years at Marriott Corporation, most recently as President, Marriott Service Group. George D. Morgan is Executive Vice President and Chief Financial Officer of the Company and has served in this capacity since January 25, 1999. From September 1994 to January 1999, Mr. Morgan served as a senior operating and senior corporate officer with Columbia/HCA Healthcare Corporation. His positions of responsibility included Chief Financial Officer, then Chief Operating Officer of the Western Group from September 1994 through April 1996; President of the Ambulatory Surgery Division from April 1996 through June 1998; and Senior Vice President--Managed Care from July 1998 until January 1999. Prior to Columbia/HCA, Mr. Morgan was a regional CFO, then VP of Financial Operations for Republic/OrNda Healthcorp from December 1989 through September 1994. C. Christian Winkle is Executive Vice President of the Company and has served in such capacity since January 27, 1999. Prior to that, Mr. Winkle served as Executive Vice President and Chief Operating Officer of Integrated Health Services, Inc. ("IHS"). From November 1995 to April 1997, he served as Executive Vice President--Field Operations of IHS' owned and leased facilities, and from March 1994 to November 1995, he served as Senior Vice President--Operations of IHS. Prior to serving as Senior Vice President-- Operations of IHS, Mr. Winkle served as Regional Vice President of Operations and President--MSU Product Development of IHS from September 1992 to March 1994. Susan Thomas Whittle is Senior Vice President, General Counsel and Secretary of the Company and has served in such capacity since November 4, 1997. Prior to that, Ms. Whittle served as Vice President, General Counsel and Secretary of LCA from September 1993 to November 4, 1997. Before joining LCA, Ms. Whittle was a partner with the law firms of Clark, Thomas & Winters of Austin, Texas since February 1992, and Wood, Lucksinger & Epstein, a national healthcare law firm from May 1981 through February 1992. 97 Gene E. Burleson has served as a director of the Company since November 4, 1997. Mr. Burleson currently serves as Chairman of the Board of Argonne Properties, Inc., a private investment company. Prior to that, Mr. Burleson served as the Chairman of the Board of GranCare, Inc., a Delaware corporation, and its predecessor, GranCare, Inc., a California corporation ("GranCare- California") from 1988 to November 4, 1997. Additionally, Mr. Burleson served as President and Chief Executive Officer of GranCare-California from December 1990 to February 1997. Upon completion of the merger between GranCare- California and Vitalink Pharmacy Services, Inc. ("Vitalink") in February 1997, Mr. Burleson became Chief Executive Officer and a director of Vitalink. Mr. Burleson resigned as Chief Executive Officer and as a director of Vitalink in August 1997. Mr. Burleson currently serves on the boards of directors of three other public companies: Alternative Living Services, Inc. ("ALS"), a developer and manager of assisted living facilities; Decker Outdoor Corp., a footwear manufacturer; and Tower Hill Capital Group, a provider of small business financial and consulting services. Joel S. Kanter has served as a director of the Company since November 4, 1997. From February 1995 to the present, Mr. Kanter has served as the Chief Executive Officer of Walnut Financial Services, Inc., a provider of small business financial and consulting services, including venture capital and other financing. From 1986 to the present, Mr. Kanter has been the President of Windy City, Inc., a private investment company, and from 1988 to February 1995, he served as a consultant to Walnut Capital Corporation, a closely-held investment management and advisory firm. Mr. Kanter also serves on the boards of directors of four other publicly held companies: I-Flow Corporation, a home infusion pump manufacturer; Encore Medical Corporation, a manufacturer of implant devices; Magna Labs, Inc., a manufacturer of resonance imaging systems; and THCG, Inc., a provider of investment banking services to Internet and e-commerce concerns. Samuel B. Kellett has served as a director of the Company since July 31, 1998. Prior to this, Mr. Kellett served as a director of Mariner Health since July 21, 1997. Mr. Kellett has been owner and president of Samuel B. Kellett Investments since January 1996. Mr. Kellett was President of Convalescent Services, Inc., a company engaged in the long-term healthcare business, from 1978 to January 1996. William G. Petty, Jr. has served as a director of the Company since November 4, 1997. Mr. Petty served as a director of GranCare from July 1995 by virtue of GranCare's merger with Evergreen Healthcare, Inc., a publicly held long-term care provider ("Evergreen"). Since July 1996, Mr. Petty has been a Managing Director of Beecken, Petty & Company. Beecken Petty & Company is the general partner of Healthcare Equity Partners, LP, a venture capital partnership. Mr. Petty served as Chairman of the Board of Directors, President and Chief Executive Officer of Evergreen from June 1993 to July 1995 and served as President and Chief Executive Officer of Evergreen Healthcare Ltd., L.P., an affiliate of Evergreen, from 1988 to 1992. Mr. Petty also served as Chairman of the Board, Chief Executive Officer and President of National Heritage, Inc. from October 1992 to June 1993. Mr. Petty has been the Chairman of the Board of Alterra Healthcare, Inc., a provider of assisted living services, since 1993. Mr. Petty also served as the Chief Executive Officer of ALS from 1993 until February 1996. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under the federal securities laws, the Company's directors and executive officers, and any persons holding more than 10% of the Common Stock outstanding, are required to report their initial ownership of Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission and the exchange upon which the Company's securities are traded. Specific due dates for these reports have been established and the Company is required to disclose any failure to file by these dates during the Company's most recent fiscal year. To the Company's knowledge, all of these filing requirements were satisfied. In making these disclosures, the Company has relied solely on its review of copies of the reports that have been submitted to the Company with respect to its most recent fiscal year. 98 ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation will appear in the Company's Proxy Statement for the 2000 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of certain beneficial owners will appear in the Company's Proxy Statement for the 2000 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission and is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions will appear in the Company's Proxy Statement for the 2000 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission and is incorporated herein by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)DOCUMENTS FILED AS PART OF THIS REPORT: 1. FINANCIAL STATEMENTS The following reports and financial statements are filed herewith on the pages indicated:
PAGE ---- Report of Independent Auditors......................................... 50 Consolidated Balance Sheets at September 30, 1998 and 1999............. 51 Consolidated Statements of Operations for Fiscal Years 1997, 1998 and 1999.................................................................. 52 Consolidated Statements of Stockholders' (Deficit) Equity for Fiscal Years 1997, 1998 and 1999............................................. 53 Consolidated Statements of Cash Flows for Fiscal Years 1997, 1998 and 1999.................................................................. 54 Notes to Consolidated Financial Statements............................. 55
2. FINANCIAL STATEMENT SCHEDULE The following schedule is filed herewith: Schedule II--Valuation and Qualifying Accounts and Reserves All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted. 99 3. EXHIBITS
EXHIBITS -------- *2.1 Agreement and Plan of Merger, dated as of April 13, 1998, among the Registrant, Mariner Health Group, Inc. ("Mariner Health") and Paragon Acquisition Sub, Inc. ("Merger Sub") (Annex I to Registrant's Registration Statement on Form S-4, Registration No. 333-57339, and incorporated herein by reference). *2.2 Amended and Restated Agreement and Plan of Merger dated September 17, 1997 among Apollo Management, L.P. ("Apollo"), Apollo LCA Acquisition Corp. and Living Centers of America, Inc. ("LCA") (filed as Annex I to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *2.3 Amended and Restated Agreement and Plan of Merger dated September 17, 1997 among LCA, GranCare, Inc.("GranCare"), Apollo and LCA Acquisition Sub, Inc. (filed as Annex II to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *3.1 Second Amended and Restated Certificate of Incorporation of the Registrant (filed as Annex VIII to Registrant's Registration Statement on Form S-4, Registration No. 333-57339, and incorporated herein by reference). *3.2 Second Amended and Restated Bylaws of the Registrant (filed as Annex IX to Registrant's Registration Statement on Form S-4, Registration No. 333-57339, and incorporated herein by reference). *4.1 Form of Common Stock Certificate of the Registrant (filed as Exhibit 4.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *4.2 Amended and Restated Stockholders' Agreement dated as of November 25, 1998 by and among the Registrant, Apollo and certain other investors (filed as Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *4.3 Registration Rights Agreement dated as of November 4, 1997 among the Registrant, Apollo and certain other investors (filed as Exhibit 4.7 to Registrant's Registration Statement on Form S-4, Registration No. 333-36525, and incorporated herein by reference). *4.4 Registration Rights Agreement dated as of May 1, 1998 between the Registrant and Daniel G. Schmidt III (filed as Exhibit 4.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *4.5 Registration Rights Agreement dated as of July 13, 1998 by and among the Registrant, Rembert T. Cribb and Michael E. Fitzgerald (filed as Exhibit 4.5 to the Registrant's Annual Report on Form 10 K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *4.6 Indenture dated as of November 4, 1997, between the Registrant and IBJ Schroder Bank & Trust Company (the "Company Indenture") (filed as Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997, and incorporated herein by reference). *4.7 10 1/2% Senior Subordinated Discount Note Due 2007 pertaining to the Company Indenture (filed as Exhibit 4.6 to the Registrant's Registration Statement on Form S-4, Registration No. 333-43663, and incorporated herein by reference). *4.8 9 1/2% Senior Subordinated Note Due 2007 pertaining to the Company Indenture (filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-4, Registration No. 333-43663, and incorporated herein by reference). *4.9 Indenture dated as of April 4, 1996 between Mariner Health and State Street Bank and Trust Company, as trustee (the "Mariner Health Indenture"), including (i) the form of 9% Senior Subordinated Note due 2006, Series A and (ii) the form of 9% Senior Subordinated Note due 2006, Series B (Incorporated by reference to Exhibits 4.1, 4.2, and 10.1 to Mariner Health's Current Report on Form 8-K dated April 4, 1996).
100
EXHIBITS -------- *4.10 Amendment No. 1 to Mariner Health Indenture, dated September 11, 1998 (filed as Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.1 Agreement Regarding Certain Kellett Issues dated June 19, 1998 by and among Mariner Health, Mariner Health Care of Nashville, Inc., Stiles A. Kellett, Jr., Samuel B. Kellett, certain partnerships controlled by the Kelletts, and the Registrant (filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-4, Registration No. 333-57339, and incorporated herein by reference). *10.2 Second Amendment of Amended and Restated Operating Lease dated June 19, 1998, by and between Belleair East Medical Investors, Ltd. (L.P.) and Mariner Health Care of Nashville, Inc. (filed as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.3 Second Amendment of Amended and Restated Operating Lease dated June 19, 1998, by and between Port Charlotte Health Care Associates, Ltd. (L.P.) and Mariner Health Care of Nashville, Inc. (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.4 First Amendment of Amended and Restated Operating Lease dated June 19, 1998, by and between Denver Medical Investors, Ltd. (L.P.) and Mariner Health Care of Nashville, Inc. (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.5 +Employment Agreement between the Registrant and Susan Thomas Whittle (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.6 +Form of Employment Agreement entered into between the Registrant and its Senior Vice Presidents (filed as Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.7 +Form of Employment Agreement entered into between the Registrant and its Vice Presidents (filed as Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.8 +Paragon Health Network, Inc. 1997 Long-Term Incentive Plan (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.9 +First Amendment to Paragon Health Network, Inc. 1997 Long-Term Incentive Plan (filed as Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.10 +Paragon Health Network, Inc. Incentive Compensation Plan (filed as Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by Reference). *10.11 +New GranCare, Inc. 1996 Stock Incentive Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by Reference). *10.12 First Amendment to the New GranCare, Inc. 1996 Stock Incentive Plan (filed as Exhibit 10.20 to the Registrant's Annual Report on Form 10- K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.13 +New GranCare, Inc. 1996 Replacement Stock Option Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference).
101
EXHIBITS -------- *10.14 +First Amendment to the New GranCare, Inc. 1996 Replacement Stock Option Plan (filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.15 +New GranCare, Inc. Outside Directors' Stock Incentive Plan (filed with Amendment No. 1 to GranCare's Registration Statement on Form S- 1, Registration No. 333-19097, and incorporated herein by reference). *10.16 +First Amendment to the New GranCare, Inc. Outside Directors Stock Incentive Plan (filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.17 +Second Amendment to the New GranCare, Inc. Outside Directors Stock Incentive Plan (filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.18 Indemnification Agreement dated as of February 21, 1992 between LCA and the ARA Group, Inc. (filed as Exhibit 10.4 to Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference). *10.19 Assignment Agreement dated as of February 21, 1992 between LCA and the ARA Group, Inc. (filed as Exhibit 10.6 to Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and Incorporated herein by reference). *10.20 Termination and Release Agreement dated as of September 3, 1997, by and among GranCare, Manor Care, Inc. ("Manor Care") and Vitalink Pharmacy Services, Inc. ("Vitalink"), Apollo and LCA (filed as Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.21 Letter Agreement Regarding Liquidated Damages Calculation in Pharmaceutical Supply Agreements Dated September 3, 1997, by and among GranCare, TeamCare, Inc. and Vitalink (filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.22 Letter Agreement Regarding Preferred Provider Arrangement dated August 29, 1997, by and among Vitalink and GranCare (filed as Exhibit 10.30 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.23 Amendment to AMS Properties, Inc. Facility Leases dated as of October 31, 1997 between Health and Retirement Properties Trust ("HRPT") and AMS Properties, Inc. ("AMS") (filed as Exhibit 10.31 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.24 Collateral Pledge Agreement dated as of October 31, 1997 by and between the Registrant and HRPT (filed as Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.25 Guaranty by GranCare dated as of October 31, 1997 in favor of HRPT (filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10- K for the fiscal year ended September 30, 1997 and Incorporated herein by reference). *10.26 Guaranty by the Registrant dated as of October 31, 1997 in favor of HRPT (filed as Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.27 Restructure and Asset Exchange Agreement dated as of October 31, 1997 among HRPT, GranCare, AMS and GCI Health Care Centers, Inc. ("GCI Health Care") (filed as Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference).
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EXHIBIT ------- *10.28 Subordination Agreement dated as of October 31, 1997 by and among HRPT and the corporations listed on the signature page thereto (filed as Exhibit 10.36 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.29 Amendment to GCI Health Care Centers, Inc. Facility Leases dated as of October 31, 1997 (filed as Exhibit 10.37 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.30 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of December 29, 1993 among HRPT, GranCare, AMS and GCI Health Care (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.31 Master Lease Document dated December 28, 1990, between HRPT and AMS (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.32 Form of Guaranty dated December 28, 1990, by American Medical Services, Inc. and each of its subsidiaries in favor of HRPT (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.33 Amendment to Master Lease between HRPT and AMS dated as of December 29, 1993 (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.34 Amendment to Master Lease Document and Facility Lease between GCI Health Care and HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.35 Amendment to Master Lease Document and Facility Lease between AMS and HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.36 Mortgage and Security Agreement from AMS to HRPT for the Northwest and River Hills West Health Care Centers dated as of March 31, 1995 (filed with GranCare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.37 Assumption Agreement by GranCare in favor of HRPT (filed with GranCare's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.38 Consent and Amendment to Transaction Documents dated as of December 31, 1996 (the "Consent and Amendment") among GCI Health Care, GranCare, Vitalink, HRPT and AMS (filed with GranCare's Amendment No. 1 to Registration Statement on Form S-1, Registration No. 333-19097, and incorporated herein by reference). *10.39 Credit Agreement for $890,000,000 dated as of November 4, 1997, by and among the Registrant, as Borrower, The Chase Manhattan Bank, as Administrative Agent, NationsBank, N.A., as Documentation Agent, and the several lenders from time to time parties thereto (filed as Exhibit 10.48 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.40 First Amendment, dated as of July 8, 1998, by and among the Registrant, The Chase Manhattan Bank, as Administrative Agent, NationsBank, N.A., as Documentation Agent, and the several lenders parties thereto, relating to the Credit Agreement identified in Item 10.47 above (filed as Exhibit 10.48 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.41 Second Amendment, dated as of December 22, 1998, by and among the Registrant, The Chase Manhattan Bank, as Administrative Agent, NationsBank, N.A., as Documentation Agent, and the several lender parties thereto, relating to the Credit Agreement identified in Item 10.47 above (filed as Exhibit 10.49 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference).
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EXHIBIT ------- *10.42 Guarantee and Collateral Agreement dated as of November 4, 1997, by and among the Registrant and certain of its subsidiaries in favor of The Chase Manhattan Bank, as Collateral Agent (filed as Exhibit 10.49 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.43 Amended and Restated Participation Agreement ("FBTC Participation Agreement") dated November 4, 1997, by and among LCA, as Lessee, FBTC Leasing Corp. ("FBTC"), as Lessor, The Chase Manhattan Bank, as Agent for the Lenders, the Fuji Bank Limited (Houston Agency), as Co-Agent, and the Lenders parties thereto (filed as Exhibit 10.50 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.44 First Amendment to FBTC Participation Agreement dated July 8, 1998 (filed as Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.45 Second Amendment to FBTC Participation Agreement dated December 22, 1998 (filed as Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.46 Amended and Restated Guaranty ("FBTC Guarantee") dated November 4, 1997, by and among the Registrant and certain other guarantors signatory thereto in favor of The Chase Manhattan Bank, as Administrative Agent (filed as Exhibit 10.51 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.47 First Amendment to FBTC Guarantee dated July 8, 1998 (filed as Exhibit 10.55 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.48 Second Amendment to FBTC Guarantee dated December 22, 1998 (filed as Exhibit 10.56 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.49 Lease dated October 10, 1996, between FBTC, as Lessor, and LCA, as Lessee (filed as Exhibit 10.52 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.50 Amendment to Lease dated as of November 4, 1997 between FBTC and LCA (filed as Exhibit 10.53 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.51 Form of Mortgage and Security Agreement with respect to five of GranCare's facilities located in the State of Illinois to secure a loan in the aggregate principal amount of $16.5 million from Health Care Capital Finance, Inc., each agreement dated as of March 23, 1995 (filed with GranCare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.52 Credit Agreement dated as of May 18, 1994 by and among Mariner Health, PNC Bank, N.A. ("PNC Bank") and the other banks party thereto. (filed as Exhibit 10.1 to Mariner Health's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1994 and incorporated herein by reference). *10.53 +1995 Non-Employee Director Stock Option Plan (filed as Exhibit 4.4 to Mariner Health's Form S-8, filed November 21, 1995, and incorporated herein by reference). *10.54 +Defined Care Partner Agreement, dated as of January 5, 1996, by and among AmHS Purchasing Partners, L.P. ("AmHSPP"), Mariner Health Care, Inc. and Mariner Health, including: Exhibit A, Warrant to Purchase 210,000 Shares of Mariner Health's Common Stock by and among AmHSPP and Mariner Health; and Exhibit B, Warrant to Purchase 1,890,000 Shares of Mariner Health's Common Stock by and among AmHSPP and Mariner Health (filed as Exhibit 10.36 to Mariner Health's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference).
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EXHIBIT ------- *10.55 Amended and Restated $250,000,000 Revolving Credit Facility Credit Agreement (through Amendment No. 18) dated December 23, 1998, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union, as Syndication Agent, and the financial institutions referred to therein as "Banks" (filed as Exhibit 10.63 to the Registrant's Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.56 +Mariner Savings Plan (filed as Exhibit 10.64 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.57 +First Amendment to Mariner Savings Plan (filed as Exhibit 10.65 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.58 Guaranty and Suretyship Agreement dated as of May 18, 1994, from various subsidiaries of Mariner Health signatory thereto in favor of PNC Bank, as Agent (filed as Exhibit 10.66 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.59 Collateral Agency and Sharing Agreement dated as of December 23, 1998, by and among Mariner Health, its subsidiary guarantors and PNC Bank as Collateral Agent, revolving credit facility Administrative Agent and term loan Administrative Agent (filed as Exhibit 10.67 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.60 $210,000,000 Term Loan Facility Credit Agreement, dated as of December 23, 1998, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union, as Syndication Agent, and the financial institutions referred to therein as "Banks" (filed as Exhibit 10.68 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.61 Amended and Restated Pledge Agreement (Borrower Pledging Stock) dated as of December 23, 1998, from various subsidiaries of Mariner Health signatory thereto in favor of PNC Bank, as Collateral Agent, relating to the pledge of stock of subsidiaries of Mariner Health (filed as Exhibit 10.69 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.62 Amended and Restated Pledge Agreement (Pledging Stock) dated as of December 23, 1998, from various subsidiaries of Mariner Health signatory thereto in favor of PNC Bank, as Collateral Agent, relating to the pledge of stock of subsidiaries of Mariner Health held by the subsidiary pledgors (filed as Exhibit 10.70 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.63 Amended and Restated Pledge Agreement (Pledging Partnership Interests) dated as of December 23, 1998, from various subsidiaries of Mariner Health signatory thereto in favor of PNC Bank, as Collateral Agent, relating to the pledge of certain partnership interests held by such subsidiaries (filed as Exhibit 10.71 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference). *10.64 Amended and Restated Pledge Agreement (Pledging Limited Liability Company Interests) dated as of December 23, 1998, from various subsidiaries of Mariner Health signatory thereto in favor of PNC Bank, as Collateral Agent, relating to the pledge of certain limited liability company membership interests held by such subsidiaries (filed as Exhibit 10.72 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.65 Amended and Restated Pledge Agreement (Tri-State Pledging Partnership Interests) dated as of December 23, 1998, from Tri-State Health Care, Inc. ("Tri-State") in favor of PNC Bank, as Collateral Agent, relating to the pledge of certain partnership interests held by Tri-State (filed as Exhibit 10.73 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference).
105
EXHIBIT ------- *10.66 Security Agreement dated as of December 23, 1998 from Mariner Health and its subsidiary guarantors in favor of PNC Bank, as Collateral Agent (filed as Exhibit 10.74 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.67 Continuing Agreement of Guaranty and Suretyship dated as of December 23, 1998 from various subsidiaries of Mariner Health in favor of the Collateral Agent relating to the $210,000,000 term loan facility of Mariner Health (filed as Exhibit 10.75 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.68 Confirmation for U.S. Dollar Total Return Swap Transaction dated September 21, 1998, between NationsBank, N.A. and the Registrant in connection with the ISDA Master Agreement (1992 form) dated as of October 31, 1997 between NationsBank, N.A. and the Registrant (filed as Exhibit 10.76 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.69 Guaranty dated as of September 21, 1998, from Mariner Health and the subsidiaries of Mariner Health signatory thereto, in favor of NationsBank, N.A. relating to the total return swap referred to in Item 10.76 above (filed as Exhibit 10.77 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.70 +Paragon Health Network, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.78 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.71 +First Amendment to Mariner Post-Acute Network, Inc. Employee Stock Purchase Plan (formerly the Paragon Health Network, Inc. Employee Stock Purchase Plan) (filed as Exhibit 10.79 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1998, and incorporated herein by reference). *10.72 Amended and Restated Purchase Option Agreement dated as of May 24, 1995 by and among Convalescent Services, Inc. ("CSI"), Mariner Health and the Lessors (filed as Exhibits 2.5 and 10.5 to Mariner Health's Form 10-Q for the quarter ended June 30, 1995, as amended, and incorporated herein by reference). *10.73 Form of Lease by and between CSI and each of the following lessors: (i) Houston-Northwest Medical Investors, Ltd., (ii) Fort Bend Medical Investors, Ltd., (iii) Northwest Healthcare L.P., (iv) Dallas Medical Investors, Ltd., (v) Creek Forest Limited, (vi) Denver Medical Investors, Ltd., (vii) South Denver Healthcare Associates, Ltd., (viii) Belleair East Medical Investors, Ltd., (ix) Tallahassee Healthcare Associates, Ltd., (x) Port Charlotte Healthcare Associates, Ltd., (xi) Melbourne Healthcare Associates, Ltd., (xii) Pinellas III Healthcare Associates, Ltd., (xiii) Polk Healthcare L.P., and (xiv) Orange Healthcare Ltd. (filed as Exhibit 10.37 to Mariner Health s Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.74 +Employment Agreement between the Registrant and George Morgan, dated January 25, 1999 (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference). *10.75 +Employment Agreement between the Registrant and C. Christian Winkle, dated January 20, 1999 (filed as Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference). *10.76 Amended and restated $250,000,000 Revolving Credit Facility Credit Agreement (the "Mariner Health Credit Agreement") (through Amendment No. 19) dated, as amended, as of January 19, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union, as Syndication Agent, and the financial institutions referred to therein (filed as Exhibit 10.3 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference).
106
EXHIBIT ------- *10.77 Amendment No. 19 to Mariner Health Credit Agreement dated as of January 19, 1999 (filed as Exhibit 10.4 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference). *10.78 Amended and Restated $210,000,000 Term Loan Facility Credit Agreement (the "Mariner Health Term Loan Agreement"), dated, as amended, as of January 19, 19999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union, as Syndication Agent, and the financial institutions referred to therein (filed as Exhibit 10.5 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference). *10.79 Amendment No. 1 to Mariner Term Loan Agreement dated as of January 19, 1999 (filed as Exhibit 10.6 to the Registrant's Form 10-Q for the quarter ended December 31, 1998, and incorporated herein by reference). *10.80 Third Amendment to Credit Agreement dated as of May 11, 1999, by and among the Company, The Chase Manhattan Bank, as Administrative Agent, and the lenders signatory thereto, amending the Senior Credit Facility (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). *10.81 Third Amendment to Guarantee dated as of May 11, 1999, by and among the Company, its subsidiaries signatory thereto, and The Chase Manhattan Bank, as Administrative Agent, amending the Amended and Restated Guarantee dated as of November 4, 1997 (filed as Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). *10.82 Third Amendment to Participation Agreement dated as of May 11, 1999, by and among Living Centers Holding Company, FBTC Leasing Corp., The Chase Manhattan Bank, as Agent, and The Fuji Bank, Limited (Houston Agency), amending the Amended and Restated Participation Agreement dated as of November 4, 1997 (filed as Exhibit 10.3 to the Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). *10.83 Amendment No. 19 to Revolving Credit Facility Credit Agreement, dated as of January 19, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, to which is attached as an exhibit an amended and restated $250,000,000 Revolving Credit Facility Credit Agreement, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, as "Banks" (filed as Exhibit 10.4 to the Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference). 10.84 Amendment No. 20 to Revolving Credit Facility Credit Agreement, dated as of September 2, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, to which is attached as an exhibit an amended and restated $250,000,000 Revolving Credit Facility Credit Agreement, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, as "Banks". 10.85 Amendment No. 21 to Revolving Credit Facility Credit Agreement, dated as of October 29, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, to which is attached as an exhibit an amended and restated $250,000,000 Revolving Credit Facility Credit Agreement, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, as "Banks". *10.86 Amendment No. 1 to Term Loan Facility Credit Agreement, dated as of January 19, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, to which is attached as an exhibit an amended and restated $210,000,000 Term Loan Facility Credit Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, as "Banks" (filed as Exhibit 10.5 to the Registrant's Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference).
107
EXHIBIT ------- 10.87 Amendment No. 2 to Term Loan Facility Credit Agreement, dated as of October 29, 1999, by and among Mariner Health, PNC Bank, as Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, to which is attached as an exhibit an amended and restated $210,000,000 Term Loan Facility Credit Administrative Agent, First Union National Bank, as Syndication Agent, and the financial institutions referred to therein, as "Banks". *10.88 Letter agreement between Mariner Health and Empire Medical Services dated July 20, 1999 regarding Medicare extended repayment plan (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1999, and incorporated herein by reference). 10.89 Acknowledgement and Amendment, dated August 16, 1999, to the Credit Agreement, dated November 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999), among Mariner Post-Acute Network, Inc., as the Borrower, the several banks and other financial institutions or entities from time to time parties thereto, as the Lenders, Bank of America, N.A., as Documentation Agent, and The Chase Manhattan Bank, as the Administrative Agent. 10.90 Promissory Note, dated August 16, 1999, by Mariner Post-Acute Network, Inc., as the Maker, to Bank of America, N.A., as the Holder, in the principal amount of $26,485,562.79. 10.91 Forbearance agreement, dated as of November 9, 1999, to the Credit Agreement, dated as of November 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999, and the Acknowledgement and Amendment, dated as of August 16, 1999, and as the same may be amended, supplemented or otherwise amended from time to time), among Mariner Post-Acute Network, Inc., the several banks and other financial institutions or entities from time to time parties thereto, Bank of America, N.A., as documentation agent, and The Chase Manhattan Bank, as administrative agent. 10.92 Forbearance agreement, dated as of November 9, 1999, to the Amended and Restated Credit Agreement, dated as of November 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999, and the Acknowledgement and Amendment, dated as of August 16, 1999, and as the same may be amended, supplemented or otherwise amended from time to time), among FBTC Leasing Corp., the lenders party thereto, The Chase Manhattan Bank, as agent, and the Fuji Bank, Limited (Houston Agency), as co-agent; the Amended and Restated Guarantee, dated as of November 4, 1997 (as amended by the First Amendment to Guarantee, dated as of July 8, 1998, the Second Amendment to Guarantee, dated as of December 22, 1998, the Third Amendment to Guarantee, dated as of May 11, 1999, and the Acknowledgement and Amendment to Guarantee, dated as of August 16, 1999, and as the same may be amended, supplemented or otherwise amended from time to time), made by Mariner Post-Acute Network, Inc., and the other guarantors which are signatories thereto; and the Lease, dated as of October 10, 1996 (as amended) between the Company and Living Centers Holding Company. 10.93 Termination of Amended and Restated Stockholders Agreement and Proxy and Voting Agreement, dated December 20, 1999, by and among Apollo Management L.P., Mariner Post-Acute Network, Inc. and the stockholders listed on the signature page, terminating the Stockholders Agreement, dated as of November 4, 1997, amended as of April 13, 1998 and amended and restated as of November 25, 1998 and the Proxy and Voting Agreement, dated as of November 4, 1997. 10.94 +Employment Agreement between the Registrant and Francis W. Cash dated September 18, 1999. 10.95 Debtor-In-Possession Credit Agreement dated as of January 20, 2000, by and among Mariner Health, certain subsidiaries of Mariner Health, First Union National Bank, N.A., as Syndication Agent, PNC Capital Markets, Inc. and First Union Securities, Inc., as Co-Arrangers, PNC Bank, National Association, as Collateral and Administrative Agent, and certain other lenders.
108
EXHIBIT ------- 10.96 Revolving Credit and Guaranty Agreement between dated as of January 18, 2000, by and among the Registrant, certain subsidiaries of the Registrant, the Chase Manhattan Bank, as Agent, and certain other lenders. 10.97 Security and Pledge Agreement dated January 18, 2000, by and among the Registrant, certain subsidiaries of the Registrant and The Chase Manhattan Bank, as Agent, and certain other lenders. 10.98 Security Agreement dated January 20, 2000, by and among Mariner Health, First Union National Bank, N.A., PNC Bank, National Association and certain other lenders. 21 Subsidiaries of Mariner Post-Acute Network, Inc. 23 Consent of Ernst & Young LLP. 27 Financial Data Schedule.
- -------- * Incorporated by reference as indicated. + Represents management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(d)(10)(iii) of Regulation S-K. Mariner Post-Acute Network, Inc. will furnish a copy of any exhibit described above to any beneficial holder of its securities upon receipt of a written request therefor, provided that such holder pays to Mariner Post-Acute Network, Inc. a fee compensating it for its reasonable expenses in furnishing such exhibits. (B)REPORTS ON FORM 8-K Not applicable (C)EXHIBITS The response to this portion of Item 14 is contained in Item 14(a)(3) of this report. (D)FINANCIAL STATEMENTS SCHEDULE The response to this portion of Item 14 is contained in Item 8 of this report. 109 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARINER POST-ACUTE NETWORK, INC. (Registrant) /s/ Susan Thomas Whittle By: _________________________________ Susan Thomas Whittle Senior Vice President, General Counsel and Secretary Date: January 24, 2000 110 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/ Francis W. Cash Chairman of the Board, January 24, 2000 ______________________________________ Chief Executive Officer, Francis W. Cash President and Director (Principal Executive Officer) /s/ George D. Morgan Executive Vice President January 24, 2000 ______________________________________ and Chief Financial George D. Morgan Officer (Principal Financial and Accounting Officer) /s/ Gene E. Burleson Director January 24, 2000 ______________________________________ Gene E. Burleson /s/ Samuel B. Kellett Director January 24, 2000 ______________________________________ Samuel B. Kellett /s/ Joel S. Kanter Director January 24, 2000 ______________________________________ Joel S. Kanter /s/ William G. Petty, Jr. Director January 24, 2000 ______________________________________ William G. Petty, Jr.
111 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES MARINER POST-ACUTE NETWORK, INC. (DOLLARS IN THOUSANDS)
BALANCE DEDUCTION ADDITIONS BALANCE BEGINNING CHARGED FROM FROM END OF OF PERIOD TO INCOME RESERVE ACQUISITIONS PERIOD --------- --------- --------- ------------ -------- Fiscal Year 1999: Allowance for doubtful accounts............... $68,581 142,474 (123,989) -- $ 87,066 ======= ======= ======== ====== ======== Notes receivable re- serves................. $ 4,017 3,454 -- -- $ 7,471 ======= ======= ======== ====== ======== Valuation allowance..... $70,252 400,305 -- -- $470,557 ======= ======= ======== ====== ======== Fiscal Year 1998: Allowance for doubtful accounts............... $33,138 29,544 (24,990) 30,889 $ 68,581 ======= ======= ======== ====== ======== Notes receivable re- serves................. $ 1,188 -- (300) 3,129 $ 4,017 ======= ======= ======== ====== ======== Valuation allowance..... $ 1,844 31,028 -- 37,380 $ 70,252 ======= ======= ======== ====== ======== Fiscal Year 1997: Allowance for doubtful accounts............... $17,405 27,760 (12,027) -- $ 33,138 ======= ======= ======== ====== ======== Notes receivable re- serves................. $ 3,516 (1,478)(a) (850) -- $ 1,188 ======= ======= ======== ====== ======== Valuation allowance..... $ 1,785 59 -- -- $ 1,844 ======= ======= ======== ====== ========
- -------- (a) Includes reversal of reserves based on collections of notes previously considered doubtful. 112 EX-10.84 2 AMENDMENT NO. 20 TO CREDIT AGREEMENT AND CONSENT EXHIBIT 10.84 AMENDMENT NO. 20 TO CREDIT AGREEMENT AND CONSENT THIS AMENDMENT NO. 20 TO CREDIT AGREEMENT AND CONSENT (the "Amendment") dated as of September 2, 1999 by and among Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), each other Loan Party, PNC Bank, National Association; Bank Austria Creditanstalt Corporate Finance, Inc., (formerly known as Creditanstalt AG, formerly known as Creditanstalt Bankverein); First Union National Bank (as successor by merger to First Union National Bank of North Carolina); Mellon Bank, N.A.; Toronto Dominion (New York), Inc.; Bankers Trust Company; Credit Lyonnais New York Branch; AmSouth Bank; Bank of Tokyo-Mitsubishi Trust Company; The Fuji Bank, Limited New York Branch; SunTrust Bank, Central Florida, N.A.; Bank One Kentucky, NA; Fleet National Bank; Comerica Bank; The First National Bank of Chicago; The Industrial Bank of Japan, Limited, New York Branch; General Electric Capital Corporation; and Riggs Bank N.A. (collectively, the "Banks"), First Union National Bank, in its capacity as syndication agent for the Banks and PNC Bank, National Association, in its capacity as administrative agent for the Banks (the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"), pursuant to which the Banks provided a $250,000,000 revolving credit facility to the Borrower; WHEREAS, Amwest Surety Insurance Company and Far West Insurance Company ("Amwest") have agreed to issue surety bonds in connection with the operations of the Borrower and its Subsidiaries in connection solely with that certain Commercial Surety General Indemnity Agreement executed by the Borrower for the purpose of indemnifying Amwest dated August 16, 1999 attached hereto as Exhibit A (the "Surety Agreement"); - --------- WHEREAS, as a condition to entering into the Surety Agreement, Amwest has required the Borrower to provide, as security for obligations of the Borrower under the Surety Agreement, a letter of credit with an initial expiry date of up to twelve months after the date of issuance, subject to renewal, with such letter of credit to be in the form of Exhibit B hereto (the "Surety Bond --------- Letter of Credit"); and WHEREAS, the Borrower, the Banks, the Administrative Agent and the Syndication Agent desire to amend the Credit Agreement as hereinafter provided to permit the issuance on a cash collateralized basis of the Surety Bond Letter of Credit which shall expire after the Expiration Date of the Commitments and to permit extensions, amendments and renewals of the Surety Bond Letter of Credit upon the consent of the Required Banks on the terms as hereinafter provided. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: 1. Definitions. ----------- Defined terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement as amended by this Amendment. 2. Amendments to Credit Agreement. ------------------------------ (a) Section 1.01 [Certain Definitions] of the Credit Agreement is hereby amended by the addition of the following new definitions: "Amendment No. 20 shall mean that certain Amendment No. 20 to Credit ---------------- Agreement dated September 2, 1999 among Borrower, the other Loan Parties, the Banks and Administrative Agent, together with schedules and exhibits thereto." "Fund for Certain Fees shall have the meaning assigned to such term in --------------------- Section 8.01(s)." "Surety Bond Letter of Credit" shall mean that certain Letter of ---------------------------- Credit to be issued by the Administrative Agent for the benefit of Amwest Surety Insurance Company and Far West Insurance Company in the amount of $7,850,000 with an initial expiry date of September 2, 2000 in the form of Exhibit B attached to Amendment No. 20, as amended, extended or renewed --------- from time to time as provided herein." "Twentieth Amendment Effective Date shall mean September 2, 1999." ---------------------------------- (b) Subsection (a) of Section 2.09 [Letter of Credit Subfacility] is amended and restated in its entirety to read as follows: "(a) Borrower may request the issuance of, on the terms and conditions hereinafter set forth, standby letters of credit (each a "Letter of Credit" and collectively, "Letters of Credit") by delivering to the Administrative Agent a completed application and agreement for letters of credit in such form as the Administrative Agent may specify from time to time by no later than 10:00 a.m., Pittsburgh time, at least three (3) Business Days, or such shorter period as may be agreed to by the Administrative Agent, in advance of the proposed date of issuance. Subject to the terms and conditions hereof and in reliance on the agreements of the other Banks set forth in this Section 2.09, the Administrative Agent will issue (i) a Letter of Credit provided that each Letter of Credit (other than the Surety Bond Letter of Credit) shall have a maximum maturity of twelve (12) months from the date of issuance and expire no later than ten (10) Business Days prior to the Expiration Date and (ii) the Surety Bond Letter of Credit which shall expire no later than September 2, 2000 provided that the Surety Bond Letter of Credit may be extended, amended or renewed (A) for one additional period expiring not later than September 2, 2001 with the prior written approval of the Required Banks and (B) beyond September 2, 2001 with the prior written approval of all Banks. In no event shall (i) the Letters of Credit Outstanding exceed, at any one time, $35,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the Revolving Credit Commitments. Schedule 2.09(a) hereto lists letters of ---------------- credit which PNC Bank issued for the accounts of -2- certain of the Loan Parties prior to the date hereof pursuant to the Prior Credit Agreement and which shall remain outstanding after the Closing Date (the "Existing Letters of Credit"). Each Existing Letter of Credit shall be a Letter of Credit hereunder on and after the Closing Date and the provisions of this Section 2.09 shall apply to such Existing Letter of Credit. On or before the Twentieth Amendment Effective Date (the "Cash Collateralization Date") the Loan Parties shall deposit cash, as cash collateral, to an account owned by the Administrative Agent for the benefit of the Banks from which account the Administrative Agent alone shall have sole power of withdrawal (the "Letter of Credit Cash Collateral Account") in an amount equal to 100% of the maximum amount available to be drawn under the Surety Bond Letter of Credit. Each Loan Party hereby agrees and directs the Administrative Agent to apply, from the Letter of Credit Cash Collateral Account, the amount of the Surety Bond Letter of Credit upon presentation thereof for draw on any date on or after the Cash Collateralization Date. Each of the Loan Parties, to secure the Reimbursement Obligations and all of the other obligations of the Loan Parties under the Loan Documents and under the Term Loan Documents, hereby pledges all of its rights and interests in and grants a first priority perfected lien on the Letter of Credit Cash Collateral Account and all proceeds arising therefrom to the Collateral Agent for the benefit of the Banks and the Term Loan Banks. (c) The third sentence of Subsection (d) of Section 2.09 [Letter of Credit Subfacility] is amended and restated in its entirety to read as follows: "In the event the Borrower fails to reimburse the Administrative Agent for the full amount of any drawing under any Letter of Credit by 11:00 a.m., Pittsburgh time, on the Drawing Date, the Administrative Agent will promptly notify each Bank thereof, and with respect to any Letter of Credit other than the Surety Bond Letter of Credit, the Borrower shall be deemed to have requested that Revolving Credit Loans be made by the Banks under the Base Rate Option to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the Revolving Credit Commitment and subject to the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements." (d) The first sentence of Subsection (e) of Section 2.09 [Letter of Credit Subfacility] is amended and restated in its entirety to read as follows: "Each Bank shall upon any notice pursuant to Section 2.09(d) make available to the Administrative Agent an amount in immediately available funds equal to its Ratable Share of the amount of the drawing (notwithstanding the passing of the Expiration Date or the termination of the Commitments), whereupon the participating Banks shall (subject to Section 2.09(f)) each be deemed to have made a Revolving Credit Loan under the Base Rate Option to the Borrower in that amount." (e) The first sentence of Subsection (f) of Section 2.09 [Letter of Credit Subfacility] is amended and restated in its entirety to read as follows: "With respect to any unreimbursed drawing that is not converted into Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in part -3- as contemplated by Section 2.09(d), because of the Borrower's failure to satisfy the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements or for any other reason, and with respect to any unreimbursed drawing under the Surety Bond Letter of Credit, notwithstanding the passing of the Expiration Date or the termination of the Commitments, the Borrower shall be deemed to have incurred from the Administrative Agent a Letter of Credit Borrowing in the amount of such drawing." (f) Section 8.01 [Affirmative Covenants] is hereby amended by adding after clause (r) thereof, the following new clause (s): "(s) Deposit of Funds with Administrative Agent for payment of --------------------------------------------------------- Certain Fees and Expenses. On or before the Twentieth Amendment Effective ------------------------- Date, the Borrower shall deposit with the Administrative Agent $500,000 (the "Fund for Certain Fees") to be held as cash collateral and used at the discretion of the Agents from time to time to pay for legal and other advisor fees incurred by the Agents, the Banks, the Term Loan Banks and the agents under the Term Loan Agreement, including, but not limited to, the fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and Collateral Agent, Kennedy Covington Lobdel & Hickman, L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks, and to the extent that such fees are not paid by the Borrower within 30 days of receipt of invoices therefor by the Borrower. To the extent that the amount of the Fund for Certain Fees is at any time less than $500,000, the Borrower, upon the request of the Administrative Agent shall deposit with the Administrative Agent an additional amount so that after giving effect to such additional deposit the Fund for Certain Fees is not less than $500,000. Notwithstanding the establishment of the Fund for Certain Fees or the balance thereof at any time, the Borrower shall promptly pay, from funds other than the Fund for Certain Fees, promptly upon receipt of invoices and in any event, within 30 days after such receipt, the fees and expenses of the legal counsel, financial advisors and other experts that are listed in more detail in the preceding sentence." 3. Conditions of Effectiveness of Amendment of Credit Agreement; ------------------------------------------------------------- Consent and Related Matters. The effectiveness of the Amendment of the Credit - --------------------------- Agreement set forth in Section 2 hereof is expressly conditioned upon satisfaction of each of the following conditions precedent: (a) Representations and Warranties. The representations and ------------------------------ warranties of the Borrower contained in Article VI of the Credit Agreement shall be true and accurate on the date hereof (taking into account this Amendment) with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time or which relate to the financial condition of the Loan Parties, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein). -4- (b) Consents. Each Bank consents to the issuance of the Surety Bond -------- Letter of Credit notwithstanding the existence of any Events of Default or Potential Default. Other than solely with respect to the issuance of the Surety Bond Letter of Credit as provided in the previous sentence, none of the Agents nor any Bank waives any rights against any Loan Party including, without any limitation, with respect to any Event of Default or Potential Default. (c) Fees and Expenses. The Borrower shall have paid (i) to the ----------------- Administrative Agent on the effective date hereof, the Fund for Certain Fees to be utilized in accordance with Section 8.01(s) of the Credit Agreement after giving effect to this Amendment (ii) legal and other advisor fees incurred by the Agents and the Banks, including, but not limited to, the fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdel & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks and (iii) all other out-of-pocket costs, expense and disbursements accrued through the date hereof and the out-of-pocket costs, expenses and disbursements of the Agents and the Banks including, without limitation, reasonable fees of the forgoing counsel in connection with this Amendment. (d) Legal Details; Counterparts. All legal details and proceedings in --------------------------- connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Agents, the Administrative Agent shall have received from the Borrower and the Banks an executed original of this Amendment and the Administrative Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agents. 4. Force and Effect. Except as otherwise expressly modified by this ---------------- Amendment, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed and shall remain in full force and effect after the date hereof. 5. Governing Law. This Amendment shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 6. Effective Date; Certification of the Loan Parties. This Amendment ------------------------------------------------- shall be dated as of and shall be binding, effective and enforceable upon the date of (i) satisfaction of all conditions set forth in Section 3 hereof and (ii) receipt by the Administrative Agent of duly executed telecopied counterpart signature pages of this Amendment from the Loan Parties, the Agents and all of the Banks, and from and after such date this Amendment shall be binding upon the Loan Parties, each Bank and the Agents, and their respective successors and assigns permitted by the Credit Agreement. Each of the Loan Parties by executing this Amendment, hereby certifies that this Amendment has been duly executed. [INTENTIONALLY BLANK] -5- [SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 20] IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. MARINER HEALTH GROUP, INC. By:______________________________________________ Name:____________________________________________ Title:___________________________________________ GUARANTORS: EACH GUARANTOR LISTED ON SCHEDULE A ATTACHED HERETO By:______________________________________________ Name:____________________________________________ Title:_______________________of each Guarantor listed on Schedule A attached hereto which is a corporation and of each corporation listed on Schedule A attached hereto which is the general partner or member of a Guarantor [SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 20] PNC BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 20] FIRST UNION NATIONAL BANK individually and as Syndication Agent By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 20] BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By:______________________________________________ Name:____________________________________________ Title:___________________________________________ By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 20] MELLON BANK, N.A. By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 20] TORONTO DOMINION (NEW YORK), INC. By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 20] BANKERS TRUST COMPANY By:______________________________________________ Name:____________________________________________ Title:___________________________________________ [SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 20] CREDIT LYONNAIS NEW YORK BRANCH By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 20] AMSOUTH BANK By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 20] BANK OF TOKYO-MITSUBISHI TRUST COMPANY By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 20] THE FUJI BANK, LIMITED NEW YORK BRANCH By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 20] SUNTRUST BANK, CENTRAL FLORIDA, N.A. By:_________________________________ Name:_______________________________ Title:______________________________ [SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 20] BANK ONE, KENTUCKY, NA By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 20] FLEET NATIONAL BANK By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 20] COMERICA BANK By:______________________________ Name:____________________________ Title:___________________________ [SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 20] THE FIRST NATIONAL BANK OF CHICAGO By:_______________________________ Name:_____________________________ Title:____________________________ [SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 20] THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH By:_______________________________ Name:_____________________________ Title:____________________________ [SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 20] GENERAL ELECTRIC CAPITAL CORPORATION By:_______________________________ Name:_____________________________ Title:____________________________ [SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 20] RIGGS BANK N.A. By:_______________________________ Name:_____________________________ Title:____________________________ STATE OF TENNESSEE COUNTY OF DAVIDSON On the _____ day of ___________, 1999 personally appeared _______________, as the __________ President of SunTrust Bank, Central Florida, N.A., and before me executed the attached AMENDMENT NO. 20 dated as of _____________, 1999 to the Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank, Central Florida, N.A., as Lender. IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the state and county aforesaid. ______________________________________________________________ Signature of Notary Public, State of__________________________ ______________________________________________________________ (Print, Type or Stamp Commissioned Name of Notary Public) Personally known ________; OR Produced Identification_________ Type of identification produced:______________________________ ______________________________________________________________ SCHEDULE A ---------- GUARANTORS ---------- Bride Brook Nursing & Rehabilitation Center, Inc. Compass Pharmacy Services, Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Long Ridge Nursing & Rehabilitation Center, Inc. Longwood Rehabilitation Center, Inc. Mansfield Nursing & Rehabilitation Center, Inc. Mariner Health Care, Inc. Mariner Health Care of Baltimore, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Greater Laurel, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health of Florida, Inc. Mariner Health Care of Inverness, Inc. Mariner Health of Jacksonville, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health of Maryland, Inc. Mariner Health Care of MetroWest, Inc. Mariner Health of Orlando, Inc. Mariner Health of Tampa, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Resources, Inc. Mariner Practice Corporation Mariner Physician Services, Inc. Mariner Supply Services, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab. Corp. Mystic Nursing & Rehabilitation Center, Inc. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Prism Health Group, Inc. Sassaquin Nursing & Rehabilitation Center, Inc. Windward Health Care, Inc. Acme Repackaging, Inc. MarinerSelect Staffing Solutions, Inc. MedRehab, Inc. Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Hutchinson Pinnacle Care Corporation of Lexington Pinnacle Care Corporation of Louisville Pinnacle Care Corporation of Marion Pinnacle Care Corporation of McMurray Pinnacle Care Corporation of Michigan Pinnacle Care Corporation of Morganton Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of North Carolina Pinnacle Care Corporation of Salina Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceutical Services, Inc. Pinnacle Rehabilitation of Georgia, Inc. Pinnacle Rehabilitation, Inc. [a Tennessee corporation] Pinnacle Rehabilitation, Inc. [a Massachusetts corporation] Pinnacle Rehabilitation of Texas, Inc. Tennessee Occupational Medicine, Inc. Cypress Nursing Facility, Inc. Tri-State Health Care, Inc. Aid & Assistance, Inc. The Ocean Pharmacy, Inc. MHC Transportation, Inc. Mid-America Professional Services, Inc. Pinnacle Rehabilitation of Illinois, Inc. Pinnacle Rehabilitation of Missouri, Inc. Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care, Inc., its general partner) Pinnacle Rehabilitation of Florida, Inc. IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its general partner) MedRehab of Florida, Inc. MedRehab of Illinois, Inc. MedRehab of Indiana, Inc. MedRehab of Louisiana, Inc. MedRehab of Missouri, Inc. MedRehab of Texas, Inc. MedRehab of Wisconsin, Inc. Functional Enhancements, Inc. Mariner Health at Bonifay, Inc. Mariner Health of Palmetto, Inc. Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Beechwood Heritage Retirement Community, Inc. National Health Strategies, Inc. PHG Ventures, Inc. Prism Care Centers, Inc. Prism Home Care Company, Inc. Prism Rehab Systems, Inc. Prism Hospital Ventures, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Mariner Health of Seminole County, Inc. Mariner - Regency Health Partners, Inc. Regency Health Care Center of Seminole County, Inc. Tampa Medical Associates, Inc. Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner Health of Maryland, Inc., member) EX-10.85 3 AGREEMENT NO. 21 TO CREDIT AGREEMENT AND CONSENT EXHIBIT 10.85 AMENDMENT NO. 21 TO CREDIT AGREEMENT AND CONSENT THIS AMENDMENT NO. 21 TO CREDIT AGREEMENT AND CONSENT (the "Amendment") dated as of October 29, 1999 by and among Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), each other Loan Party, PNC Bank, National Association; Bank Austria Creditanstalt Corporate Finance, Inc., (formerly known as Creditanstalt AG, formerly known as Creditanstalt Bankverein); First Union National Bank (as successor by merger to First Union National Bank of North Carolina); Mellon Bank, N.A.; Toronto Dominion (New York), Inc.; Bankers Trust Company; Credit Lyonnais New York Branch; AmSouth Bank; Bank of Tokyo-Mitsubishi Trust Company; The Fuji Bank, Limited New York Branch; SunTrust Bank, Central Florida, N.A.; Bank One Kentucky, NA; Fleet National Bank; Comerica Bank; Bank One, NA (formerly known as The First National Bank of Chicago); The Industrial Bank of Japan, Limited, New York Branch; General Electric Capital Corporation; and Riggs Bank N.A. (collectively, the "Banks"), First Union National Bank, in its capacity as syndication agent for the Banks and PNC Bank, National Association, in its capacity as administrative agent for the Banks (the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (the "Credit Agreement"), pursuant to which the Banks provided a $250,000,000 revolving credit facility to the Borrower; WHEREAS, the Loan Parties have deposited cash proceeds of Collateral, as cash collateral, to the Letter of Credit Cash Collateral Account as defined in the Credit Agreement; WHEREAS, there are the Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee payment under the Credit Agreement and quarterly interest payments due under the Credit Agreement and the Term Loan Agreement on October 1, 1999; and WHEREAS, the Borrower and its Subsidiaries have requested that the cash in the Letter of Credit Cash Collateral Account be used only to the extent necessary to make the Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee payment under the Credit Agreement and the quarterly interest payments on the Credit Agreement and the Term Loan Agreement each due October 1, 1999 in the ordinary course, to pay any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, and to pay fees and expenses required to be paid by the Borrower pursuant to paragraph 4(e) hereof, all on the terms as hereinafter provided. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: 1. Definitions. ----------- Defined terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement as amended by this Amendment. 2. Amendments to Credit Agreement. ------------------------------ (a) Section 1.01 [Certain Definitions] of the Credit Agreement is hereby amended by the addition of the following new definitions: "Amendment No. 21 shall mean that certain Amendment No. 21 to Credit ---------------- Agreement dated October 29, 1999 among Borrower, the other Loan Parties, the Banks and Administrative Agent, together with schedules and exhibits thereto." "Cash Deposit Agreement" shall mean that certain agreement dated ---------------------- October 29, 1999 among the Borrower, First Union and the Administrative Agent attached to Amendment No. 21 as Exhibit A. ---------- "First Union" shall mean First Union National Bank." ----------- "Healthcare Facility" means any of the following that are from time to ------------------- time owned or operated by a Loan Party: (i) a hospital, outpatient clinic, nursing home center, assisted or independent living community, long-term care facility or any other facility that is used or useful in the provision of healthcare or custodial care services, (ii) any healthcare business affiliated or associated with a Healthcare Facility (as defined in clause (i)) or (iii) any business related or ancillary to the provision of healthcare services or the operation of a Healthcare Facility (as defined in clause (i)) including, but not limited to, contract therapy services, as well as hospice and home care services; and "Healthcare Facilities" means ---------------------------- more than one Healthcare Facility. --------------------------------- "Medicaid" means the medical assistance program established by Title -------- XIX of the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any -- --- statutes succeeding thereto. "Medicare" means the health insurance program for the aged and -------- disabled established by Title XVIII of the Social Security Act (42 U.S.C. (S)(S) 1995 et seq.) and any statutes succeeding thereto. -- --- "Twenty-First Amendment Effective Date shall mean October 29, 1999." ------------------------------------- (b) Section 1.01 [Certain Definitions] of the Credit Agreement is hereby amended by restating in its entirety the definition of the term Collateral Agent to read as follows: "Collateral Agent shall mean, as the context requires, (i) PNC Bank, ---------------- National Association in its capacity as the collateral agent under the Collateral Sharing Agreement and its successors, and its assigns in such capacity or (ii) First Union in its capacity as collateral agent under the Cash Deposit Agreement attached to Amendment No. 21 as Exhibit A and its --------- successors, and its assigns in such capacity." -2- (c) Section 8.03 [Reporting Requirements] of the Credit Agreement is hereby amended by adding a new subsection (k) which reads as follows: "(k) Notices Regarding Certain Healthcare Reporting Events. Promptly ------------------------------------------------------ upon a Responsible Officer, any responsible person of any Loan Party, in- house general counsel of MPN or in-house general counsel of the Borrower receiving notice of the occurrence or threatened occurrence of (i) the termination of any Medicare or Medicaid contracts or conditional accreditation, (ii) denial of payment for new Medicare or Medicaid admissions, (iii) operation under involuntary receivership or involuntary management, (iv) any Healthcare Facilities which are subject to terminated Medicare or Medicaid contracts, an admissions hold or current civil money penalties in excess of $2,000 per day or are operating under involuntary receivership or involuntary management (any of the foregoing events required to be disclosed thereon being a "Reporting Event") or (v) a material change in status with respect to any Reporting Event or any Healthcare Facility becoming subject to an additional Reporting Event, written notice thereof setting forth the nature of such Reporting Event and what action the Borrower has taken, is taking or proposes to take with respect thereto, written notice to the Administrative Agent setting forth the details of such occurrence." 3. Use of Cash Collateral to Make Interest Payment. On October 29, ----------------------------------------------- 1999 the Collateral Agent shall deliver from the Letter of Credit Cash Collateral Account to the Administrative Agent under the Credit Agreement and the administrative agent under the Term Loan Agreement such amount of available funds as is necessary to make the Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee payment under the Credit Agreement and the quarterly interest payments under the Credit Agreement and the Term Loan Agreement each due on October 1, 1999 in the ordinary course, as well as to pay any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, and to pay fees and expenses required to be paid by the Borrower pursuant to paragraph 4(e) hereof. Notwithstanding anything to the contrary contained in the Credit Agreement, the Term Loan Agreement or any of the other Loan Documents, the next Interest Payment Date will be January 3, 2000. 4. Other Matters. ------------- (a) Updated Schedules. The Borrower covenants and agrees that it ----------------- shall deliver to the Administrative Agent, in form and substance satisfactory to the Agents, the following amended and restated Schedules on the Twenty-First Amendment Effective Date: Schedule 1.01(P) [Permitted Liens], Schedules 6.01(a) ---------------- ----------------- and (c) [Qualification to do Business, Subsidiaries and Excluded Entities], - ------- Schedule 6.01(aa) [Owned and Leased Real Property of the Loan Parties; Matters - ----------------- Regarding Certain Leased Facilities and Indebtedness of Certain Subsidiaries], Schedule 8.02(c) [Guaranties] and Schedule 8.02(d) [Restricted Investments], - ---------------- ---------------- provided that the Borrower shall not be obligated to cause new Lien searches or title examinations to be performed in connection therewith. (b) Execution of Mortgages and Joinder Documents. On or before the -------------------------------------------- date hereof the Borrower and each applicable Subsidiary of the Borrower shall have executed and delivered to the Collateral Agent, in form and substance acceptable to the Collateral Agent, the -3- following the documents: First Mortgages for Mariner Health Care of Greater Laurel Facility (Mariner Health Care of Greater Laurel Facility), Seventeenth St. Associates Limited Partnership (Mariner Health Care of Huntington Facility), Beechwood Heritage Retirement Community, Inc. (Heritage Harbour Health & Retirement Center Facility) and Pinnacle Care Corporation of North Carolina (Mariner Health Care of Wilmington Facility). On or before the date hereof the Borrower and each applicable Subsidiary of the Borrower shall have executed and delivered to the Collateral Agent, in form and substance acceptable to the Collateral Agent, the joinder documents, financing statements, stock powers, stock certificates and the other documents listed on Schedule B attached hereto. ---------- (c) Delivery of Requested Information. The Borrower shall and shall --------------------------------- cause each Subsidiary of the Borrower to use its best efforts to deliver to the Administrative Agent and the Administrative Agent's legal and other advisors all information on the attached Schedule C by the date indicated thereon with ---------- respect to the Borrower and its Subsidiaries and such other information that is requested by the Agents and the Banks and their legal and other advisors, including, but not limited to, Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks. (d) Consents. Each Bank consents to the appointment of First Union as -------- collateral agent with respect to the cash deposited in the deposit accounts pursuant to the Cash Deposit Agreement attached hereto as Exhibit A. All --------- deposit accounts held by First Union for the benefit of the Banks, the Agents, the Term Loan Banks and the agents under the Term Loan Agreement shall be deemed to be Collateral under the Credit Agreement and Collateral as such term is defined in and for the purpose of the Term Loan Agreement and shall be deemed to be Shared Collateral as such term is defined in and for the purpose of the Collateral Sharing Agreement and any distributions following a Foreclosure Action (as defined in the Collateral Sharing Agreement) with respect to the Cash Deposit Agreement shall be distributed as Shared Collateral in accordance with the Collateral Sharing Agreement. (e) Fees and Expenses. The Borrower shall have paid (i) legal and ----------------- other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks as a group for which bills have been rendered, and (ii) all other out-of-pocket costs, expense and disbursements accrued and unpaid for which bills have been rendered and the out-of-pocket costs, expenses and disbursements of the Agents including, without limitation, reasonable fees of the foregoing counsel and advisors, including, without limitation, those incurred in connection with this Amendment for which bills have been rendered. (f) Legal Details; Counterparts. All legal details and proceedings in --------------------------- connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Agents, the Administrative Agent shall have received from the Borrower and the requisite Banks an executed original of this Amendment and the -4- the Administrative Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agents. 5. Conditions of Effectiveness of Amendment of Credit Agreement; and ----------------------------------------------------------------- Related Matters. The effectiveness of this Amendment is expressly conditioned - --------------- upon satisfaction of each of the following conditions precedent unless waived by the Agents: (a) Execution of Cash Deposit Agreement. The Borrower and each ----------------------------------- Subsidiary of the Borrower shall have executed and satisfied the conditions of the Cash Deposit Agreement attached hereto as Exhibit A, including, without --------- limitation, the provisions of paragraph 2 thereof (with the exception of those provisions which relate to future acts). (b) DIP Projections. The Borrower and each Subsidiary of the Borrower --------------- shall have delivered to the Administrative Agent projections regarding debtor- in-possession financing. (c) Representations and Warranties. The representations and ------------------------------ warranties of the Borrower contained in Article VI of the Credit Agreement shall be true and accurate on the date hereof (taking into account this Amendment) with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein or which relate to the financial condition of the Loan Parties). (d) Interest, Fees and Expenses. To the extent the cash in the --------------------------- Letter of Credit Cash Collateral Account is insufficient to pay interest, fees and expenses required to be paid by the Borrower pursuant to paragraph 3 hereof, the Borrower shall have paid (i) the Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee payment under the Credit Agreement and the quarterly interest payments under the Credit Agreement and the Term Loan Agreement each due on October 1, 1999 in the ordinary course, (ii) any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, (iii) legal and other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks as a group for which bills have been rendered, and (iv) all other out-of-pocket costs, expense and disbursements accrued and unpaid for which bills have been rendered and the out-of-pocket costs, expenses and disbursements of the Agents including, without limitation, reasonable fees of the foregoing counsel and advisors, including, without limitation, those incurred in connection with this Amendment for which bills have been rendered. 6. Force and Effect. Except as otherwise expressly modified by this ---------------- Amendment, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed and shall remain in full force and effect after the date hereof. -5- 7. Governing Law. This Amendment shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 8. Effective Date; Certification of the Loan Parties. This ------------------------------------------------- Amendment shall be dated as of and shall be binding, effective and enforceable upon the date of (i) satisfaction of all conditions set forth in Section 5 hereof and (ii) receipt by the Administrative Agent of duly executed counterpart signature pages of this Amendment from the Loan Parties, the Agents and the requisite Banks, and from and after such date this Amendment shall be binding upon the Loan Parties, each Bank and the Agents, and their respective successors and assigns permitted by the Credit Agreement. Each of the Loan Parties, by executing this Amendment, hereby certifies that this Amendment has been duly executed. [INTENTIONALLY BLANK] -6- [SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 21] IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. MARINER HEALTH GROUP, INC. By:____________________________ Name:__________________________ Title:_________________________ GUARANTORS: EACH GUARANTOR LISTED ON SCHEDULE A ATTACHED HERETO By:____________________________ Name:__________________________ Title:__________________of each Guarantor listed on Schedule A attached hereto which is a corporation and of each corporation listed on Schedule A attached hereto which is the general partner or member of a Guarantor [SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 21] PNC BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 21] FIRST UNION NATIONAL BANK individually and as Syndication Agent By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 21] BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By:___________________________ Name:_________________________ Title:________________________ By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 21] MELLON BANK, N.A. By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 21] TORONTO DOMINION (NEW YORK), INC. By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 21] BANKERS TRUST COMPANY By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 21] CREDIT LYONNAIS NEW YORK BRANCH By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 21] AMSOUTH BANK By:___________________________ Name:_________________________ Title:________________________ [SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 21] BANK OF TOKYO-MITSUBISHI TRUST COMPANY By:_____________________________ Name:___________________________ Title:__________________________ [SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 21] THE FUJI BANK, LIMITED NEW YORK BRANCH By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 21] SUNTRUST BANK, CENTRAL FLORIDA, N.A. By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 21] BANK ONE, KENTUCKY, NA By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 21] FLEET NATIONAL BANK By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 21] COMERICA BANK By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 21] BANK ONE, NA By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 21] THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 21] GENERAL ELECTRIC CAPITAL CORPORATION By:____________________________ Name:__________________________ Title:_________________________ [SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 21] RIGGS BANK N.A. By:____________________________ Name:__________________________ Title:_________________________ STATE OF TENNESSEE COUNTY OF DAVIDSON On the _____ day of ___________, 1999 personally appeared _______________, as the __________ President of SunTrust Bank, Central Florida, N.A., and before me executed the attached AMENDMENT NO. 21 dated as of _____________, 1999 to the Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank, Central Florida, N.A., as Lender. IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the state and county aforesaid. _________________________________________________________________ Signature of Notary Public, State of ____________________________ _________________________________________________________________ (Print, Type or Stamp Commissioned Name of Notary Public) Personally known __________; OR Produced Identification__________ Type of identification produced:_________________________________ _________________________________________________________________ SCHEDULE A ---------- GUARANTORS ---------- Bride Brook Nursing & Rehabilitation Center, Inc. Compass Pharmacy Services,Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Long Ridge Nursing & Rehabilitation Center, Inc. Longwood Rehabilitation Center, Inc. Mariner Health Care, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Greater Laurel, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health of Florida, Inc. Mariner Health Care of Inverness, Inc. Mariner Health of Jacksonville, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health of Maryland, Inc. Mariner Health Care of MetroWest, Inc. Mariner Health of Orlando, Inc. Mariner Health of Tampa, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Resources, Inc. Mariner Practice Corporation Mariner Physician Services, Inc. Mariner Supply Services, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab. Corp. Mystic Nursing & Rehabilitation Center, Inc. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Prism Health Group, Inc. Sassaquin Nursing & Rehabilitation Center, Inc. Windward Health Care, Inc. MarinerSelect Staffing Solutions, Inc. MedRehab, Inc. Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceutical Services, Inc. Pinnacle Rehabilitation, Inc. [a Tennessee corporation] Cypress Nursing Facility, Inc. Tri-State Health Care, Inc. Aid & Assistance, Inc. The Ocean Pharmacy, Inc. MHC Transportation, Inc. Pinnacle Rehabilitation of Missouri, Inc. Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care, Inc., its general partner) IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its general partner) MedRehab of Indiana, Inc. MedRehab of Louisiana, Inc. MedRehab of Missouri, Inc. Mariner Health at Bonifay, Inc. Mariner Health of Palmetto, Inc. Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Beechwood Heritage Retirement Community, Inc. National Health Strategies, Inc. Prism Care Centers, Inc. Prism Home Care Company, Inc. Prism Rehab Systems, Inc. Prism Hospital Ventures, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Mariner Health of Seminole County, Inc. Mariner - Regency Health Partners, Inc. Regency Health Care Center of Seminole County, Inc. Tampa Medical Associates, Inc. Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner Health of Maryland, Inc., member) EX-10.87 4 AMENDMENT NO. 2 TO CREDIT AGREEMENT AND CONSENT EXHIBIT 10.87 AMENDMENT NO. 2 TO CREDIT AGREEMENT AND CONSENT THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT AND CONSENT (the "Amendment") dated as of October 29, 1999 by and among Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), each other Loan Party, PNC Bank, National Association; Bank Austria Creditanstalt Corporate Finance, Inc., (formerly known as Creditanstalt AG, formerly known as Creditanstalt Bankverein); First Union National Bank (as successor by merger to First Union National Bank of North Carolina); Mellon Bank, N.A.; Toronto Dominion (New York), Inc.; Bankers Trust Company; Credit Lyonnais New York Branch; AmSouth Bank; Bank of Tokyo-Mitsubishi Trust Company; The Fuji Bank, Limited New York Branch; SunTrust Bank, Central Florida, N.A.; Bank One Kentucky, NA; Fleet National Bank; Comerica Bank; Bank One, NA (formerly known as The First National Bank of Chicago); The Industrial Bank of Japan, Limited, New York Branch; General Electric Capital Corporation; and Riggs Bank N.A. (collectively, the "Banks"), First Union National Bank, in its capacity as syndication agent for the Banks and PNC Bank, National Association, in its capacity as administrative agent for the Banks (the "Administrative Agent"). W I T N E S S E T H: WHEREAS, the parties hereto are parties to that certain Credit Agreement dated as of December 23, 1998, as amended (the "Credit Agreement"), pursuant to which the Banks provided a $210,000,000 term loan facility to the Borrower; WHEREAS, the Loan Parties have deposited cash proceeds of Collateral, as cash collateral, to the Letter of Credit Cash Collateral Account as defined in the Revolving Credit Agreement; WHEREAS, there are the Commitment Fee payment under the Revolving Credit Agreement, the Letter of Credit Fee payment under the Revolving Credit Agreement and quarterly interest payments due under the Revolving Credit Agreement and the Credit Agreement on October 1, 1999; and WHEREAS, the Borrower and its Subsidiaries have requested that the cash in the Letter of Credit Cash Collateral Account as defined in the Revolving Credit Agreement be used only to the extent necessary to make the Commitment Fee (as defined in the Revolving Credit Agreement) payment under the Revolving Credit Agreement, the Letter of Credit Fee (as defined in the Revolving Credit Agreement) payment under the Revolving Credit Agreement and the quarterly interest payments on the Revolving Credit Agreement and the Credit Agreement each due October 1, 1999 in the ordinary course, to pay any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, and to pay fees and expenses required to be paid by the Borrower pursuant to paragraph 4(e) hereof, all on the terms as hereinafter provided. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: 1. Definitions. ----------- Defined terms used herein unless otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement as amended by this Amendment. 2. Amendments to Credit Agreement. ------------------------------ (a) Section 1.01 [Certain Definitions] of the Credit Agreement is hereby amended by the addition of the following new definitions: "Amendment No. 2 shall mean that certain Amendment No. 2 to Credit --------------- Agreement dated October 29, 1999 among Borrower, the other Loan Parties, the Banks and Administrative Agent, together with schedules and exhibits thereto." "Cash Deposit Agreement" shall mean that certain agreement dated October 29, 1999 among the Borrower, First Union and the Administrative Agent attached to Amendment No. 2 as Exhibit A. --------- "First Union" shall mean First Union National Bank." ----------- "Healthcare Facility" means any of the following that are from time to ------------------- time owned or operated by a Loan Party: (i) a hospital, outpatient clinic, nursing home center, assisted or independent living community, long-term care facility or any other facility that is used or useful in the provision of healthcare or custodial care services, (ii) any healthcare business affiliated or associated with a Healthcare Facility (as defined in clause (i)) or (iii) any business related or ancillary to the provision of healthcare services or the operation of a Healthcare Facility (as defined in clause (i)) including, but not limited to, contract therapy services, as well as hospice and home care services; and "Healthcare Facilities" means --------------------- more than one Healthcare Facility. "Medicaid" means the medical assistance program established by Title -------- XIX of the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any -- --- statutes succeeding thereto. "Medicare" means the health insurance program for the aged and -------- disabled established by Title XVIII of the Social Security Act (42 U.S.C. (S)(S) 1995 et seq.) and any statutes succeeding thereto. -- --- "Second Amendment Effective Date shall mean October 29, 1999." ------------------------------- -2- (b) Section 1.01 [Certain Definitions] of the Credit Agreement is hereby amended by restating in its entirety the definition of the term Collateral Agent to read as follows: "Collateral Agent shall mean, as the context requires, (i) PNC Bank, ---------------- National Association in its capacity as the collateral agent under the Collateral Sharing Agreement and its successors, and its assigns in such capacity or (ii) First Union in its capacity as collateral agent under the Cash Deposit Agreement attached to Amendment No. 2 as Exhibit A and its --------- successors, and its assigns in such capacity." (c) Section 8.03 [Reporting Requirements] of the Credit Agreement is hereby amended by adding a new subsection (k) which reads as follows: "(k) Notices Regarding Certain Healthcare Reporting Events. Promptly ----------------------------------------------------- upon a Responsible Officer, any responsible person of any Loan Party, in- house general counsel of MPN or in-house general counsel of the Borrower receiving notice of the occurrence or threatened occurrence of (i) the termination of any Medicare or Medicaid contracts or conditional accreditation, (ii) denial of payment for new Medicare or Medicaid admissions, (iii) operation under involuntary receivership or involuntary management, (iv) any Healthcare Facilities which are subject to terminated Medicare or Medicaid contracts, an admissions hold or current civil money penalties in excess of $2,000 per day or are operating under involuntary receivership or involuntary management (any of the foregoing events required to be disclosed thereon being a "Reporting Event") or (v) a material change in status with respect to any Reporting Event or any Healthcare Facility becoming subject to an additional Reporting Event, written notice thereof setting forth the nature of such Reporting Event and what action the Borrower has taken, is taking or proposes to take with respect thereto, written notice to the Administrative Agent setting forth the details of such occurrence." 3. Use of Cash Collateral to Make Interest Payment. On October 29, ----------------------------------------------- 1999 the Collateral Agent shall deliver from the Letter of Credit Cash Collateral Account (as defined in the Revolving Credit Agreement) to the administrative agent under the Revolving Credit Agreement and the Administrative Agent under the Credit Agreement such amount of available funds as is necessary to make the Commitment Fee payment under the Revolving Credit Agreement, the Letter of Credit Fee payment under the Revolving Credit Agreement and the quarterly interest payments under the Revolving Credit Agreement and the Credit Agreement each due on October 1, 1999 in the ordinary course, as well as to pay any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, and to pay fees and expenses required to be paid by the Borrower pursuant to paragraph 4(e) hereof. Notwithstanding anything to the contrary contained in the Credit Agreement, the Revolving Credit Agreement or any of the other Loan Documents, the next Interest Payment Date will be January 3, 2000. 4. Other Matters. ------------- (a) Updated Schedules. The Borrower covenants and agrees that its ----------------- shall deliver to the Administrative Agent, in form and substance satisfactory to the Agents, the following amended and restated Schedules on the Second Amendment Effective Date: -3- Schedule 1.01(P) [Permitted Liens], Schedules 6.01(a) and (c) [Qualification to - ---------------- ------------------------- do Business, Subsidiaries and Excluded Entities], Schedule 6.01(aa) [Owned and ----------------- Leased Real Property of the Loan Parties; Matters Regarding Certain Leased Facilities and Indebtedness of Certain Subsidiaries], Schedule 8.02(c) ---------------- [Guaranties] and Schedule 8.02(d) [Restricted Investments], provided that the ---------------- Borrower shall not be obligated to cause new Lien searches or title examinations to be performed in connection therewith. (b) Execution of Joinder Documents. On or before the date hereof the ------------------------------ Borrower and each applicable Subsidiary of the Borrower shall have executed and delivered to the Collateral Agent, in form and substance acceptable to the Collateral Agent, the following documents: First Mortgages for Mariner Health Care of Greater Laurel Facility (Mariner Health Care of Greater Laurel Facility), Seventeenth St. Associates Limited Partnership (Mariner Health Care of Huntington Facility), Beechwood Heritage Retirement Community, Inc. (Heritage Harbour Health & Retirement Center Facility) and Pinnacle Care Corporation of North Carolina (Mariner Health Care of Wilmington Facility). On or before the date hereof the Borrower and each applicable Subsidiary of the Borrower shall have executed and delivered to the Collateral Agent, in form and substance acceptable to the Collateral Agent, the joinder documents, financing statements, stock powers, stock certificates and the other documents listed on Schedule B ---------- attached hereto. (c) Delivery of Requested Information. The Borrower shall and shall --------------------------------- cause each Subsidiary of the Borrower to use its best efforts to deliver to the Administrative Agent and the Administrative Agent's legal and other advisors all information on the attached Schedule C by the date indicated thereon with ----------- respect to the Borrower and its Subsidiaries and such other information that is requested by the Agents and the Banks and their legal and other advisors, including, but not limited to, Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks. (d) Consents. Each Bank consents to the appointment of First Union as -------- collateral agent with respect to the cash deposited in the deposit accounts pursuant to the Cash Deposit Agreement attached hereto as Exhibit A. All --------- deposit accounts held by First Union for the benefit of the Banks, the Agents, the Revolving Credit Banks and the agents under the Revolving Credit Agreement shall be deemed to be Collateral under the Credit Agreement and Collateral as such term is defined in and for the purpose of the Revolving Credit Agreement and shall be deemed to be Shared Collateral as such term is defined in and for the purpose of the Collateral Sharing Agreement and any distributions following a Foreclosure Action (as defined in the Collateral Sharing Agreement) with respect to the Cash Deposit Agreement shall be distributed as Shared Collateral in accordance with the Collateral Sharing Agreement. (e) Fees and Expenses. The Borrower shall have paid (i) legal and ----------------- other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the Banks as a group for -4- which bills have been rendered, and (ii) all other out-of-pocket costs, expense and disbursements accrued and unpaid for which bills have been rendered and the out-of-pocket costs, expenses and disbursements of the Agents including, without limitation, reasonable fees of the foregoing counsel and advisors, including, without limitation, those incurred in connection with this Amendment for which bills have been rendered. (f) Legal Details; Counterparts. All legal details and proceedings in --------------------------- connection with the transactions contemplated by this Amendment shall be in form and substance satisfactory to the Agents, the Administrative Agent shall have received from the Borrower and the requisite Banks an executed original of this Amendment and the Administrative Agent shall have received all such other counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance satisfactory to the Agents. 5. Conditions of Effectiveness of Amendment of Credit Agreement; and ----------------------------------------------------------------- Related Matters. The effectiveness of this Amendment is expressly conditioned - --------------- upon satisfaction of each of the following conditions precedent unless waived by the Agents: (a) Execution of Cash Deposit Agreement. The Borrower and each ----------------------------------- Subsidiary of the Borrower shall have executed and satisfied the conditions of the Cash Deposit Agreement attached hereto as Exhibit A, including, without --------- limitation, the provisions of paragraph 2 thereof (with the exception of those provisions which relate to future acts). (b) DIP Projections. The Borrower and each Subsidiary of the Borrower --------------- shall have delivered to the Administrative Agent projections regarding debtor- in-possession financing. (c) Representations and Warranties. The representations and ------------------------------ warranties of the Borrower contained in Article VI of the Credit Agreement shall be true and accurate on the date hereof (taking into account this Amendment) with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein or which relate to the financial condition of the Loan Parties). (d) Interest, Fees and Expenses. To the extent the cash in the Letter --------------------------- of Credit Cash Collateral Account (as defined in the Revolving Credit Agreement) is insufficient to pay interest, fees and expenses required to be paid by the Borrower pursuant to paragraph 3 hereof, the Borrower shall have paid (i) the Commitment Fee payment under the Credit Agreement, the Letter of Credit Fee payment under the Credit Agreement and the quarterly interest payments under the Credit Agreement and the Term Loan Agreement each due on October 1, 1999 in the ordinary course, (ii) any mortgage taxes, recording taxes or similar taxes, and all recording and filing fees, in connection with the additional documents required by paragraph 4(b) hereof, (iii) legal and other advisor fees of Buchanan Ingersoll, P.C., counsel to the Administrative Agent and the Collateral Agent, Kennedy Covington Lobdell & Hickman L.L.P. counsel to the Syndication Agent, O'Melveny & Myers LLP, special counsel to the Banks, and Houlihan Lokey Howard & Zukin or any other financial advisors and other experts engaged by the Agents or the -5- Banks as a group for which bills have been rendered, and (iv) all other out-of- pocket costs, expense and disbursements accrued and unpaid for which bills have been rendered and the out-of-pocket costs, expenses and disbursements of the Agents including, without limitation, reasonable fees of the foregoing counsel and advisors, including, without limitation, those incurred in connection with this Amendment for which bills have been rendered. 6. Force and Effect. Except as otherwise expressly modified by this ---------------- Amendment, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed and shall remain in full force and effect after the date hereof. 7. Governing Law. This Amendment shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the internal laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 8. Effective Date; Certification of the Loan Parties. This ------------------------------------------------- Amendment shall be dated as of and shall be binding, effective and enforceable upon the date of (i) satisfaction of all conditions set forth in Section 5 hereof and (ii) receipt by the Administrative Agent of duly executed counterpart signature pages of this Amendment from the Loan Parties, the Agents and the requisite Banks, and from and after such date this Amendment shall be binding upon the Loan Parties, each Bank and the Agents, and their respective successors and assigns permitted by the Credit Agreement. Each of the Loan Parties, by executing this Amendment, hereby certifies that this Amendment has been duly executed. [INTENTIONALLY BLANK] -6- [SIGNATURE PAGE 1 OF 19 TO AMENDMENT NO. 2] IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. MARINER HEALTH GROUP, INC. By:_______________________________________ Name:_____________________________________ Title:____________________________________ GUARANTORS: EACH GUARANTOR LISTED ON SCHEDULE A ATTACHED HERETO By:_______________________________________ Name:_____________________________________ Title:_____________________________of each Guarantor listed on Schedule A attached hereto which is a corporation and of each corporation listed on Schedule A attached hereto which is the general partner or member of a Guarantor [SIGNATURE PAGE 2 OF 19 TO AMENDMENT NO. 2] PNC BANK, NATIONAL ASSOCIATION, individually and as Administrative Agent By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 3 OF 19 TO AMENDMENT NO. 2] FIRST UNION NATIONAL BANK individually and as Syndication Agent By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 4 OF 19 TO AMENDMENT NO. 2] BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By:_______________________________________ Name:_____________________________________ Title:____________________________________ By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 5 OF 19 TO AMENDMENT NO. 2] MELLON BANK, N.A. By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 6 OF 19 TO AMENDMENT NO. 2] TORONTO DOMINION (NEW YORK), INC. By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 7 OF 19 TO AMENDMENT NO. 2] BANKERS TRUST COMPANY By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 8 OF 19 TO AMENDMENT NO. 2] CREDIT LYONNAIS NEW YORK BRANCH By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 9 OF 19 TO AMENDMENT NO. 2] AMSOUTH BANK By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 10 OF 19 TO AMENDMENT NO. 2] BANK OF TOKYO-MITSUBISHI TRUST COMPANY By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 11 OF 19 TO AMENDMENT NO. 2] THE FUJI BANK, LIMITED NEW YORK BRANCH By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 12 OF 19 TO AMENDMENT NO. 2] SUNTRUST BANK, CENTRAL FLORIDA, N.A. By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 13 OF 19 TO AMENDMENT NO. 2] BANK ONE, KENTUCKY, NA By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 14 OF 19 TO AMENDMENT NO. 2] FLEET NATIONAL BANK By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 15 OF 19 TO AMENDMENT NO. 2] COMERICA BANK By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 16 OF 19 TO AMENDMENT NO. 2] BANK ONE, NA By:_______________________________________ Name:_____________________________________ Title:____________________________________ [SIGNATURE PAGE 17 OF 19 TO AMENDMENT NO. 2] THE INDUSTRIAL BANK OF JAPAN, LIMITED, NEW YORK BRANCH By:___________________________________ Name:_________________________________ Title:________________________________ [SIGNATURE PAGE 18 OF 19 TO AMENDMENT NO. 2] GENERAL ELECTRIC CAPITAL CORPORATION By:___________________________________ Name:_________________________________ Title:________________________________ [SIGNATURE PAGE 19 OF 19 TO AMENDMENT NO. 2] RIGGS BANK N.A. By:___________________________________ Name:_________________________________ Title:________________________________ STATE OF TENNESSEE COUNTY OF DAVIDSON On the _____ day of ___________, 1999 personally appeared ______________, as the __________ President of SunTrust Bank, Central Florida, N.A., and before me executed the attached Amendment No. 2 dated as of _____________, 1999 to the Credit Agreement between Mariner Health Group, Inc., with SunTrust Bank, Central Florida, N.A., as Lender. IN WITNESS WHEREOF, I have hereunto set my hand and official seal, in the state and county aforesaid. ________________________________________________________________ Signature of Notary Public, State of____________________________ ________________________________________________________________ (Print, Type or Stamp Commissioned Name of Notary Public) Personally known __________; OR Produced Identification_________ Type of identification produced:________________________________ ________________________________________________________________ SCHEDULE A ---------- GUARANTORS ---------- Bride Brook Nursing & Rehabilitation Center, Inc. Compass Pharmacy Services, Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Long Ridge Nursing & Rehabilitation Center, Inc. Longwood Rehabilitation Center, Inc. Mariner Health Care, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Greater Laurel, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health of Florida, Inc. Mariner Health Care of Inverness, Inc. Mariner Health of Jacksonville, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health of Maryland, Inc. Mariner Health Care of MetroWest, Inc. Mariner Health of Orlando, Inc. Mariner Health of Tampa, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Resources, Inc. Mariner Practice Corporation Mariner Physician Services, Inc. Mariner Supply Services, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab. Corp. Mystic Nursing & Rehabilitation Center, Inc. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Prism Health Group, Inc. Sassaquin Nursing & Rehabilitation Center, Inc. Windward Health Care, Inc. MarinerSelect Staffing Solutions, Inc. MedRehab, Inc. Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceutical Services, Inc. Pinnacle Rehabilitation, Inc. [a Tennessee corporation] Cypress Nursing Facility, Inc. Tri-State Health Care, Inc. Aid & Assistance, Inc. The Ocean Pharmacy, Inc. MHC Transportation, Inc. Pinnacle Rehabilitation of Missouri, Inc. Seventeenth Street Associates Limited Partnership (By: Tri-State Health Care, Inc., its general partner) IHS Rehab Partnership, Ltd. (By: Mariner Health Care of Nashville, Inc., its general partner) MedRehab of Indiana, Inc. MedRehab of Louisiana, Inc. MedRehab of Missouri, Inc. Mariner Health at Bonifay, Inc. Mariner Health of Palmetto, Inc. Mariner Health Properties IV, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Mariner Health Properties VI, Ltd. (By: Mariner Health of Florida, Inc., its general partner) Beechwood Heritage Retirement Community, Inc. National Health Strategies, Inc. Prism Care Centers, Inc. Prism Home Care Company, Inc. Prism Rehab Systems, Inc. Prism Hospital Ventures, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Mariner Health of Seminole County, Inc. Mariner - Regency Health Partners, Inc. Regency Health Care Center of Seminole County, Inc. Tampa Medical Associates, Inc. Allegis Health and Living Center at Heritage Harbour, L.L.C. (By: Mariner Health of Maryland, Inc., member) EX-10.89 5 ACKNOWLEDGEMENT AND AMENDMENT EXHIBIT 10.89 ACKNOWLEDGMENT AND AMENDMENT ACKNOWLEDGMENT AND AMENDMENT, dated as of August 16, 1999 (this "Acknowledgment and Amendment"), to the Credit Agreement, dated as of November ---------------------------- 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999, and as may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among MARINER POST-ACUTE NETWORK, INC. ---------------- (formerly known as Paragon Health Network, Inc.), a Delaware corporation (the "Borrower"), the several banks and other financial institutions or entities from --------- time to time parties thereto (the "Lenders"), BANK OF AMERICA, N.A. (formerly ------- known as NationsBank, N.A., "BofA"), as documentation agent (in such capacity, ---- the "Documentation Agent"), and THE CHASE MANHATTAN BANK, as Administrative ------------------- agent (in such capacity, the "Administrative Agent"). -------------------- WITNESSETH ---------- WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, certain loans and other extensions to credit to the Borrower; WHEREAS, the Borrower and BofA are party to the Amended and Restated Confirmation for U.S. Dollar Total Return Swap Transaction, dated as of September 21, 1998, as amended and restated as of March, 1999 (the "BofA Swap"), --------- under that certain ISDA Master Agreement, dated as of October 31, 1997, among the Borrower and BofA; WHEREAS, the Borrower is obligated to BofA in respect of the BofA Swap in an aggregate amount equal to $26,485,562.79, net of the application of termination payments and collateral held in respect of the BofA Swap (the "BofA ---- Swap Obligation"); - --------------- WHEREAS, the Borrower has requested, and, upon this Acknowledgment and Amendment becoming effective, the Lenders have agreed, that certain provisions of the Credit Agreement be amended to permit the restructuring of the BofA Swap Obligation and to provide that such restructured obligation be secured on a pari passu basis with the Lenders in the Collateral, all in the manner provided for in this Acknowledgment and Amendment; and WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger and book manager in arranging the consents necessary for the effectiveness of this Acknowledgment and Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 2 1. Defined Terms. (a) General. Terms defined in the Credit Agreement ------------- ------- and used herein shall, unless otherwise indicated, have the meanings given to them in the Credit Agreement. Terms defined and used in this Acknowledgment and Amendment shall have the meanings given to them in this Acknowledgment and Amendment. (b) Addition of Definitions. The following defined terms are hereby ----------------------- added to Section 1.1 of the Credit Agreement in appropriate alphabetical order: "BofA": Bank of America, N.A., a national banking association. ---- "BofA Swap": the Amended and Restated Confirmation for U.S. Dollar --------- Total Return Swap Transaction, dated as of September 21, 1998, as amended and restated as of March, 1999, under that certain ISDA Master Agreement, dated as of October 31, 1997, among the Borrower BofA. "Deficiency Note": the promissory note dated August 16, 1999, by the --------------- Borrower in favor of BofA in an aggregate principal amount equal to $26,485,562.79 which, among other things (i) provides for the payment of interest thereon at a rate equal to the interest rate from time to time in effect with respect to the Revolving Credit Loans, (ii) has a tenor equal to that of the Revolving Credit Loans, (iii) provides that the loans thereunder may only be accelerated by BofA (A) upon a failure to pay principal and interest due thereon or (B) if the Loans are declared to be, or automatically become, due and payable in accordance with Section 8, (iv) does not contain any financial or operating covenants with respect to the Borrower or any of its Subsidiaries, (v) is not assignable by BofA unless contemporaneous with any assignment thereof BofA shall assign all of the remaining Loans and Commitments held by it at such time to the assignee of the Deficiency Note, (vi) provides that any amendments, supplements, modifications, extensions or forebearances of the Revolving Credit Loans or the Revolving Credit Commitments shall be equally and automatically applicable to the loans thereunder mutatis mutandis without any further consent of BofA thereunder, (vii) provides that any permanent reduction of the Revolving Credit Commitments resulting in a prepayment of the Revolving Credit Loans will be accompanied by a prepayment of the loans under the Deficiency Note, ratably based on the amount of the prepayment of the Revolving Credit Loans, (viii) acknowledges that BofA shall not be entitled to be treated as a class separate from the Lenders with respect to the obligations thereunder in any bankruptcy, insolvency or reorganization proceedings of the Borrower and (ix) is on other terms and conditions reasonably satisfactory to the Administrative Agent." 2. Amendment to Section 7.2. Section 7.2 of the Credit Agreement is ------------------------ hereby amended by (a) deleting the word "and" at the end of paragraph (j), (b) deleting the period at the end of paragraph (k) and substituting in lieu thereof, "and" and (c) inserting the following new paragraph (1): 3 "(l) Indebtedness in respect of the Deficiency Note." 3. Acknowledgment. The parties hereto acknowledge and agree that, -------------- solely with respect to the Collateral, the obligations of the Borrower under the Deficiency Note shall be (i) treated as "Borrower Obligations" as defined in the Guarantee and Collateral Agreement and (ii) entitled to the benefits of the collateral security provided under the Mortgages on a pari passu basis with the Lenders. 4. Conditions to Effectiveness. The acknowledgments and amendments --------------------------- provided for herein shall become effective upon the satisfaction of the following conditions precedent and shall be deemed to be effective as of the date hereof: (a) The Administrative Agent shall have received counterparts of this Acknowledgment and Amendment duly executed and delivered by the Borrower and the Required Lenders. (b) The swap transaction evidenced by the BofA Swap shall have been terminated and the obligations in respect thereof shall have been restructured in the form of the Deficiency Note (it being understood that the guarantee of Mariner and certain of its Subsidiaries in respect thereof shall remain in full force and effect). (c) All other matters in connection with the termination of the swap transaction evidenced by the BofA Swap shall be in form and substance reasonably satisfactory to the Administrative Agent. The execution and delivery of this Acknowledgment and Amendment by any Lender shall be binding upon each of its successors and assigns (including Transferees of its commitments and Loans in whole or in part prior to effectiveness hereof) and binding in respect of all of its Commitments and Loans, including any acquired subsequent to its execution and delivery hereof and prior to the effectiveness hereof. 5. Representations and Warranties. The Borrower as of the date ------------------------------ hereof and after giving effect to the acknowledgments and amendments contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 4 of the Credit Agreement (other than the last sentence of Section 4.7 and other than with respect to any matters previously disclosed in writing to the Lenders or disclosed in any of the Borrower's public filings, including, without limitation, matters disclosed in its financial statements); provided, that each reference to the Credit Agreement therein shall -------- be deemed to be a reference to the Credit Agreement after giving effect to this Acknowledgment and Amendment. 4 6. Payment of Expenses. The Borrower agrees to pay or reimburse the ------------------- Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with this Acknowledgment and Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 7. Reference to and Effect on the Loan Documents: Limited Effect. On and ------------------------------------------------------------- after the date hereof and the satisfaction of the conditions contained in paragraph 4 of this Acknowledgment and Amendment, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. The execution, delivery and effectiveness of this Acknowledgment and Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or any Agent under any of the Loan Documents, nor constitute a waiver of any provisions of any of the Loan Documents. Except as expressly amended or waived herein, all of the provisions and covenants of the Credit Agreement and the other Loan Documents are and shall continue to remain in full force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. 8. Counterparts. This Acknowledgment and Amendment may be executed ------------ by one or more of the parties hereto in any number of separate counterparts (which may include counterparts delivered by facsimile transmission) and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Any executed counterpart delivered by facsimile transmission shall be effective as for all purposes hereof. 9. GOVERNING LAW. THIS ACKNOWLEDGMENT AND AMENDMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 5 IN WITNESS WHEREOF, the parties hereto have caused this Acknowledgment and Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. MARINER POST-ACUTE NETWORK, INC. By: ____________________________ Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: /s/ Agnes L. Levy ---------------------------- Name: Agnes L. Levy Title: Vice President BANK OF AMERICA, N.A. /s/ F. A. Zagar ------------------------------- By: F. A. Zagar Title: Managing Director EX-10.90 6 PROMISSORY NOTE EXHIBIT 10.90 PROMISSORY NOTE $26,485,562.79 New York, New York August 16, 1999 FOR VALUE RECEIVED, the undersigned, MARINER POST-ACUTE NETWORK, INC. (f/k/a Paragon Health Network, Inc.), a Delaware corporation (the "Maker"), ----- hereby unconditionally promises to pay to the order of BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), a national banking association (the "Holder"), at the office of Bank of America, N.A. located at 101 N. Tryon ------ Street, NC1-001-15-03, Charlotte, North Carolina 28255, in lawful money of the United States of America and in immediately available funds on the Revolving Credit Termination Date, the principal amount of TWENTY-SIX MILLION FOUR HUNDRED EIGHTY-FIVE THOUSAND FIVE HUNDRED SIXTY-TWO AND 79/100 DOLLARS ($26,485,562.79). The Maker further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates hereinafter set forth. Capitalized terms used in this Note and not otherwise defined herein shall have the meanings ascribed to such capitalized terms in that certain Credit Agreement, dated as of November 4, 1997 (as amended, modified, supplemented, extended, restated or replaced from time to time, the "Credit Agreement"), among ---------------- the Maker, as borrower, the Holder, as a lender thereunder, the several other banks and financial institutions from time to time parties thereto (together with the Holder, the "Lenders"), The Chase Manhattan Bank, as Administrative ------- Agent (the "Administrative Agent"), and Bank of America, N.A. (f/k/a -------------------- NationsBank, N.A.), as Documentation Agent. Interest shall accrue on the outstanding principal amount hereof from and including the date hereof to, but excluding, the date of payment in full of the principal amount of this Note, at the rate or rates from time to time applicable to the Revolving Credit Loans under the Credit Agreement; provided, however, that the interest set forth in Section 2.14(c) of the Credit Agreement shall only be applicable to the outstanding principal amount hereof if the Revolving Credit Lenders are then charging such interest on the Revolving Credit Loans. For any period during which the Revolving Credit Loans include multiple Eurodollar Tranches, or one or more Eurodollar Tranches and ABR Loans, (a) a portion of the outstanding principal amount hereof corresponding to the percentage of the Revolving Credit Loans represented by each Eurodollar Tranche shall bear interest at a rate (the "Deficiency Note Eurodollar Rate") equal to ------------------------------- the sum of (i) the Eurodollar Base Rate applicable to such Eurodollar Tranche, plus (ii) the Applicable Margin pertaining to the Revolving Credit Loans, and (b) a portion of the outstanding principal amount hereof corresponding to the percentage of the Revolving Credit Loans representing ABR Loans shall bear interest at a rate (the "Deficiency Note Base Rate") equal to the sum of (i) the ------------------------- ABR, plus (ii) the Applicable Margin pertaining to the Revolving Credit Loans. If all or a portion of the principal amount hereof or any interest payment hereon shall not be paid when due (whether at the stated maturity, by acceleration as herein provided, or otherwise), the entire outstanding principal amount hereof (whether or not then overdue) shall, if the Revolving Credit Loans are then bearing interest at the rate set forth in Section 2.14(c) of the Credit Agreement, bear interest at a rate which is two (2) percentage points in excess of the interest rate otherwise applicable pursuant to the foregoing clauses (a) and (b) of this paragraph. To the extent the indebtedness evidenced by this Note is bearing interest at the rate specified in the immediately preceding sentence, such interest shall be payable on demand, provided that the Holder shall not make such demand unless the Revolving Credit Lenders have demanded the payment of default rate interest on the Revolving Credit Loans pursuant to Section 2.14(d) of the Credit Agreement. To the extent any portion of this Note bears interest at a Deficiency Note Eurodollar Rate, such interest shall be due and payable, in arrears, on each Interest Payment Date that relates to the corresponding Eurodollar Tranche(s) of the Revolving Credit Loans on which the interest rate applicable to such portion of this Note is based. Interest accruing hereon at the Deficiency Note Base Rate shall be due and payable, in arrears, on each Interest Payment Date applicable to Revolving Credit Loans that constitute ABR Loans. Interest hereon shall be calculated on the basis of a 360-day year for the actual number of days elapsed, except that, with respect to any portion of this Note bearing interest at a rate determined by reference to Revolving Credit Loans constituting ABR Loans whose rate of interest, in turn, is calculated by reference to the Prime Rate, the interest on such portion of this Note shall be calculated on the basis of a 365-day year (or a 366-day year, as the case may be), for the actual number of days elapsed. In the event there shall be any optional or mandatory prepayment, in whole or in part, of the Revolving Credit Loans as a result of a permanent reduction of the Revolving Credit Commitments under the Credit Agreement, whether such prepayment results from asset sales, the application of the proceeds of Collateral, or otherwise, the Maker agrees to make a corresponding prepayment of principal hereunder contemporaneously therewith in an amount equal to the product of the then outstanding principal amount hereof multiplied by a fraction, the numerator of which shall be equal to the principal amount of the Revolving Credit Loans being so prepaid, and the denominator of which shall be equal to the aggregate Revolving Credit Commitments of the Revolving Credit Lenders under the Credit Agreement immediately prior to such prepayment. The Holder may accelerate the maturity of this Note solely upon the occurrence of any of the following events: (a) upon the acceleration (including, without limitation, automatic acceleration) of the Revolving Credit Loans pursuant to Section 8 of the Credit Agreement; (b) upon the failure of the Maker to pay any principal amount due hereunder as and when due and payable; (c) upon the failure of the Maker to pay any installment of interest due hereon within five (5) days after the due date thereof; or -2- (d) upon the failure of the Required Lenders under the Credit Agreement to have approved the Chase Amendment (as defined in the Settlement Agreement hereinafter referred to) by no later than September 16, 1999. Notwithstanding anything to the contrary contained herein, the Holder may only pursue its remedies in respect of an acceleration of this Note arising under clause (a) above, if and so long as the Administrative Agent or the Collateral Agent are pursuing remedies against the Maker in connection with the obligations arising under the Credit Agreement. The Maker agrees to pay or reimburse the Holder for all of its out-of-pocket costs and expenses (including, without limitation, reasonable legal fees and disbursements) incurred in connection with the enforcement or preservation of any of its rights under this Note or the Settlement Agreement. All amendments, modifications, supplementations, extensions, renewals, consents, waivers and forbearances granted by the requisite Lenders under the Credit Agreement and applicable to the Revolving Credit Loans and the Revolving Credit Commitments shall be automatically binding upon the Holder with respect to the obligations evidenced by the Settlement Agreement (as hereinafter defined) and this Note, without the necessity of any further act or deed of the Holder. It is the express intent of the Maker and the Holder that the obligations of the Maker evidenced by this Note shall receive the same treatment in any in- court or out-of-court restructuring of the Maker's debt as the Revolving Credit Loans receive. By its acceptance of this Note, the Holder acknowledges and agrees that in any out-of-court restructuring of the Maker's debt under the Credit Agreement, the Holder of this Note will not be entitled in such capacity to vote on any such restructuring plan. Nothing contained herein, however, shall be construed to deprive the Holder of any vote on any such out-of-court restructuring plan which the Holder may have with respect to its Revolving Credit Loans and Revolving Credit Commitments. Furthermore, in connection with any in-court restructuring of the Maker's debt, the Maker agrees to include the claim evidenced by this Note in the same creditor class as the Revolving Credit Loans, including, without limitation, for purposes of voting on any such in- court restructuring plan, and by its acceptance of this Note, the Holder agrees to such inclusion. This Note may not be assigned by the Holder unless the Holder is no longer (or after giving effect to any contemporaneous assignment of Loans and Commitments under the Credit Agreement, will no longer be) the holder of any Loans or Commitments under the Credit Agreement, and then this Note must be assigned to the assignee of such Loans and Commitments under the Credit Agreement. This Note may not be pledged or encumbered by the Holder. Any assignment, pledge or encumbrance in violation of the provisions hereof shall be null and void. All parties now or hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind in connection with this Note. -3- THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. This Note is being issued by the Maker pursuant to the provisions of that certain Swap Settlement Agreement dated as of August 13, 1999 (as the same may be amended from time to time, the "Settlement Agreement") by and among the -------------------- Holder, the Maker and Mariner Health Group, Inc., for itself and certain of its subsidiaries. The indebtedness evidenced by this Note represents the deficiency owed by the Maker under that certain Amended and Restated Confirmation for U.S. Dollar Total Return Swap Transaction to be Subject to 1992 Master Agreement, dated as of September 21, 1998, and amended and restated as of March, 1999 (the "LMS Confirmation"), entered into by the Maker and the Holder pursuant to that ---------------- certain 1992 ISDA Master Agreement dated October 31, 1997 between the Maker and the Holder (as amended, the "Master Agreement"). Any assignment of this Note in ---------------- compliance with the foregoing provisions of this Note shall automatically and without any further act or deed constitute an assignment of the Holder's right, title and interest in, to and under the Settlement Agreement, the Master Agreement, the LMS Confirmation and the LMS Guaranty (as defined in the Settlement Agreement), whether or not so specified. This Note and the Settlement Agreement together constitute a modification, restructuring and restatement of the LMS Confirmation and the Master Agreement, including, without limitation, the provisions of the LMS Confirmation and the Master Agreement relating to the Maker's payment obligations thereunder and the enforcement and remedial rights of the Holder in connection therewith. Notwithstanding anything to the contrary contained in the LMS Confirmation or the Master Agreement, the provisions of this Note and the Settlement Agreement shall in all events control over any terms or provisions contained in the LMS Confirmation or the Master Agreement, and by its acceptance hereof, the Holder acknowledges and agrees that its shall have no right to enforce any provision of the LMS Confirmation or the Master Agreement, except if and to the extent such provisions are expressly set forth in this Note or in the Settlement Agreement. This Note shall be binding upon, and shall inure to the benefit of, the Maker and the Holder and their respective successors and permitted assigns. [The Remainder of this Page Intentionally Left Blank] -4- IN WITNESS WHEREOF, the Maker has caused this duly authorized officer to execute and deliver this Note as of the day and year first-above written. MARINER POST-ACUTE NETWORK, INC. By: /s/ Boyd P. Gentry ---------------------------------------- Boyd P. Gentry Senior Vice President and Treasurer [Deficiency Note] EX-10.91 7 FORBEARANCE AGREEMENT EXHIBIT 10.91 FORBEARANCE AGREEMENT FORBEARANCE AGREEMENT, dated as of November 9, 1999 (this "Forbearance ----------- Agreement"), to the Credit Agreement, dated as of November 4, 1997 (as amended - --------- by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999, and the Acknowledgment and Amendment, dated as of August 16, 1999, and as the same may be amended, supplemented or otherwise modified from time to time, the "Credit ------ Agreement"), among MARINER POST-ACUTE NETWORK, INC. (formerly known as Paragon - --------- Health Network, Inc.), a Delaware corporation (the "Borrower"), the several -------- banks and other financial institutions or entities from time to time parties thereto (the "Lenders"), BANK OF AMERICA, N.A. (formerly known as NationsBank, ------- N.A.), as documentation agent, and THE CHASE MANHATTAN BANK ("Chase"), as ----- administrative agent (in such capacity, the "Administrative Agent"). -------------------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the Credit Agreement, the Lenders have agreed to make, and have made, certain loans and other extensions of credit to the Borrower; WHEREAS, the Borrower has advised the Agent and the Lenders of the current existence and the imminent occurrence of certain Defaults and Events of Default under the Credit Agreement; WHEREAS, the Borrower has requested that the Lenders forbear from exercising certain remedies under the Credit Agreement with respect to such Defaults and Events of Default and the Lenders are willing to so forbear, but only on the terms and subject to the conditions set forth herein; WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger and book manager in arranging the consents necessary for the effectiveness of this Forbearance Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Terms defined in the Credit Agreement and used ------------- herein shall, unless otherwise indicated, have the meanings given to them in the Credit Agreement. As used in this Forbearance Agreement, terms defined in the preamble or the recitals shall have the meanings so assigned and the following terms shall have the following meanings: "Basic Rent": as defined in Annex A to the to the Amended and Restated ---------- Participation Agreement dated as of November 4, 1997 (as amended, supplemented or 1 otherwise modified from time to time), among Living Centers Holding Company and the parties to the Synthetic Credit Agreement. "Forbearance Period": the period from the date hereof to the earlier ------------------ of (i) January 14, 2000, and (ii) the date on which the forbearance provided in Section 2 of this Forbearance Agreement terminates in accordance with its terms. "HCFA": the Health Care Financing Administration. ---- "Synthetic Agent": Chase in its capacity as agent under the Synthetic --------------- Credit Agreement. "Synthetic Credit Agreement": the Amended and Restated Credit -------------------------- Agreement, dated as of November 4, 1997, among FBTC Leasing Corp., as borrower, the lenders from time to time party thereto, the Synthetic Agent and The Fuji Bank, Limited (Houston Agency), as co-agent, as amended, supplemented or otherwise modified from time to time. "Synthetic Forbearance Agreement": the Forbearance Agreement, dated as ------------------------------- of the date hereof, among the Borrower and certain of its direct and indirect subsidiaries that are party thereto, FBTC Leasing Corp., the lenders party thereto, the Synthetic Agent and The Fuji Bank, Limited (Houston Agency), as co-agent under the Synthetic Credit Agreement. "Synthetic Guarantee": the Amended and Restated Guarantee, dated as of ------------------- November 4, 1997, made by the Borrower and its direct and indirect subsidiaries that are party thereto in favor of the Synthetic Agent, as the same has been amended, supplemented or otherwise modified from time to time. "Synthetic Lease": the Lease, dated as of October 10, 1996 (as --------------- amended, supplemented or otherwise modified from time to time), between FBTC Leasing Corp., as Lessor, and Living Centers Holding Company, as Lessee. 2. Forbearance. The Administrative Agent and the Lenders agree to ----------- forbear, during the Forbearance Period, from the exercise of any rights or remedies under the Credit Agreement, the Notes and the other Loan Documents (including, without limitation, the right to accelerate the Obligations) in respect of Defaults or Events of Default arising as a result of (a) events or conditions first arising or coming into existence prior to the date hereof, (b) the Borrower's failure to pay interest on, or letter of credit, commitment or similar fees in respect of, the obligations outstanding under the Credit Agreement and the Deficiency Note first becoming due and payable during the Forbearance Period, (c) the Borrower's failure to pay interest due and owing on November 1, 1999 in respect of the Senior Subordinated Notes, (d) the Borrower's failure to pay principal due and owing on December 31, 1999 on the Term Loans (collectively, the "December 31 Amortization Payments") or (e) the events or --------------------------------- conditions that are the subject of the Synthetic Forbearance Agreement; provided -------- that the Forbearance Period shall immediately terminate in the event that the Borrower breaches its obligations under Section 3 below. 2 3. Application of Prudent Buyer Settlement Proceeds. In ------------------------------------------------ consideration for the forbearance granted hereunder, and in order to induce the Lenders to enter into this Forbearance Agreement, the Borrower shall pay to Chase, as Administrative Agent and Synthetic Agent, within one Business Day of its receipt thereof all amounts representing the "Paragon Disallowance Settlement" (as that term is used on page 9 of the bank books presented by the Borrower to the Lenders at the meeting of Lenders in New York City on November 3, 1999) and received, in cash, from HCFA or any other Governmental Authority by the Borrower or any Subsidiary Guarantor in respect of charges previously disallowed for allegedly failing to satisfy HCFA's "prudent buyer" standard. Any amounts so paid to Chase shall be applied (without duplication) as follows: first, to the payment in full of interest, Basic Rent and fees due and owing (at - ----- the applicable non-default rates) on the obligations outstanding under the Credit Agreement, the Synthetic Credit Agreement, the Synthetic Lease and the Deficiency Note, ratably in the proportion that the amount (without duplication) of interest, Basic Rent and fees then due and owing under each of the Credit Agreement, the Synthetic Credit Agreement, the Synthetic Lease or the Deficiency Note bears to the aggregate amount (without duplication) of all interest, Basic Rent and fees then due and owing under the Credit Agreement, the Synthetic Credit Agreement, the Synthetic Lease and the Deficiency Note, second, to the ------ extent any such amounts are so paid to Chase prior to December 31, 1999, to prepayment of the Term Loans in accordance with Section 2.17(b) and third, to ----- the extent that such amounts are so paid to Chase on or after December 31, 1999 and the December 31 Amortization Payments have not otherwise been paid in full, to the payment in full of the December 31 Amortization Payments, ratably in accordance with the proportion that each December 31 Amortization Payment bears to the aggregate of all of the December 31 Amortization Payments (with any excess amount to be applied to prepayment of the Term Loans in accordance with Section 2.17(b)). 4. Conditions to Effectiveness. The forbearance and agreements --------------------------- provided for herein shall become effective, and shall be deemed to be effective as of the date hereof, upon the Administrative Agent's receipt of counterparts of this Forbearance Agreement duly executed and delivered by the Borrower and the Required Lenders. The execution and delivery of this Forbearance Agreement by any Lender shall be binding upon each of its successors and assigns (including Transferees of its commitments and Loans in whole or in part prior to effectiveness hereof) and binding in respect of all of its Commitments and Loans, including any acquired subsequent to its execution and delivery hereof and prior to the effectiveness hereof. 5. Representations and Warranties. The Borrower, as of the date ------------------------------ hereof and after giving effect to the agreements contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 4 of the Credit Agreement (other than the last sentence of Section 4.7 and other than with respect to any matters previously disclosed in writing to the Lenders or disclosed in any of the Borrower's public filings, including, without limitation, matters disclosed in its financial statements); provided, -------- that each reference to the Credit Agreement therein shall be deemed to be a reference to the Credit Agreement as amended. 3 6. Payment of Expenses. The Borrower agrees to pay or reimburse the ------------------- Administrative Agent for all of its out-of-pocket costs and expenses incurred in connection with this Forbearance Agreement and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 7. Reference to and Effect on the Loan Documents; Limited Effect. ------------------------------------------------------------- This Forbearance Agreement shall be deemed to be a Loan Document for all purposes. The execution, delivery and effectiveness of this Forbearance Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or any Agent under any of the Loan Documents, nor constitute a waiver of or forbearance with respect to any provisions of any of the Loan Documents, provided that the forbearance provided -------- hereunder shall constitute a forbearance under the Deficiency Note. Except as expressly provided herein, all of the provisions and covenants of the Credit Agreement and the other Loan Documents are and shall continue to remain in full force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. 8. Counterparts. This Forbearance Agreement may be executed by one ------------ or more of the parties hereto in any number of separate counterparts (which may include counterparts delivered by facsimile transmission) and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Any executed counterpart delivered by facsimile transmission shall be effective as for all purposes hereof. 9. GOVERNING LAW. THIS FORBEARANCE AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 4 IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. MARINER POST-ACUTE NETWORK, INC. By:____________________________________ Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By:____________________________________ Name: Title: BANK OF AMERICA, N.A. By:____________________________________ Name: Title: 5 ABN AMRO Bank N.V. By:____________________________ Name: Title: By:____________________________ Name: Title: 6 Alliance Investments, Limited By:____________________________________ Name: Title: 7 Allstate Insurance Company By:_______________________________ Name: Title: By:_______________________________ Name: Title: 8 AmSouth Bank of Alabama By:_______________________________ Name: Title: By:_______________________________ Name: Title: 9 Arab Banking Corporation (B.S.C.) By:__________________________________ Name: Title: 10 Archimedes Funding, L.L.C., By: ING Capital Advisors, Inc., As Collateral Manager By:______________________________ Name: Title: By:______________________________ Name: Title: 11 Ares Leveraged Investment Fund, LP By: Ares Management L.P. By:_________________________________ Name: Title: 12 Balanced High Yield Fund I Ltd. By: BHF (USA) Capital Corporation, As Attorney-In-Fact By:____________________________________ Name: Title: By:____________________________________ Name: Title: 13 Bank Austria Creditanstalt Corporate Finance Inc. By:________________________________ Name: Title: By:________________________________ Name: Title: 14 Bank of America, N.A. By:________________________________ Name: Title: 15 The Bank of Nova Scotia By:_______________________ Name: Title: 16 Bank of Scotland By:____________________________ Name: Title: 17 Bankers Trust Company By:_________________________ Name: Title: 18 Banque Worms Capital Corporation By:____________________________ Name: Title: By:____________________________ Name: Title: 19 Batterson Park CBO By: General Re-New England Asset Management, Inc., as Collateral Manager By:__________________________________________ Name: Title: 20 Bayerische Hypo und Vereinsbank AG, New York Branch By:________________________________ Name: Title: By:________________________________ Name: Title: 21 Bear Sterns Investment Products, Inc. By:___________________________________ Name: Title: 22 BHF(USA) Capital Corporation By:____________________________ Name: Title: By:____________________________ Name: Title: 23 Captiva Finance Ltd. By:_____________________ Name: Title: 24 Ceres Finance Ltd. By:________________________ Name: Title: 25 Conseco Capital Management, Inc. By:__________________________________ Name: Title: 26 Credit Lyonnais New York Branch By:___________________________ Name: Title: 27 CypressTree Investment Partners I, Ltd., By: CypressTree Investment Management Company, Inc., as Portfolio Manager By:_____________________________________ Name: Title: 28 DLJ Capital Funding, Inc. By:_________________________ Name: Title: 29 Dresdner Bank AG, New York and Grand Cayman Branches By:_______________________________ Name: Title: By:_______________________________ Name: Title: 30 Eaton Vance Senior Income Trust By: Eaton Vance Management, As Investment Advisor By:________________________________ Name: Title: 31 Erste Bank Der Oesterreichishen Sparkassen AG By:______________________________ Name: Title: By:_______________________________ Name: Title: 32 First American National Bank By:_______________________________ Name: Title: By:_______________________________ Name: Title: First Source Financial LLP By: First Source Financial, Inc., its Agent/Manager By:________________________________ Name: Title: First Union National Bank N.C. By:__________________________________ Name: Title: By:__________________________________ Name: Title: Floating Rate Portfolio By: INVESCO Senior Secured Management Inc., as attorney in fact By:____________________________________ Name: Title: Foothill Partners III, LP By:_____________________________ Name: Title: Franklin Mutual Advisors, Inc. By:_______________________________ Name: Title: The Fuji Bank, Limited By:___________________________________ Name: Title: General Electric Capital Corporation By:_______________________________ Name: Title: Goldman Sachs Credit Partners L.P. By:____________________________________ Name: Title: HSBC Bank,U.S.A. By:____________________________ Name: Title: Indosuez Capital Funding III, Limited By: Indosuez Capital, as Portfolio Manager By:___________________________________ Name: Title: The Industrial Bank of Japan, Limited By:___________________________________ Name: Title: Kislak National Bank By: ING Capital Advisors, Inc., As Investment Advisors By:_____________________________ Name: Title: KZH III LLC By:____________________ Name: Title: KZH Pamco LLC By:____________________________ Name: Title: KZH - CNC LLC By:_____________________ Name: Title: KZH - ING-3 LLC By:___________________________ Name: Title: KZH Riverside LLC By:____________________ Name: Title: KZH - Soleil LLC By:____________________________ Name: Title: KZH - Shoshone LLC By:_____________________________ Name: Title: KZH - Sterling LLC By:_____________________________ Name: Title: Merrill Lynch Debt Strategies Portfolio By: Merrill Lynch Asset Management, L.P., as Investment Advisor By:__________________________________ Name: Title: Merrill Lynch Global Investment Series: Income Strategies Portfolio By: Merrill Lynch Asset Management, L.P., as Investment Advisor By:_________________________________ Name: Title: Merrill Lynch Prime Rate Portfolio By: Merrill Lynch Asset Management, L.P., as Investment Advisor By:________________________________ Name: Title: Merrill Lynch Senior Floating Rate Fund, Inc. By:________________________________________ Name: Title: The Mitsubishi Trust and Banking Corporation By:________________________________ Name: Title: ML CBO IV (Cayman) Ltd. By: Highland Capital Management, L.P., as Collateral Manager By:__________________________ Name: Title: ML Debt Strategies Fund, Inc. By:_____________________________ Name: Title: ML CLO XII Pilgrim America (Cayman), Ltd. By: Pilgram Investments, Inc., as its Investment Manager By:__________________________________ Name: Title: Natexis Banque BFCE By:____________________________ Name: Title: By:____________________________ Name: Title: National City Bank of Indiana By:______________________________ Name: Title: OCM Administrative Services II LLC By:_________________________________ Name: Title: Olympic Funding Trust, Series 1999-1 By:___________________________________ Name: Title: ORIX USA Corporation By:_____________________ Name: Title: Pacific Life CBO 1998-1 LTD By: Pacific Life Insurance Company, as Collateral Manager By:______________________________ Name: Title: PAMCO Cayman Ltd. By: Highland Capital Management, L.P., as Collateral Manager By:________________________________________ Name: Title: PAM Capital Funding L.P. By: Highland Capital Management, L.P., as Collateral Manager By:_______________________________________ Name: Title: Paribas By:____________________________ Name: Title: By:___________________________ Name: Title: Paribas Capital Funding LLC By:________________________________ Name: Title: By:________________________________ Name: Title: Pilgrim Prime Rate Trust By: Pilgrim Investments, Inc., as its Investment Manager By:____________________________________________ Name: Title: Royalton Company By: Pacific Investments Management Company, as its Investment Advisor By: PIMCO Management Inc., a general partner By:_____________________________________ Name: Title: Senior Debt Portfolio By: Boston Management and Research, as Investment Advisor By:___________________________________ Name: Title: Senior High Income Portfolio, Inc. By:___________________________________ Name: Title: SEQUILS - Pligrim I Ltd. By:_____________________________ Name: Title: Skandinaviska Enskilda Banken AB (publ.) New York Branch By:__________________________________ Name: Title: By:__________________________________ Name: Title: Societe Generale By:_______________________________ Name: Title: Southern Pacific Bank By:___________________________ Name: Title: SPS SWAPS By:_________________________ Name: Title: SPS High Yield Loan Trading By:_________________________________ Name: Title: Strata Funding Ltd. By:________________________ Name: Title: The Sumitomo Bank, Limited, New York Branch By:___________________________________________ Name: Title: Toronto Dominion Bank (Texas), Inc. By:___________________________________ Name: Title: Transamerica Business Credit Corporation By:______________________________________ Name: Title: Union Bank of California, N.A. By:_______________________________ Name: Title: Van Kampen Prime Rate Income Trust By:___________________________________ Name: Title: Wachovia Bank, N.A. By:_____________________ Name: Title: EX-10.92 8 FORBEARANCE AGREEMENT EXHIBIT 10.92 FORBEARANCE AGREEMENT FORBEARANCE AGREEMENT, dated as of November 9, 1999 (this "Forbearance ----------- Agreement"), to: - --------- (i) the Amended and Restated Credit Agreement, dated as of November 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998, the Second Amendment, dated as of December 22, 1998, the Third Amendment, dated as of May 11, 1999, the Acknowledgment and Amendment, dated as of August 16, 1999, and as the same may be further amended, supplemented or otherwise modified from time to time, the "Synthetic Credit Agreement"), among FBTC LEASING CORP., as Borrower --------------------------- (the "Borrower"), the lenders party thereto (the "Lenders"), THE CHASE -------- ------- MANHATTAN BANK ("Chase"), as agent (in such capacity, the "Agent") and ----- ----- THE FUJI BANK, LIMITED (HOUSTON AGENCY), as co-agent (in such capacity, the "Co-Agent"); -------- (ii) the Amended and Restated Guarantee, dated as of November 4, 1997 (as amended by the First Amendment to Guarantee, dated as of July 8, 1998, the Second Amendment to Guarantee, dated as of December 22, 1998, the Third Amendment to Guarantee, dated as of May 11, 1999, the Acknowledgment and Amendment to Guarantee, dated as of August 16, 1999, and as the same may be further amended, supplemented or otherwise modified from time to time, the "Synthetic Guarantee"), made ------------------- by MARINER POST-ACUTE NETWORK, INC. (formerly known as Paragon Health Network, Inc., "Mariner"), a Delaware corporation, and the other ------- guarantors which are signatories thereto (Mariner and each such other guarantor, individually, a "Guarantor"; collectively, the --------- "Guarantors"), in favor of the Agent; and ---------- (iii) the Lease, dated as of October 10, 1996 (as amended, supplemented or otherwise modified from time to time, the "Lease"), ----- between Borrower, as Lessor, and Living Centers Holding Company, as Lessee. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Synthetic Credit Agreement, the Lenders have agreed to make, and have made, certain loans and other extensions of credit to the Borrower; WHEREAS, pursuant to the Guarantee, the Guarantors agreed to guarantee the prompt and complete performance of the Guaranteed Obligations (as defined in the Guarantee); WHEREAS, Mariner has advised the Agent, the Lenders and the Borrower (in its capacity as Lessor) of the current existence and the imminent occurrence of certain Defaults and Events of Default under the Synthetic Credit Agreement, the Synthetic Guarantee and the Lease; WHEREAS, Mariner has requested that the Agent, the Lenders and the Borrower (in its capacity as Lessor) forbear from exercising certain remedies under the Synthetic Credit Agreement, the Synthetic Guarantee and the Lease with respect to such Defaults and Events of Default and the Lenders are willing to so forbear, but only on the terms and subject to the conditions set forth herein; WHEREAS, Chase Securities Inc. has agreed to act as the lead arranger and book manager in arranging the consents necessary for the effectiveness of this Forbearance Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Terms defined in Annex A to the Amended and ------------- Restated Participation Agreement, dated as of November 4, 1997 (as amended, supplemented or otherwise modified from time to time, the "Participation ------------- Agreement"), among Living Centers Holding Company, a Delaware corporation, the - --------- Borrower, the Agent, the Co-Agent and the Lenders, and used herein shall, unless otherwise indicated, have the meanings given to them in the Annex A to the Participation Agreement. As used in this Forbearance Agreement, terms defined in the preamble or the recitals shall have the meanings so assigned and the following terms shall have the following meanings: "Corporate Agent": Chase in its capacity as administrative agent under --------------- the Corporate Credit Agreement. "Corporate Credit Agreement": the Credit Agreement, dated as of -------------------------- November 4, 1997, among Mariner, as borrower, the several banks and other financial institutions or entities from time to time parties thereto, Bank of America, N.A. (formerly known as NationsBank, N.A.), as documentation agent, and the Corporate Agent, as amended, supplemented, or otherwise modified from time to time. "Corporate Forbearance Agreement": the Forbearance Agreement, dated as ------------------------------- of the date hereof, among Mariner, the lenders party thereto, Chase, as administrative agent under the Corporate Credit Agreement and Bank of America, N.A. (formerly known as NationsBank, N.A.), as documentation agent under the Corporate Credit Agreement. "Forbearance Period": the period from the date hereof to the earlier ------------------ of (i) January 14, 2000, and (ii) the date on which the forbearance provided in Section 2 of this Forbearance Agreement terminates in accordance with its terms. "HCFA": the Health Care Financing Administration. ---- 2. Forbearance. The Agent, the Lenders and the Borrower (in its ----------- capacity as Lessor) agree to forbear, during the Forbearance Period, from the exercise of any rights or remedies under the Lease, the Synthetic Credit Agreement, the Notes, the Synthetic Guarantee or any other Credit Document (including, without limitation, the right to accelerate the Obligations) in respect of Defaults or Events of Default arising as a result of (a) events or conditions first arising or coming into existence prior to the date hereof, (b) the Lessee's failure to pay Basic Rent or fees under the Lease first becoming due and payable during the Forbearance Period, (c) the Borrower's failure to pay interest on, or commitment or other fees in respect of, the obligations outstanding under the Synthetic Credit Agreement first becoming due and payable during the Forbearance Period, (d) Mariner's failure to pay interest due and owing on November 1, 1999 in respect of the Senior Subordinated Notes and (e) the events or conditions that are the subject of the Corporate Forbearance Agreement; provided that the -------- Forbearance Period shall immediately terminate in the event that Mariner breaches its obligations under Section 3 below or Section 3 of the Corporate Forbearance Agreement. 3. Application of Prudent Buyer Settlement Proceeds. In ------------------------------------------------ consideration for the forbearance granted hereunder, and in order to induce the Lenders to enter into this Forbearance Agreement, Mariner shall pay to Chase, as Agent and Corporate Agent, within one Business Day of its receipt thereof all amounts representing the "Paragon Disallowance Settlement" (as that term is used on page 9 of the bank books presented by Mariner to the Lenders at the meeting of Lenders in New York City on November 3, 1999) and received, in cash, from HCFA or any other Governmental Authority by Mariner or any Subsidiary Guarantor in respect of charges previously disallowed for allegedly failing to satisfy HCFA's "prudent buyer" standard. Any amounts so paid to Chase shall be applied (without duplication) to the payment in full of interest, Basic Rent and fees due and owing (at the applicable non-default rates) on the obligations outstanding under the Corporate Credit Agreement, the Synthetic Credit Agreement, the Lease and the Deficiency Note (as defined in the Corporate Credit Agreement), ratably in the proportion that the amount (without duplication) of interest, Basic Rent and fees then due and owing under each of the Corporate Credit Agreement, the Synthetic Credit Agreement, the Lease or the Deficiency Note bears to the aggregate amount (without duplication) of the interest, Basic Rent and fees then due and owing under the Corporate Credit Agreement, the Synthetic Credit Agreement, the Lease and the Deficiency Note. 4. Conditions to Effectiveness. The forbearance and agreements --------------------------- provided for herein shall become effective, and shall be deemed to be effective as of the date hereof, upon the Agent's receipt of counterparts of this Forbearance Agreement duly executed and delivered by the Borrower, Mariner and the subsidiaries of Mariner set forth on the signature pages hereto and the Required Lenders. The execution and delivery of this Forbearance Agreement by any Lender shall be binding upon each of its successors and assigns (including Transferees of its commitments and Loans in whole or in part prior to effectiveness hereof) and binding in respect of all of its Commitments and Loans, including any acquired subsequent to its execution and delivery hereof and prior to the effectiveness hereof. 5. Representations and Warranties. Mariner, as of the date hereof ------------------------------ and after giving effect to the agreements contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 9 of the Synthetic Guarantee (other than the last sentence of such Section 9 and other than with respect to any matters previously disclosed in writing to the Lenders or disclosed in any of the Mariner's public filings, including, without limitation, matters disclosed in its financial statements); provided, that each -------- reference to the Synthetic Guarantee therein shall be deemed to be a reference to the Synthetic Guarantee after giving effect to this Forbearance Agreement. 6. Payment of Expenses. Mariner agrees to pay or reimburse the ------------------- Agent for all of its out-of-pocket costs and expenses incurred in connection with this Forbearance Agreement and any other documents prepared in connection herewith, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 7. Reference to and Effect on the Credit Documents; Limited Effect. --------------------------------------------------------------- This Forbearance Agreement shall be deemed to be a Credit Document for all purposes. The execution, delivery and effectiveness of this Forbearance Agreement shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or any Agent under any of the Credit Documents, nor constitute a waiver of or forbearance with respect to any provisions of any of the Credit Documents. Except as expressly provided herein, all of the provisions and covenants of the Synthetic Guarantee and the other Credit Documents are and shall continue to remain in full force and effect in accordance with the terms thereof and are hereby in all respects ratified and confirmed. 8. Counterparts. This Forbearance Agreement may be executed by one ------------ or more of the parties hereto in any number of separate counterparts (which may include counterparts delivered by facsimile transmission) and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Any executed counterpart delivered by facsimile transmission shall be effective as for all purposes hereof. 9. GOVERNING LAW. THIS FORBEARANCE AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Forbearance Agreement to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. MARINER POST-ACUTE NETWORK, INC. By:_______________________________________________ Name: Title: AMERICAN-CAL MEDICAL SERVICES, INC. AMS GREEN TREE, INC. AMS PROPERTIES, INC. CONNERWOOD HEALTHCARE, INC. COORDINATED HOME HEALTH SERVICES, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE, INC. EVERGREEN HEALTHCARE LTD., L.P. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VALLEY MANOR HEALTH CARE CENTER, INC. GCI VILLAGE GREEN, INC. GCI-CAL HEALTH CARE CENTERS, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. MARINER HEALTH MANAGEMENT COMPANY (f/k/a GRANCARE GPO SERVICES, INC.) GRANCARE HOME HEALTH SERVICES, INC. GRANCARE, INC. GRANCARE NURSING SERVICES AND HOSPICE, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSTMASTERS, INC. NATIONAL HERITAGE REALTY, INC. OMEGA/INDIANA CARE CORPORATION RENAISSANCE MENTAL HEALTH CENTER, INC. STONECREEK MANAGEMENT COMPANY, INC. By:___________________________________________ Name: Title: AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN SENIOR HEALTH SERVICES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC. DEVCON HOLDING COMPANY EXTENDED ACUTE HOSPITALS OF AMERICA, INC. HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC. HOMECARE ASSOCIATES OF AMERICA, INC. HOSPICE ASSOCIATES OF AMERICA, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS - EAST, INC. LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. MED-THERAPY REHABILITATION SERVICES, INC. PROFESSIONAL RX SYSTEMS, INC. REHABILITY HEALTH SERVICES, INC. THERACARE HOME HEALTH AGENCY, INC. By:_________________________________________ Name: Title: THE CHASE MANHATTAN BANK, as Agent and as a Lender By:__________________________________ Name: Title: Bank of America, N.A. By:__________________________________ Name: Title: The Bank of Nova Scotia By:___________________________________ Name: Title: Credit Lyonnais New York Branch By:________________________________ Name: Title: Dresdner Bank AG, New York and Grand Cayman Branches By:___________________________________ Name: Title: By:___________________________________ Name: Title: FBTC Leasing Corp. By:_______________________________ Name: Title: Fuji Bank, Limited (Houston Agency), as Co-Agent By:___________________________________ Name: Title: Union Bank of California, N.A. By:_______________________________ Name: Title: General Electric Capital Corporation By:________________________________ Name: Title: HSBC Bank, U.S.A. By:___________________________________ Name: Title: Toronto Dominion Bank (Texas), Inc. By:___________________________________ Name: Title: EX-10.93 9 TERMINATION OF AMENDED AND RESTATED STOCKHOLDERS EXHIBIT 10.93 TERMINATION OF AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AND PROXY AND VOTING AGREEMENT This TERMINATION OF AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AND PROXY AND VOTING AGREEMENT (the "Termination"), dated as of December 20, 1999, by and among Apollo Management, L.P., a Delaware limited partnership ("Apollo Management" and together with its affiliates and managed investment funds, "Apollo"), Mariner Post-Acute Network, Inc., a Delaware corporation (the "Company") and the stockholders (including Apollo) listed on the signature pages attached hereto (the "Stockholders"). W I T N E S S E T H: WHEREAS, the parties hereto are all of the parties to that certain Stockholders Agreement, dated as of November 4, 1997, amended as of April 13, 1998 and amended and restated as of November 25, 1998 (the "Stockholders Agreement") pursuant to which the parties provided for certain rights and obligations in respect of the Shares (defined in the Stockholders Agreement); WHEREAS, in addition to the Stockholders Agreement, the Stockholders provided for certain voting rights and obligations in respect to Shares pursuant to that certain Proxy and Voting Agreement, dated as November 4, 1997 (the "Proxy Agreement"), by and among Apollo Management and the Other Stockholders (defined in the Stockholders Agreement); WHEREAS, each Stockholder party hereto owns the number of shares of common stock, par value $.01 per share ("Common Stock") set forth under its name on the signature pages attached hereto, and the Stockholders party hereto collectively beneficially own all of the shares of Common Stock currently subject to the Stockholders Agreement and the Proxy Agreement; WHEREAS, in connection with the sale of the shares of Common Stock owned by Apollo to Credit Suisse First Boston Management Corporation ("CSFBMC") pursuant to a Transfer Agreement between CSFBMC and Apollo (the "Sale Transaction"), Apollo, the Stockholders and the Company have agreed to enter into this Termination to become effective (the "Effective Time") (i) with respect to the Stockholders Agreement immediately upon its execution by Apollo, the Company and Stockholders holding the requisite number of shares, and (ii) with respect to the shares of Common Stock owned by each Other Stockholder subject to the Proxy Agreement, immediately upon its execution by Apollo Management and such Other Stockholder; and NOW, THEREFORE, the parties hereto agree as follows: 1. Representation and Warranties. Each party hereto represents and ----------------------------- warrants to the other party as follows: (a) Authority Relative to this Termination. Each party hereto has the -------------------------------------- requisite 1 power and authority to execute and deliver this Termination and to consummate the transactions contemplated hereby. The execution and delivery of this Termination and the consummation of the transactions contemplated hereby have been duly and validly authorized by such party and no other proceedings on the part of such party are necessary to authorize this Termination or to consummate the transactions so contemplated. This Termination has been duly and validly executed and delivered by such party, and assuming that this Termination has been duly and validly authorized, executed and delivered by the other parties hereto, this Termination constitutes a valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditor's rights generally and to general principles of equity (whether considered in a proceeding in equity or at law). (b) No Conflicts. Neither the execution and delivery of this ------------ Termination nor the consummation of the transactions contemplated hereby will conflict with or constitute a violation of or default under any contract, commitment, agreement, arrangement or restriction of any kind to which such party is a party or by which such party is bound. Other than the Stockholders Agreement and the Proxy Agreement there are no other agreements or understandings with respect to the voting of the Shares. 2. Termination of Rights and Obligations. As of the applicable Effective ------------------------------------- Time, the rights and obligations of (i) Apollo, the Company and the Stockholders under the Stockholders Agreement and (ii) Apollo Management and each of the Other Stockholders under the Proxy Agreement (including, without limitation, the irrevocable proxy granted by each of the Other Stockholders to Apollo Management), shall be deemed to be terminated and of no further effect with respect to any shares of Common Stock beneficially owned by any of Apollo, the Stockholders, or the Other Stockholders, as the case may be. Notwithstanding anything herein to the contrary, this Section 2 shall not terminate or interfere with any Other Stockholder's right to exercise its "tag-along rights" pursuant to Section 6.2 of the Stockholders Agreement with respect to the Sale Transaction. 3. Governing Law. This Termination shall be governed in all respects, ------------- including validity, interpretation and effect, by the laws of the State of Delaware (without giving effect to the provisions thereof relating to conflicts of law). 4. Counterparts. This Termination may be executed in two or more ------------ counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 5. Descriptive Headings. The headings herein are inserted for convenience -------------------- of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Termination. 2 IN WITNESS WHEREOF, the parties hereto have executed this Termination as of the date first above written. MARINER POST-ACUTE NETWORK, INC. By: /s/ Francis W. Cash -------------------------------------- Name: Francis W. Cash Title: Date: January 5, 2000 APOLLO MANAGEMENT, L.P., on behalf of one or more managed investment funds By: AIF III Management, Inc. Its General Partner By: /s/ Michael D. Weiner ---------------------------------------- Name: Michael D. Weiner Title: Vice President Date: December 20, 1999 APOLLO INVESTMENT FUND III, L.P. By: Apollo Advisors II, L.P. Its General Partner By: Apollo Capital Management II, Inc. Its General Partner By: /s/ Michael D. Weiner ---------------------------------------- Name: Michael D. Weiner Title: Vice President 13,100,370 Shares of Common Stock Date: December 20, 1999 3 APOLLO UK PARTNERS III, L.P. By: Apollo Advisors II, L.P. Its General Partner By: Apollo Capital Management II, Inc. Its General Partner By: /s/ Michael D. Weiner ---------------------------------------- Name: Michael D. Weiner Title: Vice President 484,188 Shares of Common Stock Date: December 20, 1999 APOLLO OVERSEAS PARTNERS III, L.P. By: Apollo Advisors II, L.P. Its General Partner By: Apollo Capital Management II, Inc. Its General Partner By: /s/ Michael D. Weiner ---------------------------------------- Name: Michael D. Weiner Title: Vice President 783,033 Shares of Common Stock Date: December 20, 1999 4 CHASE EQUITY ASSOCIATES, L.P. By: Chase Capital Partners Its General Partner By: /s/ Christopher C. Behrens ---------------------------------------- Partner 2,592,594 Shares of Common Stock Date: December 30, 1999 DRAX HOLDINGS L.P. By: Inman Corporation Its General Partner By: /s/ Linda Hamilton ------------------------------------- Name: Linda Hamilton Title: Executive Vice President 75,000 Shares of Common Stock Date: December 30, 1999 5 WALNUT GROWTH PARTNERS LIMITED PARTNERSHIP By: Walnut GP, L.L.C. Its General Partner By: Walnut Funds, Inc. By: Joel Kanter President By: /s/ Joel Kanter ---------------------------------- Managing Director 74,073 Shares of Common Stock Date: December 28, 1999 6 PATRICIAN CORPORATION (as successor to Healthcare Equity Partners, L.P., Healthcare Equity QP Partners, L.P., Key Capital Corporation, and Key Equity Partners 97) By: /s/ John Power --------------------------------- Its: President 1,111,113 Shares of Common Stock Date: January 5, 2000 7 EX-10.94 10 EMPLOYMENT AGREEMENT EXHIBIT 10.94 EMPLOYMENT AGREEMENT Employment Agreement dated as of September 8, 1999 between Francis W. Cash (the "Executive") and Mariner Post-Acute Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as its Chairman of the Board, President and Chief Executive Officer, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company. NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall become effective on September 8, 1999 ---- (the "Effective Date"). This Agreement is for the three-year period (the "Term") commencing on the Effective Date and terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the third anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than six (6) months prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as Chairman -------- of the Board and Chief Executive Officer of the Company and, pending the appointment of a President, President of the Company or in such other senior executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. Notwithstanding the preceding sentence, nothing contained herein shall prevent the Executive from serving as a director of any company or other entity, provided, that, the Executive does not devote a material amount of -------- ---- his time to such service or participate in the management or operation of such entity. The Executive shall report to the Board and, subject to the powers, authorities and responsibilities vested in the Company's Board under the General Corporation Law of the State of Delaware and in duly constituted committees of the Board, the Executive shall have responsibility and authority for the overall strategic policies, management and leadership of the Company. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of Chairman of the Board, President and Chief Executive Officer) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at the principal executive offices of the Company, except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder ----------- shall be $800,000 a year, payable monthly. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $800,000 a year. (b) Annual Bonus. The Company shall provide the Executive ------------ with an annual bonus plan providing the Executive with an opportunity to earn an annual bonus equal to between fifty percent (50%) and one hundred fifty percent (150%) of his base salary if the Company achieves for the relevant year certain financial targets established pursuant to such plan. (c) Relocation Bonus. On the Effective Date, in ---------------- consideration of the Executive's relocation to Atlanta, Georgia, the Company shall pay to the Executive $200,000 (subject to any applicable payroll or other taxes required to be withheld). 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior executive officers. 8. Business Expenses. The Executive shall be reimbursed for all ----------------- ordinary and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. The Executive shall receive an automobile allowance of $1,000 per month during the term of this Agreement. 9. Pension and Welfare Benefits. ---------------------------- (a) Except as set forth in Section 9(b), during the Term, the Executive shall be eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to senior officers of the Company generally. 2 (b) From September 8, 1999, until March 31, 2000, the Company shall either (i) assume or (ii) reimburse the Executive for the cost of obtaining continued coverage under the life insurance and long-term disability plans under which the Executive was covered while employed by Red Roof Inns, Inc.; provided, that, the aggregate amount of any such assumed payments or --------- ---- reimbursements shall not exceed $20,000 per year. Unless the Executive provides the Company with a written election to the contrary on or prior to March 31, 2000, the obligations of the Company set forth in the first sentence of this clause (b) shall continue throughout the Term, and the Executive shall not participate in the life insurance and long-term disability plans otherwise maintained by the Company. If, on or prior to March 31, 2000, the Executive so elects by written notice provided to the Company, the obligations of the Company set forth in the first sentence of this clause (b) shall terminate as of March 31, 2000, and from that date forward, during the Term, the Executive shall participate in such life insurance and long-term disability plans as may be maintained from time to time during the Term by the Company for the benefit of the employees of the Company, to the extent and in such manner available to other executive officers of the Company and subject to the terms and provisions of such plans and programs. 10. Value Creation Incentive Plan. The Company, pursuant to the terms ----------------------------- of a value creation incentive plan substantially similar to the terms set forth in Appendix A attached hereto (and as approved by the Compensation Committee of the Board of Directors), shall provide the Executive with an opportunity to earn additional compensation if the Company achieves certain financial targets established pursuant to such plan. 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be ------- terminated without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any twelve (12) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate -------------------------- the Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or 3 mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct described in Section 15) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. Notwithstanding the foregoing, the Executive's employment hereunder shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board, other than the Executive, at a meeting of the Board at which the Executive recuses himself (after written notice to the Executive and a reasonable opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive should be terminated for Cause. (d) Termination by the Executive. The Executive shall be ---------------------------- entitled to terminate his employment hereunder (A) for Good Reason or (B) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence (without the Executive's express written consent), within twenty-four (24) months after a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) any change in the Executive's title (other than upon the appointment of another person to serve as the President of the Company), authorities, responsibilities (including reporting responsibilities) which, in the Executive's reasonable judgment, represents a significant adverse change from his status, title, position or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in 4 Section 11(i)(i) below) in control of the Company provided in no event -------- shall any such reduction reduce the Executive's base salary below $800,000; (III) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (IV) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(g) below; for purposes of this Agreement, no such purported termination shall be effective. The Executive's continued employment for six (6) months after any act or failure to act constituting Good Reason hereunder shall constitute the Executive's consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to --------------------- resign from his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the 5 preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. If the Executive terminates his employment for other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the $200,000 that he received prior to the Effective Date for relocation and related expenses. (f) Bankruptcy. If the Company shall commence a voluntary ---------- case concerning itself under Title 11 of the United States Code entitled "Bankruptcy", as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"), or an involuntary case is commenced against the Company and the petition is not dismissed within sixty (60) days after commencement of the case, or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Company, or the Company commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company, or there is commenced against the Company any such proceeding which remains undismissed for a period of sixty (60) days, then the Executive, in his sole discretion, may ask the Company to seek to have the court administering such case or proceeding to approve this Agreement. The Company shall use its best efforts to file an appropriate motion seeking such approval within 30 days after receipt of such notice from the Executive. If (i) the Company does not file such a motion seeking approval of this Agreement within 30 days after receipt of notice from the Executive or (ii) the court administering such case or proceeding does not approve this Agreement within 60 days after the motion seeking such approval is filed, the Executive shall have no further duty to perform under this Agreement, may cease his performance under this Agreement and upon ceasing his performance under this Agreement in accordance with this Section 11(f), the Executive shall be entitled to the benefits and payments set forth in Section 12(e) hereof. (g) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (h) Date of Termination. "Date of Termination" shall mean ------------------- (i) if the Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination (which, in the case of a termination for Good Reason shall not be less than fifteen (15) nor more than sixty (60) days from the date such Notice of Termination is given, and in the case of a termination for any 6 other reason shall not be less than thirty (30) days (sixty (60) days in the case of a termination under Subsection (e) hereof) from the date such Notice of Termination is given). (i) Change in Control. For purposes of this Agreement, a ----------------- Change in Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, L.P., any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i) of this Section 11(i)) whose election or designation to the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement dated as of November 4, 1997, as amended from time to time, (B) made by Apollo, or (C) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation in which (A) no person acquires or beneficially owns a percentage of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation greater than the percentage of such securities beneficially owned by Apollo or (B) both (1) the voting securities of the Company outstanding immediately prior thereto continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity 7 outstanding immediately after such merger or consolidation and (2) no person (other than Apollo) acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or a agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (j) Resignation as Member of Board. If the Executive's ------------------------------ employment by the Company is terminated for any reason, the Executive hereby agrees that he shall simultaneously submit his resignation as a member of the Board in writing on or before the Date of Termination. If the Executive fails to submit such required resignation in writing, the provisions of this Section 11(j) may be deemed by the Company to constitute the Executive's written resignation as a member of the Board effective as of the Date of Termination. (k) Return of Property. When the Executive shall cease to ------------------ be employed by the Company, the Executive shall promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain -------- ------- copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability, Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his full salary at the rate then in effect for such period until his employment is terminated pursuant to Section 11(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any amounts due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. 8 (c) If the Executive's employment shall be terminated by the Company for Cause or by the Executive for other than (i) Good Reason or (ii) clause (B) of the first sentence of Section 11(d) hereof, the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If (A) following a Change in Control the Company shall terminate the Executive's employment other than for Cause or otherwise repudiate this Agreement, or (B) following a Change in Control the Executive shall terminate his employment for Good Reason, then (i) the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's annual salary rate in effect as of the Date of Termination and (2) the average of the annual bonuses actually paid (including $0 if no such bonus is paid and excluding the relocation bonus paid to Executive pursuant to Section 6(c) hereof) to the Executive by the Company with respect to the two full fiscal years which immediately precede the year of the Term in which the Date of Termination occurs provided, that, for purposes of this Agreement, if the -------- ---- Date of Termination occurs after the end of the first full fiscal year, but before the end of the second full fiscal year that ends after the Effective Date, then such single year's bonus shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of this -------- ------- Agreement, if the Date of Termination occurs before the end of the first full fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the amount, if any, payable pursuant to Section 12(d)(iii), and (B) the number three (3); (iii) if it is determined that the Company has met financial objectives established pursuant to its Incentive Compensation Plan and to pay bonuses to eligible employees for the fiscal year within which the Date of Termination occurs, the Company shall pay the Executive, as long as the Executive is otherwise eligible for such payment, his bonus prorated for the period beginning on the first day of the fiscal year in which the Date of Termination occurs through the Date of Termination, payable at the same time and in the same manner as the Company customarily pays other bonuses; 9 (iv) the Company shall (x) continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health, disability and similar welfare benefit plans for a period equal to thirty-six (36) months, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the remainder of the Term. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report to the Company any such benefits actually received by him; and (v) the payments provided for in this Section 12(d) (other than Sections 12(d)(iii) and 12(d)(iv)) shall be made not later than the thirtieth day following the Date of Termination, provided, however, that if the Company so elects, the Executive hereby agrees to enter into a consulting agreement reasonably satisfactory to the Executive, pursuant to which the Executive shall render consulting services to the Company for a period of eighteen (18) months following the Date of Termination and the Company shall pay to the Executive, in eighteen (18) equal monthly installments, the aggregate amount of $500,000 and the liquidated damages due to the Executive pursuant to Section 12(d)(ii) shall be reduced by $500,000. (e) If prior to any Change of Control the Company shall terminate the Executive's employment without Cause or otherwise repudiate this Agreement or the Executive shall cease to perform his duties under this Agreement pursuant to Section 11(f) or terminate his employment under clause (B) of the first sentence of Section 11(d) hereof, then (i) the Company shall pay the Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the number two (2); such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs and ending with the month corresponding to the end of the Term hereunder. Payments otherwise receivable by the Executive pursuant to this Section 12(e)(ii) shall be reduced to the extent compensation is 10 actually received by the Executive from a subsequent employer during the period during which the Company is required to make such payments, and the Executive shall report to the Company any such payments actually received by him; and (iii) the Company shall (x) continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, disability and similar welfare benefit plans for a period equal to twenty-four (24) months, and (y) provide the benefits which the Executive would have been entitled to receive pursuant to any supplemental retirement plan maintained by the Company had his employment continued at the rate of compensation specified herein for the remainder of the Term. Benefits otherwise receivable by the Executive pursuant to clause (x) of this Section 12(e)(iii) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report to the Company any such benefits actually received by him. (f) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(d) and 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (g) Release. Prior to making any payment pursuant to Sections ------- 12(d)(ii) , 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, (i) an agreement to be bound by the terms of Section 15 of this Agreement and (ii) a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), other than claims for payments or benefits hereunder or claims for indemnification for director or officer liability, in connection with the termination of the Executive's employment with the Company and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. The Company agrees and covenants that it will (i) provide the Executive with customary director and officer indemnification; and (ii) maintain director and officer liability insurance which is of a type customarily maintained by companies of similar size and with a similar business as the Company. 11 (b) The Executive represents and warrants that he is not a party to any agreement or instrument which would prevent him from entering into or performing his duties in any way under this Agreement. The Executive agrees and covenants that he will obtain, and submit to, such physical examinations as may be necessary to facilitate the Company obtaining an insurance policy for its benefit insuring the life of the Executive. 14. Successors; Binding Agreement. ----------------------------- (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. (b) This Agreement is a personal contract and the rights and interests of the Executive hereunder may not be sold, transferred, assigned, pledged, encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period of five (5) years after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, information pertaining 12 to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and, if (i) the Executive's employment is terminated by the Executive for other than Good Reason or (ii) the Executive shall cease to perform his duties under this Agreement other than pursuant to Section 11(f), for a period of two (2) years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if (i) the Executive's employment is terminated by the Executive for other than Good Reason or (ii) the Executive shall cease to perform his duties under this Agreement other than pursuant to Section 11(f), for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of a center or facility operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 13 16. Tax Considerations. ------------------- Notwithstanding anything herein to the contrary, in the event any payments to the Executive hereunder ("Total Payments") are determined by the Company to be subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any similar federal or state excise tax, FICA tax, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest or penalties are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay to the Executive at the time specified in Section 12(d)(v), an additional amount (the "Gross-Up Payment") such that after the payment by the Executive of all federal, state, or local income taxes, Excise Taxes, FICA taxes, or other taxes (including any interest or penalties imposed with respect thereto) imposed upon the receipt of the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the Total Payments. If the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of employment, the Executive shall repay to the Company, at the time the reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction. If the Excise Tax is determined to exceed the amount taken into account hereunder at the time of termination of employment, the Company shall make an additional Gross-Up Payment to the Executive in respect of such excess at the time the amount of such excess is finally determined. The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30) day period following the date on which he gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (a) give the Company any information reasonably requested by the Company relating to such claim; (b) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (c) cooperate with the Company in good faith in order to effectively contest such claim; and (d) permit the Company to participate in any proceedings relating to such claim; 14 provided, however, that the Company shall bear and pay directly all costs and - -------- ------- expenses (including legal and accounting fees and additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax, FICA tax, or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 16, the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings, and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction, and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, other issues raised by the Internal Revenue Service or any other taxing authority. If any such claim referred to in this Section 16 is made by the Internal Revenue Service and the Company does not request the Executive to contest the claim within the thirty (30) day period following notice of the claim, the Company shall pay to the Executive the amount on any Gross-Up Payment owed to the Executive, but not previously paid pursuant to this Section 16, immediately upon the expiration of such thirty (30) day period. If any such claim is made by the Internal Revenue Service and the Company requests the Executive to contest such claim, but does not advance the amount of such claim to the Executive for purposes of such contest, the Company shall pay to the Executive the amount of any Gross-Up Payment owed to the Executive, but not previously paid under the provisions of this Section 16, within five (5) business days of a Final Determination of the liability of the Executive for such Excise Tax. For purposes of this Agreement, a "Final Determination" shall be deemed to occur with respect to a claim when (i) there is a decision, judgment, decree, or other order by any court of competent jurisdiction, which decision, judgment, decree, or other order has become final, i.e., all allowable appeals pursuant to this Section 16 have been exhausted by either party to the action, (ii) there is a closing agreement made under Section 7121 of the Code, or (iii) the time for instituting a claim for refund has expired, or if a claim was filed, the time for instituting suit with respect thereto has expired. If, after the receipt by the Executive of an amount advanced by the Company pursuant to this Section 16, the Executive becomes entitled to receive any refund with respect to such claim, the 15 Executive shall (subject to the Company's complying with the requirements of this Section 16) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If after the receipt by the Executive of an amount advanced by the Company pursuant to this Section 16, a determination is made by the Internal Revenue Service that the Executive is not entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification, Waiver. No provision of this --------------------------------- Agreement may be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing ------- and shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To the Executive at: Francis W. Cash 360 Devils Bight Naples, Florida 34103 To the Company at: Mariner Post-Acute Network, Inc. One Ravinia Drive Suite 1500 Atlanta, Georgia 30346 Attn: General Counsel Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 16 20. Severability. If any provision of this Agreement or the ------------ application of any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the ------------ parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law; Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23 Dispute Resolution. The Executive and the Company shall not ------------------ initiate legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the Mediator. 24 Headings. All descriptive headings of sections and paragraphs in -------- this Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25 Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 17 26 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MARINER POST-ACUTE NETWORK, INC. BY:_______________________________________ NAME:_____________________________________ TITLE:____________________________________ THE EXECUTIVE __________________________________________ Francis W. Cash 18 APPENDIX A ---------- Value Creation Incentive Plan Objectives ..................................... Create incentive to maximize cash flow (EBITDA) while optimizing investment in working capital and capital expenditures. Term of Plan .................................... Three years -- FYE 9/30/00 through FYE 9/30/02 Baseline EBITDA ................................. To be determined based on operating results during FY99QIV subject to a pro forma adjustment to reflect a reorganization of MHG such that 100% of MHG's EBITDA is no longer included in MPN's consolidated EBITDA. Cash Basis EBITDA ............................... Earnings before depreciation, interest and taxes less increase in accounts receivable. New Investment .................................. Excess of capital expenditures and acquisitions over the sum of maintenance capital expenditures and the proceeds from any divestitures during the Term of the Plan). Target ROI ...................................... 15% (Effectively, the Baseline EBITDA is increased by 15% of the amount of New Investment in the business during the Term of the Plan). Valuation Multiple .............................. 8x Cash Basis EBITDA Total Value Created ............................. 8x {FY02 Cash Basis EBITDA-Baseline EBITDA-15% of New Investment Executive's Share ............................... 2.5% of Total Value Created Vesting ......................................... One-third of award shall vest on each of 9/30/00, 9/30/01 and 9/30/02 subject to accelerated vesting of the entire award upon a Change of Control. Conversion of Plan .............................. Upon mutual agreement of Executive and Company, amounts earned under the Value Creation Incentive Plan can be converted into employee stock options. It is anticipated that this would only be considered upon the completion of the restructuring of MPN's capital structure currently in progress.
19 EX-10.95 11 DEBTOR-IN-POSSESSION CREDIT AGREEMENT EXECUTION EXHIBIT 10.95 DEBTOR-IN-POSSESSION CREDIT AGREEMENT dated as of January 20, 2000 among MARINER HEALTH GROUP, INC., and EACH OF THE SUBSIDIARIES OF MARINER HEALTH GROUP, INC. PARTY HERETO, each as debtor and debtor-in-possession, THE LENDERS PARTY HERETO, THE LC ISSUING BANKS PARTY HERETO, FIRST UNION NATIONAL BANK, as Syndication Agent, PNC CAPITAL MARKETS, INC. and FIRST UNION SECURITIES, INC., as Co-Arrangers, and PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent and Collateral Agent ARTICLE 1. Definitions................................................................................. 1 Section 1.01 Defined Terms............................................................................... 1 Section 1.02 Accounting Terms and Determinations......................................................... 25 Section 1.03 Other Definitional Provisions............................................................... 25 ARTICLE 2. The Credit Facilities....................................................................... 25 Section 2.01 Commitments to Lend......................................................................... 25 Section 2.02 Notice of Borrowing......................................................................... 27 Section 2.03 Notice to Lenders; Funding of Loans......................................................... 27 Section 2.04 Interest Rate; Default Rate................................................................. 28 Section 2.05 Letters of Credit........................................................................... 28 Section 2.06 Fees........................................................................................ 36 Section 2.07 Final Maturity of Loans..................................................................... 36 Section 2.08 Unscheduled Mandatory Prepayments of Loans; Reduction of Commitments....................... 37 Section 2.09 Optional Prepayments........................................................................ 38 Section 2.10 Termination or Reduction of Commitments..................................................... 39 Section 2.11 General Provisions as to Payments........................................................... 39 Section 2.12 Computation of Interest and Fees............................................................ 40 Section 2.13 Superpriority Nature of Obligations......................................................... 40 Section 2.14 Joint and Several Liability; Payment Indemnifications....................................... 41 ARTICLE 3. Conditions.................................................................................. 41 Section 3.01 Effectiveness of this Agreement; Closing.................................................... 41 Section 3.02 Credit Events............................................................................... 45 ARTICLE 4. Representations and Warranties.............................................................. 46 Section 4.01 Corporate Existence and Power............................................................... 46 Section 4.02 Corporate and Governmental Authorization; No Contravention.................................. 47 Section 4.03 Binding Effect.............................................................................. 47 Section 4.04 Security Interests.......................................................................... 47 Section 4.05 Financial Information....................................................................... 47 Section 4.06 Litigation.................................................................................. 48 Section 4.07 Compliance with ERISA....................................................................... 48 Section 4.08 Taxes....................................................................................... 48
i Section 4.09 Compliance with Laws........................................................................ 48 Section 4.10 No Regulatory Restrictions on Borrowing..................................................... 49 Section 4.11 Environmental Matters....................................................................... 50 Section 4.12 Full Disclosure............................................................................. 50 Section 4.13 Information as to Equity Interests and Instruments Owned by MHG Companies................... 50 Section 4.14 Representations in Other Financing Documents................................................ 50 Section 4.15 Year 2000 Compliance........................................................................ 50 Section 4.16 Margin Stock................................................................................ 51 Section 4.17 Representations Concerning Cash Management System; Credit and Collection Policy............. 51 Section 4.18 Prepetition Indebtedness.................................................................... 51 Section 4.19 Chapter 11 Cases............................................................................ 51 Section 4.20 Cash Budget; Year 2000 DIP Budget........................................................... 51 Section 4.21 Liens....................................................................................... 51 Section 4.22 Government Claims........................................................................... 52 Section 4.23 Management Employees........................................................................ 52 ARTICLE 5. Affirmative Covenants....................................................................... 52 Section 5.01 Information................................................................................. 52 Section 5.02 Maintenance of Property..................................................................... 57 Section 5.03 Insurance................................................................................... 57 Section 5.04 Compliance with Law......................................................................... 57 Section 5.05 Maintenance of Existence, Rights, Etc....................................................... 58 Section 5.06 Use of Proceeds and Letters of Credit....................................................... 58 Section 5.07 Future Actions with Respect to Collateral................................................... 58 Section 5.08 Casualty Events............................................................................. 60 Section 5.09 Cash Management System; Credit and Collection Policy........................................ 61 Section 5.10 Certain Orders.............................................................................. 61 Section 5.11 Inspection Rights; Lender Meeting........................................................... 61 Section 5.12 Creditor Schedule........................................................................... 62 Section 5.13 Transition Management....................................................................... 62 Section 5.14 Overhead Payments........................................................................... 63 Section 5.15 Post Closing Deliveries..................................................................... 63
ii ARTICLE 6. Financial Covenants......................................................................... 64 Section 6.01 Consolidated EBITDAR........................................................................ 64 Section 6.02 Nursing Home Occupancy...................................................................... 64 Section 6.03 Receivables................................................................................. 65 Section 6.04 Compliance with Cash Budget................................................................. 65 Section 6.05 Capital Expenditures........................................................................ 65 ARTICLE 7. Negative Covenants.......................................................................... 66 Section 7.01 Limitation on Debt.......................................................................... 66 Section 7.02 Negative Pledge............................................................................. 67 Section 7.03 Consolidations, Mergers and Asset Sales..................................................... 68 Section 7.04 Limitations on Investments.................................................................. 68 Section 7.05 Limitations on Transactions with Affiliates................................................. 69 Section 7.06 Limitation on Restrictions Affecting Subsidiaries........................................... 69 Section 7.07 Restricted Payments......................................................................... 69 Section 7.08 No Modification of Certain Documents Without Consent........................................ 70 Section 7.09 No Change of Fiscal Periods................................................................. 71 Section 7.10 Margin Stock................................................................................ 71 Section 7.11 Limitation on Business...................................................................... 71 Section 7.12 Leases...................................................................................... 71 Section 7.13 Limitation on Cash Not Held in Collateral Accounts or Concentration Accounts................ 71 Section 7.14 Chapter 11 Claims........................................................................... 71 Section 7.15 Limitation on Repayments; Prepetition Obligations........................................... 72 Section 7.16 Agreements.................................................................................. 72 Section 7.17 Management Employees........................................................................ 72 ARTICLE 8. Defaults.................................................................................... 72 Section 8.01 Events of Default........................................................................... 72 Section 8.02 Notice of Default........................................................................... 76 Section 8.03 Enforcement Notice.......................................................................... 76 Section 8.04 Cash Cover.................................................................................. 76 ARTICLE 9. The Agents.................................................................................. 77 Section 9.01 Appointment and Authorization............................................................... 77
iii Section 9.02 Agents and Affiliates....................................................................... 77 Section 9.03 Action by Agents............................................................................ 77 Section 9.04 Delegation of Duties; Consultation with Experts............................................. 78 Section 9.05 Liability of Agents......................................................................... 78 Section 9.06 Indemnification............................................................................. 79 Section 9.07 Credit Decision............................................................................. 79 Section 9.08 Successor Agents............................................................................ 80 ARTICLE 10. Changes In Circumstances.................................................................... 80 Section 10.01 Increased Cost and Reduced Return........................................................... 80 Section 10.02 Taxes....................................................................................... 81 ARTICLE 11. Miscellaneous............................................................................... 83 Section 11.01 Notices..................................................................................... 83 Section 11.02 No Waiver................................................................................... 83 Section 11.03 Expenses; Indemnification................................................................... 83 Section 11.04 Sharing of Set-offs......................................................................... 87 Section 11.05 Amendments and Waivers...................................................................... 87 Section 11.06 Successors and Assigns...................................................................... 89 Section 11.07 Margin Stock................................................................................ 91 Section 11.08 Governing Law; Submission to Jurisdiction................................................... 91 Section 11.09 Counterparts; Integration................................................................... 92 Section 11.10 WAIVER OF JURY TRIAL........................................................................ 92 Section 11.11 Confidentiality............................................................................. 92 Section 11.12 Parties Including Trustees; Court Proceedings............................................... 93 Section 11.13 MHG Appointed Attorney-In-Fact.............................................................. 94 Section 11.14 No Waiver................................................................................... 94 Section 11.15 Survival of Agreements...................................................................... 94
iv SCHEDULES - --------- Commitment Schedule Schedule 1 - [Intentionally Omitted] Schedule 2 - [Intentionally Omitted] Schedule 3 - Subsidiaries; Excluded Subsidiaries Schedule 4 - Certain Transactions Schedule 5 - [Intentionally Omitted] Schedule 6 - Prepetition Indebtedness Schedule 7 - Existing Liens Schedule 8 - Existing Investments Schedule 9 - Material Contracts and Approvals Schedule 10 - Cash Management System Schedule 11 - [Intentionally Omitted] Schedule 12 - Healthcare Facilities; Nursing Home Facilities Schedule 13 - Prepetition Liens on Accounts Schedule 14 - [Intentionally Omitted] Schedule 15 - Management Employees -v- EXHIBITS -------- Exhibit A - Form of Tranche A Note Exhibit B - Form of Tranche B Note Exhibit C - Form of Notice of Borrowing Exhibit D - Form of LC Request Exhibit E - Form of Prepayment Notice Exhibit F - Form of Security Agreement Exhibit G - Financial Officer's Certificate Exhibit H - Form of Opinion of Counsel for the Borrowers Exhibit I - Form of Assignment Agreement Exhibit J - Form of Interim Borrowing Order Exhibit K - Form of Borrowing Order Exhibit L - Form of Healthcare Status Report vi DEBTOR-IN-POSSESSION CREDIT AGREEMENT This DEBTOR-IN-POSSESSION CREDIT AGREEMENT is dated as of January 20, 2000 and entered into by and among MARINER HEALTH GROUP, INC., a Delaware corporation ("MHG"), as debtor and debtor-in-possession, and EACH OF MHG'S SUBSIDIARIES LISTED ON THE SIGNATURE PAGES HEREOF, each as debtor and debtor-in- possession (each such Subsidiary and MHG individually referred to herein as a "Borrower" and, collectively, on a joint and several basis, as the "Borrowers"); THE LENDERS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "Lender" and collectively as "Lenders"); FIRST UNION NATIONAL BANK ("First Union"), as Syndication Agent; PNC CAPITAL MARKETS, INC. and FIRST UNION SECURITIES, INC., as Co-Arrangers; and PNC BANK, NATIONAL ASSOCIATION ("PNC"), as Collateral Agent and Administrative Agent, and as an issuing bank for Letters of Credit hereunder. RECITALS WHEREAS, on January 18, 2000 (the "Petition Date"), each Borrower filed a voluntary petition for relief under the Bankruptcy Code (such term and other capitalized terms used in these Recitals without definition have the meanings set forth in Section 1.01 of this Agreement) with the United States Bankruptcy Court for the District of Delaware (the "Court") (such proceedings being jointly administered under Case No. 00-215 (MFW) are hereinafter referred to as the "Chapter 11 Cases"). Each Borrower continues to operate its businesses and manage its properties as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code; and WHEREAS, the Borrowers have requested Lenders to provide revolving credit facilities in an aggregate amount of up to $50,000,000 on a post-petition basis on the terms and conditions set forth herein; and WHEREAS, Lenders are willing to provide such financing only if, as set forth herein, all Obligations (i) shall constitute allowed super-priority administrative expense claims in the Chapter 11 Cases and (ii) are secured by a first priority Lien on substantially all of the Borrowers' real, personal and mixed property, including a pledge of all of the capital stock of each of the Subsidiaries of each Borrower; NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrowers, Lenders and Agents hereby agree as follows: ARTICLE 1. Definitions Section 1.01 Defined Terms. The following terms, as used herein, ------------- have the following meanings: 1 "Account Party" means the party identified as the Account Party for a Letter of Credit pursuant to Section 2.05(c). "Accounts Receivable" means any right to payment that is due within one year from any invoice date for goods sold or leased or for services rendered no matter how evidenced, all as determined in conformity with GAAP. "Adjusted Consolidated Net Income" means, for any period, Consolidated Net Income for such period, adjusted to exclude therefrom, without duplication, (i) gains or losses from Asset Sales net of related tax effects and (ii) any net income (or loss) of any Person other than a Borrower in which any Person other than a Borrower has an ownership interest, except that such Person's net income shall not be excluded if (and to the extent that) such Person pays dividends or distributions in cash to a Borrower during such period. "Administrative Agent" means PNC, in its capacity as Administrative Agent for the Lenders under the Financing Documents, and any successor thereto in such capacity. "Administrative Questionnaire" means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent, duly completed by such Lender and submitted to the Administrative Agent (with a copy to the Borrowers). "Affiliate" means any Person (other than a Subsidiary) directly or indirectly controlling, controlled by or under common control with MHG. As used in this definition, the term "control" means possession, directly or indirectly, of the power to vote 10% or more of any class of voting securities of a Person or to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Notwithstanding anything to the contrary in this definition, no individual shall be deemed an Affiliate of any Person solely by reason of his or her being an employee, officer or director of such Person. "Agents" means the Syndication Agent, the Administrative Agent and the Collateral Agent, collectively. "Aggregate LC Exposure" means, at any time, the sum, without duplication, of (i) the aggregate amount that is (or may thereafter become) available for drawing under all Letters of Credit outstanding at such time and (ii) the aggregate unpaid principal amount of all LC Reimbursement Obligations outstanding at such time. "Agreement" means this Debtor-In-Possession Credit Agreement dated as of January 18, 2000, as it may hereafter be amended, supplemented, extended or otherwise modified from time to time. "Applicable Laws" means all applicable provisions of constitutions, statutes, laws, rules, treaties, regulations and orders of all Governmental Authorities and all applicable orders, rules and decrees of courts and arbitrators. 2 "Approvals" has the meaning set forth in Section 4.09(c). "Asset Sale" means any sale, lease or other transfer (including any such transaction effected by way of merger or consolidation) of any asset by any MHG Company, including without limitation any sale-leaseback transaction, whether or not involving a capital lease, but excluding (i) any sale of inventory, cash, cash equivalents and other cash management investments and obsolete, unused or unnecessary equipment, in each case in the ordinary course of business, (ii) any transfer of assets by any Borrower to another Borrower, (iii) any sub-lease, in the ordinary course of business and consistent with MHG's past practices, to another Person (for use by such Person in connection with a business related to the operation of the applicable Healthcare Facility) of a portion of the floor space and related property at any Healthcare Facility, and (iv) any sale of equipment or other goods for which the sales price does not exceed $250,000 for any single sale or related series of sales, and $500,000 for all such sales in the aggregate. "Assignee" has the meaning set forth in Section 11.06(c). "Assignment Agreement" means an Assignment Agreement in substantially the form of Exhibit I annexed hereto. --------- "Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Borrower" and "Borrowers" have the respective meanings set forth in the introduction to this Agreement. "Borrowing" means an aggregation of Tranche A Loans or of Tranche B Loans, as the case may be, made or to be made to the Borrowers by the Lenders pursuant to Section 2.01(a) or 2.01(b), respectively, on the same day. "Borrowing Base" means, as of any date of determination during any calendar month, the sum of (i) $7,500,000 and (ii) the amount shown in the Year 2000 DIP Budget's projected monthly balance sheets as "Working Capital Facility" borrowings for such calendar month. "Borrowing Order" means an order of the Court entered in the Chapter 11 Cases after a final hearing under Bankruptcy Rule 4001(c)(2) in the form attached hereto as Exhibit K with any modifications thereto on or prior to the --------- entry thereof as are approved by Agents in their sole discretion, as the same may thereafter be amended, supplemented, extended or otherwise modified from time to time with the express written consent or joinder of Required Lenders. "Business Day" means any day except a Saturday, Sunday or other day on which either (i) in the case of any action to be taken by the Court or any filing with the Court, the Court is unable or unwilling to act or is observing a "legal holiday" as provided in Rule 9006(a) of the Federal Rules of 3 Bankruptcy Procedure, or (ii) in all other cases, commercial banks in Pittsburgh, Pennsylvania, Charlotte, North Carolina, or New York, New York are authorized by law to close. "Capital Lease" means a lease that would be capitalized on a balance sheet of the lessee prepared in accordance with GAAP. "Carve-Out" has the meaning set forth in Section 2.13. "Carve-Out Notice" has the meaning set forth in Section 2.13. "Cash Balance" means, as at any time of determination, the sum of the dollar amount of all money, currency, Temporary Cash Investments and credit balances held or carried in the Concentration Accounts, after giving effect to checks issued and outstanding and any administrative holds assessed by the financial institution maintaining the Concentration Accounts. "Cash Budget" means the consolidated cash forecast for the Borrowers for the 13-week period commencing with the week beginning January 8, 2000, delivered by the Borrowers to the Agents pursuant to Section 3.01(r), as it may be amended or supplemented pursuant to Section 5.01(q). "Cash Management System" means the cash management system of the Borrowers described in Schedule 10 hereto. ----------- "Casualty Event" means (i) any Condemnation Event with respect to any property owned by or leased to any MHG Company or (ii) any damage to, or destruction of, any property owned by or leased to any MHG Company. "Casualty Proceeds" means (i) with respect to any Condemnation Event, all awards or payments received by any MHG Company or the Collateral Agent by reason of such Condemnation Event, including all amounts received with respect to any transfer in lieu or anticipation of such Condemnation Event or in settlement of any proceeding relating to such Condemnation Event and (ii) with respect to any other Casualty Event, all insurance proceeds or payments (excluding payments with respect to business interruption) which any MHG Company or the Collateral Agent receive by reason of such other Casualty Event. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, and the regulations promulgated thereunder. "Chapter 11 Cases" has the meaning set forth in the recitals to this Agreement. "Closing" means the closing hereunder on the Closing Date. "Closing Date" means the date on which the Agents shall have received the documents specified in or pursuant to Section 3.01 and the other conditions specified in Section 3.01 shall have been satisfied or waived in accordance with the terms hereof. 4 "Co-Arrangers" means PNC Capital Markets, Inc. and First Union Securities, Inc. in their capacities as Co-Arrangers under the Financing Documents. "Collateral" means all property, real and personal, tangible and intangible, with respect to which Liens are created or purportedly created for the benefit of Lenders pursuant to the Collateral Documents. "Collateral Agent" means PNC, in its capacity as Collateral Agent for the holders of the Secured Obligations under the Collateral Documents, and any successor thereto in such capacity. "Collateral Documents" means the Security Agreement, the Mortgages and all other supplemental or additional security agreements, mortgages or similar instruments delivered pursuant hereto or thereto or pursuant to an applicable order of the Court. "Commitment" means, as to any Lender, the aggregate amount of such Lender's Tranche A Commitment and Tranche B Commitment, and "Commitments" means all such Commitments of all Lenders, in the aggregate. "Commitment Schedule" means the Commitment Schedule attached hereto. "Commitment Termination Date" means the earliest of (i) the Stated Maturity Date, (ii) the effective date of a joint plan of reorganization in the Chapter 11 Cases, as specified in such plan, (iii) the date of (x) termination of the Borrowers' exclusive right to file a plan or plans of reorganization in any of the Chapter 11 Cases other than as a result of the filing of a plan or plans of reorganization in the Chapter 11 Cases acceptable to the Required Lenders or (y) filing of any plan of reorganization or any modification to any previously filed plan of reorganization, in any such case without the prior written approval of the Required Lenders, (iv) the date of termination in whole of the Commitments pursuant to Article 8, (v) the date that is 15 days after the Petition Date, if neither the Interim Borrowing Order nor the Borrowing Order has been entered by the Court by such date; (vi) the date that is 30 days after the Petition Date if the Borrowing Order has not been entered by the Court by such date, unless Required Lenders agree in their sole discretion to extend such date by no more than 15 additional days; and (vii) the date of any sale, transfer or other disposition of all or substantially all of the assets or stock of the MHG Companies. "Concentration Accounts" means the Concentration Accounts for the Cash Management System as identified in Schedule 10 hereto. ----------- "Condemnation Event" means any condemnation or other taking or temporary or permanent requisition of any property, any interest therein or right appurtenant thereto, or any change of grade affecting any property, as the result of the exercise of any right of condemnation or eminent domain. A transfer to a governmental authority in lieu or anticipation of condemnation shall be deemed to be a Condemnation Event. 5 "Consolidated Capital Expenditures" means, for any period, the gross additions to property, plant and equipment and other capital expenditures of MHG and its Consolidated Subsidiaries for such period, as the same are or would be reflected in a consolidated statement of cash flows of MHG and its Consolidated Subsidiaries for such period. "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent deducted in determining Adjusted Consolidated Net Income for such period, the sum of (i) Consolidated Interest Expense, (ii) income tax expense and (iii) depreciation, amortization and other similar non-cash charges. "Consolidated EBITDAR" means, for any period, Consolidated EBITDA for such period plus, to the extent deducted in determining Consolidated EBITDA for such period, the sum (without duplication) of (i) Consolidated Rental Expense, (ii) Overhead Payments and (iii) non-cash compensation expense and minus (iv) any cash paid during such period in respect of non-cash compensation expense accrued during any prior period; provided that Consolidated EBITDAR shall be calculated so as to exclude the effect of any income or expense that (A) is classified as extraordinary, (B) is reported separately as an unusual or non-recurring item, (C) is attributable to discontinued operations or (D) represents the effect of an accounting change on prior periods, in each case in accordance with GAAP. "Consolidated Interest Expense" means, for any period, the interest expense of MHG and its Consolidated Subsidiaries, determined on a consolidated basis for such period; provided that Consolidated Interest Expense shall not (i) include interest capitalized in accordance with GAAP or (ii) be reduced by any interest income. "Consolidated Net Income" means, for any period, the net income of MHG and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "Consolidated Rental Expense" means, for any period, the total rental expense for operating leases of MHG and its Consolidated Subsidiaries, determined on a consolidated basis for such period; provided that Consolidated Rental Expense shall not be reduced by any rental income. "Consolidated Subsidiary" means, as to any Person at any date, any Subsidiary or other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. Unless otherwise specified, "Consolidated Subsidiary" means a Consolidated Subsidiary of MHG; provided that the Consolidated Subsidiaries of MHG shall not include any Excluded Subsidiaries. "Court" has the meaning set forth in the recitals to this Agreement. "Credit and Collection Policy" means the policies and procedures existing as of the Closing Date for the MHG Companies in respect of creating, administering and collecting accounts receivable, including without limitation the policy for creating reserves in accordance with GAAP 6 and writing down or writing off accounts receivables, delivered to the Agents on or prior to the Closing Date pursuant to Section 3.01(t). "Credit Event" means (i) the making of a Loan, (ii) the issuance of a Letter of Credit or (iii) the extension of the expiry date of a Letter of Credit. "Credit Exposure" means, as to any Lender, (i) at any time before the termination of its Commitment in its entirety, the amount of its Commitment at such time; or (ii) at any time thereafter, if the Commitments have terminated in their entirety, its Outstanding Credit Amount, all determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 11.06(c). "Credit Facilities" means the credit facilities provided to the Borrowers under Sections 2.01(a), 2.01(b) and 2.05 and the other provisions hereof relating to Loans and Letters of Credit. "Credit Parties" means the Borrowers, collectively. "Debt" of any Person means, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, (iv) all obligations of such Person as lessee under Capital Leases, (v) all obligations of such Person to purchase securities which arise out of or in connection with the sale of the same or substantially similar securities, (vi) all obligations of such Person (whether contingent or non-contingent) to reimburse any Lender or other Person in respect of amounts paid under a letter of credit, banker's acceptance or similar instrument, (vii) all obligations secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (viii) all Guarantees by such Person of obligations of another Person (each such Guarantee to constitute Debt in an amount equal to the maximum amount of such other Person's obligations Guaranteed thereby); provided that neither trade accounts payable nor amounts owed to patients or residents arising after the Petition Date in the ordinary course of business nor obligations arising after the Petition Date in the ordinary course of business in respect of insurance policies or performance or surety bonds which are not themselves Guarantees of Debt (nor drafts, acceptances or similar instruments evidencing the same nor obligations in respect of letters of credit supporting the payment of the same) shall constitute Debt. "Default" means any condition or event that constitutes an Event of Default or that with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Deposit Account" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "Eastern Time" means local time in the Eastern time zone of the United States. 7 "Eligible Assignee" means any Person which is a holder of Prepetition Indebtedness at the time of the relevant assignment and which is either (A) (i) a commercial bank organized under the laws of the United States or any state thereof having unimpaired capital and surplus of not less than $500,000,000; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof having unimpaired capital and surplus of not less than $500,000,000; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof having unimpaired capital and surplus of not less than $500,000,000; provided that (x) such bank is acting through a branch or agency located in the United States or (y) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; or (iv) an "accredited investor" (as defined in Regulation D under the Securities Act of 1933, as amended) which extends credit as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies and having unimpaired capital and surplus of not less than $100,000,000; or (B) a Lender or an Affiliate of a Lender; provided that no MHG Company or Affiliate of any of them shall be an Eligible Assignee; and provided further that Eligible Assignee shall mean and include any other Person designated as such pursuant to the prior written consent of (y) the Agents (such consent not to be unreasonably withheld or delayed) and (z) as long as no Event of Default has occurred or is continuing, MHG, acting on behalf of itself and all other Borrowers (such consent not to be unreasonably withheld or delayed). "Enforceable Judgment" means a judgment or order of a court or arbitral or regulatory authority as to which the period, if any, during which the enforcement of such judgment or order is stayed shall have expired. A judgment or order which is under appeal or as to which the time in which to perfect an appeal has not expired shall not be deemed an Enforceable Judgment so long as enforcement thereof is effectively stayed pending the outcome of such appeal or the expiration of such period, as the case may be. "Enforcement Notice" means a notice delivered by the Administrative Agent to the Collateral Agent pursuant to Section 8.03 directing the Collateral Agent to exercise one or more specific rights or remedies under the Collateral Documents. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions relating to the environment or to the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment, including ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Environmental Liabilities" means any and all liabilities of or relating to any of the MHG Companies (including any entity which is, in whole or in part, a predecessor of any of the MHG 8 Companies), whether vested or unvested, contingent or fixed, actual or potential, known or unknown, which arise under or relate to matters covered by Environmental Laws. "Equity Interest" means (i) in the case of a corporation, any shares of its capital stock, (ii) in the case of a limited liability company, any membership interest therein, (iii) in the case of a partnership, any partnership interest (whether general or limited) therein, (iv) in the case of any other business entity, any participation or other interest in the equity or profits thereof or (v) any warrant, option or other right to acquire any Equity Interest described in the foregoing clauses (i), (ii), (iii) and (iv). "Equity Issuance" means any issuance or sale by any MHG Company of any Equity Interest in such MHG Company, other than any issuance or sale of such Equity Interests to any other MHG Company. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the MHG Companies and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with any MHG Company, are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" means any event defined as an "Event of Default" in Section 8.01. "Excess Cash Amount" has the meaning set forth in Section 2.08(f). "Excess Casualty Proceeds" has the meaning set forth in Section 5.08(a). "Excluded Subsidiaries" means each of the Subsidiary joint ventures of MHG identified on Schedule 3 hereto as an Excluded Subsidiary. ---------- "Executive Officer" means any "executive officer" (within the meaning of Rule 3b-7 under the Securities Exchange Act) of any of the Borrowers. "Existing Credit Facilities" means, collectively, (i) the Term Loan Facility Credit Agreement dated as of December 23, 1998, as amended through the Closing Date, among MHG and the lenders and agents named therein, (ii) the Revolving Credit Facility Credit Agreement dated as of May 18, 1994, as amended through the Closing Date, among MHG and the lenders and agents named therein, (iii) all agreements, documents and instruments pursuant to which any interest in collateral is granted or purported to be granted, created, evidenced or perfected in connection with any of such Credit Agreements, including without limitation, all deeds of trust, mortgages, security agreements, pledge agreements, assignments, licenses, landlord consents and releases, financing statements, fixture filings, registrations or similar documents and (iv) all ancillary agreements as to which any holder of any of the obligations evidenced by any of the foregoing is a party or a beneficiary and all other agreements, instruments, documents and certificates including promissory 9 notes, consents, assignments, contracts, and notices delivered in connection with any of the foregoing or the transactions contemplated thereby, in each case as any of the foregoing may be in effect as of the Closing Date and as the same may be amended, supplemented or otherwise modified from time to time to the extent permitted hereunder. "Existing Lender" means each of the "Banks" party to any of the Existing Credit Facilities. "Existing Lender Lien" means, collectively, the adequate protection Liens provided to the Existing Lenders as set forth in the Interim Borrowing Order and the Borrowing Order. "Existing Note Indenture" means the indenture dated as of April 4, 1996, as amended through the Closing Date, pursuant to which indenture the Existing Notes were issued. "Existing Notes" means the 9-1/2% subordinated notes of MHG in the aggregate outstanding principal amount of $150,000,000 issued pursuant to the Existing Note Indenture. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent. "Fee Mortgages" means fee mortgages in favor of the Collateral Agent in form and substance satisfactory to the Collateral Agent relating to any real property now or hereafter owned in fee by any MHG Company which is required to be so encumbered to secure the Obligations pursuant to Section 5.07. "Final Order" means an order, judgment or other decree of the Court or any other court or judicial body with proper jurisdiction, as the case may be, which (i) in the case of any order, judgment or decree other than the Interim Borrowing Order and the Borrowing Order, is in full force and effect and has not been reversed, stayed, modified or amended and as to which (a) any right to appeal or seek certiorari, review or rehearing has been waived or (b) the time to appeal or seek certiorari, review or rehearing has expired and as to which no appeal or petition for certiorari, review or rehearing is pending, and (ii) in the case of the Interim Borrowing Order and the Borrowing Order, is in full force and effect and has not been reversed or stayed or, without the consent of Required Lenders, modified or amended. "Financial Accommodations" means arrangements for the extension of credit or other financial accommodation to one or more of the MHG Companies, including committed or uncommitted lines of credit for advances or other financial accommodation, letters of credit, performance and surety bonds and the like, committed or uncommitted agreements for the purchase 10 of accounts receivable or other financial assets, with or without recourse or repurchase obligation, forward and future contracts for purchase of bullion or foreign currencies and other similar arrangements and interest rate swaps and other similar arrangements, but excluding (i) trade accounts payable and amounts owed to patients or residents arising after the Petition Date, in each case arising in the ordinary course of business, and obligations arising after the Petition Date in the ordinary course of business in respect of insurance policies or performance or surety bonds which are not themselves Guarantees of Debt (and drafts, acceptances or similar instruments evidencing the same and obligations in respect of letters of credit supporting the payment of the same) and (ii) Debt, Letters of Credit and Commitments under this Agreement. "Financial Officer" means, with respect to any Person, the principal financial officer (which, if so identified by the Borrowers, may include a vice president principally responsible for financial matters), principal accounting officer or treasurer of such Person, in each case acceptable to the Administrative Agent. "Financing Documents" means this Agreement (including the Schedules and Exhibits hereto), the Notes and the Collateral Documents. "First Day Orders" means those orders entered by the Court as a result of motions and applications filed by the Borrowers with the Court on or about the Petition Date, in each case in form and substance as approved by the Administrative Agent pursuant to Section 3.01. "First Union" has the meaning set forth in the introduction to this Agreement. "Fiscal Quarter" means a fiscal quarter of MHG. "Fiscal Year" means a fiscal year of MHG. "GAAP" means at any time generally accepted accounting principles as then in effect in the United States, applied on a basis consistent (except for changes concurred in by MHG's independent public accountants) with the Most Recent Audited Financial Statements. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all Governmental Authorities. "Governmental Authority" means any nation, province, state or political subdivision thereof, and any government or any Person exercising executive, legislative, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Grantor" means a MHG Company that grants a Lien on any of its property pursuant to the Collateral Documents. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt (the "primary obligation") of any other Person (the 11 "primary obligor") and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services primarily for the purpose of assuring the owner of such primary obligation of the ability of the primary obligor to pay such primary obligation, to take-or-pay, or to maintain financial statement conditions or otherwise), (ii) to reimburse a bank for drawings under a letter of credit for the purpose of paying such Debt or (iii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee", when used as a verb, has a corresponding meaning. "Hazardous Substances" means any toxic, radioactive, corrosive or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics, whether or not regulated under Environmental Laws. "Healthcare Event" means (i) the termination (without reinstatement) of the Medicare or Medicaid contract or license for any three or more Healthcare Facilities (other than Managed Facilities); or (ii) the involuntary receivership or involuntary management of any Healthcare Facility (other than a Managed Facility) by any applicable Governmental Authority; or (iii) the imposition by any applicable Governmental Authority, with respect to four or more Healthcare Facilities (other than Managed Facilities) in the aggregate, of administrative holds or similar restrictions or limitations on the admission of patients (but only for so long as such holds, restrictions or limitations shall be in effect). "Healthcare Facility" means any of the following to the extent owned, leased, managed or operated by an MHG Company: (i) a hospital, outpatient clinic, nursing center, assisted or independent living community, long-term care facility or any other facility that is used or useful in the provision of healthcare or custodial care services, (ii) any healthcare business affiliated or associated with a Healthcare Facility (as described in clause (i)) or (iii) any business related or ancillary to the provision of healthcare services or the operation of a Healthcare Facility (as described in clause (i)) including, but not limited to, pharmaceutical services, respiratory and infusion management, contract therapy services, as well as hospice and home care services. "Healthcare Status Report" has the meaning set forth in Section 5.01(l). "HHS Stipulation" means the Stipulation Between the United States Department of Health and Human Services and the Debtors in the form provided to the Agents on or prior to the Closing Date, with any modifications thereto on or prior to the Closing Date or entry thereof, which modifications are approved by the Agents in their sole discretion, as the same may thereafter be amended, supplemented or otherwise modified from time to time with the express written consent of Required Lenders. 12 "Indemnitee" has the meaning set forth in Section 11.03(b). "Insolvency Proceeding" shall mean, with respect to any Person, (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of any such Person or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets of creditors, or other, similar arrangements in respect of such Person's creditors generally or any substantial portion of its creditors; undertaken under any law. "Interim Borrowing Order" means an order of the Court entered in the Chapter 11 Cases after a hearing under Bankruptcy Rule 4001(c)(2) in the form attached hereto as Exhibit J, with any modifications thereto on or prior to the --------- Closing Date or entry thereof as are approved by the Agents in their sole discretion, as the same may thereafter be amended, supplemented or otherwise modified from time to time with the express written consent or joinder of Required Lenders. "Interim Order Date" means the date that the Court signs the Interim Borrowing Order. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute. "Investment" means, with respect to any Person (the "Investor"), any investment by the Investor in any other Person, whether by means of share purchase, capital contribution, loan, advance, purchase of Debt, payment in respect of a Guarantee of Debt, time deposit or otherwise. "Investor" has the meaning set forth in the definition of "Investment" in this Section 1.01. "LC Exposure" means, with respect to any Lender at any time, its Percentage of the Aggregate LC Exposure at such time. "LC Fee Rate" means a per annum rate equal to 4.50% or, upon the occurrence and during the continuation of any Event of Default, 7.00%. "LC Indemnitees" has the meaning set forth in Section 2.05(n). "LC Issuing Bank" means (i) PNC and (ii) any other Lender designated as an "LC Issuing Bank" for purposes hereof in a notice to the Administrative Agent signed by MHG (acting on its own behalf and on behalf of all other Borrowers) and such Lender, acting in each case in the capacity of an LC Issuing Bank under the letter of credit facility described in Section 2.05, and their respective successors. 13 "LC Issuing Bank Fee Letter" means the letter agreement dated the Closing Date by and among PNC and the Borrowers regarding fees to be paid by the Borrowers to PNC as LC Issuing Bank with respect to Letters of Credit. "LC Office" means, with respect to any LC Issuing Bank, the office at which it books any Letter of Credit issued by it. "LC Payment Date" has the meaning set forth in Section 2.05(h). "LC Reimbursement Obligations" means, at any time, all obligations of the Borrowers to reimburse the LC Issuing Banks pursuant to Section 2.05 for amounts paid by the LC Issuing Banks in respect of drawings under Letters of Credit, including any portion of any such obligation to which a Lender has become subrogated pursuant to Section 2.05(j)(i). "LC Request" has the meaning set forth in Section 2.05(c). "Leasehold Mortgages" means leasehold mortgages in favor of, and in form and substance satisfactory to, the Collateral Agent, relating to the leases of any real properties leased by any MHG Company which are required to be encumbered to secure the Obligations pursuant to Section 5.07. "Lender" means each bank or other financial institution listed on the Commitment Schedule, each Assignee which becomes a "Lender" for purposes hereof pursuant to Section 11.06, and their respective successors. "Lender Parties" means the Lenders, each LC Issuing Bank and the Agents. "Lending Office" means, as to each Lender, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Lending Office) or such other office as such Lender may hereafter designate as its Lending Office by notice to the Borrowers and the Administrative Agent. "Letter of Credit" means any letter of credit issued pursuant to Section 2.05 by an LC Issuing Bank. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset or any other arrangement (other than a right of set-off, recoupment, counterclaim or similar right) the economic effect of which is to give a creditor preferential access to such asset to satisfy its claim. For purposes of this Agreement, any MHG Company shall be deemed to own subject to a Lien any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement or other title retention agreement relating to such asset or any Capital Lease. "Loan" or "Loans" means one or more of the Tranche A Loans or Tranche B Loans or any combination thereof. 14 "Managed Facility" means a Healthcare Facility (i) which is neither owned nor leased by any MHG Company, (ii) which the relevant MHG Company either manages or operates primarily in its capacity as a manager, and (iii) with respect to which no MHG Company would have liability as a result of any event or occurrence of any type described in the definition of Healthcare Event. "Management and Service Agreements" means all agreements or arrangements between any Borrower and any Person other than a Borrower for employment (including agreements with employees of any Borrower), management consulting services, or the provision of any other management services to any MHG Company. "Management Employee" has the meaning set forth in Section 4.23. "Margin Stock" has the meaning set forth in Regulation U. "Material Adverse Effect" means (i) any material adverse effect upon the condition (financial or otherwise), results of operations, business or prospects of MHG and its Consolidated Subsidiaries, taken as a whole, (ii) a material adverse effect on the validity, binding effect or enforceability of any Financing Document or (iii) a material adverse effect on the validity, perfection or priority of any Lien on any of the Collateral created or purportedly created under the Collateral Documents; provided that a Material Adverse Effect shall not be deemed to have occurred solely on account of (x) the events, occurrences and circumstances disclosed in writing in detail prior to the date hereof to the Existing Lenders or (y) the filing of the petitions in the Chapter 11 Cases. "Material Contract" means any contract or other arrangement to which any MHG Company is a party (other than the Financing Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "Medicaid" means the medical assistance program established by Title XIX of the Social Security Act (42 U.S.C. (S)(S) 1396 et seq.) and any statutes -- --- succeeding thereto. "Medicaid Regulations" means, collectively, (a) all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting Medicaid, (b) all applicable provisions of all federal rules, regulations, manuals and orders of Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (a) above and all federal administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant to or in connection with the statutes described in clause (a) above, (c) all state statutes and plans for medical assistance enacted in connection with the statutes and provisions described in clauses (a) and (b) above, and (d) all applicable provisions of all rules, regulations, manuals and orders of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (c) above and all state administrative, reimbursement and other guidelines of all Governmental Authorities having the force of law promulgated pursuant 15 to or in connection with the statutes described in clause (c) above, in each case as may be amended or supplemented. "Medicare" means the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. (S)(S) 1995 et -- seq.) and any statutes succeeding thereto. - --- "Medicare Regulations" means, collectively, all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting Medicare, together with all applicable provisions of all rules, regulations, manuals and orders and administrative, reimbursement and other guidelines having the force of law of all Governmental Authorities (including without limitation, Health and Human Services ("HHS"), Health Care Finance Administration, the Office of the Inspector General for HHS, or any Person succeeding to the functions of any of the foregoing) promulgated pursuant to or in connection with any of the foregoing having the force of law, in each case as may be amended or supplemented. "MHG" has the meaning set forth in the introduction to this Agreement. "MHG Company" means MHG or any Subsidiary of MHG (other than an Excluded Subsidiary). "Moody's" means Moody's Investors Service, Inc. "Mortgages" means the Leasehold Mortgages and Fee Mortgages, collectively. "Most Recent Audited Financial Statements" means the audited consolidated financial statements of MHG and its Consolidated Subsidiaries as of December 31, 1998. "MPAN" means Mariner Post-Acute Network, Inc., a Delaware corporation, and each of its Subsidiaries and Affiliates (other than the MHG Companies and the Excluded Subsidiaries). "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Net Amount of Eligible Accounts" means, the dollar value of all trade Accounts Receivable of MHG and the Consolidated Subsidiaries that are payable in United States Dollars and are generated in the ordinary course of the rendition of healthcare services at the Healthcare Facilities by the MHG Companies, stated on a basis consistent with the Credit and Collection Policy, less, without duplication, the sum of the following: (a) any account receivable or portion thereof that is payable (1) by an individual beneficiary, recipient or subscriber individually and not directly to a Borrower by (v) the United States of America acting under Medicaid or Medicare (w) any State or the District of Columbia acting pursuant to a health plan adopted pursuant to Title XIX of the Social 16 Security Act, (x) a commercial insurer, (y) the Veterans Administration or (z) any agent, carrier, administrator or intermediary for any of the foregoing (provided that in the case of MHG's "inpatient" division no account receivable shall be excluded as a result of this clause (1) unless either 30 days have passed from the applicable invoice date or Medicare coverage of such account receivable has been declined), or (2) by a commercial medical insurance carrier that is not acceptable to the Administrative Agent in its sole discretion; (b) any account receivable that remains unpaid more than 120 days after the applicable claim, statement or invoice date; (c) any account receivable to the extent that it is subject to any asserted or claimed defense, set-off, counterclaim, deduction, discount, credit, charge-back, allowance or adjustment of any kind (whether issued, owing, granted or outstanding); (d) any account receivable that is subject to a Lien other than a Lien permitted hereunder or that is subject to a Lien described on Schedule 13 hereto; (e) any ----------- account receivable which is due from an account debtor that is (w) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any federal or state law, (x) has a principal place of business or chief executive office outside the United States, (y) is an Affiliate of any MHG Company or (z) is otherwise unacceptable to Administrative Agent acting in good faith. "Net Cash Proceeds" means, with respect to any Asset Sale, Equity Issuance or incurrence of Debt other than Debt incurred pursuant to the Financing Documents, an amount equal to the cash proceeds received by the MHG Companies in respect of such Asset Sale, Equity Issuance or incurrence of Debt (including any cash proceeds received as income or other cash proceeds of any noncash proceeds of such Asset Sale), less (a) any expenses reasonably incurred by the MHG Companies in respect of such Asset Sale, Equity Issuance or incurrence of Debt (including reasonable attorneys' fees and expenses and including any payment with respect to taxes actually paid or to become payable by the MHG Companies (as reasonably estimated by the Financial Officer) in respect of such Asset Sale, Equity Issuance or incurrence of Debt) and approved by the Court, if such approval is necessary pursuant to the Bankruptcy Code or any applicable order of the Court, and (b) amounts required to be applied against Debt (other than Debt incurred pursuant to the Financing Documents) secured by a Lien on the assets so sold. "Note" means one or more of the Tranche A Notes or Tranche B Notes or any combination thereof. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Nursing Home Census" has the meaning set forth in Section 5.01(r). "Nursing Home Facility" means any Healthcare Facility constituting a licensed nursing home center as set forth and identified as a "Nursing Home Facility" in Schedule 12 hereto. ----------- "Nursing Home Occupancy" means, as of any week of determination, the amount expressed as a percentage obtained by dividing (i) the Nursing Home Census for such week by (ii) the average of the aggregate patient capacity of all Nursing Home Facilities (other than Managed Facilities) as of each day of such week. 17 "Oakwood Facilities" means, collectively, the Healthcare Facilities known as Cape Heritage Rehabilitation and Nursing Center, Cape Regency Rehabilitation and Nursing Center, East Lincoln Rehabilitation and Nursing Center, Mayflower Rehabilitation and Nursing Center, Northbridge Rehabilitation and Nursing Center, Northwood Rehabilitation and Nursing Center and Oakwood Rehabilitation and Nursing Center. "Obligations" means all obligations of every nature of each of the Borrowers under the Financing Documents, including, without limitation, any liability of any such Borrower on any claim, whether or not the right to payment in respect of such claim is reduced to judgment, liquidated, unliquidated, fixed or contingent, matured, disputed, undisputed, legal, equitable, secured or unsecured, and whether or not such claim is discharged, stayed or otherwise affected by any bankruptcy, insolvency, reorganization or other similar proceeding. Without limiting the generality of the foregoing, the Obligations of the Borrowers under the Financing Documents include (i) the obligation to pay principal, interest, charges, expenses, fees, actual and reasonable attorneys' fees and disbursements, indemnities and other amounts payable by any Borrower under any Financing Document and (ii) the obligation to reimburse any amount in respect of any of the foregoing that any Agent or any Lender, in its sole discretion, may elect to pay or advance on behalf of any Borrower. In addition to the foregoing, "Obligations" means all obligations of any Borrower owed to any Lender arising in the ordinary course of operation of the Cash Management System, without regard to whether such obligations arise or have arisen with respect to items deposited, collected, presented, paid, returned or reversed pre-petition or post-petition, and including without limitation obligations for overdrafts, returned items, fees, expenses, indemnities and similar charges; provided that this sentence shall not be construed to include within the definition of "Obligations" any obligation for prepetition loans or other prepetition obligations other than obligations incurred by any Borrower in the ordinary course of operation of the Cash Management System and approved by order of the Court. "Official Body" shall mean any national, federal, state, local or other government or political subdivision or any agency, authority, board, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "Organizational Documents" means (i) with respect to any corporation, its certificate or articles of incorporation, by-laws and other constitutional documents, including the certificate of designation for any series of its preferred stock, (ii) with respect to any limited liability company, its articles of organization and operating agreement, or other comparable documents however named, and (iii) with respect to any partnership, its partnership agreement and any certificate of limited partnership or statement of partnership filed with a Governmental Authority. "Outstanding Credit Amount" means, with respect to any Lender at any time, the sum of (i) the Outstanding Tranche A Amount of such Lender and (ii) the Outstanding Tranche B Amount of such Lender. 18 "Outstanding Tranche A Amount" means, with respect to any Lender at any time, the sum of (i) the aggregate outstanding principal amount of its Tranche A Loans and (ii) its LC Exposure, all determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 11.06(c). "Outstanding Tranche B Amount" means, with respect to any Lender at any time, the aggregate outstanding principal amount of its Tranche B Loans, determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 11.06(c). "Overhead Payment" has the meaning set forth in Section 7.07. "Parent" means, with respect to any Lender, any Person controlling such Lender. "Participant" has the meaning set forth in Section 11.06(b). "Patient Trust Accounts" means the accounts of the Borrowers holding solely funds that residents of Nursing Home Facilities receive as income (whether from government or private sources) which are required to be held in such accounts pursuant to the Omnibus Budget and Reconciliation Act of 1987, 28 U.S.C. (S)483.10(c) and the regulations of the Health Care Financing Administration. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Percentage" means, with respect to any Lender at any time, the percentage which the amount of its Commitment at such time represents of the aggregate amount of all the Commitments at such time. At any time after the Commitments shall have terminated, the term "Percentage" shall refer to a Lender's Percentage immediately before such termination, adjusted to reflect any subsequent assignments pursuant to Section 11.06(c). "Permitted Adequate Protection Liens" means Liens for "adequate protection" (as such term is used in Sections 361 through 364 of the Bankruptcy Code) which are approved in writing by Required Lenders and the Court. "Permitted Encumbrances" means, with respect to any property (including any leasehold interest) owned by any MHG Company: (a) Liens for taxes, assessments or other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of such MHG Company in accordance with GAAP; (b) carriers', warehousemen's, mechanics', materialmens', repairmens' or other like Liens arising by operation of law in the ordinary course of business so long as (A) the 19 underlying obligations are not overdue for a period of more than 30 days or (B) such Liens are being contested in good faith and by appropriate proceedings and adequate reserves with respect thereto are maintained on the books of such MHG Company in accordance with GAAP; (c) Liens consisting of rights of patients in respect of Patient Trust Accounts; (d) other Liens or title defects (including matters which an accurate survey might disclose and exceptions to title set forth in title insurance with respect to the Fee Mortgages) which (x) do not secure Debt and (y) do not materially detract from the value of such property or materially impair the use thereof by such MHG Company in the operation of its business; (e) pledges or deposits made in the ordinary course of business to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, old-age pensions or other social security programs; and (f) good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, progress or advance payments, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business. "Permitted Intercompany Debt" means Debt owed by any Borrower to any other Borrower; provided that such Debt is either evidenced by a promissory note or maintained in the form of open account balances in which, in either case, the Collateral Agent has a first priority, perfected security interest under the Interim Borrowing Order, the Borrowing Order or the Security Agreement at all times until such security interest is released pursuant to Section 18 thereof. "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Petition Date" has the meaning set forth in the recitals to this Agreement. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "PNC" has the meaning set forth in the introduction to this Agreement. 20 "Prepayment Notice" means a properly completed Prepayment Notice, substantially in the form of Exhibit E hereto. --------- "Prepetition Indebtedness" means Debt of any Credit Party outstanding on the Petition Date, including Debt under the Existing Credit Facilities and the Existing Notes. "Prime Rate" means the rate of interest established by the PNC from time to time as its Prime Rate, which may not be the lowest rate then being charged commercial borrowers by PNC. "Register" has the meaning set forth in Section 11.06(e). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Related Fund" means, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed by the same investment advisor as such Lender or by an affiliate of such investment advisor. "Reporting Event" has the meaning set forth in Section 5.01(l). "Required Cash Flow Amount" has the meaning set forth in Section 6.04. "Required Lenders" means, at any time, Lenders having outstanding Credit Exposures in an aggregate amount (excluding accrued interest) equal to more than 66-2/3% of the aggregate amount of the Credit Exposures of all Lenders at such time. "Restricted Payment" means (i) any dividend or other distribution on any Equity Interests of MHG (except dividends payable solely in Equity Interests of the same class), (ii) any payment on account of the purchase, redemption, retirement or acquisition of any Equity Interests of MHG, (iii) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Prepetition Indebtedness and (iv) any payment, dividend or other distribution to, or on behalf of, MPAN. "S&P" means Standard and Poor's Rating Services, a division of The McGraw- Hill Companies, Inc. "SEC" means the United States Securities and Exchange Commission. "Secured Obligations" has the meaning set forth in Section 1 of the Security Agreement. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 21 "Security Agreement" means the Security Agreement dated as of the Closing Date among the Borrowers and the Collateral Agent, substantially in the form of Exhibit F hereto, as amended from time to time. - --------- "Security Interests" has the meaning set forth in Section 1 of the Security Agreement. "Settlement Letter" means the letter dated July 20, 1999 by the Health Care Financing Administration of the Department of Health and Human Services, acknowledged and agreed to by Mariner Post Acute Network, Inc. and MHG, in form and substance acceptable to the Agents. "Specified Change" has the meaning set forth in Section 11.05(b). "Specified Default" means (i) any Healthcare Event affecting 10% or more of the Healthcare Facilities (excluding any Managed Facilities), and (ii) any Event of Default (a) under Section 8.01(a), 8.01(j)(iii) (excluding, at all times after the Obligations have been paid in full and no Lender has any Credit Exposure hereunder, Section 8.01(j)(i)(b)(2)) or 8.01(k)(iii), or (b) arising as a result of any breach of any provision under the first paragraph of Section 5.01 or under Section 5.01(a), 5.01(b)(ii), 5.01(l), 5.01(n), 5.01(q), 5.01(r), 5.03(a), 5.11, 5.13, 7.07 or 7.17; provided, that an Event of Default arising under the first paragraph of Section 5.01 or under Section 5.01(a), 5.01(b)(ii), 5.01(l), 5.01(n), 5.01(q), 5.01(r), 5.03(a), 5.11 or 5.13 shall constitute a Specified Default only in the event not less than 15 days' prior written notice from the Administrative Agent to MPAN setting forth the details of such Specified Default shall have been delivered (which notice may be delivered during the pendency of any applicable cure period with respect to any Default which, if not cured, would constitute any such Event of Default) and such Specified Default shall not be cured prior to the later of (x) the expiration of such 15-day period and (y) the date of occurrence of such Event of Default. "Stated Maturity Date" means January 19, 2001. "Subsidiary" means, as to any Person, (i) any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person or (ii) any limited liability company or partnership that, in accordance with GAAP, is a Consolidated Subsidiary of such Person. Unless otherwise specified, "Subsidiary" means a Subsidiary of MHG. "Supermajority Lenders" means, at any time, Lenders having outstanding Credit Exposures in an aggregate amount (excluding accrued interest) equal to more than 75% of the aggregate amount of the Credit Exposures of all Lenders at such time. "Syndication Agent" means First Union in its capacity as Syndication Agent under the Financing Documents. 22 "Temporary Cash Investment" means any Investment in (i) securities issued, or directly and fully guaranteed or insured, by the United States or any agency or instrumentality thereof; provided that the full faith and credit of the United States is pledged in support thereof, (ii) time deposit accounts, bankers' acceptances, certificates of deposit and money market deposits maturing within 30 days of the date of acquisition thereof issued by any office located in the United States of a bank or trust company which is organized or licensed under the laws of the United States or any State thereof and which bank or trust company has capital, surplus and undivided profits aggregating more than $1,000,000,000 and has outstanding debt which is rated "P-1" (or higher) by Moody's or "A-1" (or higher) by S&P or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with an office located in the United States of a bank or trust company meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 30 days after the date of acquisition, issued by a corporation (other than any MHG Company or any Affiliate) organized under the laws of the United States or any State thereof with a rating, at the date of acquisition, of "P-1" (or higher) by Moody's or "A-1" (or higher) by S&P, (v) securities with maturities of 30 days or less from the date of acquisition issued or fully and unconditionally guaranteed by any State, commonwealth or territory of the United States, or by a political subdivision or taxing authority thereof, and rated at least "P-1" (or higher) by Moody's or "A-1" (or higher) by S&P and (vi) money market funds which invest substantially all of their assets in securities described in the preceding clauses (i) through (v). "Total Utilization of Commitments" means, as at any date of determination, the aggregate Outstanding Credit Amounts of all Lenders. "Tranche A Commitment Fee Rate" means 0.75% per annum. "Tranche A Commitments" means (i) with respect to any Lender listed on the Commitment Schedule, the amount (if any) set forth therein opposite the name of such Lender under the heading "Tranche A Commitment" and (ii) with respect to any Assignee of a Tranche A Commitment, the amount of the transferor Lender's Tranche A Commitment assigned to such Assignee pursuant to Section 11.06(c), in each case as such amount may be reduced from time to time pursuant to Section 2.08 or 2.10 or changed as a result of an assignment pursuant to Section 11.06(c). "Tranche A Default Rate" has the meaning set forth in Section 2.04. "Tranche A Exposure" means, as to any Lender, (i) at any time before the termination of its Tranche A Commitment in its entirety, the amount of its Tranche A Commitment at such time; or (ii) at any time thereafter, if its Tranche A Commitment has terminated in its entirety, its Outstanding Tranche A Amount, all determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 11.06(c). "Tranche A Interest Rate" has the meaning set forth in Section 2.04. "Tranche A Loan" means a loan made by a Lender pursuant to Section 2.01(a). 23 "Tranche A Note" means a promissory note of the Borrowers payable to the order of a Lender evidencing the Borrowers' obligation to repay the Tranche A Loans made by such Lender. Each Tranche A Note shall be substantially in the form of Exhibit A hereto. "Tranche A Notes" means any or all of such promissory --------- notes, as the context may require. "Tranche B Commencement Date" has the meaning set forth in Section 2.01(b). "Tranche B Commitment Fee Rate" means (i) until the Tranche B Commencement Date, 0.25% per annum and (ii) on and after the Tranche B Commencement Date, 0.75% per annum. "Tranche B Commitments" means (i) with respect to any Lender listed on the Commitment Schedule, the amount (if any) set forth therein opposite the name of such Lender under the heading "Tranche B Commitment" and (ii) with respect to any Assignee of a Tranche B Commitment, the amount of the transferor Lender's Tranche B Commitment assigned to such Assignee pursuant to Section 11.06(c), in each case as such amount may be reduced from time to time pursuant to Section 2.08 or 2.10 or changed as a result of an assignment pursuant to Section 11.06(c). "Tranche B Default Rate" has the meaning set forth in Section 2.04. "Tranche B Exposure" means, as to any Lender, (i) at any time before the termination of its Tranche B Commitment in its entirety, the amount of its Tranche B Commitment at such time; or (ii) at any time thereafter, if its Tranche B Commitment has terminated in its entirety, its Outstanding Tranche B Amount, all determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 11.06(c). "Tranche B Interest Rate" has the meaning set forth in Section 2.04. "Tranche B Loan" means a loan made by a Lender pursuant to Section 2.01(b). "Tranche B Note" means a promissory note of the Borrowers payable to the order of a Lender evidencing the Borrowers' obligation to repay the Tranche B Loans made by such Lender. Each Tranche B Note shall be substantially in the form of Exhibit B hereto. "Tranche B Notes" means any or all of such promissory --------- notes, as the context may require. "UCC" has the meaning set forth in Section 1 of the Security Agreement. "UCP" means the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, or any successor publication governing the rights and obligations of the parties in connection with Letters of Credit. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title I of ERISA 24 (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Unscheduled Mandatory Prepayment" has the meaning set forth in Section 2.08(h). "Year 2000 DIP Budget" means the projected financial statements with respect to MHG and its Consolidated Subsidiaries for the Fiscal Year ending December 31, 2000 delivered to the Agents on or prior to the Closing Date pursuant to Section 3.01(r)(ii); provided, that such projected financial statements may be amended, supplemented, replaced or otherwise modified with the approval of the Required Lenders. Section 1.02 Accounting Terms and Determinations. Unless otherwise ----------------------------------- specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP; provided that, if the Borrowers notify the Administrative Agent that the Borrowers wish to amend any provision hereof to eliminate the effect of any change in GAAP on the operation of such provision (or if the Administrative Agent notifies the Borrowers that the Required Lenders wish to amend any provision hereof for such purpose), then such provision shall be applied on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such provision is amended in a manner satisfactory to the Borrowers and the Required Lenders. Section 1.03 Other Definitional Provisions. References in this ----------------------------- Agreement to "Articles", "Sections", "Schedules" or "Exhibits" are to Articles, Sections, Schedules or Exhibits of or to this Agreement unless otherwise specifically provided. Any of the terms defined in Section 1.01 may, unless the context otherwise requires, be used in the singular or plural depending on the reference. "Include", "includes" and "including" are deemed to be followed by "without limitation" whether or not they are in fact followed by such words or words of like import. "Writing", "written" and comparable terms refer to printing, typing, facsimile and other means of reproducing words on paper. References to any agreement or contract are to such agreement or contract as amended, modified or supplemented from time to time (whether before, on or after the Closing Date) in accordance with the terms hereof and thereof. "Hereto", "herein" and "hereof" refer to this Agreement as amended from time to time. ARTICLE 2. The Credit Facilities Section 2.01 Commitments to Lend. ------------------- (a) Tranche A Loans. Subject to the terms and conditions set forth in this Agreement, each Lender severally agrees to make Tranche A Loans to the Borrowers from time to 25 time during the period from and including the Closing Date to but excluding the Commitment Termination Date; provided that, immediately after each such Tranche A Loan is made, such Lender's Outstanding Tranche A Amount shall not exceed its Tranche A Commitment. Each Borrowing of Tranche A Loans shall be borrowed from the several Lenders ratably in proportion to their respective Tranche A Commitments. The initial aggregate amount of the Tranche A Commitments of all Lenders as of the Closing Date is $40,000,000. Within the limits specified herein, the Borrowers may borrow Tranche A Loans, repay such borrowing and reborrow Tranche A Loans pursuant to the terms of this Agreement. (b) Tranche B Loans. Subject to the terms and conditions set forth in this Agreement, each Lender severally agrees to make Tranche B Loans to the Borrowers from time to time during the period from and including the Tranche B Commencement Date to but excluding the Commitment Termination Date; provided that, immediately after each such Tranche B Loan is made, such Lender's Outstanding Tranche B Amount shall not exceed its Tranche B Commitment. Each Borrowing of Tranche B Loans shall be borrowed from the several Lenders ratably in proportion to their respective Tranche B Commitments. The initial aggregate amount of the Tranche B Commitments of all Lenders as of the Closing Date is $10,000,000. Within the limits specified herein, the Borrowers may borrow Tranche B Loans, repay such borrowing and reborrow Tranche B Loans pursuant to the terms of this Agreement. As used in this Section 2.01(b), "Tranche B Commencement Date" means the date, if any, on which Supermajority Lenders in their sole discretion shall have consented in writing to a request by the Borrowers (delivered to the Administrative Agent and the Lenders) that Lenders permit Tranche B Loans to be borrowed hereunder. Notwithstanding anything to the contrary contained herein, Supermajority Lenders may in their sole discretion, together with any consent described in the preceding sentence, prescribe additional limitations on the aggregate amount of Tranche B Loans permitted to be borrowed from time to time, the increments for borrowing Tranche B Loans and the times such Borrowings may be made hereunder and other terms and conditions relating to the availability of the Tranche B Loans. (c) Borrowing Limitations. Anything contained in this Agreement to the contrary notwithstanding, (A) in no event shall the Total Utilization of Commitments at any time outstanding exceed the lesser of (x) the Commitments and (y) the amount permitted to be outstanding hereunder pursuant to the Interim Borrowing Order or the Borrowing Order, as applicable, in each case as the foregoing limits may be in effect from time to time; (B) in no event shall the Outstanding Tranche A Amount of all Lenders exceed the lesser of (x) the Tranche A Commitments and (y) the Borrowing Base, in each case as the foregoing limits may be in effect from time to time; (C) in no event shall the Outstanding Tranche B Amounts of all Lenders exceed the Tranche B Commitments in effect from time to time; (D) the Borrowers shall comply with any additional limitations on Tranche B Loan Borrowings prescribed by Supermajority Lenders pursuant to the last sentence of Section 2.01(b) and incorporated into this Agreement by amendment; and (E) the Borrowers agree to immediately prepay the Loans in the amounts and at the times as may be necessary to comply with the foregoing clauses (A), (B), (C) and (D). (d) Amount of Each Borrowing. Each Borrowing under this Section 2.01 shall be in an aggregate principal amount of $1,000,000 or any larger multiple of $500,000; provided that any 26 Borrowing of Tranche A Loans or Tranche B Loans may be in an aggregate amount equal to the aggregate unused amount of the Tranche A Commitments or Tranche B Commitments, respectively. Section 2.02 Notice of Borrowing. The Borrowers shall give the ------------------- Administrative Agent notice, substantially in the form of Exhibit C hereto (a --------- "Notice of Borrowing"), not later than 1:00 P.M. (Eastern Time) on the date which is one Business Day immediately preceding the date of the proposed borrowing (provided that no such Notice of Borrowing for Tranche B Loans shall be given to the Administrative Agent prior to obtaining the consent of Supermajority Lenders described in clause (i) of the definition of Tranche B Commencement Date) specifying: (i) the proposed date of such borrowing, which shall be a Business Day; and (ii) the amount of Tranche A Loans and/or the amount of Tranche B Loans requested. Section 2.03 Notice to Lenders; Funding of Loans. ----------------------------------- (a) Upon receipt of a Notice of Borrowing, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's ratable share of such Borrowing. Such Notice of Borrowing shall not thereafter be revocable by the Borrowers. (b) Not later than 12:00 Noon (Eastern Time) on the date of each Borrowing, each Lender shall make available its ratable share of such Borrowing, in Federal or other funds immediately available in Pittsburgh, Pennsylvania, to the Administrative Agent at its address for payments specified in or pursuant to Section 11.01. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent shall promptly make such funds received from Lenders available to the Borrowers on such date at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received, prior to the date of any Borrowing, notice from a Lender that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with Section 2.03(b) and, in reliance upon such assumption, Administrative Agent may (but shall not be obligated to) make available to the Borrowers on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and the Borrowers severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the day such amount is made available to the Borrowers until the day such amount is repaid to the Administrative Agent, at (i) in the case of the Borrowers, a rate per annum equal to the Tranche A Interest Rate or Tranche B Interest Rate, as applicable, and (ii) in the case of such Lender, a rate per annum equal to (x) for each day from the day such amount is made available to the Borrowers to the third succeeding Business Day, inclusive, the Federal Funds Rate for such day as determined by the Administrative Agent and (y) for each day thereafter until the day such amount is repaid to the Administrative Agent, the Base Rate for such day. If such Lender shall repay such corresponding 27 amount to the Administrative Agent, the amount so repaid shall constitute such Lender's Loan included in such Borrowing for purposes of this Agreement. (d) Each Lender's Tranche A Loans shall be evidenced by a single Tranche A Note, and each Lender's Tranche B Loans (if any) shall be evidenced by a single Tranche B Note, in each case payable to the order of such Lender for the account of its Lending Office. (e) Upon receipt of each Lender's Tranche A Note and Tranche B Note pursuant to Section 3.01(b), the Administrative Agent shall forward such Notes to such Lender. Each Lender shall record the date and amount of each Loan made by it and the date and amount of each payment of principal made by the Borrowers with respect thereto, and may, in connection with any transfer or enforcement of either of its Notes, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to the then outstanding Loans evidenced by such Note; provided that neither the failure of any Lender to make any such recordation or endorsement nor any error therein shall affect the obligations of the Borrowers under any Financing Document. Each Lender is hereby irrevocably authorized by the Borrowers so to endorse each of its Notes and to attach to and make a part of such Note a continuation of any such schedule as and when required. Section 2.04 Interest Rate; Default Rate. Each Loan shall bear --------------------------- interest on the outstanding principal amount thereof, for each day from and including the day such Loan is made to but excluding the day it becomes due, (i) in the case of Tranche A Loans, at a rate per annum equal to the sum of 2.50% plus the Base Rate for such day (the "Tranche A Interest Rate"), and (ii) in the case of Tranche B Loans, at a rate per annum equal to the sum of 3.00% plus the Base Rate for such day (the "Tranche B Interest Rate"). Such interest shall be payable monthly in arrears on the last Business Day of each month. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Loans and, to the extent permitted by Applicable Law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall thereafter bear interest payable upon demand at a rate that is (a) in the case of Tranche A Loans and such amounts related thereto, 2.50% per annum in excess of the Tranche A Interest Rate (the "Tranche A Default Rate"), and (b) in the case of Tranche B Loans and such amounts related thereto, 2.50% per annum in excess of the Tranche B Interest Rate (the "Tranche B Default Rate"). Payment or acceptance of the increased rates of interest provided for herein is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of any Agent or any Lender. Section 2.05 Letters of Credit. ----------------- (a) Issuance of Letters of Credit. Any LC Issuing Bank may, but shall not be obligated to, issue a letter of credit (other than a trade letter of credit) at the request of the Borrowers pursuant to this subsection, from time to time during the period from and including the Closing Date to but excluding the earlier of (x) the Commitment Termination Date and (y) the date which is 60 days prior to the Stated Maturity Date; provided that, immediately after each such letter of credit is issued and participations therein are sold to the Lenders as provided in this subsection: 28 (i) the Aggregate LC Exposure shall not exceed $5,000,000; and (ii) in the case of each Lender, its Outstanding Tranche A Amount shall not exceed its Tranche A Commitment. Upon the issuance by any LC Issuing Bank of a Letter of Credit pursuant to this subsection, such LC Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each other Lender, and each such Lender shall be deemed, without further action by any party hereto, to have purchased from such LC Issuing Bank, a participation in such Letter of Credit, on the terms specified in this Section 2.05, equal to such Lender's Percentage thereof. (b) Expiry Dates. No Letter of Credit shall have an expiry date later than the tenth Business Day before the Stated Maturity Date. (c) Notice of Proposed Issuance. With respect to each Letter of Credit, the Borrowers shall give the relevant LC Issuing Bank and the Administrative Agent at least five Business Days' prior notice, substantially in the form of Exhibit D hereto (a "LC Request") (i) specifying the date such --------- Letter of Credit is to be issued, (ii) describing the proposed terms of such Letter of Credit and the nature of the transactions proposed to be supported thereby and (iii) specifying the Account Party for such Letter of Credit, which may be any Borrower. Upon receipt of an LC Request, the Agents shall promptly notify each Lender of the contents thereof. (d) Conditions to Issuance. No LC Issuing Bank shall issue any Letter of Credit unless: (i) such Letter of Credit shall be satisfactory in form and substance to such LC Issuing Bank in its sole discretion; (ii) the Borrowers shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as such LC Issuing Bank shall have reasonably requested; (iii) such LC Issuing Bank shall have confirmed with the Agents on the date of such issuance that the limitations specified in clauses (i) and (ii) of subsection (a) of this Section 2.05 will not be exceeded immediately after such Letter of Credit is issued; and (iv) such LC Issuing Bank shall not have been notified in writing by any MHG Company, any Agent or the Required Lenders expressly to the effect that any condition specified in Section 3.02 is not satisfied at the time such Letter of Credit is to be issued. (e) Notice of Proposed Extensions of Expiry Dates. The relevant LC Issuing Bank or the Borrowers shall give the Administrative Agent at least five Business Days' notice before such LC Issuing Bank extends the expiry date of any Letter of Credit issued by it. Such notice shall (i) identify such Letter of Credit, (ii) specify the date on which such extension is to be made (or the last day on which such LC Issuing Bank can give notice to prevent such extension from occurring) 29 and (iii) specify the date to which such expiry date is to be so extended. Upon receipt of such notice, the Administrative Agent shall promptly notify each Lender of the contents thereof. No LC Issuing Bank shall extend (or allow the extension of) the expiry date of any Letter of Credit if (x) the extended expiry date would be after the tenth Business Day before the Stated Maturity Date or (y) such LC Issuing Bank shall have been notified by any MHG Company, any Agent or the Required Lenders expressly to the effect that any condition specified in Section 3.02 is not satisfied at the time such Letter of Credit is to be extended. (f) Notice of Actual Issuances and Extensions. Promptly upon issuing any Letter of Credit or extending any Letter of Credit, the relevant LC Issuing Bank will notify the Administrative Agent of the date of such Letter of Credit, the amount thereof, the beneficiary or beneficiaries thereof and the expiry date or extended expiry date thereof. Upon receipt of such notice the Administrative Agent shall promptly notify each Lender of the contents thereof and the amount of such Lender's participation in the relevant Letter of Credit. Promptly upon issuing any Letter of Credit, the relevant LC Issuing Bank will send a copy of such Letter of Credit to the Administrative Agent. (g) Fees. The Borrowers shall pay to the Administrative Agent, for the account of the Lenders ratably in accordance with their respective Percentages, a letter of credit fee, calculated for each day at the LC Fee Rate for such day, on the aggregate amount available for drawings (whether or not conditions for drawing thereunder have been satisfied) under all Letters of Credit outstanding at the close of business on such day. Such letter of credit fee shall be payable with respect to each Letter of Credit in arrears on the last Business Day of each month for so long as such Letter of Credit is outstanding and on the final expiry date thereof. The Borrowers shall pay to each LC Issuing Bank additional fronting fees, monthly in arrears, and reasonable expenses in the amounts and at the times agreed between the Borrowers and such LC Issuing Bank. (h) Drawings. Upon receiving a demand for payment under any Letter of Credit from the beneficiary thereof, the relevant LC Issuing Bank shall determine in accordance with the terms of such Letter of Credit whether such demand for payment should be honored. In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the LC Issuing Bank shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply on their face with the requirements of such Letter of Credit. If such LC Issuing Bank determines that any such demand for payment should be honored, such LC Issuing Bank shall (i) promptly notify the Borrowers and the Administrative Agent as to the amount to be paid by such LC Issuing Bank as a result of such demand and the date on which such amount is to be paid (an "LC Payment Date") and (ii) on such LC Payment Date make available to such beneficiary in accordance with the terms of such Letter of Credit the amount of the drawing under such Letter of Credit. (i) Reimbursement and Other Payments by the Borrowers. If any amount is drawn under any Letter of Credit: (i) the Borrowers irrevocably and unconditionally agree to reimburse the relevant LC Issuing Bank for all amounts paid by such LC Issuing Bank upon such drawing, 30 together with any and all reasonable charges and expenses which such LC Issuing Bank may pay or incur relative to such drawing and interest on the amount drawn at the Federal Funds Rate for each day from and including the date such amount is drawn to but excluding the date such reimbursement payment is due and payable. Such reimbursement payment shall be due and payable at or before 3:00 P.M. (Eastern Time) (x) on the relevant LC Payment Date if such LC Issuing Bank notifies the Borrowers of such drawing before 11:00 A.M. (Eastern Time) on such date or (y) on the date such notice is given, if such notice is given after the LC Payment Date; provided that any notice given to the Borrowers after 11:00 A.M. (Eastern Time) on any day shall be deemed for purposes of the foregoing clause (y) to have been given on the next succeeding Business Day; and (ii) in addition, the Borrowers agree to pay to the relevant LC Issuing Bank interest on any and all amounts not paid by the Borrowers when due hereunder with respect to a Letter of Credit, for each day from and including the date when such amount becomes due to but excluding the date such amount is paid in full, payable on demand, at a rate per annum equal to the Default Rate for such day. Each payment to be made by the Borrowers pursuant to this subsection (i) shall be made to the relevant LC Issuing Bank in Federal or other funds immediately available to it at its address specified in or pursuant to Section 11.01. (j) Payments by Lenders with Respect to Letters of Credit. If the Borrowers fail to reimburse the relevant LC Issuing Bank as and when required by subsection (i) above for all or any portion of any amount drawn under a Letter of Credit issued by it: (i) such LC Issuing Bank may notify the Administrative Agent of such unreimbursed amount and request that the Lenders reimburse such LC Issuing Bank for their respective Percentages thereof. Upon receiving any such notice from an LC Issuing Bank, the Administrative Agent shall promptly notify each Lender of the unreimbursed amount and such Lender's Percentage thereof, but the failure of the Administrative Agent to give such notice on the drawing date or in sufficient time to enable any Lender to effect payment on such date shall not relieve such Lender from its obligations under this Section 2.05(j)(i). Upon receiving such notice from the Administrative Agent, each Lender shall make available to such LC Issuing Bank, at its address specified in or pursuant to Section 11.01, an amount equal to such Lender's Percentage of such unreimbursed amount as set forth in such notice, in Federal or other funds immediately available to such LC Issuing Bank, by 3:00 P.M. (Eastern Time) (A) on the day such Lender receives such notice if it is received at or before 12:00 Noon (Eastern Time) on such day or (B) on the first Business Day following such Lender's receipt of such notice if it is received after 12:00 Noon (Eastern Time) on the date of receipt. Upon payment in full thereof, such Lender shall be subrogated to the rights of such LC Issuing Bank against the Borrowers to the extent of such Lender's Percentage of the related LC Reimbursement Obligation (including interest accrued thereon). Nothing in this subsection (j) shall affect any rights any Lender may have against any LC Issuing Bank for any action or omission for which such LC Issuing Bank is not indemnified under subsection (n) of this Section 2.05; and 31 (ii) if any Lender fails to pay any amount required to be paid by it pursuant to clause (i) of this subsection (j) on the date on which such payment is due, interest shall accrue on such Lender's obligation to make such payment, for each day from and including the date such payment became due to but excluding the date such Lender makes such payment, at a rate per annum equal to (x) for each day from the day such payment is due to the third succeeding Business Day, inclusive, the Federal Funds Rate for such day as determined by the relevant LC Issuing Bank and (y) for each day thereafter the Base Rate for such day. Any payment made by any Lender after 3:00 P.M. (Eastern Time) on any Business Day shall be deemed for purposes of the preceding sentence to have been made on the next succeeding Business Day. If the Borrowers shall reimburse any LC Issuing Bank for any drawing with respect to which any Lender shall have made funds available to such LC Issuing Bank in accordance with clause (i) of this subsection (j), such LC Issuing Bank shall promptly upon receipt of such reimbursement distribute to such Lender its pro rata share thereof, including interest, to the extent received by such LC Issuing Bank. If the LC Issuing Bank is required at any time to return to any Borrower, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by any Borrower to the LC Issuing Bank pursuant to Section 2.05(i) in reimbursement of a payment made under any Letter of Credit or interest or fee thereon, each Lender shall, on demand of the LC Issuing Bank, forthwith return to the LC Issuing Bank the amount equal to such Lender's Percentage of any amounts so returned by the LC Issuing Bank plus interest thereon from the date such demand is made to the date such amounts are returned by such Lender to the LC Issuing Bank, at a rate per annum equal to (x) for each day from the day such payment is due to the third succeeding Business Day, inclusive, the Federal Funds Rate for such day as determined by the relevant LC Issuing Bank and (y) for each day thereafter the Base Rate for such day. Any payment made by any Lender after 3:00 p.m. (Eastern time) on any Business Day shall be deemed for purposes of the preceding sentence to have been made on the next succeeding Business Day. (k) Increased Cost and Reduced Return. If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or LC Issuing Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall impose, modify or deem applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to letters of credit or participations therein, and the result of any of the foregoing is to increase the cost to such Lender or LC Issuing Bank of issuing or maintaining any Letter of Credit or any participation therein, or to reduce any amount receivable by any Lender or LC Issuing Bank under this Section 2.05 in respect of any Letter of Credit or any participation therein (which increase in cost, or reduction in amount receivable, shall be the result of such Lender's or LC Issuing Bank's reasonable allocation of the aggregate of such increases or reductions resulting from such event), then, within 15 days after written demand by such Lender or LC Issuing 32 Bank (with a copy to the Administrative Agent), the Borrowers agree to pay to such Lender or LC Issuing Bank, from time to time as specified by such Lender or LC Issuing Bank, such additional amounts as shall be sufficient to compensate such Lender or LC Issuing Bank for such increased cost or reduction. A certificate of such Lender or LC Issuing Bank submitted to the Borrowers pursuant to this subsection (k) and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. (l) Exculpatory Provisions. The Borrowers' obligations under this Section 2.05 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which any MHG Company or any Account Party may have or have had against any LC Issuing Bank, any Lender, the beneficiary of any Letter of Credit or any other Person. The Borrowers assume all risks of the acts or omissions of, or misuse of any Letter of Credit by, any beneficiary of any Letter of Credit with respect to the use of such Letter of Credit by such beneficiary. None of the LC Issuing Banks, the Lenders and their respective officers, directors, employees and agents shall be responsible for, and the obligations of each Lender to make payments to each LC Issuing Bank and of the Borrowers to reimburse each LC Issuing Bank for drawings pursuant to this Section 2.05 (except to the extent such obligations result from the gross negligence or willful misconduct of the relevant LC Issuing Bank) shall not be excused or affected by, among other things, (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the form, validity, sufficiency, legal effect or genuineness of documents presented under any Letter of Credit or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged (even if the LC Issuing Bank shall have been notified thereof); (iii) payment by any LC Issuing Bank against presentation of documents to it which do not comply with the terms of the relevant Letter of Credit; (iv) any dispute between or among any of the MHG Companies or their Affiliates, the beneficiary of any Letter of Credit or any other Person or any claims or defenses whatsoever of any of the MHG Companies or their Affiliates or any other Person against the beneficiary of any Letter of Credit; (v) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (vi) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply fully with any conditions required in order to draw upon such Letter of Credit or any other claim of any Borrower against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among any Borrower and any beneficiary of any Letter of Credit or any such transferee; (vii) errors in interpretation of technical terms; (viii) any loss or delay in the transmission or otherwise of any documents required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (ix) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under any such Letter of Credit; or (x) any consequences arising from causes beyond the control of the LC Issuing Bank, including any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority, and none of the above shall affect or impair, or prevent the vesting of, any of the LC Issuing Bank's rights or powers hereunder. No LC Issuing Bank shall be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit. Any action taken 33 or omitted by any LC Issuing Bank or any Lender under or in connection with any Letter of Credit and the related drafts and documents, if done without willful misconduct or gross negligence, shall be binding upon the Borrowers and shall not place any LC Issuing Bank or any Lender under any liability to any MHG Company. (m) Reliance, Etc. Subject to Section 2.05(d), each LC Issuing Bank shall be entitled (but not obligated) to rely, and shall be fully protected in relying, on the representation and warranty by the Borrowers set forth in the last sentence of Section 3.02 to establish whether the conditions specified in Section 3.02 are met in connection with any issuance or extension of a Letter of Credit. The rights and obligations of each LC Issuing Bank under each Letter of Credit issued by it shall be governed by the provisions thereof and the provisions of the UCP and/or UCC referred to therein or otherwise applicable thereto. (n) Indemnification by the Borrowers. The Borrowers agree to protect, indemnify, pay and hold harmless each Lender, each LC Issuing Bank and each Agent and their respective directors, officers, agents and employees (collectively, the "LC Indemnitees") from and against any and all claims, demands, liabilities, charges, damages, losses, liabilities, costs or expenses (including, without limitation, the reasonable fees and disbursements of counsel and allowed costs of internal counsel) which such LC Indemnitee may reasonably incur (or which may be claimed against any such LC Indemnitee by any Person) by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit or any actual or proposed use of any Letter of Credit, including any claims, demands, liabilities, charges, damages, losses, liabilities, costs or expenses which any LC Issuing Bank may incur by reason of or in connection with the failure of any Lender to fulfill or comply with its obligations to such LC Issuing Bank hereunder in connection with any Letter of Credit (but nothing herein contained shall affect any rights the Borrowers may have against any such defaulting Lender); provided that the Borrowers shall not be required to indemnify any LC Indemnitee for any claims, demands, liabilities, charges, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of any LC Indemnitee as determined by a final judgment of a court with competent jurisdiction in determining whether a request presented under any Letter of Credit issued by it complied with the terms of such Letter of Credit or (ii) any LC Issuing Bank's failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit. Nothing in this subsection (n) is intended to limit the obligations of the Borrowers under any other provision of this Section 2.05. (o) Indemnification by Lenders. Each Lender shall, ratably in accordance with its Percentage, indemnify each LC Issuing Bank, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the MHG Companies) against any cost, expense (including reasonable fees and disbursements of counsel), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct or such LC Issuing Bank's failure to pay under any Letter of Credit issued by it after the presentation to it of a request strictly complying with the terms and conditions of such Letter of Credit) that any such indemnitee may suffer or incur in connection with this Section 2.05 or any action taken or omitted by such indemnitee under this Section 2.05. Each Lender's obligation in accordance with 34 this Agreement to reimburse the LC Issuing Bank for its respective Percentage, as contemplated by Section 2.05(j), as a result of a drawing under a Letter of Credit, and the Obligations of any Borrower to reimburse the LC Issuing Bank upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 2.05 under all circumstances, including the following circumstances: (i) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against the LC Issuing Bank, any Borrower or other Person for any reason whatsoever; (ii) any lack of validity or enforceability of any Letter of Credit; (iii) the existence of any claim, set-off, defense or other right which any Borrower or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the LC Issuing Bank or any Lender or any other Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any MHG Companies or their Affiliates and the beneficiary for which any Letter of Credit was procured); (iv) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the LC Issuing Bank has been notified thereof; (v) payment by the LC Issuing Bank under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (vi) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Borrower or Subsidiaries of a Borrower; (vii) any breach of this Agreement or any other Financing Document by any party thereto; (viii) the occurrence or continuance of an Insolvency Proceeding with respect to any Borrower; (ix) the fact that an Event of Default shall have occurred and be continuing; (x) the fact that the Commitment Termination Date shall have passed or this Agreement or the Commitments hereunder shall have been terminated; and (xi) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. (p) Liability for Damages. Nothing in this Section 2.05 shall preclude the Borrowers or any Lender from asserting against any LC Issuing Bank any claim for direct (but not 35 consequential) damages suffered by the Borrowers or such Lender to the extent, but only to the extent, caused by (i) the willful misconduct or gross negligence of such LC Issuing Bank or its directors, officers, employees or agents in determining whether a request presented under any Letter of Credit issued by it complied with the terms thereof or (ii) such LC Issuing Bank's failure to pay under any such Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions thereof. (q) Dual Capacities. In its capacity as a Lender, each LC Issuing Bank shall have the same rights and obligations under this Section 2.05 as any other Lender. (r) Information to be Provided to Administrative Agent. The LC Issuing Banks shall furnish to the Administrative Agent upon request such information as the Administrative Agent shall reasonably request in order to calculate (i) the Aggregate LC Exposure existing from time to time and (ii) the amount of any fee payable for the account of the Lenders under Section 2.05(g). Section 2.06 Fees. ---- (a) Closing Date Financing Fee. The Borrowers shall pay to the Administrative Agent for distribution to each Lender on the Closing Date financing fees in an amount equal to 2.50% of the aggregate Commitments. (b) Arrangement Fee. The Borrowers shall pay on the Closing Date to the Co-Arrangers, for their own accounts to be shared equally by the Co- Arrangers, an arrangement fee in an aggregate amount equal to 1.00% of the aggregate Commitments. (c) Administrative Agent's Fee. The Borrowers shall pay to the Administrative Agent, for its own account, a monthly Administrative Agent's fee of $5,000, payable in advance on the Closing Date (for the remainder of the month in which such date falls) and on the last Business Day of each month thereafter (for the next succeeding month). (d) Commitment Fee. The Borrowers shall pay to the Administrative Agent for the account of each Lender a commitment fee, calculated for each day and equal to the sum of (i) the Tranche A Commitment Fee Rate for such day (expressed as a daily rate), multiplied by the amount by which such Lender's Tranche A Commitment on such day exceeds its Outstanding Tranche A Amount on such day, plus (ii) the Tranche B Commitment Fee Rate for such day (expressed as a daily rate), multiplied by the amount by which such Lender's Tranche B Commitment on such day exceeds its Outstanding Tranche B Amount on such day, regardless of whether the Tranche B Commencement Date shall have occurred. Such commitment fees shall accrue from and including the Interim Order Date to but excluding the Commitment Termination Date and shall be payable monthly in arrears on the last Business Day of each month after the Closing Date, and on the Commitment Termination Date . Section 2.07 Final Maturity of Loans. The Loans shall mature, and ----------------------- the outstanding principal amount thereof shall be due and payable (together with interest accrued thereon), on the Commitment Termination Date. 36 Section 2.08 Unscheduled Mandatory Prepayments of Loans; Reduction ----------------------------------------------------- of Commitments. - -------------- (a) Asset Sales. If after the Closing Date any MHG Company receives any Net Cash Proceeds of any Asset Sale, the Borrowers shall prepay (subject to subsection (g) below) an aggregate principal amount of Loans and permanently reduce the Commitments in an amount equal to 100% of such Net Cash Proceeds of such Asset Sale. (b) Incurrence of Debt. If after the Closing Date any MHG Company receives any Net Cash Proceeds from the issuance or other incurrence of any Debt, the Borrowers shall prepay (subject to subsection (g) below) an aggregate principal amount of Loans and permanently reduce the Commitments in an amount equal to 100% of such Net Cash Proceeds; provided that this subsection (b) shall not apply to any Net Cash Proceeds of (i) Debt under this Agreement or (ii) Permitted Intercompany Debt. (c) Equity Issuances. If after the Closing Date any MHG Company receives any Net Cash Proceeds from any Equity Issuance, the Borrowers shall prepay (subject to subsection (g) below) an aggregate principal amount of Loans and permanently reduce the Commitments in an amount equal to 100% of such Net Cash Proceeds. (d) Tax Refunds. If after the Closing Date any MHG Company receives any cash refund or rebate of any federal, state or other tax, the Borrowers shall prepay (subject to subsection (g) below) an aggregate principal amount of Loans and permanently reduce the Commitments in an amount equal to 100% of such tax refund or rebate; provided that this Section 2.08(d) shall not require any such prepayment unless the aggregate amount of such refunds and rebates received after the Closing Date shall exceed $100,000. (e) Excess Casualty Proceeds. The Borrowers (or the Collateral Agent on its behalf) shall apply any Excess Casualty Proceeds to prepay (subject to subsection (g) below) an aggregate principal amount of Loans and permanently reduce the Commitments in an amount equal to 100% of such Excess Casualty Proceeds; provided that this Section 2.08(e) shall not require any such prepayment unless the aggregate amount of such Excess Casualty Proceeds received after the Closing Date shall exceed $100,000. (f) Prepayments from Cash Balances. The Borrowers shall on each Business Day prepay (subject to subsection (g) below) an aggregate principal amount of Loans in an amount equal to the excess (such excess, as of any date of determination, being the "Excess Cash Amount"), if any, of (x) the amount of the Cash Balances of the Borrowers outstanding on such date over (y) the sum of (a) $5,000,000 and (b) the aggregate amount of cash required to be maintained on deposit as a minimum balance by the applicable financial institutions for the disbursement accounts, payroll accounts, depository accounts, concentration accounts and sub-concentration accounts as described in Schedule 10 hereto. ----------- (g) Timing of Prepayment. Each prepayment required by subsection (a), (b), (c), (d) or (e) of this Section 2.08 shall be made within one Business Day after any MHG Company 37 receives the relevant Net Cash Proceeds, and each prepayment required by subsection (f) of this Section 2.08 shall be made on the Business Day on which any excess Cash Balance which is required to be prepaid under such subsection is outstanding. (h) Allocation of Prepayments; Ratable Application. Each prepayment of the Loans required under Section 2.08(a) through (e) above (an "Unscheduled Mandatory Prepayment") shall be applied (i) prior to the Tranche B Commencement Date, first, to prepay the outstanding Tranche A Loans to the full extent ----- thereof and permanently reduce the Tranche A Commitments by the amount of such prepayments, second, to permanently reduce the Tranche A Commitments to the full ------ extent thereof, and third, to permanently reduce the Tranche B Commitments to ----- the full extent thereof; and (ii) on and after the Tranche B Commencement Date, first, to prepay the outstanding Tranche B Loans to the full extent thereof and - ----- permanently reduce the Tranche B Commitments by the amount of such prepayments, second, to prepay the outstanding Tranche A Loans to the full extent thereof and - ------ permanently reduce the Tranche A Commitments by the amount of such prepayments, third, to the extent of any remaining amount of such prepayment, to further - ----- permanently reduce the Tranche B Commitments to the full extent thereof, and fourth, to further permanently reduce the Tranche A Commitments to the full - ------ extent thereof. Each prepayment of the Loans required under Section 2.08(f) shall be applied, without reducing the Commitments, (i) prior to the Tranche B Commencement Date, to prepay the outstanding Tranche A Loans to the full extent thereof; and (ii) on and after the Tranche B Commencement Date, first, to prepay ----- the outstanding Tranche B Loans to the full extent thereof, and second, to ------ prepay the outstanding Tranche A Loans to the full extent thereof. Each prepayment of Loans or reduction of Commitments pursuant to this Section 2.08 shall be applied in accordance with this Agreement ratably to the applicable Loans and Commitments, respectively, of the several Lenders. The Borrowers shall give the Administrative Agent notice of any such prepayment as if it were an optional prepayment made pursuant to Section 2.09. Any amounts required to be applied to reduce Tranche A Commitments under this Section 2.08 to an amount below the aggregate LC Exposure of all Lenders shall be applied to cash collateralize Letters of Credit in accordance with the Security Agreement. (i) Interest. Each prepayment of principal of the Loans under this Section 2.08, other than prepayments pursuant to Section 2.08(f), shall be made together with interest accrued on the amount prepaid to the date of payment. Section 2.09 Optional Prepayments. -------------------- (a) Notice to Administrative Agent. The Borrowers may, upon giving a Prepayment Notice to the Administrative Agent before 12:00 Noon (Eastern Time) on the date of prepayment, prepay the Tranche A Loans or Tranche B Loans (as specified in such Prepayment Notice) outstanding on any Business Day in whole or in part in amounts aggregating $1,000,000 or any larger multiple of $100,000. (b) Notice to Lenders. Upon receiving a Prepayment Notice pursuant to this Section 2.09, the Administrative Agent shall promptly notify each Lender of the contents thereof and of such Lender's share of such prepayment and such Prepayment Notice shall not thereafter be revocable by the Borrowers. 38 (c) Ratable Application. Each prepayment of Tranche A Loans or Tranche B Loans pursuant to this Section 2.09 shall be applied ratably to the Tranche A Loans or Tranche B Loans, respectively, of the several Lenders. (d) Payment of Accrued Interest. Each prepayment of principal of the Loans under this Section 2.09 shall be made together with interest accrued on the amount prepaid to the date of payment. Section 2.10 Termination or Reduction of Commitments. The Borrowers --------------------------------------- may, upon at least three Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Lender has any Outstanding Tranche A Amount or Outstanding Tranche B Amount, respectively, after such termination, or (ii) ratably reduce the Tranche A Commitments or Tranche B Commitments from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000; provided that immediately after such reduction no Lender's Outstanding Tranche A Amount or Outstanding Tranche B Amount shall exceed its Tranche A Commitment or Tranche B Commitment, respectively, as so reduced. Unless previously terminated, the Commitments shall terminate in their entirety on the Commitment Termination Date. Once reduced or terminated the Commitments may not be reinstated. The Borrowers' notice to the Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction, whether the Tranche A Commitments or the Tranche B Commitments are to be terminated or reduced, and the amount of any partial reduction of the Tranche A Commitments or the Tranche B Commitments, and such termination or reduction of the Tranche A Commitments or Tranche B Commitments shall be effective on the date specified in the Borrowers' notice and shall be applied ratably to the Tranche A Commitments or Tranche B Commitments (as specified by the Borrowers in such notice), respectively, of the several Lenders. Section 2.11 General Provisions as to Payments. --------------------------------- (a) The Borrowers shall make each payment of principal of, and interest on, the Loans and the LC Reimbursement Obligations and each payment of facility fees, commitment fees and letter of credit fees (other than fees payable directly to the LC Issuing Banks) hereunder not later than 1:00 P.M. (Eastern Time) on the date when due, in Federal or other funds immediately available in Pittsburgh, Pennsylvania, to the Administrative Agent at its address for payments specified in or pursuant to Section 11.01. Upon receiving a payment for the account of the Lenders, the Administrative Agent will promptly distribute to each such Lender its ratable share of such payment. Whenever any payment of principal of, or interest on, Loans or LC Reimbursement Obligations or any payment of commitment fees or letter of credit fees shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Administrative Agent shall have received notice from the Borrowers before the date on which any payment is due to any of the Lenders hereunder that the Borrowers will not make such payment in full, the Administrative Agent may assume that the Borrowers have made such payment in full to the Administrative Agent on such date and, in reliance 39 upon such assumption, the Administrative Agent may (but shall not be obligated to) cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrowers shall not have so made such payment, each such Lender shall repay to the Administrative Agent forthwith on demand any such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.12 Computation of Interest and Fees. -------------------------------- (a) Interest and fees hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). (b) The Administrative Agent shall determine the Tranche A Interest Rate, the Tranche B Interest Rate, the Tranche A Default Rate, the Tranche B Default Rate and the LC Fee Rate applicable hereunder and the amount of accrued interest and fees. The Administrative Agent shall give prompt notice to the Borrowers and the Lenders of each Tranche A Interest Rate, Tranche B Interest Rate, Tranche A Default Rate, Tranche B Default Rate and LC Fee Rate and the amount of accrued interest and fees so determined, and its determination thereof shall be conclusive in the absence of manifest error. Section 2.13 Superpriority Nature of Obligations. All Obligations ----------------------------------- under the Financing Documents shall constitute allowed administrative expense claims in the Chapter 11 Cases against Borrowers with priority under Section 364(c)(1) of the Bankruptcy Code over any and all other administrative expenses of the kind specified or ordered pursuant to any provision of the Bankruptcy Code, including, but not limited to, Sections 105, 326, 328, 503(b), 506(c), 507(a), 507(b) and 726 of the Bankruptcy Code; provided that, the superpriority administrative claim status of the Obligations, and the Liens and security interests securing the same, shall be subject only to the "Carve-Out", consisting of: (i) unpaid professional fees and expenses incurred (x) prior to the date of the delivery of a notice from the Administrative Agent or Required Lenders to the Borrowers of the occurrence of an Event of Default and specifying that the limitation on professional fees and expenses referred to in the following clause (ii) is in effect (such notice being the "Carve-Out Notice") or (y) after the earlier of (1) such time as no Event of Default shall be continuing or (2) such time as such Carve-Out Notice shall be rescinded by the Administrative Agent at the direction of Required Lenders in their sole discretion, to the extent such fees and expenses described in this clause (i) are allowed by the Court in the Chapter 11 Cases (including on an interim basis and subject to final allowance), (ii) after and from the date of the delivery of a Carve-Out Notice, professional fees and expenses allowed by the Court in the Chapter 11 Cases (including on an interim basis and subject to final allowance) in an aggregate amount (determined without regard to fees and expenses incurred prior to the date of the delivery of such Carve-Out Notice and which are at any time allowed by the Court (including on an interim basis and subject to final allowance)) not to exceed $2,000,000 (for any period commencing at the time a Carve-Out Notice shall have been so delivered and ending at the earlier of (1) such subsequent time as no Event of Default shall be continuing and (2) such time as such Carve-Out Notice shall be rescinded by the Administrative 40 Agent at the direction of Required Lenders in their sole discretion), and (iii) fees payable to the Clerk of the Court and to the United States Trustee pursuant to 28 U.S.C. (S)1930(a)(6). Section 2.14 Joint and Several Liability; Payment Indemnifications. ----------------------------------------------------- (a) All Obligations of Borrowers under the Financing Documents shall be the joint and several Obligations of the Borrowers. The Obligations of and the Liens granted by any such Borrower under the Financing Documents shall not be impaired or released by any action or inaction on the part of any Agent or any Lender with respect to any Credit Party, including any action or inaction which would otherwise release a surety. (b) In order to provide for just and equitable contribution between the Borrowers if any payment is made by a Borrower (a "Funding Borrower") in discharging any of the Obligations, each of the Funding Borrowers shall be entitled to a contribution from the other Borrowers for all payments, damages and expenses incurred by such Funding Borrower in discharging the Obligations, in the manner and to the extent required to allocate liabilities in an equitable manner among the Borrowers on the basis of the relative benefits received by the Borrowers. If and to the extent that a Funding Borrower makes any payment to any Lender or any other Person in respect of the Obligations, any claim which said Funding Borrower may have against the other Borrowers by reason thereof shall be subject and subordinate to the prior Cash payment in full of the Obligations. The parties hereto acknowledge that the right to contribution hereunder shall constitute an asset of the party to which such contribution is owing. Notwithstanding any of the foregoing to the contrary, such contribution arrangements shall not limit in any manner the joint and several nature of the Obligations, limit, release or otherwise impair any rights of any Agent or any Lender under the Financing Documents, or alter, limit or impair the obligation of each Borrower, which is absolute and unconditional and joint and several with the other Borrowers, to repay the Obligations. The obligation of any Borrower to make any contribution to another Borrower under this Section 2.14(b) shall be deemed an expense of administration of such Borrower arising under Section 503(b) of the Bankruptcy Code and shall be junior in priority to all Obligations of such Borrower and of the Borrowers under the Financing Documents. ARTICLE 3. Conditions Section 3.01 Effectiveness of this Agreement; Closing. This ---------------------------------------- Agreement will become effective, and the Closing will occur, when (i) the Agents shall have received the following documents, each dated the Closing Date unless otherwise indicated, and (ii) the other conditions specified below shall have been satisfied or waived in accordance with the terms hereof: (a) with respect to each party listed on the signature pages hereof, either a counterpart of this Agreement signed by such party or facsimile or other written confirmation satisfactory to the Administrative Agent that such party has signed a counterpart hereof; (b) a duly executed Tranche A Note and a duly executed Tranche B Note complying with the provisions of Section 2.03 payable to each Lender; 41 (c) a counterpart of the Security Agreement, signed by each of the Borrowers, together with (to the extent not previously delivered to Collateral Agent in its capacity as collateral agent under the Existing Credit Facilities) certificates evidencing all the certificated Equity Interests listed in Schedule 3 hereto and signed stock powers or other ---------- appropriate instruments of transfer relating thereto; (d) all signed UCC financing statements requested by the Collateral Agent to perfect its security interests in the Collateral; (e) to the extent received by the Collateral Agent on or prior to the Closing Date, the results of Lien and tax and judgment Lien searches with respect to the personal, mixed and real properties of the Borrowers in the jurisdictions and with the scope requested by the Collateral Agent, which results shall be satisfactory to the Collateral Agent; (f) written wire transfer instructions signed by MHG on behalf of the Borrowers and in form and substance satisfactory to the Administrative Agent for application of the proceeds of the initial Borrowing hereunder on the date of initial Borrowing, including providing for the payment on the date of initial Borrowing of (1) all fees, expenses and other amounts payable by the Borrowers on or before such date to the Agents, Co-Arrangers and the Lenders in connection with this Agreement, and (2) all fees and expenses of each counsel and advisor to the Agents, the Lenders and the Existing Lenders in connection with this Agreement, the Existing Credit Facilities, the Existing Notes and the transactions contemplated thereby (including without limitation O'Melveny & Myers LLP, counsel to the Agents, Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to the Administrative Agent and the administrative agent under the Existing Credit Facilities, Kennedy Covington Lobdell & Hickman, L.L.P., special counsel to the Syndication Agent and the syndication agent under the Existing Credit Facilities, Houlihan Lokey Howard & Zukin and Care Consulting, L.L.C.), incurred and invoiced but not yet paid through the Petition Date; (g) an opinion of Powell, Goldstein, Frazer & Murphy LLP, special counsel for the Borrowers, substantially in the form of Exhibit H hereto --------- (and Borrowers hereby request such counsel to deliver such opinions to Lenders); (h) all approvals, consents and other actions by or in respect of, or filings with, any governmental body, agency, official, authority or other Person (including stockholders) required in connection with the transactions contemplated by the Financing Documents shall have been obtained, taken or made (except for any such approvals, consents, actions or filings with any Person (other than any governmental body, agency, official or authority) (1) as to which the failure to have obtained, taken or made them is not, in the aggregate, material or (2) which have been rendered unnecessary, in the reasonable judgment of the Agents, due to the entry of the Interim Borrowing Order); (i) the Interim Borrowing Order (or if there is no Interim Borrowing Order, the Borrowing Order) shall have been entered by the Court; 42 (j) no pleading, application or objection sought by any party in interest (including any Existing Lender) shall have been filed with and granted by the Court (or shall have been filed with the Court by or on behalf of an official committee of creditors) which has not been withdrawn, stayed, dismissed or denied seeking (i) to dismiss or convert any of the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code, (ii) the appointment of a Chapter 11 trustee in any of the Chapter 11 Cases or of a trustee of any Borrower under Chapter 7, (iii) the appointment of an examiner (with expanded powers beyond those set forth in Sections 1106(a)(3) and (4) of the Bankruptcy Code) for any Borrower under Section 1106(b) of the Bankruptcy Code, (iv) the granting of an administrative expense or priority claim or a Lien in either case pari passu or senior to that of the Collateral Agent granted pursuant to the Collateral Documents, the Interim Borrowing Order and the Borrowing Order, other than the Carve- Out, (v) to stay, reverse, vacate, or otherwise modify the Interim Borrowing Order or the Borrowing Order without the prior written consent of the Agents and Required Lenders, or (vi) relief from the automatic stay (or any other injunction having similar effect) so as to allow a third party to proceed against any property or assets of the Borrowers deemed material by the Agents; (k) all First Day Orders shall be in form and substance satisfactory to the Agents, and the Agents shall have received copies of all orders, if any, entered by the United States Bankruptcy Court in the bankruptcy cases of MPAN as a result of motions and applications filed by the relevant debtors with such court on the relevant petition date; (l) since the date of the Most Recent Audited Financial Statements, no Material Adverse Effect (in the sole opinion of Required Lenders) shall have occurred; (m) the Agents shall have received, in form and substance satisfactory to the Agents, a certificate from an appropriate officer of each of the Credit Parties (i) attaching copies of the Organizational Documents of such Credit Party and copies of resolutions or consents of the board of directors of such Credit Party or of its applicable partner or member authorizing the applicable Financing Documents, the Chapter 11 Cases and the other transactions contemplated hereby, and (ii) certifying (A) that such copies are true, correct and complete copies thereof and that such resolutions and Organizational Documents are in full force and effect as of the Closing Date and have been duly adopted in accordance with the Organizational Documents of such Credit Party, and (B) as to the signatures and incumbency of the Persons executing Financing Documents on behalf of such Credit Party; (n) the Agents shall have received copies of all Management and Service Agreements, including all employment agreements (if any) with the administrator, facility director, and director of nursing for each Healthcare Facility, which shall be (i) in form and substance satisfactory to the Agents and (ii) certified as true, correct and complete and in full force and effect as of the Closing Date by an appropriate officer of the Credit Parties; (o) the Lenders shall have received (i) unaudited consolidated financial statements of MHG and its Consolidated Subsidiaries for the nine- month period ended September 30, 1999 and the one-month period ended October 31, 1999, consisting of 43 consolidated balance sheets and the related consolidated statements of income, stockholders' equity and cash flows for such Fiscal Year, which unaudited financial statements shall be in form and substance satisfactory to the Agents and Lenders and shall be certified by a Financial Officer of MHG that they fairly present the financial condition of MHG and its Consolidated Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, and (ii) drafts of the audited consolidated balance sheet of Mariner Post-Acute Network, Inc. and its Subsidiaries for the fiscal year ended September 30, 1999 and the related audited consolidated statements of income, stockholders' equity and cash flows of Mariner Post-Acute Network, Inc. and its Subsidiaries for such fiscal year, in reasonable detail and certified by a financial officer of MPAN that they fairly present the financial condition of Mariner Post-Acute Network, Inc. and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated; (p) the Lenders shall have received (i) a detailed written description of all outstanding claims asserted by, and disputes with, the United States with respect to Medicare and/or under the False Claims Act or with any State or with any fiscal intermediary or agent for any of the foregoing, in any such case involving or against any of the MHG Companies and their Subsidiaries, and the amounts involved or claimed, (ii) a copy of the Settlement Letter, which Settlement Letter shall be in full force and effect, with no modifications thereto, and (iii) a copy of the HHS Stipulation, which shall be duly executed by all parties purported to be bound thereby; (q) the Agents shall have received a written instrument, in form and substance satisfactory to the Agents, executed by MPAN for the benefit of the Agents and Lenders (i) evidencing MPAN's acknowledgment of and agreement to the provisions of Sections 5.13 and 7.07 and (ii) undertaking to comply with the obligations of the Borrowers and MPAN set forth in such Sections; (r) the Agents shall have received (i) the Cash Budget and (ii) the Year 2000 DIP Budget, in each case in form and substance satisfactory to the Agents; (s) the LC Issuing Bank shall have received a counterpart to the LC Issuing Bank Fee Letter, signed by each of the Borrowers; (t) the Agents shall have received the Credit and Collection Policy, in form and substance satisfactory to the Agents; (u) the Agents shall have received a schedule of actions, suits or proceedings pending or threatened against the Borrowers as of the Closing Date, which schedule shall be in form and substance satisfactory to the Agents; and (v) the Agents shall have received all other documents that any Agent may reasonably request relating to the existence of the MHG Companies, the corporate or other authority for and the validity of the Financing Documents, the creation and perfection 44 of the Liens contemplated by the Collateral Documents and any other matters relevant thereto, all in form and substance satisfactory to the Agents. Promptly after the Closing occurs, the Agents shall notify the Borrowers and the Lenders thereof, and such notice shall be conclusive and binding on all parties hereto. Section 3.02 Credit Events. The obligations (i) of each Lender to ------------- make a Loan on the occasion of each Borrowing, (ii) of an LC Issuing Bank to sell and of each Lender to purchase each participation in a Letter of Credit as and when provided in Section 2.05, and (iii) of each LC Issuing Bank to extend (or allow the extension of) the expiry date of a Letter of Credit issued by it hereunder as and when provided in Section 2.05 are each subject to the satisfaction (or waiver in accordance with the terms hereof) of the following conditions: (a) the fact that the Closing Date shall have occurred; (b) receipt by the Administrative Agent of notice of the relevant Credit Event as required by Section 2.02 or 2.05(c), as the case may be; (c) the fact that, immediately before and after such Credit Event, no Default shall have occurred and be continuing; (d) the fact that each of the representations and warranties made by any of the Borrowers in or pursuant to any Financing Document to which it is a party shall be true on and as of the date of such Credit Event as if made on and as of such date, unless such representation or warranty was expressly made solely as of an earlier date, in which case such representation or warranty was true and correct on such earlier date; (e) no order, judgment or decree of any court (including, without limitation, the Court), arbitrator or governmental authority shall purport to enjoin or restrain such Lender from making any such Loan or extending or issuing any such Letter of Credit on the date of such Credit Event; (f) immediately after giving effect to such Credit Event, the limitations on borrowing set forth in Section 2.01(c) shall have been complied with; (g) the making of the Loans requested in connection with any such Borrowing shall not violate any law including Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; (h) no pleading, application or objection sought by any party in interest (including any Existing Lender) shall have been filed with and granted by the Court (or shall have been filed with the Court by or on behalf of an official committee of creditors) which has not been withdrawn, stayed, dismissed or denied seeking (i) to dismiss or convert any of the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code, (ii) the appointment of a Chapter 11 trustee in any of the Chapter 11 Cases or of a trustee of any Borrower under Chapter 7, (iii) the appointment of an examiner (with expanded powers beyond those set 45 forth in Sections 1106(a)(3) and (4) of the Bankruptcy Code) for any Borrower under Section 1106(b) of the Bankruptcy Code, (iv) the granting of an administrative expense or priority claim or a Lien in either case pari passu or senior to that of the Collateral Agent granted pursuant to the Collateral Documents, the Interim Borrowing Order and the Borrowing Order, other than the Carve-Out, (v) to stay, reverse, vacate, or otherwise modify the Interim Borrowing Order or the Borrowing Order, as the case may be, without the prior written consent of the Agents and Required Lenders, or (vi) relief from the automatic stay (or any other injunction having similar effect) so as to allow a third party to proceed against any property or assets of the Borrowers having an aggregate value in excess of $500,000; (i) there shall not be pending or, to the knowledge of any Executive Officer of the Borrowers, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting any MHG Company that would be required to be, but has not been, disclosed by the Borrowers in writing pursuant to Section 4.06 or 5.01(h) prior to the making of the last preceding Loans (or, in the case of the initial Loans, prior to the execution of this Agreement), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration whether or not required to be so disclosed, that, in either event, in the opinion of Required Lenders, in any manner questions the validity of any Financing Document or could be expected to have a Material Adverse Effect or in which there is a reasonable possibility of an adverse decision that could be expected to have a Material Adverse Effect seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of Loans hereunder; and (j) The Interim Borrowing Order and/or the Borrowing Order, as the case may be, shall be Final Orders. Each Credit Event under this Agreement shall be deemed to be a representation and warranty by the Borrowers on the date of such Credit Event that all of the conditions set forth in this Section 3.02 have been satisfied and that each certification contained in the relevant Notice of Borrowing or LC Request, as the case may be, is true, correct and complete on the date of such Credit Event. ARTICLE 4. Representations and Warranties Each of the Borrowers represents and warrants to the Lender Parties that: Section 4.01 Corporate Existence and Power. Each MHG Company is a ----------------------------- corporation, limited liability company or partnership duly incorporated, organized or formed, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, and, subject to compliance with any applicable provisions of the Bankruptcy Code, has all corporate or other powers and all material Governmental Approvals (including without limitation those required by Medicaid Regulations and Medicare Regulations) required to carry on its business as now 46 conducted and as proposed to be conducted, except for such Governmental Approvals the failure of which to have in the aggregate could not be expected to have a Material Adverse Effect. Each Borrower is in compliance with its Organizational Documents and all orders of the Court. Section 4.02 Corporate and Governmental Authorization; No -------------------------------------------- Contravention. The execution and delivery by each MHG Company of the Financing - ------------- Documents to which it is a party, its performance of its obligations thereunder and, with respect to each of the Borrowers, the issuance and payment of the Notes are within its corporate, partnership or limited liability company or other powers, have been duly authorized by all necessary corporate, partnership, limited liability company or other action, require no action by or in respect of, or filing with, any governmental body, agency or official (except for the Court and such as shall have been made at or before the time required by the Financing Documents and shall be in full force and effect on and after the date when made to the extent required by the Financing Documents) and do not contravene or violate any Applicable Laws (including an applicable order of the Court) or any provision of its Organizational Documents, or contravene or constitute a default under any agreement or other instrument binding upon it (which contravention or default, in the case of such instruments or agreements, would give rise to rights enforceable on a post-Petition Date basis) or result in or require the imposition of any Lien (other than the Liens created by the Collateral Documents) on any of its assets. Section 4.03 Binding Effect. This Agreement constitutes a valid and -------------- binding agreement of the Borrowers, and the other Financing Documents, when executed and delivered as contemplated by this Agreement, will constitute valid and binding obligations of each MHG Company that is a party thereto, in each case enforceable in accordance with its terms, except as limited by general principles of equity. Section 4.04 Security Interests. On the Closing Date, the Collateral ------------------ Documents will create valid Security Interests in the Collateral to the extent set forth therein. At all times after the Closing, the Collateral Documents, in conjunction with the entry of the Interim Borrowing Order and/or the Borrowing Order, will create valid and perfected Security Interests in the Collateral of the Borrowers from time to time covered or purportedly covered thereby. Such Security Interests will be prior to all other Liens (except as set forth in the Interim Borrowing Order and the Borrowing Order) on such Collateral until the applicable Security Interest is released pursuant to Section 18 of the Security Agreement. Section 4.05 Financial Information. --------------------- (a) The Most Recent Audited Financial Statements, reported on by Ernst & Young, LLP, fairly present in all material respects, in conformity with GAAP, the consolidated financial position of MHG and its Consolidated Subsidiaries as of December 31, 1998 and their consolidated results of operations and cash flows for the twelve-month period ending as of such date. (b) The unaudited consolidated balance sheets of MHG and its Consolidated Subsidiaries as of September 30, 1999 and October 31, 1999 and the related unaudited consolidated statements of operations, cash flows and shareholders' equity for the nine-month period and one-month period then ended, respectively, as delivered to the Lenders on or prior to the Closing Date, 47 fairly present in all material respects, in conformity with GAAP, the consolidated financial position of MHG and its Consolidated Subsidiaries as of such dates and their consolidated results of operations and cash flows for such periods, subject to audit and normal year-end adjustments. (c) Since the date of the Most Recent Audited Financial Statements, no event has occurred and no condition has come into existence which has had, or is likely to have, a Material Adverse Effect. Section 4.06 Litigation. Except as disclosed in the schedule ---------- delivered on or prior to the Closing Date pursuant to Section 3.01(u) or pursuant to Section 5.01(h), there is no action, suit or proceeding pending against, or to the knowledge of any Executive Officer of the Borrowers threatened against or affecting, any MHG Company before any court or arbitrator or any governmental body, agency or official (i) in which there is a reasonable possibility of an adverse decision that could be expected to have a Material Adverse Effect or (ii) which in any manner questions the validity of any Financing Document. Section 4.07 Compliance with ERISA. Each member of the ERISA Group --------------------- has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or made any amendment to any Plan, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. Section 4.08 Taxes. The MHG Companies have filed all United States ----- federal income tax returns that are required to be filed by them (or have filed appropriate extensions for filing such tax returns) and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except (i) such taxes, if any, as are being contested in good faith and as to which reserves have been provided and (ii) taxes the liability for which does not exceed, in the aggregate, $50,000. The charges, accruals and reserves on the books of the MHG Companies in respect of taxes or other similar governmental charges are, in the opinion of MHG, adequate. Section 4.09 Compliance with Laws. (a) The MHG Companies are in -------------------- compliance in all material respects with all Applicable Laws (including without limitation Medicaid Regulations and Medicare Regulations), other than such laws, rules or regulations (i) the validity or applicability of which the relevant MHG Company is contesting in good faith or (ii) the failure to comply with which could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. (b) As of the date hereof Schedule 9 hereto lists the following ---------- contracts relating to the business operations of the MHG Companies: (i) all employee benefit plans, employment agreements where the compensation paid by any MHG Company exceeds $250,000 in any fiscal year, collective bargaining agreements and labor contracts (the "Labor Contracts"), (ii) all written 48 provider or similar agreements (the "Provider Agreements") pursuant to which the MHG Companies have received or may claim any entitlement to receive reimbursement from or as a result of (1) Medicaid, Medicare or Blue Cross programs, or (2) any other public or private reimbursement programs where the payments received by any MHG Company exceeded or are expected to exceed $6,000,000 in the current fiscal year; (iii) all leases of real property where the payments made by any MHG Company in the current fiscal year exceed or are expected to exceed $250,000, (iv) any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, where the payments made by any MHG Company exceeded or are expected to exceed $1,000,000 in the aggregate in the current fiscal year; (v) all management contracts pursuant to which any MHG Company provides management services to any other person where the payments received or expected to be received by any MHG Company exceed $500,000 in the current fiscal year, and all other Management and Service Agreements; and (vi) all material contracts filed as exhibits to any report filed by MHG with the SEC during the past twelve months. All contracts listed on Schedule 9 and any Provider Agreements which ---------- provide for annual payments in excess of $6,000,000 which are not listed on Schedule 9 are valid, binding and enforceable upon each of the parties thereto - ---------- in accordance with their respective terms and there is no default thereunder. There are no patient care agreements with patients or any other person or organization which deviate in such a material respect from the standard patient care forms used by the MHG Companies. (c) As of the date hereof, Schedule 12 hereto sets forth an accurate ----------- description of all of the Healthcare Facilities (including without limitation all of the Nursing Home Facilities) together with a list of their location and a general description of the services provided by each such Healthcare Facility. Except as set forth on Schedule 9, each MHG Company has all material ---------- accreditations, authorizations, approvals, certificates of need, consents, agreements, licenses, permits and qualifications (collectively, "Approvals") required for them to (i) construct, acquire, own, manage, lease and/or operate their facilities and services, and (ii) receive payment and reimbursement from any patient or third party payor. The MHG Companies have all other material Approvals required for the lawful operation of their businesses. All material Approvals of each MHG Company are in full force and effect and have not been amended or otherwise modified (except for modifications which would not have a material adverse effect upon any MHG Company) rescinded, revoked or assigned, and no notice has been received of any violation of Applicable Laws or any refusal to renew any Approval which could reasonably be expected to cause any of such Approvals to be modified, rescinded or revoked (except for modifications, rescissions or revocations which could not reasonably be expected have a Material Adverse Effect). No MHG Company knows of any reason why any of them will not be able to maintain all material Approvals necessary or appropriate to construct, own, lease, manage and operate all of their facilities and to otherwise conduct their businesses as now conducted and presently proposed to be conducted. There are no deficiencies to the conditions for participation by any MHG Company in any Medicare, Medicaid, Veterans Administration or other reimbursement programs which would preclude such participation. Section 4.10 No Regulatory Restrictions on Borrowing. No MHG Company --------------------------------------- is (i) an "investment company", within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company", or an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as 49 amended or (iii) otherwise subject to any regulatory scheme (other than the Bankruptcy Code) which restricts its ability to incur Debt hereunder. Section 4.11 Environmental Matters. --------------------- (a) From time to time after the Closing, MHG will review the effect of Environmental Laws on the business, operations and properties of the MHG Companies, in the course of which reviews it will identify and evaluate associated liabilities and costs. On the basis of such reviews, MHG has reasonably concluded that the foregoing associated liabilities and costs are unlikely to have a Material Adverse Effect. (b) Except to the extent that the Environmental Liabilities of the MHG Companies that relate to or could result from the matters referred to in this Section 4.11(b) would not exceed $1,000,000 for any one occurrence, no material notice, notification, demand, request for information, citation, summons, complaint or order with respect to Hazardous Substances or any violation of Environmental Laws is in existence or, to the knowledge of MHG, proposed, threatened or anticipated with respect to or in connection with the operation of any properties to be owned, leased or operated after the Closing Date by any MHG Company. Section 4.12 Full Disclosure. All information heretofore furnished --------------- in writing by any MHG Company to any Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby was, and all such information hereafter furnished in writing by the MHG Companies to any Agent or Lender will be, true and accurate in every material respect or based on reasonable estimates on the date as of which such information is or was stated or certified. MHG has disclosed to the Lenders in writing any and all facts which are known to it and which have had or could be expected to have a Material Adverse Effect. Section 4.13 Information as to Equity Interests and Instruments -------------------------------------------------- Owned by MHG Companies. Schedule 3 hereto sets forth a correct and complete list - ----------------------- ---------- of each Subsidiary of MHG, its outstanding Equity Interests, the owner thereof and the percentage thereof owned by such owner. Neither MHG nor any of its Subsidiaries owns any interest in any Subsidiary which is not a Borrower (other than the Excluded Subsidiaries). Except for the notes specified on Schedule 1 to the Security Agreement, no Debt (including Permitted Intercompany Debt) owed to any Grantor is evidenced by an instrument (as such term is defined in the UCC) that is not held in a Concentration Account or pledged to the Collateral Agent as part of the Collateral. Section 4.14 Representations in Other Financing Documents. The -------------------------------------------- representations of each Grantor in Section 2 of the Security Agreement are true and correct in all material respects. Section 4.15 Year 2000 Compliance. The MHG Companies have completed -------------------- all remediation and upgrades of their respective computer hardware and software, information systems and devices incorporating embedded chips so that all such systems, equipment and applications (including those of its suppliers and vendors) that are material to any MHG Company's businesses and operations will be able to perform properly date-sensitive functions for all dates before and after January 1, 2000. 50 Section 4.16 Margin Stock. The Borrowers do not, as of the date ------------ hereof, expect that the MHG Companies will acquire any Margin Stock in the future. Even if they do, Margin Stock will not at any time represent more than 25% of the value (as determined by any reasonable method) of the assets subject to any provision of the Financing Documents that restricts the right or ability of the MHG Companies to sell, pledge or otherwise dispose of Margin Stock owned by them or requires a prepayment of Loans upon the exercise of any such right. Section 4.17 Representations Concerning Cash Management System; -------------------------------------------------- Credit and Collection Policy. The summaries of the Cash Management System set - ---------------------------- forth in Schedule 10 and the Credit and Collection Policy are accurate and ----------- complete in all material respects as of the Closing Date and do not omit to state any material fact necessary to make the statements set forth therein not misleading. No Borrower owns any Deposit Account (other than Patient Trust Accounts) which is not subject to the liens granted under the Security Agreement. There has been no material change to the Cash Management System or Credit and Collection Policy since the Closing Date except such changes as have been disclosed to and approved by the Agents in writing. Section 4.18 Prepetition Indebtedness. All Prepetition Indebtedness ------------------------ as of the Petition Date, including, without limitation, the Debt under the Existing Credit Facilities and the Existing Notes, is set forth on Schedule 6 ---------- hereto. All such amounts in respect of the Existing Credit Facilities are absolute, due and owing as of the Closing Date and are not subject to any defense, setoff, counterclaim, or reduction of any kind. Section 4.19 Chapter 11 Cases. The Chapter 11 Cases were commenced ---------------- on the Petition Date in accordance with Applicable Law and proper notice thereof has been given to third-party health insurers and creditors to the extent required by Applicable Law. The Borrowers constitute all debtors and debtors-in- possession subject to the Chapter 11 Cases. Section 4.20 Cash Budget; Year 2000 DIP Budget. The Borrowers have, --------------------------------- in connection with the preparation of the Cash Budget and the Year 2000 DIP Budget, made all investigations and inquiries as the Borrowers deem necessary and prudent therefor. A summary of the significant assumptions upon which the Cash Budget and the Year 2000 DIP Budget are based are stated therein. The projections and financial information contained in the Cash Budget and the Year 2000 DIP Budget are based upon good faith estimates and assumptions believed by the Borrowers to be reasonable at the time made, it being recognized by the Lender Parties that such financial information as it relates to future performance is not to be viewed as fact and that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount. Section 4.21 Liens. As of the Closing Date, the Liens created in ----- favor of the Existing Lenders under the Existing Credit Facilities in accounts receivable of the Borrowers are not subject to defenses, claims of set-off or recoupment or consensual encumbrances or Liens of any kind except for the Liens described on Schedule 13 hereto with respect to the Healthcare Facilities ----------- described thereon. As of the Closing Date, (a) the Borrowers have no knowledge of any adverse interests (except for the Liens described on such Schedule and the Liens created in favor of the Existing Lenders under the Existing Credit Facilities) with respect to such accounts receivable, and (b) the 51 Borrowers (1) have not created or suffered to exist any Liens on their respective property other than as set forth on Schedule 7 hereto and Permitted ---------- Encumbrances and (2) are not subject to any unpaid judgments in excess of $1,000,000 in the aggregate. Section 4.22 Government Claims. As of the date hereof, all cost ----------------- reports of the MHG Companies and their Subsidiaries have been audited for all periods ending on or prior to December 31, 1996. Section 4.23 Management Employees. Each Person serving as (or -------------------- performing the functions of) a facility administrator or director of nursing for any of the Healthcare Facilities (any such Person serving in such capacity as of any date of determination being referred to herein as a "Management Employee") is an employee of an MHG Company and performs such services exclusively for and/or on behalf of such MHG Company and accepts no compensation for employment from any Person other than an MHG Company and other than as set forth on Schedule 4 hereto. Each Management Employee as of the Closing Date and the MHG - ---------- Company which employs such Person on the Closing Date are set forth on Schedule -------- 15 annexed hereto. To the best of the Borrowers' knowledge after due inquiry, - -- during the 90-day period preceding the Closing Date no Person who was a Management Employee during such period became an employee of or rendered services of a similar nature to MPAN. ARTICLE 5. Affirmative Covenants Each of the Borrowers agrees that, so long as any Lender has any Credit Exposure hereunder or any Obligation remains unpaid: Section 5.01 Information. MHG and the other Borrowers will maintain ----------- (i) a system of accounting (including complete and accurate records of all intercompany accounts) established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP and preparation of the other statements and reports required under Sections 5.01(a), (b) and (c), and (ii) separate books and records (including but not limited to separate financial and accounting records, patient information, personnel information and census information) for each Healthcare Facility, which books and records, together with any applicable computer programs and computer materials, shall be at all times owned by (or, in the case of computer programs, licensed to) the relevant Healthcare Facility and copies of which shall be kept at the relevant Healthcare Facility to the extent consistent with practices of the Borrowers in effect on the Petition Date. MHG will deliver the following information to the Administrative Agent (with copies thereof for each Lender) and, promptly upon receipt thereof, the Administrative Agent will deliver a copy thereof to each Lender (provided that the items described in Sections 5.01(a), (b), (c), (d), (j), (q), (r) and (s) shall be delivered by MHG directly to the Administrative Agent and each Lender, and not solely to the Administrative Agent): (a) (i) as soon as available and in any event not later than 5:00 p.m. (Eastern Time) on the 15/th/ day of each calendar month commencing February 15, 2000, consolidated cash flow reports for MHG and its Consolidated Subsidiaries, consistent with the Cash Budget and 52 otherwise substantially in the form and scope of the Cash Budget reflecting on a line-item basis cash receipts and disbursements for the Borrowers for the preceding four weeks, and (ii) on a monthly basis after the Closing Date, as soon as available and in any event not later than 5:00 p.m. (Eastern Time) on the monthly due date for such information set forth below in each case for the month preceding such due date (A) a detailed inpatient income statement and (B) a detailed income statement for each Healthcare Facility, all of the foregoing to be satisfactory in form and substance to Administrative Agent: ------------------------------------------------------------- Information Monthly Due Date ----------- ---------------- ------------------------------------------------------------- Inpatient income statement 25/th/ ------------------------------------------------------------- Healthcare Facility income statement 25/th/ ------------------------------------------------------------- (b) as soon as available and in any event no later than the forty- fifth (45/th/) day after the end of each month for the first two calendar months ending after the Closing Date and the thirtieth (30/th/) day after the end of each month ending thereafter, (i) an unaudited condensed consolidated balance sheet of MHG and its Consolidated Subsidiaries and the related condensed consolidated statements of operations for such month, and for the portion of the Fiscal Year ended at the end of such month, and of cash flows for the portion of the Fiscal Year ended at the end of such month, setting forth in each case in comparative form the unaudited consolidated statements of operations and cash flows (to the extent available) for the corresponding month and the corresponding portion of the previous Fiscal Year, all prepared in accordance GAAP, (ii) a calculation of the Net Amount of Eligible Accounts as of the end of the preceding month, and (iii) a certificate (subject to normal year-end adjustments) of the Financial Officer as to the fairness of presentation and consistency of such financial statements; (c) as soon as available and in any event within 90 days after the end of each Fiscal Year (including the Fiscal Year ended December 31, 1999), (i) the consolidated balance sheet of MHG and its Consolidated Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of income, stockholders' equity and cash flows of MHG and its Consolidated Subsidiaries for such Fiscal Year, all in reasonable detail and certified by a Financial Officer of MHG that they fairly present the financial condition of MHG and its Consolidated Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated and (ii) a report thereon of Ernst & Young, LLP or other nationally recognized firm of independent public accountants, which report shall state that such consolidated financial statements fairly present the consolidated financial position of MHG and its Consolidated Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (d) simultaneously with the delivery of each set of financial statements referred to in Section 5.01(b) and (c), a certificate of a Financial Officer of MHG, substantially in the form of 53 Exhibit G hereto, (i) setting forth in reasonable detail such calculations as - --------- are required to establish whether the Borrowers were in compliance with the requirements of Article 6 on the date of such financial statements, (ii) stating whether, to the knowledge of such Financial Officer, any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action that MHG is taking or proposes to take with respect thereto, (iii) stating whether, since the date of the Most Recent Audited Financial Statements, an event has occurred or condition arisen which has had a Material Adverse Effect which is not reflected in the financial statements delivered simultaneously therewith and, if so, the nature of such Material Adverse Effect, and (iv) stating whether, since the date of the Most Recent Audited Financial Statements, there has been a change in the GAAP applied in preparing the financial statements then being delivered from those applied in preparing the Most Recent Audited Financial Statements which is material to the financial statements then being delivered; (e) within two Business Days after any Executive Officer or a Financial Officer of MHG obtains knowledge of any Default, if such Default is then continuing, a certificate of a Financial Officer or Executive Officer setting forth the details thereof and the action that the Borrowers are taking or propose to take with respect thereto; (f) within two Business Days after any Executive Officer or a Financial Officer of MHG obtains knowledge of any failure by a MHG Company to comply with the provisions (enforceable or actionable on a post-Petition Date basis) of any third party lease or mortgage and such failure could be expected to result in an Event of Default or Material Adverse Effect, if such failure is then continuing, a certificate of a Financial Officer or Executive Officer setting forth the details thereof and the action that such MHG Company is taking or proposes to take with respect thereto; (g) promptly after any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the Financial Officer setting forth details as to such occurrence and the action, if any, which the Borrowers or the applicable member of the ERISA Group is required or proposes to take; 54 (h) as soon as reasonably practicable after any Executive Officer obtains knowledge of the commencement of an action, suit or proceeding against any MHG Company before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could have a Material Adverse Effect or which in any manner questions the validity of any Financing Document, a certificate of the Financial Officer setting forth the nature of such action, suit or proceeding and such additional information as may be reasonably requested by any Lender through the Administrative Agent; (i) promptly upon MHG's receipt from its independent public accountants of any management letter which indicates a material weakness in the reporting practices of any MHG Company, a description of such material weakness and any action being taken with respect thereto; (j) promptly upon their becoming available, copies of all press releases and other statements made available generally by any MHG Company to the public concerning material developments in its business; (k) promptly after the same is completed and prior to the filing thereof, all pleadings, motions, applications, judicial information, financial information and other documents (with a copy to counsel to the Administrative Agent) proposed to be filed by or on behalf of the Borrowers with the Court or the United States Trustee in the Chapter 11 Cases or distributed by or on behalf of Borrowers to any official committee appointed in the Chapter 11 Cases; and without limiting the generality of the foregoing, the Borrowers shall promptly deliver to, and discuss with, the Administrative Agent and its counsel any and all information and developments in connection with any event or condition which is likely to have a material effect on the Borrowers or the Chapter 11 Cases, including, without limitation, the progress of any disclosure statement or any proposed Chapter 11 plan of reorganization, except where such information is protected as attorney work product or is attorney-client privileged; (l) no later than 5:00 p.m. (Eastern Time) of the second Business Day of each month following the Closing Date, (i) a status report indicating (x) any Healthcare Facilities which are subject to terminated Medicare or Medicaid contracts, "fast track" 23-day termination of Medicare or Medicaid contracts or denial of payment for new Medicare or Medicaid admissions or are subject to or under involuntary receivership or involuntary management and (y) any admissions hold or current civil money penalties in excess of $2,000 per day or are operating under involuntary receivership or involuntary management, in substantially the form of Exhibit L hereto (a "Healthcare Status Report", and --------- any of the foregoing events required to be disclosed thereon being a "Reporting Event") and (ii) a report indicating (x) any Asset Sales, the dates of such sales, the gross proceeds and Net Cash Proceeds received from each such sale and any Asset Sales which are being negotiated or are otherwise pending on the date of such report and (y) any properties subject to a Casualty Event or a Condemnation Event, the amount of any Casualty Proceeds from any Casualty Event received by the Borrowers, and the date of receipt thereof; (m) within two Business Days after any Executive Officer or a Financial Officer of MHG obtains knowledge of a change in status with respect to any Reporting Event (other than current civil money penalties) or any Healthcare Facility becoming subject to an additional 55 Reporting Event (other than a current civil money penalty), written notice thereof setting forth the nature of such Reporting Event and what action the Borrowers have taken, are taking or propose to take with respect thereto; (n) with reasonable notice and upon the reasonable request of any Lender from time to time, each MHG Company shall make available for inspection by such Lender at the chief executive office or the Houston, Texas office of MHG, promptly after the same is available or received, (a) copies of each cost report or interim cost report filed by any Borrower with Medicare, Medicaid or any other third party payor or any summaries thereof prepared by any Borrower and a copy, when received, of any response to such reports by the recipient thereof; (b) copies of any and all statements, audits, studies or reports submitted by or on behalf of any Borrower to any Governmental Authority or any nationally-recognized accreditation association or commission; (c) copies of any and all audits, studies, or reports prepared by any Governmental Authority or nationally recognized accreditation association or commission relating specifically to the business or operations of any Borrower; and (d) any claims by any Governmental Authority for Medicaid/Medicare overpayments or under the False Claims Act, in each case except to the extent that making such items or information available for such inspection is prohibited by Applicable Laws (notwithstanding the above, neither the Agents, the Lenders nor any of their respective advisors shall be given access to any attorney work product, or any attorney-client privileged communication); (o) promptly upon any Person becoming or ceasing to be a Subsidiary of MHG, an update to Schedule 3 hereto setting forth the information described in ---------- Section 4.13 with respect to each Subsidiary of MHG (it being understood that nothing in this Section 5.01(o) shall be deemed to permit or authorize the creation, dissolution, liquidation or acquisition of a Subsidiary of MHG not otherwise permitted under this Agreement); (p) from time to time such additional information regarding the financial position, results of operations or business of any MHG Company or the Chapter 11 Cases or such other matters relating to any MHG Company as any Lender may reasonably request through the Administrative Agent; (q) promptly after the same is available but in no event later than 5:00 p.m. (Eastern time) (i) on the fifteenth day of every calendar month commencing February 15, 2000, (ii) five Business Days after a Financial Officer of MHG has delivered a statement pursuant to Section 5.01(r)(ii)(B) indicating that the Borrowers believe that the projections and financial information set forth in the Cash Budget do not represent reasonable good faith estimates as of the date of such statement, and (iii) on the fifth Business Day after the end of each week ending after November 30, 2000, a supplement to the Cash Budget setting forth, for the period commencing the week immediately following the date such delivery is required and ending thirteen weeks later (or on the Stated Maturity Date, if earlier), a consolidated cash forecast for the Borrowers in substantially the form of the Cash Budget and in substance satisfactory to Required Lenders; (r) as soon as available and in any event not later than 5:00 p.m. (Eastern Time) on the second Business Day of each week after the Closing Date, (i) a report setting forth the weekly 56 average census (the "Nursing Home Census") in each Nursing Home Facility (other than any Managed Facilities) and the Nursing Home Occupancy (all such calculations to be made in a manner consistent with MHG's historical practices in compiling and reporting such data), and (ii) a report setting forth cumulative net cash flow of the Borrowers for the preceding week, together with a statement of a Financial Officer of MHG as to (A) whether the "Cash Receipts" amount set forth in such report varies adversely from the amount of the corresponding "Cash Receipts" amount set forth in the Cash Budget for the corresponding week by an amount exceeding 20% of such amount set forth in the Cash Budget, and (B) whether the Borrowers believe that the projections and financial information set forth in the Cash Budget with respect to periods following such date represent, as of such date, reasonable good faith estimates and that the estimates and assumptions on which the Cash Budget is based are reasonable as of such date, all of the foregoing to be in form and substance satisfactory to Administrative Agent; and (s) promptly after the filing thereof, copies of (i) all pleadings, motions, applications and other documents filed by or on behalf of MPAN with the United States Bankruptcy Court with jurisdiction over MPAN's bankruptcy cases or the United States trustee in such cases and (ii) all pleadings served on the debtors in such cases; provided, however, that in the case of any such pleading, motion or application described in clause (i) which affects any of the MHG Companies, a copy of such filing shall be provided to the Administrative Agent promptly after the same is completed and prior to the filing thereof. Section 5.02 Maintenance of Property. Each MHG Company will keep all ----------------------- property useful and necessary in its business in good working order and condition, ordinary wear and tear and casualty excepted. Each MHG Company will maintain all property leased to it and all property operated by it under a management contract as required by the provisions of the applicable lease or management contract. Section 5.03 Insurance. --------- (a) Each MHG Company will maintain insurance with responsible companies in such amounts and against such risks as is usually carried by owners of similar businesses and properties in the same general areas in which it operates, including self-insurance consistent with past practice. In addition, each MHG Company will insure all property leased to it and all property operated by it under a management contract as required by the provisions of the applicable lease or management contract. (b) If any MHG Company fails to maintain any insurance policy required to be maintained under this Section 5.03, the Collateral Agent shall have the right to maintain such policy or obtain a comparable policy, and in either case pay the premiums therefor. If the Collateral Agent maintains or obtains any such policy and pays the premiums therefor, Borrowers will reimburse the Collateral Agent upon demand for its expenses in connection therewith, including interest thereon for each day at a rate per annum equal to the Default Rate. Section 5.04 Compliance with Law. Each MHG Company will comply in ------------------- all material respects with all Applicable Laws (including Medicare Regulations, Medicaid Regulations, 57 Environmental Laws and ERISA and the rules and regulations thereunder), except where (i) the necessity of compliance therewith is contested in good faith by appropriate measures or proceedings, in which case adequate and reasonable reserves will be established in accordance with GAAP and notice of each such contest relating to Medicare Regulations, Medicaid Regulations, Environmental Regulations and ERISA (other than contests in the ordinary course of business set forth in the form of footnotes to cost reports) shall be given to the Administrative Agent, or (ii) failures to comply therewith could not, in the aggregate, be expected to have a Material Adverse Effect. Section 5.05 Maintenance of Existence, Rights, Etc. Each MHG Company ------------------------------------- will preserve, renew and keep in full force and effect its existence and its rights, privileges, licenses and franchises necessary or desirable in the normal conduct of business; provided, however, that MHG Companies may consolidate or merge to the extent permitted under Section 7.03. Section 5.06 Use of Proceeds and Letters of Credit. Subject to the ------------------------------------- provisions of this Section 5.06, the proceeds of all Loans shall be applied in accordance with this Agreement and the Cash Budget. The proceeds of the Loans and the benefits of the Letters of Credit shall be applied to fund working capital requirements and general corporate purposes relating to Borrowers' post- Petition Date operations, all in accordance with, and limited by, those items set forth in the Cash Budget; provided that no portion of the Loans or any cash Collateral or the benefits of the Letters of Credit shall be used, directly or indirectly, to (i) finance or make or support any Restricted Payment except as permitted under Section 7.15; (ii) make or support any payment or prepayment that is prohibited under this Agreement, including any payment or prepayment in respect of Prepetition Indebtedness to the extent prohibited hereunder; (iii) make or support any payment in settlement of any pre-Petition Date claim, action or proceeding, before any court, arbitrator or other governmental body other than as permitted by a First Day Order or Required Lenders; (iv) make or support any payment on behalf or for the benefit of any Excluded Subsidiary (except Investments permitted under Section 7.04(f) and reflected in the Cash Budget) or (v) make or support any payment in respect of (y) (a) investigating, objecting to, challenging in any manner, or raising any defenses to, the validity, perfection, priority or enforceability of the security interests granted in favor of the Existing Lenders and Lenders pursuant to the Existing Credit Facilities, the Financing Documents or any order of the Court or (b) the enforceability of any of the obligations of any Borrower owing to the Existing Lenders, the agents of the Existing Lenders, the Agents or Lenders under the Existing Credit Facilities or the Financing Documents (although, subject to the Carve-Out, the professionals for an official creditors' committee may be paid (to the extent allowed by the Court) fees and expenses incurred in analyzing such liens or claims under the Existing Credit Facilities in an aggregate amount not to exceed $25,000), or (z) otherwise investigating, commencing or prosecuting any claim or cause of action against any Agent, Existing Lender, or DIP Lender. Section 5.07 Future Actions with Respect to Collateral. ----------------------------------------- (a) Subject to obtaining any third party approvals which are required under the Bankruptcy Code, the Borrowers shall as soon as reasonably practicable after the Closing Date deliver to the Collateral Agent a Fee Mortgage or Leasehold Mortgage with respect to any real property interest (whether owned or leased) of any of the MHG Companies that the Collateral Agent 58 shall request from time to time on or after the Closing Date, and the appropriate UCC form for the related fixture filing, all in form and substance satisfactory to the Collateral Agent. (b) Without expense or cost to any Agent or Lenders, each Borrower shall from time to time hereafter execute, acknowledge, file, record, do and deliver all and any further acts, deeds, conveyances, mortgages, deeds of trust, deeds to secure debt, security agreements, hypothecations, pledges, charges, assignments, financing statements and continuations thereof, notices of assignment, transfers, certificates, assurances and other instruments as any Agent may from time to time reasonably request and that do not involve a material expansion of the Borrowers' obligations or liabilities hereunder in order to carry out more effectively the purposes of this Agreement, the other Financing Documents, the Interim Borrowing Order or the Borrowing Order, including to subject any Collateral, intended to now or hereafter be covered, to the Liens created by the Collateral Documents, to perfect and maintain such Liens, and to assure, convey, assign, transfer and confirm unto the Collateral Agent the property and rights thereby conveyed and assigned or intended to now or hereafter be conveyed or assigned or that any Borrower may be or may hereafter become bound to convey or to assign to the Collateral Agent or for carrying out the intention of or facilitating the performance of the terms of this Agreement, any other Financing Documents, the Interim Borrowing Order or the Borrowing Order, registering or recording this Agreement or any other Financing Document. Without limiting the generality of the foregoing, the Borrowers shall deliver to the Collateral Agent, promptly upon receipt thereof, all promissory notes or similar instruments received by the Borrowers after the Closing Date and take all actions and execute all endorsements or documents necessary or reasonably requested by the Collateral Agent to perfect the Collateral Agent's Liens in any such promissory note or other instrument or any other Investment acquired by any Borrower. (c) The Borrowers shall jointly and severally pay all filing, registration and recording fees and all expenses incident to the execution and acknowledgement of any Mortgage or other Financing Document, including any instrument of further assurance described in Section 5.07(b), and shall pay all fees and expenses, mortgage recording taxes, transfer taxes, general intangibles taxes and governmental stamp and other taxes, duties, imposts, assessments and charges arising out of or in connection with the execution, delivery, filing, recording or registration of any Mortgage or other Financing Document, including any instrument of further assurance described in Section 5.07(b), or by reason of its interest in, or measured by amounts payable under, the Notes, the Mortgages or any other Financing Document, including any instrument of further assurance described in Section 5.07(b), (excluding income, franchise and doing business Taxes), and shall pay all stamp Taxes and other Taxes required to be paid on the Notes or any other Financing Document; provided, however, that such Borrower may contest in good faith and through appropriate proceedings, any such Taxes, duties, imposts, assessments and charges; provided further, however, that such Borrower shall pay all such Taxes, duties, imposts and charges when due to the appropriate taxing authority during the pendency of any such proceedings if required to do so to stay enforcement thereof. If any Borrower fails to make any of the payments described in the preceding sentence within 10 days after notice thereof from the Collateral Agent (or such shorter period as is necessary to protect the loss of or diminution in value of any Collateral by reason of tax foreclosure or otherwise, as determined by the Collateral Agent) accompanied by documentation verifying the nature and amount of such payments, the Collateral Agent may (but shall not be obligated to) pay the 59 amount due and Borrowers shall jointly and severally reimburse all amounts in accordance with the terms hereof. (d) The Collateral Agent may, upon at least five days' prior written notice to the Borrowers, (i) appear in and defend any action or proceeding, in the name and on behalf of the Administrative Agent, Lenders or any Borrower, in which any Agent or any Lender is named or which the Collateral Agent in its sole discretion determines is likely to materially adversely affect any Collateral, any Collateral Document, the Lien thereof or any other Financing Document and (ii) institute any action or proceeding which the Collateral Agent determines should be instituted to protect the interest or rights of the Administrative Agent and Lenders in any Collateral or under this Agreement or any other Financing Document. The Borrowers, jointly and severally, agree that all reasonable and actual costs and expenses expended or otherwise incurred pursuant to this subsection (including reasonable attorneys' fees and disbursements) by any Agent shall be paid pursuant to Section 11.03 hereof. (e) Whenever any asset is added to the Collateral pursuant to this Section 5.07, the Borrowers shall deliver to the Agents such legal opinions and other documents as any Agent may reasonably request relating to the existence of the relevant Grantor, the corporate or other authority for and validity of the Collateral Documents applicable thereto, the creation and perfection (or proper place and form for filing or recordation) of the Lien purportedly created thereby and any other matters relevant thereto, all in form and substance reasonably satisfactory to the Agents. Section 5.08 Casualty Events. --------------- (a) All Casualty Proceeds received by the Collateral Agent or any MHG Company shall be deposited in the appropriate Casualty Proceeds Account (as defined in the Security Agreement) established pursuant to Section 7(b) of the Security Agreement and applied as follows: (i) such Casualty Proceeds will be released by the Collateral Agent from time to time, in accordance with Section 18 of the Security Agreement, to restore, repair, replace or rebuild the asset in respect of which such Casualty Proceeds were received; and (ii) if within 60 days after such Casualty Proceeds are received, the relevant MHG Company shall not have expended or committed to expend the full amount of such Casualty Proceeds to restore, repair, replace or rebuild the asset in respect of which such Casualty Proceeds were received (the excess of the amount of such Casualty Proceeds over the amount of such expenditures and commitments, being "Excess Casualty Proceeds"), then such Excess Casualty Proceeds shall be applied to prepay Loans to the extent required pursuant to Section 2.08(e) within two Business Days after the end of such 60-day period. (b) If any Condemnation Event occurs with respect to property owned or leased by any MHG Company, or if any negotiation or proceeding is commenced which might result in such a Condemnation Event, or if any such Condemnation Event is proposed or threatened, such MHG Company (i) will, promptly after receiving notice or obtaining knowledge thereof, do all 60 things deemed necessary or appropriate by it to preserve its interest in such property and promptly make claim for awards payable with respect thereto and diligently pursue to conclusion such claim and any suit, action or other proceeding necessary or appropriate to obtain payment thereof and (ii) will not settle any such claim, negotiation or proceeding without the consent of the Collateral Agent if an Enforcement Notice is in effect. Section 5.09 Cash Management System; Credit and Collection Policy. The ---------------------------------------------------- Borrowers shall maintain the Cash Management System (including through timely compliance with their obligations to pay returned items and other Obligations arising in the ordinary course of operation of the Cash Management System) and the Credit and Collection Policy. Section 5.10 Certain Orders. On or before the date which is four months -------------- after the Petition Date, the Borrowers shall file with the Court a joint plan of reorganization and disclosure statement for the Borrowers and an appropriate motion, application or other pleading and other material documents requesting (i) the confirmation and consummation of a joint plan of reorganization for the Borrowers, all of the foregoing (including without limitation the terms and conditions of such plan of reorganization and all payments and distributions to be made in connection therewith) to be in form and substance satisfactory to Required Lenders in their sole discretion or (ii) definitive agreements for the sale of all, substantially all, or a material portion of their assets, all in form and substance satisfactory to Required Lenders in their sole discretion. Section 5.11 Inspection Rights; Lender Meeting. --------------------------------- (a) Each Borrower shall permit, and shall cause each of its Subsidiaries to permit any authorized representatives designated by any Lender and consultants and advisors identified by the Administrative Agent or Required Lenders to visit and inspect any of the properties of Borrowers, to inspect, copy and take extracts from its and their books and records (including but not limited to separate financial and accounting records, patient information (to the extent such information is of the type customarily disclosed in connection with a disposition of a healthcare facility), personnel information (to the extent permitted under Applicable Law) and census information), and to discuss its and their affairs, finances and accounts with its and their officers, employees, consultants (including, without limitation, any personnel or consultants engaged for the benefit or on behalf of any Borrower) and independent public accountants (provided that Borrowers may, if they choose, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may reasonably be requested; provided that any such consultants and advisors identified by the Administrative Agent or Required Lenders shall have signed a written agreement to comply with Section 11.11. In addition to the foregoing, the Borrowers will, as promptly as practicable after any request therefor by the Administrative Agent, provide to the Administrative Agent and the Lenders copies of the records of any Healthcare Facility referred to in clause (ii) of the first sentence of Section 5.01. (b) The Borrowers and each of their Subsidiaries will, upon the request of the Administrative Agent or Required Lenders, participate in meetings of the Agents and Lenders to be held at Borrowers' corporate offices (or at such other location as may be agreed to by Borrowers and 61 the Administrative Agent) at such times as may be agreed to by Borrowers and the Administrative Agent. Section 5.12 Creditor Schedule. The Borrowers, promptly from time to time ----------------- upon the request of the Administrative Agent, shall provide to the Administrative Agent a schedule describing the creditors (in detail (including names and addresses thereof) reasonably satisfactory to the Administrative Agent) of any MHG Company or Healthcare Facility specified by the Administrative Agent in such request and the amount and nature of the obligations owed to each such creditor. Section 5.13 Transition Management. --------------------- (a) The Borrowers shall not permit MPAN to cease for any reason to supervise those aspects of the management of each Healthcare Facility which MPAN supervises as of the Closing Date in substantially the same manner in which MPAN supervises such aspects of management as of the Closing Date, except as set forth in this Section 5.13. (b) In the event that (i) the Required Lenders or the Administrative Agent on behalf of the Required Lenders shall have notified the Borrowers that MPAN is to be replaced in its supervisory capacity with respect to any or all Healthcare Facilities (the date of any such notice with respect to any Healthcare Facility being a "Lender Termination Notice Date"), or (ii) MPAN shall have notified the Borrowers and the Administrative Agent that MPAN intends to cease acting in its supervisory capacity with respect to any or all Healthcare Facilities (the date of any such notice with respect to any Healthcare Facility being a "MPAN Termination Notice Date"), the Borrowers shall cause MPAN to cease performing its functions as such supervisor of the relevant Healthcare Facility or Healthcare Facilities 90 days after the relevant Lender Termination Notice Date or the relevant MPAN Termination Notice Date, subject in each case to receipt of the approval from any regulatory agency (if such approval is required) (such date of cessation being the "Termination Effective Date" with respect to such Healthcare Facility); provided, that no such notice may be given until after the date which is five months after the Petition Date. The Borrowers hereby agree that on a Termination Effective Date with respect to a Healthcare Facility with respect to which an MPAN Termination Notice Date has occurred, the automatic stay of Section 362 of the Bankruptcy Code with respect to such Healthcare Facility (and all Collateral related thereto) in favor of the Collateral Agent shall be deemed terminated for the benefit of the Lenders and in favor of the Existing Lenders. At all times after the Petition Date until MPAN is permitted under this Section to cease performing its supervisory services with respect to any Healthcare Facility, the Borrowers shall and shall cause MPAN to (A) without limiting Section 5.11, cooperate fully with the Administrative Agent and the Required Lenders and any consultants or advisors or other Persons identified by the Administrative Agent or the Required Lenders in providing reasonable access to such Healthcare Facility, employees of the Borrowers and the Borrowers' books and records, and (B) supervise aspects of the management of such Healthcare Facility with substantially the same diligence and standard of care which MPAN exercises with respect to its own healthcare facilities similar to such Healthcare Facility, including with respect to providing for the proper care, safety, and well being of the patients in such Healthcare Facility. 62 (c) At all times after a Lender Termination Notice Date or a MPAN Termination Notice Date with respect to a Healthcare Facility, the Borrowers shall and shall cause MPAN to (i) consent to the entry of an order reasonably satisfactory to the Administrative Agent in the Chapter 11 Cases authorizing the retention of a Replacement Manager (as defined below) with respect to such Healthcare Facility and (ii) promptly perform or cause to be performed any and all acts which are reasonably necessary or that Agent may reasonably request to transfer as of the Termination Effective Date the supervisory and management functions performed by MPAN and MHG in an orderly and effective manner to any Person or Persons identified by the Administrative Agent or the Required Lenders with respect to such Healthcare Facility (such Person or Persons so identified being the "Replacement Manager" with respect to such Healthcare Facility). Without limiting the generality of the foregoing, the Borrowers shall not permit any of the books and records (including but not limited to separate financial and accounting records, patient information, personnel information and census information) or any applicable computer programs and computer materials for any such Healthcare Facility to be removed from such Healthcare Facility. After a MPAN Termination Notice Date with respect to any Healthcare Facility, the Borrowers shall and shall cause MPAN to, at the request of the Administrative Agent or the Required Lenders, promptly perform or cause to be performed any all acts which are reasonably necessary or that the Administrative Agent may reasonably request to sell or otherwise dispose of such Healthcare Facility (and all Collateral related thereto) under Section 363 of the Bankruptcy Code or otherwise as of the Termination Effective Date with respect thereto. (d) Anything contained herein or in any Financing Document to the contrary notwithstanding, no provision of this Agreement or any other Financing Document shall be construed as or deemed a waiver, release or discharge by any Agent or Lender of any right or claim against MPAN based upon or arising out of its supervision of any aspect of the management of any of the Healthcare Facilities or any other event, occurrence, act or omission, in each case whether before or after the Closing Date. Section 5.14 Overhead Payments. The Borrowers shall make Overhead ----------------- Payments to MPAN at the times and in accordance with the terms set forth in Section 7.07 so long as and to the extent that MPAN provides supervisory services with respect to certain aspects of the management of the Healthcare Facilities in substantially the same manner in which MPAN supervises such aspects of management as of the Closing Date. Section 5.15 Post Closing Deliveries. The Borrowers shall deliver to the ----------------------- Administrative Agent as soon as possible after receipt by the Borrowers and in any event within 30 days after the Closing Date, to the extent not delivered on or prior to the Closing Date, personal property Lien and tax and judgment Lien searches with respect to all personal, mixed and real properties of the Borrowers in all jurisdictions and filing offices where, in the case of personal property Liens, the filing of a financing statement is required in order to perfect a security interest in such property and, in the case of tax Liens and judgment Liens, recordation of such Liens is necessary to give notice to other creditors. The results of such searches shall not reflect any Liens not described in Schedule 7 hereto and shall otherwise be reasonably satisfactory to ---------- the Administrative Agent. The Borrowers shall also deliver to the Administrative Agent promptly after the Closing Date copies of the management agreements relating to the Oakwood Facilities. 63 ARTICLE 6. Financial Covenants Each of the Borrowers agrees that, so long as any Lender has any Credit Exposure hereunder or any interest or fee accrued hereunder remains unpaid: Section 6.01 Consolidated EBITDAR. -------------------- Consolidated EBITDAR, calculated on a cumulative basis from January 1, 2000 through the last day of each month set forth below, shall not be less than the amount set forth below opposite such month: Month Amount ----- ------ January 2000 $ 2,934,000 February 2000 $ 6,879,000 March 2000 $11,890,000 April 2000 $16,339,000 May 2000 $20,558,000 June 2000 $24,577,000 July 2000 $28,547,000 August 2000 $32,226,000 September 2000 $35,552,000 October 2000 $40,378,000 November 2000 $45,233,000 December 2000 $49,710,000 Section 6.02 Nursing Home Occupancy. The Borrowers shall not permit ---------------------- Nursing Home Occupancy as of any week during any month set forth below to be less than the minimum Nursing Home Occupancy amount corresponding to such month as set forth below: 64 Month Minimum Nursing ----- --------------- Home Occupancy -------------- January 2000 87.40% February 2000 87.79% March 2000 88.04% April 2000 88.17% May 2000 88.22% June 2000 88.09% July 2000 88.87% August 2000 88.20% September 2000 88.49% October 2000 88.00% November 2000 88.00% December 2000 88.00% Section 6.03 Receivables. The Borrower shall not permit the Net Amount ----------- of Eligible Accounts at any time to be less than $40,000,000. Section 6.04 Compliance with Cash Budget. Each Borrower agrees that if --------------------------- the "Cash Receipts" amount set forth in the report for any four consecutive week period delivered pursuant to Section 5.01(a)(i) (it being understood that only a four-week period covered by such a report shall be the basis for determining compliance with this Section 6.04) varies adversely from the amount of the corresponding "Cash Receipts" amount set forth in the Cash Budget (the "Required Cash Receipts Amount") for each of the corresponding weeks by an amount exceeding 20% of the Required Cash Receipts Amount for each of the corresponding weeks, such variance shall constitute an immediate Event of Default under this Agreement. Section 6.05 Capital Expenditures. The Borrowers shall not make any -------------------- Consolidated Capital Expenditures, calculated on a cumulative basis from January 1, 2000 through the last day of each month set forth below, in excess of the correlative maximum amount set forth below: 65 Maximum Consolidated -------------------- Month Capital Expenditures ----- -------------------- Amount ------ March 2000 $4,777,000 June 2000 $6,021,000 September 2000 $7,653,000 December 2000 $9,285,000 ; provided, that the Borrowers shall not make any Consolidated Capital Expenditures other than (i) necessary maintenance capital expenditures, (ii) capital expenditures which are (x) required as a result of surveys, inspections or reviews of such properties by Governmental Authorities or (y) necessary to avoid negative results of such surveys, inspections or reviews, which results would require such expenditures, (iii) capital expenditures with respect to "owned buildings" of the Borrowers so long as such expenditures are disclosed and reasonably identified in advance to the Lenders and the Administrative Agent or the Required Lenders do not determine, in their sole discretion, that such expenditures would not be favorable to the economic interests of the Lenders and the Existing Lenders, and (iv) other capital expenditures with the prior written approval of the Required Lenders; and provided further, that, in any event, all Consolidated Capital Expenditures shall be set forth in the Cash Budget. ARTICLE 7. Negative Covenants Each of the Borrowers agrees that, so long as any Lender has any Credit Exposure hereunder or any Obligation remains unpaid: Section 7.01 Limitation on Debt. The Borrowers and their Subsidiaries ------------------ (other than the Excluded Subsidiaries) will not incur or be liable with respect to (i) any Debt of a type described in clause (i), (ii) or (iv) of the definition of "Debt" in Section 1.01 or (ii) any Guarantee of any such Debt, except: (a) Debt outstanding under the Financing Documents; (b) Permitted Intercompany Debt; (c) Prepetition Indebtedness without giving effect to any extensions, renewals, refinancings, supplemental borrowings or other incurrences thereof; 66 (d) Debt consisting of trade obligations arising in the ordinary course of business after the Petition Date; and (e) Guarantees by MHG of post-Petition Date obligations of other Borrowers in the ordinary course of business; (f) Debt incurred in connection with the rejection of unexpired leases and executory contracts in the Chapter 11 Cases; provided, that the obligation of any Borrower in respect of such Debt shall qualify as a general, unsecured, non-priority claim pursuant to appropriate order of the Court; (g) Not more than $500,000 of unsecured Debt at any time outstanding which is not otherwise permitted pursuant to this Section 7.01; and (h) Debt (x) in respect of Capital Leases or (y) secured by Liens permitted under Section 7.02(g), provided that (i) such Debt is incurred to finance necessary capital expenditures of the MHG Companies in the ordinary course of business, (ii) the aggregate principal amount of such Debt, together (without duplication) with any Consolidated Capital Expenditures made during the relevant period, shall not exceed the maximum amount set forth in Section 6.05 for the relevant period, and (iii) the incurrence of such Debt and the expenditures made in connection therewith shall be set forth in the Cash Budget. Section 7.02 Negative Pledge. No MHG Company (other than the Excluded --------------- Subsidiaries) will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it (or any income therefrom or any right to receive income therefrom), or apply to the Court for authority to do any of the foregoing, except: (a) Liens existing as of the Petition Date which (i) were created in favor of the Existing Lenders under the Existing Credit Facilities or (ii) are set forth on Schedule 7 hereto; ---------- (b) Permitted Encumbrances; (c) Liens (i) created in favor of the Collateral Agent (for the benefit of Lenders) pursuant to the Collateral Documents or (ii) authorized by the Interim Borrowing Order or the Borrowing Order; (d) the Existing Lender Lien; (e) Permitted Adequate Protection Liens; (f) Liens arising in connection with Capital Leases permitted under Section 7.01(h)(x); provided that no such Lien shall extend to or cover any Collateral or assets other than the assets subject to such Capital Leases; and (g) Liens securing Debt permitted by Section 7.01(h)(y) incurred to finance the acquisition, construction or improvement of any real property or tangible personal property 67 assets acquired or held by any MHG Company in the ordinary course of business; provided that (1) such Liens shall be created within 30 days after the acquisition, construction or improvement of such assets, and (2) the principal amount of Debt secured by any such Liens shall at no time exceed 100%, and the proceeds of such Debt shall be used to provide not less than 75%, of the original purchase price of such asset or the amount expended to construct or improve such asset, as the case may be; and provided further, (i) such Liens attach solely to the assets financed with such Debt, (ii) no recourse may be had under the Debt secured by such Lien against any Person other than the borrower of such Debt for the payment of principal, interest, fees, costs or premium on such Debt or for any claim based thereon, and (iii) the financial covenants under any Debt secured by such Liens are, in each case, no more restrictive than those set forth in this Agreement. Section 7.03 Consolidations, Mergers and Asset Sales. No MHG Company --------------------------------------- will consolidate or merge with or into, or sell, lease or otherwise dispose of any Healthcare Facility or any of its other assets outside the ordinary course of business to any other Person without (i) prior written approval of Required Lenders and (ii) an appropriate approval of the Court, to the extent such Court approval is required pursuant to the Bankruptcy Code or any order of the Court; provided that (i) any Borrower may merge or consolidate with and into any other Borrower or any Borrower may be liquidated, wound up or dissolved, or all or substantially all of any Borrower's business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, to any Borrower, so long as the Borrowers shall have taken all actions and executed all documents necessary or reasonably requested by the Collateral Agent to preserve and protect the Collateral Agent's Lien (and the perfection and priority thereof) in the assets of such Borrower after giving effect to such transaction, and such transaction shall not adversely affect the Collateral Agent's Lien in the assets of the MHG Companies involved in such transaction or the value thereof and (ii) Borrowers may sell Healthcare Facilities, so long as such sales are approved by Required Lenders, for purchase prices acceptable to Required Lenders (subject to customary purchase price adjustments and allowances for transaction expenses) pursuant to asset sale agreements and an order of the Court in each case in form and substance satisfactory to Required Lenders and as long as the Net Cash Proceeds of such Asset Sale are applied as required by Section 2.08(a). Section 7.04 Limitations on Investments. After the Closing, neither the -------------------------- Borrowers nor any of their Subsidiaries (other than the Excluded Subsidiaries) will make, acquire or hold any Investment, except: (a) Investments (including Investments in Excluded Subsidiaries) existing on the Closing Date and set forth in Schedule 8 hereto; ---------- (b) Investments by the Borrowers in any of the other Borrowers; (c) advances to employees of the MHG Companies to meet expenses incurred by such employees in the ordinary course of business; (d) trade credit extended on usual and customary terms in the ordinary course of business; 68 (e) Investments consisting of contributions, loans or advances to Excluded Subsidiaries, provided that the aggregate amount so contributed, loaned or advanced after the Closing Date shall not exceed $1,000,000; and (f) Temporary Cash Investments. Section 7.05 Limitations on Transactions with Affiliates. No MHG Company ------------------------------------------- will, directly or indirectly, pay any funds to or for the account of, make any Investment in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect any transaction in connection with any joint enterprise or other joint arrangement with, any Affiliate; provided that the foregoing shall not prohibit any MHG Company from (a) engaging in transactions with any other MHG Company; (b) engaging in transactions described on Schedule 4 hereto; (c) making sales to or purchases ---------- from any Affiliate and, in connection therewith, extending credit or making payments, or from making payments for services rendered by any Affiliate (other than payments to MPAN for supervising the management of Healthcare Facilities) if such sales or purchases are made or such services are (i) rendered in the ordinary course of business and on terms and conditions at least as favorable to such MHG Company as the terms and conditions which would apply in a similar transaction with a Person not an Affiliate; (ii) approved in writing by Required Lenders (which approval may relate to categories or groups of transactions); and (iii) are approved by the Court to the extent such approval is required pursuant to the Bankruptcy Code or an order of the Court; or (d) making payments to MPAN permitted under Section 7.07. Section 7.06 Limitation on Restrictions Affecting Subsidiaries. No MHG ------------------------------------------------- Company will enter into, or suffer to exist, any agreement (other than the Financing Documents) which is binding or enforceable after the Petition Date, which prohibits or limits the ability of any Subsidiary of the Borrowers (except an Excluded Subsidiary) to (i) pay dividends or make other distributions or pay any Debt owed to any MHG Company, (ii) make loans or advances to any MHG Company or (iii) create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, to secure the obligations of any MHG Company under any Financing Document, except agreements for Debt permitted under Section 7.01(h) which prohibit the creation of Liens upon the property securing such Debt. Section 7.07 Restricted Payments. No MHG Company will declare or make ------------------- any Restricted Payment on or after the Closing Date other than (i) as permitted by Section 7.15 and clauses (a), (b) and (c) of the proviso to Section 7.05; and (ii) as long as no Specified Default has occurred and is continuing or would result therefrom, MHG may make weekly payments to MPAN on the last Business Day of each of the first four weeks of each month after the Closing Date, in an amount in each such week not to exceed 1.25% of "Revenues" projected in the Year 2000 DIP Budget for the month in which such week occurs (the amount so payable in each such week being the "Overhead Payment" payable for such week); provided, however, that (a) in the event 5% of "net inpatient revenues" of the Borrowers for any month, as reflected in the inpatient income statement delivered pursuant to Section 5.01(a)(ii)(A), exceeds the aggregate amount of Overhead Payments payable during such month, the Borrowers shall pay the amount of such excess to MPAN at the time of the next Overhead Payment, and (b) in the event 5% of "net inpatient revenues" of the Borrowers for any month, as reflected in the inpatient income statement delivered pursuant to 69 Section 5.01(a)(ii)(A), is less than the aggregate amount of Overhead Payments payable during such month, the Borrowers shall deduct the amount of the difference from the payments of the next succeeding Overhead Payment or Overhead Payments payable to the full extent thereof; provided, that if the Borrowers fail to deliver the inpatient income statement required at the time required pursuant to Section 5.01(a)(ii)(A), no further payment of Overhead Payments shall be made until such statement is delivered; provided, further, that if payment of Overhead Payments shall be prohibited hereunder solely pursuant to the preceding proviso or due to the occurrence and the continuation of a Specified Default, the amount of such prohibited payments may accrue at the rate set forth above and may be deemed owing and may be paid only at any subsequent time that no Specified Default shall have occurred and be continuing or the statement referred to in the preceding proviso is delivered, as the case may be; and provided, further, that the calculation of the total Overhead Payments payable in any given month for purposes of the first proviso to this Section shall not give effect to any payment pursuant to clause (a) of such proviso made in such month or any deduction pursuant to clause (b) of such proviso made in such month, or any payment of Overhead Payments accrued in respect of a prior month pursuant to the third proviso to this Section but paid during the given month; and (iii) payment to MPAN of any management fees from the Oakwood Facilities as and when received by the Borrowers, net of any costs of the Borrowers incurred with respect to the Oakwood Facilities. In the event of a sale of or other termination of MPAN's supervisory services with respect to any Healthcare Facility in any month, the aggregate amount of any Overhead Payments payable with respect to such month shall be adjusted to reflect the exclusion of the "Revenues" attributable to such Healthcare Facility from the amount of "Revenues" on which Overhead Payments are calculated. Anything contained herein or in any other Financing Document to the contrary notwithstanding, the provisions of this Section 7.07 restricting payment of Overhead Payments by the Borrowers during the continuance of Specified Defaults and permitting payment of Overhead Payments by the Borrowers during the continuance of other Events of Default shall not be deemed or construed as in any way limiting the rights and remedies otherwise available to the Agents and the Lenders under the Financing Documents and under Applicable Law upon and after the occurrence of any Default or Event of Default. Nothing in this Agreement or any of the other Financing Documents shall be construed as or deemed a waiver, release or discharge by any party hereto of any right to modify, assume or assign the management agreement of the Borrowers with respect to the Oakwood Facilities. The Borrowers shall not make any Investments (including any working capital investments) in the Oakwood Facilities after the Closing Date. Section 7.08 No Modification of Certain Documents Without Consent. ---------------------------------------------------- (a) No MHG Company will consent to or solicit any amendment or supplement to, or any waiver or other modification of, any Management and Service Agreement or enter into any new Management and Service Agreement without the prior written consent of Required Lenders. (b) Without the prior written consent of the Required Lenders, the Borrowers will not modify or amend, or waive or solicit any waiver of, any provision of the Existing Note Indenture or the Existing Credit Facilities in any manner that could be expected to be adverse in any material respect to the interests of the Lenders under the Financing Documents. 70 Section 7.09 No Change of Fiscal Periods. MHG will not change the date --------------------------- on which any of its Fiscal Years or Fiscal Quarters ends, unless the Required Lenders shall have consented to such change (which consent may be conditioned on the amendment of any covenant herein that would be affected by such change to eliminate the effect thereof). Section 7.10 Margin Stock. None of the proceeds of the Loans or the ------------ Letters of Credit will be used in violation of any applicable law or regulation and, without limiting the generality of the foregoing, no use of any such proceeds or Letters of Credit will include any use thereof, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any Margin Stock. Section 7.11 Limitation on Business. ---------------------- (a) MHG will at all times own, directly or indirectly, 100% of the outstanding Equity Interests of the Borrowers and will not engage in any activities other than owning such Equity Interests and Equity Interests in other MHG Subsidiaries and financing activities and other activities reasonably related to such ownership. (b) Not more than 10% of the consolidated assets of the MHG Companies (excluding assets used in connection with the institutional pharmacy business line of the Borrowers) shall be used in any business or businesses other than the business of owning, operating or managing Healthcare Facilities (including accepting risk for the cost of long term care) and not more than 10% of their consolidated revenues in any Fiscal Quarter shall be attributable to such other businesses (excluding the institutional pharmacy business). (c) The Borrowers shall not consent to, cause or (to the extent it is within the control of any Borrower) permit the Excluded Subsidiaries to, engage in any activities other than in the ordinary course of the Excluded Subsidiaries' respective businesses, consistent with their respective past practices. Section 7.12 Leases. No MHG Company shall lease or sublease any facility ------ pursuant to any lease agreement entered into after the Closing Date except on arm's length terms; provided that this Section 7.12 shall not apply to any lease or sublease from a Borrower to any other Borrower. Section 7.13 Limitation on Cash Not Held in Collateral Accounts or ----------------------------------------------------- Concentration Accounts. The Borrowers will not permit the aggregate amount of - ---------------------- all collected funds and Temporary Cash Investments held by the MHG Companies in accounts, other than the Collateral Accounts (as defined in the Security Agreement) and the Concentration Accounts, to exceed $4,000,000 at the close of business on any two consecutive Business Days. Section 7.14 Chapter 11 Claims. Without limiting the provisions of ----------------- Section 7.02 hereof, no Borrower shall incur, create, assume, suffer or permit any claim or Lien or encumbrance against it or any of its property or assets in any Chapter 11 Case (other than (i) the claims specifically referred to in Section 2.13, the Interim Borrowing Order and the Borrowing Order but only to the extent therein described and (ii) Permitted Encumbrances) to be pari passu ---- ----- with or senior to the 71 claims of the Agents and Lenders against any Borrower in respect of the Obligations hereunder, or apply to the Courts for authority to do so, except to the extent permitted herein. Section 7.15 Limitation on Repayments; Prepetition Obligations. The ------------------------------------------------- Borrowers shall not, except as otherwise allowed pursuant to the Interim Borrowing Order or the Borrowing Order, (i) make any payment or prepayment on or redemption or acquisition for value (including, without limitation, by way of depositing with the trustee with respect thereto money or securities before due for the purpose of paying when due) of any Prepetition Indebtedness or other pre-Petition Date obligations of any Borrower, (ii) pay any interest on any Prepetition Indebtedness of any Borrower (whether in cash, in kind securities or otherwise), or (iii) except as provided in the Interim Borrowing Order or the Borrowing Order, make any payment or create or permit any Lien pursuant to Section 361 of the Bankruptcy Code (or pursuant to any other provision of the Bankruptcy Code authorizing adequate protection), or apply to the Court for the authority to do any of the foregoing; provided that (a) the Borrowers may make payments permitted under Section 2.14, (b) the Borrowers may make payments for administrative expenses that are allowed and payable under Sections 330 and 331 of the Bankruptcy Code, (c) the Borrowers may make payments permitted by the First Day Orders, (d) the Borrowers may make rental payments with respect to leased properties to the extent permitted under Section 7.12, (e) the Borrowers may permit Permitted Adequate Protection Liens, and (f) the Borrowers may make payments to such other claimants and in such amounts as may be consented to by the Required Lenders and approved by the Court. Section 7.16 Agreements. Without the consent of Required Lenders, the ---------- Borrowers shall not assume, reject, cancel, terminate or modify (whether pursuant to Section 365 of the Bankruptcy Code, or any other applicable law), (i) any Prepetition Indebtedness or (ii) any Material Contract. Section 7.17 Management Employees. The Borrowers shall not, without the -------------------- written consent (not to be unreasonably withheld) of the Agents, (i) cause or permit the transfer of any Management Employee to MPAN and (ii) enter into any new employment agreement with, or make any change in the compensation or other terms of employment of, any Management Employee other than changes consistent with the normal business practices of the Borrowers prior to the Petition Date or consistent with changes made by MPAN with respect to comparable employees of MPAN; provided that, in any event, no retention or severance policy may be implemented after the Closing Date without written approval of the Agents. ARTICLE 8. Defaults Section 8.01 Events of Default. If one or more of the following events ----------------- (each, an "Event of Default") shall have occurred and be continuing: (a) any principal of any Loan or LC Reimbursement Obligation shall not be paid when due, or any interest thereon or any fee or other amount payable hereunder to or for the account of any Agent or any Lenders shall not be paid within two Business Days after the due date thereof; or 72 (b) the Borrowers shall fail to observe or perform any covenant contained in Section 5.01(d), Section 5.10, Article 6 or Article 7; or (c) any MHG Company shall fail to observe or perform any of its covenants or agreements contained in the Financing Documents (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Borrowers by the Administrative Agent at the request of any Lender; or (d) any representation, warranty, certification or statement made by any MHG Company in any Financing Document or in any certificate, financial statement or other document delivered pursuant thereto shall prove to have been incorrect in any material respect when made; or (e) any event or condition shall occur that (i) results in the acceleration of the maturity of any Financial Accommodation which is binding or enforceable on a post-Petition Date basis or (ii) enables (or, with the giving of notice or lapse of time or both, would enable) the holder or holders of such Financial Accommodation or any Person acting on behalf of such holder or holders to accelerate the maturity thereof (where such acceleration would be binding or enforceable on a post-Petition Date basis), and the aggregate amount that would be payable by the MHG Companies upon the acceleration of all Financial Accommodations referred to in clauses (i) and (ii) above equals or exceeds $1,000,000; or (f) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; or (g) one or more Enforceable Judgments for the payment of money aggregating in excess of $1,000,000 shall be rendered against one or more of the MHG Companies and shall not have been satisfied; or (h) any Lien created by any of the Collateral Documents shall at any time fail to constitute a valid and perfected Lien on all of the Collateral purported to be subject to such Lien, subject to no prior or equal Lien (except as set forth in the Interim Borrowing Order and the Borrowing Order, and except Liens permitted to be equal or prior to such Liens by this Agreement), or any MHG Company shall so assert in writing; or (i) the obligations of each MHG Company with respect to the Existing Notes shall, for any reason, not be or cease to be validly subordinated as provided in the Existing Note 73 Indenture to the monetary obligations of such MHG Companies under the Existing Credit Facilities; or (j) With respect to the Chapter 11 Cases, (i) the entry of an order which has not been stayed, withdrawn, dismissed or reversed (a) authorizing any Borrower in any of the Chapter 11 Cases to obtain additional financing under Section 364(c) or (d) of the Bankruptcy Code except for financings permitted under Section 7.01, or (b) (1) authorizing any Person to recover from any portion of the Collateral any costs or expenses of preserving or disposing of such Collateral under Section 506(c) of the Bankruptcy Code, or (2) (except as provided in the Interim Borrowing Order or the Borrowing Order) authorizing the use of cash collateral under Section 363(c) of the Bankruptcy Code; (c) appointing an interim or permanent trustee in any of the Chapter 11 Cases or the appointment of an examiner with expanded powers in any of the Chapter 11 Cases beyond those set forth in Sections 1106(a)(3) and (4) of the Bankruptcy Code; (d) dismissing any of the Chapter 11 Cases or converting any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code; (e) granting relief from or modifying the automatic stay of Section 362 of the Bankruptcy Code (x) to allow any creditor to execute upon or enforce a Lien on any Collateral or on any other property or assets of any Borrower the aggregate value of which, together with the value of any other property or assets subject to such executed or enforced Liens, exceeds $500,000 or (y) with respect to any Lien of, or the granting of any Lien on any Collateral or any other property or assets of any Borrower to, any State or local environmental or regulatory agency or authority, where the aggregate value of such property or assets, together with the value of any other property or assets subject to such a Lien, exceeds $500,000; (f) staying, reversing, vacating, amending, supplementing, or otherwise modifying any of the Interim Borrowing Order or the Borrowing Order, or any of any Agent's or Lender's rights, benefits, privileges or remedies under the Interim Borrowing Order or the Borrowing Order; (g) staying, reversing, vacating, amending, supplementing or otherwise modifying this Agreement or any other Financing Document or any of Agent's or Lenders' rights, benefits, privileges or remedies under this Agreement or any other Financing Document; (h) consolidating or combining any Borrower with any other Person (other than another Borrower) except pursuant to a confirmed plan of reorganization as contemplated in the plan of reorganization; or (i) approving any other administrative expense claim (other than those specifically referred to in Section 2.13) having any priority over, or being pari passu with the administrative expense priority of the ---- ----- Obligations in respect of any of the Chapter 11 Cases; or (ii) termination of the Borrowers' exclusive right to file a plan or plans of reorganization in any of the Chapter 11 Cases other than as a result of the filing of a plan or plans of reorganization in the Chapter 11 Cases acceptable to the Required Lenders; or (iii) the filing by any Borrower of a motion, application or other petition to effect or consent to any order referred to in clause (i) of this subsection (j); or (iv) the filing of any plan of reorganization or any modification to any previously filed plan of reorganization, in any such case without the prior written approval of Required Lenders; or (k) (i) any Healthcare Event shall have occurred; or (ii) any Governmental Authority shall (y) assert any claim against any MHG Company with respect to any healthcare regulatory violation, overpayment (including without limitation with respect to Medicare or the False Claims Act) or similar violation or liability in excess of $4,000,000, individually or in the aggregate (exclusive of claims which are subject to the provisions of the HHS Stipulation) or (z) make or give notice (which notice shall not be rescinded or withdrawn within 15 days) of its intent or 74 right to make any reduction from or otherwise withhold through setoff, recoupment or otherwise, an amount in excess of $1,000,000 in the aggregate from any account receivable arising from healthcare services; or (iii) any MHG Company shall settle any dispute with any Governmental Authority or any claim asserted by a Governmental Authority against any MHG Company with respect to any healthcare regulatory violation, overpayment (other than routine, periodic settlements of overpayments in the ordinary course) or similar violation or liability in excess of $100,000 in any individual case or $1,000,000 in the aggregate (x) in a manner not approved in writing by Required Lenders or (y) with respect to the claims and disputes which are the subject of the Settlement Letter, other than in accordance with the terms of the Settlement Letter; or (iv) any Governmental Authority shall act in a manner which constitutes a breach or violation of any term of the Settlement Letter or the HHS Stipulation, where such breach or violation could reasonably be expected to have a Material Adverse Effect, and such breach or violation is not cured within 30 days after the occurrence thereof; or (v) the HHS Stipulation shall fail to be approved by the Court on or before the entry by the Court of the Borrowing Order; or (l) any Person employed by MPAN and performing services as a regional manager with respect to the operations of the Healthcare Facilities (any such Person being a "Regional Manager") shall enter into or be bound by any contractual arrangement or agreement that has the effect of prohibiting such Regional Manager from accepting employment with the Borrowers or the Healthcare Facilities; or then, and in every such event: (i) if requested by the Required Lenders, the Administrative Agent shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and without application or motion to, or order from, the Court) by notice to the Borrowers terminate the Commitments and they shall thereupon terminate; (ii) if requested by the Required Lenders, the Administrative Agent shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and without application or motion to, or order from, the Court) by notice to each LC Issuing Bank instruct such LC Issuing Bank not to extend the expiry date of any outstanding Letter of Credit, whereupon such LC Issuing Bank shall deliver notice to that effect promptly (or as soon thereafter as is permitted by the provisions of the relevant Letter of Credit) to the beneficiary of each such Letter of Credit and the Borrowers; and (iii) if requested by the Required Lenders, the Administrative Agent shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and without application or motion to, or order from, the Court) by notice to the Borrowers declare the Loans, all amounts in respect of the Letters of Credit and all other amounts in respect of the Obligations (in each case together with accrued interest thereon) to be, and they shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrowers. 75 Section 8.02 Notice of Default. The Administrative Agent shall give ----------------- notice to the Borrowers under Section 8.01 promptly upon being requested to do so by the Required Lenders and shall thereupon notify all the Lenders thereof. Section 8.03 Enforcement Notice. If the Administrative Agent is (i) ------------------ instructed to do so by the Required Lenders at any time after the Loans become immediately due and payable pursuant to Section 8.01, or (ii) instructed to do so by the Required Lenders at any time after the Loans have been declared due and payable pursuant to Section 8.01, the Administrative Agent shall deliver to the Collateral Agent an Enforcement Notice directing the Collateral Agent to exercise one or more specific remedies under the Collateral Documents, the Interim Borrowing Order, the Borrowing Order, or any other right or remedy available at law or in equity; provided that, any other provision of this Agreement or any other Financing Document to the contrary notwithstanding, with respect to the foregoing, the Collateral Agent shall give the Borrowers and counsel to any official committees in respect of the Chapter 11 Cases and the office of the United States Trustee five Business Days' prior written notice (which notice shall be delivered by facsimile or overnight courier) of the exercise of its rights and remedies with respect to the Collateral (excluding the acceleration of the Loans or other Obligations and the termination of the Commitments, but including exercise of any rights of set-off or counterclaim hereunder or under any other Financing Document) and file a copy of such notice with the Clerk of the Court. Neither any Agent nor any Lender shall have any obligation of any kind to make a motion or application to the Court to exercise their rights and remedies set forth or referred to in this Agreement or in the other Financing Documents. Concurrently with the delivery of any such Enforcement Notice to the Collateral Agent, all outstanding Loans and other amounts in respect of the Obligations not theretofore declared due and payable shall (notwithstanding the provisions of Section 362 of the Bankruptcy Code and without application or motion to, or order from, the Court) automatically become immediately due and payable. Other than the notice to the Borrowers described in the preceding paragraph, Borrowers waive (i) presentment, demand and protest and notice of presentment, dishonor, notice of intent to accelerate, notice of acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties or other property at any time held by any Agent or any Lender on which Credit Parties may in any way be liable and hereby ratify and confirm whatever any Agent and any Lender may lawfully do in this regard, (ii) subject to the notice provisions of the preceding paragraph, all rights to notice and hearing prior to any Agent's taking possession or control of, or to any Agent's or any Lender's reply, attachment or levy upon, the Collateral, or any bond or security which might be required by any court prior to allowing any Agent or any Lender to exercise any of their remedies, and (iii) the benefit of all valuation, appraisal and exemption laws. Borrowers acknowledge they have been advised by counsel of their choice with respect to the effect of the foregoing waivers and this Agreement, the other Financing Documents and the transactions evidenced by this Agreement and the other Financing Documents. Section 8.04 Cash Cover. The Borrowers agree that, if any Event of ---------- Default shall have occurred and be continuing, the Borrowers shall, if requested by the Administrative Agent upon instruction from the Required Lenders, pay to the Collateral Agent an amount in immediately 76 available funds equal to 105% of the then aggregate amount available for subsequent drawings under all outstanding Letters of Credit to be held for the benefit of the Lenders and the LC Issuing Banks in accordance with the Collateral Documents to secure the payment of all LC Reimbursement Obligations arising from subsequent drawings under such Letters of Credit. ARTICLE 9. The Agents Section 9.01 Appointment and Authorization. ----------------------------- (a) Each Lender irrevocably designates, appoints and authorizes the Administrative Agent, the Collateral Agent and the Syndication Agent to act as its agent in connection herewith and authorizes the Administrative Agent, the Collateral Agent and the Syndication Agent to take such action as agent on such Lender's behalf, to execute and deliver or accept on behalf of the Lenders the other Financing Documents and to exercise such powers under the Financing Documents as are delegated to the Administrative Agent, the Collateral Agent and the Syndication Agent, respectively, by the terms thereof, together with all such powers as are reasonably incidental thereto. Notwithstanding anything contained herein to the contrary, the Co-Arrangers shall not have any rights (other than the right to receive and retain the fees described in Section 2.06 payable to it), duties or obligations hereunder or under the other Financing Documents solely in such capacity. (b) Each of the Lenders, the LC Issuing Banks and the Agents irrevocably authorize, and each holder of a Note by its acceptance of such Note shall be deemed to irrevocably authorize, the Collateral Agent to execute the Collateral Documents and irrevocably appoints and authorizes the Collateral Agent to take such action as agent on its behalf and to exercise such powers and perform such duties under the Collateral Documents as are delegated to the Collateral Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. Section 9.02 Agents and Affiliates. Each of PNC and First Union --------------------- shall have the same rights and powers under the Financing Documents as any other Lender and may exercise or refrain from exercising the same as though it were not the Administrative Agent and the Collateral Agent, in the case of PNC, or the Syndication Agent, in the case of First Union. Each of PNC, First Union and their respective affiliates may accept deposits from, lend money to, and generally engage in any kind of business with any of the MHG Companies or their Affiliates as if it were not the Administrative Agent and the Collateral Agent, in the case of PNC, or the Syndication Agent, in the case of First Union. Section 9.03 Action by Agents. ---------------- (a) The obligations of each of the Agents under the Financing Documents are only those expressly set forth therein with respect to it. Without limiting the generality of the foregoing, none of the Agents shall be required to take any action with respect to any Default, except as expressly provided in Article 8 hereof and in the Collateral Documents. The Agents shall have no duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this 77 Agreement or otherwise exist. The duties of the Agents shall be mechanical and administrative in nature; the Agents shall not have by reason of this Agreement a fiduciary or trust relationship in respect of any Lender; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement except as expressly set forth herein. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to any of the Agents is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any Applicable Law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. (b) As to any matters not expressly provided for in the Financing Documents (including the timing and methods of realization upon the Collateral), the Agents shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion; provided that no Agent shall be obligated to take any action if such Agent believes that such action is or may be contrary to any applicable law or might cause such Agent to incur any loss or liability for which it has not been indemnified to its satisfaction. (c) The Collateral Agent shall not be responsible for the existence, genuineness or value of any of the Collateral or for the validity, perfection, priority or enforceability of any Lien on any of the Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part under the Collateral Documents. The Collateral Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of the Collateral Documents by the MHG Companies. Section 9.04 Delegation of Duties; Consultation with Experts. Each of ----------------------------------------------- the Agents may perform any of its duties hereunder or under any other Financing Document through agents or employees. Each of the Agents may consult with legal counsel (who may be counsel for any MHG Company), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 9.05 Liability of Agents. None of the Agents or their respective ------------------- affiliates or their respective directors, officers, attorneys, agents or employees shall be liable for any action taken or not taken by it in connection with the Financing Documents (A) with the consent or at the request of the Required Lenders or (B) in the absence of its own gross negligence or willful misconduct. None of the Agents or their respective affiliates or their respective directors, officers, attorneys, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, recital, warranty or representation made in connection with any Financing Document or any Credit Event; (ii) the performance or observance of any of the terms, conditions, covenants or agreements of any MHG Company under any Financing Document or the financial condition of any Credit Party or the existence or possible existence of any Event of Default; (iii) the satisfaction of any condition specified in Article 3 except, in the case of any of the Agents, receipt of items required to be delivered to it; (iv) the validity, effectiveness, enforceability, due execution or genuineness of any Financing Document or any other instrument or writing furnished in connection therewith; or (v) 78 the existence, genuineness or value of any of the Collateral or the validity, perfection, recordation, priority or enforceability of any Lien on any of the Collateral. None of the Agents shall incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile copy or similar writing) believed by it to be genuine or to be signed by the proper party or parties. No claim may be made by any MHG Company, any Lender, any Agent or any of their respective Subsidiaries against the Agents, any Lender or any of their respective directors, officers, employees, agents, attorneys or Affiliates, or any of them, for any special, indirect or consequential damages or, to the fullest extent permitted by Law, for any punitive damages in respect of any claim or cause of action (whether based on contract, tort, statutory liability, or any other ground) based on, arising out of or related to any Financing Document or the transactions contemplated hereby or any act, omission or event occurring in connection therewith, including the negotiation, documentation, administration or collection of the Loans, and each of the Borrowers (for itself and on behalf of each of its Subsidiaries), the Agents and the Lenders hereby waives, releases and agrees never to sue upon any claim for any such damages, whether such claim now exists or hereafter arises and whether or not it is now known or suspected to exist in its favor. Each Lender agrees that, except for notices, reports and other documents expressly required to be furnished to the Lender by the Agents hereunder or given to the Agents for the account of or with copies for the Lenders, the Agents and each of their directors, officers, employees, agents, attorneys or Affiliates shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrowers which may come into the possession of any Agent or any of their directors, officers, employees, agents, attorneys or Affiliates. Section 9.06 Indemnification. The Lenders shall, ratably in accordance --------------- with their respective Credit Exposures, reimburse and indemnify each Agent, their respective affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the MHG Companies and without limiting the obligation of the MHG Companies to do so) against any cost, expense (including reasonable counsel fees and disbursements and reasonable fees and costs of appraisers, accountants and consultants), claim, demand, action, obligations, damages, penalties, judgments, suits, disbursements, loss or liability (except such as result from such indemnitee's gross negligence or willful misconduct) that such indemnitee may suffer or incur in connection with the Financing Documents or any action taken or omitted by such indemnitees thereunder. Section 9.07 Credit Decision. Each Lender acknowledges (i) that the --------------- Agents have not made any representations or warranties to it and that no act by the Agents hereafter taken, including any review of the affairs of the Borrowers, shall be deemed to constitute any representation or warranty by the Agents to any Lender and (ii) that it has, independently and without reliance on any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under the Financing Documents and except as expressly provided herein, that the Agents shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other 79 information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter. Section 9.08 Successor Agents. Any Agent may resign at any time (a ---------------- "Retiring Agent") by giving notice thereof to the Lenders, the other Agents and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor for the Retiring Agent (a "Successor Agent"). If no Successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the Retiring Agent gives notice of resignation, then the Retiring Agent may, on behalf of the Lenders, appoint a Successor Agent, which shall be a Lender or any other commercial bank organized or licensed under the laws of the United States or any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as a Successor Agent, such Successor Agent shall thereupon, without order of the Court, succeed to and become vested with all the rights and duties of the Retiring Agent, and the Retiring Agent shall be discharged from its duties and obligations hereunder. After any Retiring Agent resigns as an Agent hereunder, the provisions of this Article 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was one of the Agents. ARTICLE 10. Changes In Circumstances Section 10.01 Increased Cost and Reduced Return. --------------------------------- (a) If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender Party (other than the Administrative Agent in its capacity as such) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including any such requirement imposed by the Board of Governors of the Federal Reserve System) against assets of, deposits with or for the account of, or credit extended by, any Lender Party (other than the Administrative Agent in its capacity as such) or shall impose on any Lender Party (other than the Administrative Agent in its capacity as such) any other condition affecting its Notes or its obligation to participate in any Letter of Credit, and the result of any of the foregoing is to increase the cost to such Lender Party of participating in any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender Party under this Agreement or under its Notes with respect thereto, by an amount deemed by such Lender Party to be material, then, within 15 days after demand by such Lender Party (with a copy to the Administrative Agent), the Borrowers shall pay to such Lender Party such additional amount or amounts as will compensate such Lender Party for such increased cost or reduction; provided that the Borrowers shall not be liable to any Lender Party in respect of any such increased cost or reduction with respect to any period of time more than three months before the Borrowers receive the notice required by the first sentence of Section 10.01(c) or more than six months before the Borrowers receive the relevant certificate referred to in the second sentence of Section 10.01(c). 80 (b) If any Lender Party (other than the Administrative Agent in its capacity as such) shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Lender Party (or its Parent) as a consequence of such Lender Party's obligations hereunder to a level below that which such Lender Party (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Lender Party to be material, then from time to time, within 15 days after demand by such Lender Party (with a copy to the Administrative Agent), the Borrowers shall pay to such Lender Party such additional amount or amounts as will compensate it for such reduction; provided that the Borrowers shall not be liable to any Lender Party in respect of any such reduction with respect to any period of time more than three months prior to the date of the notice required by the first sentence of Section 10.01(c). (c) Each Lender Party (other than the Administrative Agent in its capacity as such) will promptly notify the Borrowers and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle it to compensation pursuant to this Section and will designate a different Lending Office or LC Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender Party, be otherwise disadvantageous to it. A certificate of any such Lender Party claiming compensation under this Section 10.01 and setting forth the additional amount or amounts to be paid to it hereunder, showing the calculation thereof in reasonable detail, shall be conclusive in the absence of manifest error. In determining such amount, such Lender Party may use any reasonable averaging and attribution methods. Section 10.02 Taxes. ----- (a) Any and all payments by the MHG Companies to or for the account of any Lender Party under any Financing Document shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender Party, taxes imposed on its net income, and franchise or similar taxes imposed on it, by (i) the jurisdiction under the laws of which it is organized or any political subdivision thereof, (ii) in the case of each Lender, the jurisdiction of its Lending Office or any political subdivision thereof and (iii) in the case of each LC Issuing Bank, the jurisdiction of its LC Office or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If any MHG Company shall be required by law to deduct any Taxes from or in respect of any sum payable under any Financing Document to any Lender Party, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 10.02) such Lender Party receives an amount equal to the sum it would have received had no such deductions been made, (ii) the relevant MHG Company shall make such deductions, (iii) such MHG Company shall pay the full amount 81 deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) such MHG Company shall furnish to the Administrative Agent, at its address specified in or pursuant to Section 11.01, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrowers agree to pay any present or future stamp or documentary taxes or any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any other Financing Document or from the execution or delivery of, or otherwise with respect to, any Financing Document (hereinafter referred to as "Other Taxes"). (c) The Borrowers agree to indemnify each Lender Party for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 10.02) paid by such Lender Party and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 15 days from the date such Lender Party makes demand therefor. (d) Each Lender Party organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Lender Party listed on the signature pages hereof and on or prior to the date on which it becomes a Lender Party in the case of each other Lender Party, and from time to time thereafter if requested in writing by the Borrowers (but only so long as such Lender Party remains lawfully able to do so), shall provide the Borrowers and the Administrative Agent with (i) Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender Party is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest under the Financing Documents or certifying that the income receivable pursuant to the Financing Documents is effectively connected with the conduct of a trade or business in the United States or (ii) if such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Internal Revenue Code, Internal Revenue Service form W-8 or any successor form prescribed by the Internal Revenue Service claiming complete exemption from, or a reduced rate of, withholding tax on payments of interest under the Financing Documents. If the form provided by a Lender Party at the time such Lender Party first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be excluded from "Taxes" as defined in Section 10.02(a). (e) For any period with respect to which a Lender Party has failed to provide the Borrowers and the Administrative Agent with the appropriate form pursuant to Section 10.02(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Lender Party shall not be entitled to indemnification under Section 10.02(a) with respect to Taxes imposed by the United States; provided that should a Lender Party, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the relevant MHG Company shall take such steps as such Lender Party shall reasonably request to assist such Lender Party to recover such Taxes. 82 (f) If any MHG Company is required to pay additional amounts to or for the account of any Lender Party pursuant to this Section 10.02, then such Lender Party will change the jurisdiction of its Lending Office or LC Office, as the case may be, so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the sole judgment of such Lender Party, is not otherwise disadvantageous to such Lender Party. (g) Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the MHG Companies contained in this Section 10.02 shall survive the payment in full of the principal of and interest on the Loans and the LC Reimbursement Obligations. ARTICLE 11. Miscellaneous Section 11.01 Notices. Unless otherwise specified herein, all notices, ------- requests and other communications to any party under any Financing Document shall be in writing (including bank wire, facsimile copy or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof (or, in the case of any Lender, in its Administrative Questionnaire) or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrowers. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified in or pursuant to this Section 11.01 and confirmation of receipt is received, (ii) if given by mail, ten days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered at the address specified in or pursuant to this Section 11.01, provided that notices and requests to any Agent under Article 2, 8 or 10 shall not be effective until received. NOTICE TO UNDER THIS AGREEMENT OR UNDER ANY OTHER FINANCING DOCUMENT SHALL CONSTITUTE NOTICE TO ALL BORROWERS FOR ALL PURPOSES HEREUNDER AND THEREUNDER, AND NOTICE FROM UNDER THIS AGREEMENT OR UNDER ANY OTHER FINANCING DOCUMENT PURPORTING TO BE NOTICE FROM ALL BORROWERS SHALL CONSTITUTE NOTICE FROM ALL BORROWERS FOR ALL PURPOSES HEREUNDER AND THEREUNDER. Section 11.02 No Waiver. No failure or delay by the Lender Parties, or --------- any of them, in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in the Financing Documents shall be cumulative and not exclusive of any rights or remedies provided by law. Section 11.03 Expenses; Indemnification. ------------------------- (a) In addition to any expenses set forth in and required to be paid to any Persons pursuant to the Interim Borrowing Order or the Borrowing Order or any other applicable order of the Court, the Borrowers shall pay on demand all the actual and reasonable costs, fees and expenses of 83 (i) preparation of the Financing Documents and any consents, amendments, waivers or other modifications thereto; (ii) furnishing all opinions by counsel for MHG and its Subsidiaries (including any opinions reasonably requested by the Administrative Agent or Required Lenders as to any legal matters arising hereunder) and of MHG's and its Subsidiaries' performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Financing Documents, including with respect to confirming compliance with environmental and insurance requirements; (iii) counsel to the Administrative Agent (including allocated costs of internal counsel and fees and expenses of O'Melveny & Myers LLP, counsel to the Agents, Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to the Administrative Agent and the administrative agent under the Existing Credit Facilities, and Kennedy Covington Lobdell & Hickman, L.L.P., special counsel to the Syndication Agent and the syndication agent under the Existing Credit Facilities) in connection with the negotiation, preparation, execution, administration and enforcement of the Financing Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by MHG or its Subsidiaries; (iv) creating and perfecting Liens in favor of Collateral Agent on behalf of Lenders pursuant to any Collateral Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, and reasonable fees, expenses and disbursements of counsel to any Agent and of counsel providing any opinions that any Agent or Required Lenders may reasonably request in respect of the Collateral Documents or the Liens created pursuant thereto; (v) any advisors, auditors, accountants or appraisers or other consultants or agents employed or retained by any Agent, the Lenders or their counsel or the Existing Lenders or their counsel, including, without limitation, Houlihan Lokey Howard & Zukin, Care Consulting, L.L.C. and any other financial, accounting or valuation advisors; (vi) the Collateral Agent in connection with the custody or preservation of any of the Collateral; (vii) any Agent in connection with the syndication of the Commitments and the negotiation, preparation and execution of the Financing Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby, and (viii) if any Event of Default occurs, any Lender Party, including actual and reasonable costs, fees and expenses of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency (including pursuant to the Chapter 11 Cases) and other enforcement proceedings resulting therefrom, including the negotiation of any plan of reorganization, restructuring or "workout" of the Borrowers' obligations under the Financing Documents. Without limiting the generality of the foregoing, if, at any time or times, regardless of the existence of an Event of Default, any Agent or any Lender or any of the Existing Lenders or their counsel shall incur actual and reasonable fees, costs and expenses itself or employ counsel or other professional advisors, including, but not limited to, Houlihan Lokey Howard & Zukin, Care Consulting, L.L.C. and other environmental, financial and management consultants, for advice or other representation or shall incur legal, appraisal, accounting, consulting or other actual and reasonable fees, costs and expenses in connection with: (i) any litigation, contest, dispute, suit, proceeding or action (whether instituted by any Agent, any Lender, any Existing Lender, any Borrower or any other Person) in any way relating to the Collateral, any of the Financing Documents, or any other agreements to be executed or delivered in connection therewith or herewith, including any litigation, contest, dispute, suit, case, proceeding or action, and any appeal or review thereof, in 84 connection with a case or proceeding commenced by or against any Borrower or any other Person that may be obligated to any Agent or any Lender or any Existing Lender by virtue of the Financing Documents, under the Bankruptcy Code, or any other applicable Federal, state, or foreign bankruptcy or other similar law; (ii) any attempt to enforce any rights or remedies of any Agent, any Lender or any Existing Lender against any Borrower, or any other Person that may be obligated to any Agent, any Lender or any Existing Lender by virtue of being a party to any of the Financing Documents; (iii) any attempt by any Person (including, without limitation, the Agents and the Lenders) (A) to appraise, inspect, verify, protect, collect, sell, liquidate or otherwise dispose of the Collateral, including any Healthcare Facility, or (B) to negotiate the terms of, and to facilitate and implement, the replacement of MPAN in its supervisory capacity with respect to any Healthcare Facility; or (iv) any Chapter 11 Case (including, without limitation, (A) the on- going monitoring by any Agent, any Lender or any Existing Lender of any Chapter 11 Case, including attendance by any Agent and its counsel at hearings or other proceedings, (B) the on-going review of documents filed with a Court in respect thereof, and (C) the negotiation, preparation and development of a plan or plans of reorganization) and each Agent's and the Lenders' and the Existing Lenders' interests with respect to any Borrower (including, without limitation, the on-going review of any Borrower's business, assets, operations, prospects or financial condition as any Agent shall deem necessary), the Collateral or the Obligations; then, and in any such event, the actual and reasonable fees and expenses incurred by any Agent, such Lender, such Existing Lender and such attorneys and other professional advisors and consultants arising from such services, including those of any appellate proceedings, and all actual and reasonable expenses, costs, charges and other fees incurred by such counsel or other professionals in any way or respect arising in connection with or relating to any of the events or actions described in this Section 11.03 shall be payable, on demand, by the Borrowers to any Agent, such Lender and such Existing Lender and shall be additional Obligations secured under the Collateral Documents and the other Financing Documents. Without limiting the generality of the foregoing, such expenses, costs, charges and fees may include: paralegal fees, costs and expenses; accountants' and experts' fees, costs and expenses; appraisers' fees, costs and expenses; management and other consultants' fees, costs and expenses; court costs and expenses; photocopying and duplicating expenses; court reporter fees, costs and expenses; long distance telephone charges; communication charges, air express charges; telegram charges; secretarial overtime charges; and expenses for travel, lodging and food paid or incurred in connection with the performance of such legal or other professional services. (b) In addition to the payment of expenses pursuant to Section 11.03(a), whether or not the transactions contemplated hereby shall be consummated, the Borrowers agree to defend (subject to Indemnitee's selection of counsel), indemnify, pay and hold harmless each Agent, each of 85 the Lenders and their counsel and each of the Existing Lenders and their counsel (including, without limitation, O'Melveny & Myers LLP, counsel to the Agents, Lenders and Existing Lenders, Buchanan Ingersoll, P.C., special counsel to the Administrative Agent and the administrative agent under the Existing Credit Facilities, and Kennedy Covington Lobdell & Hickman, L.L.P. special counsel to the Syndication Agent and the syndication agent under the Existing Credit Facilities), and the officers, directors, employees, advisors, auditors, accountants, appraisers, consultants (including, without limitation, Houlihan Lokey Howard & Zukin and Care Consulting, L.L.C.), agents and affiliates of each Agent, each of the Lenders and their counsel and each of the Existing Lenders and their counsel (collectively called the "Indemnitees"), from and against any and all Indemnified Liabilities (as hereinafter defined); provided, that the Borrowers shall not have any obligation to any Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction. As used herein, "Indemnified Liabilities" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including environmental claims), costs (including the costs of any investigation, study, sampling, testing, abatement, clean-up, removal, remediation or other response action necessary to remove, remediate, clean up or abate any hazardous materials activity), expenses and disbursements of any kind or nature whatsoever (including the actual and reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statues, rules or regulations (including securities and commercial laws, statutes, rules or regulations and environmental laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Financing Documents or the transactions contemplated hereby or thereby including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of letters of credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Financing Documents including any sale of, collection from, or other realization upon any of the Collateral, or (ii) any environmental claim or any hazardous materials activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Borrowers and their Subsidiaries. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this Section 11.03(b) may be unenforceable in whole or in part because they are violative of any law or public policy, the Borrowers shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 11.03 shall survive termination of the Commitments, the payment in full of the principal of and interest on the Loans and the LC Reimbursement Obligations. 86 Section 11.04 Sharing of Set-offs. ------------------- (a) Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment of a proportion of the aggregate amount of principal and interest then due (or overdue) with respect to the Loans and participations in LC Reimbursement Obligations (if any) held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest then due (or overdue) with respect to the Loans and participations in LC Reimbursement Obligations (if any) held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Loans and participations in LC Reimbursement Obligations (if any) held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans and participations in LC Reimbursement Obligations held by the Lenders shall be shared by the Lenders pro rata, subject to Section 2.11. (b) Nothing in this Section 11.04 shall impair the right of any Lender, and notwithstanding the provisions of Section 362 of the Bankruptcy Code and without application or motion to, or order from, the Court, to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the relevant MHG Company other than its indebtedness in respect of the Loans and LC Reimbursement Obligations. (c) The Borrowers agree, to the fullest extent they may effectively do so under applicable law, that any holder of a participation in a Loan or LC Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrowers in the amount of such participation. Section 11.05 Amendments and Waivers. ---------------------- (a) Neither this Agreement nor any other Financing Document, nor any terms hereof or thereof, may be amended, supplemented or modified except in accordance with the provisions of this Section 11.05. (b) Except as set forth in subsections (c) through (j) of this Section 11.05, the Required Lenders (or the Administrative Agent with their written consent) may from time to time (i) enter into written amendments, supplements or modifications of any Financing Document (which shall not be effective unless signed by each MHG Company party thereto) for the purpose of adding any provisions to such Financing Document or changing in any manner the rights or obligations of the parties hereunder or thereunder or (ii) waive, on such terms and conditions as the Required Lenders (or the Administrative Agent with their written consent) may specify in such instrument, any of the requirements of any Financing Document or any Default or Event of Default and its consequences (any such amendment, supplement, modification or waiver, a "Specified Change"); provided that 87 (1) without the written consent of the relevant LC Issuing Bank, no Specified Change shall amend, supplement or otherwise modify any Letter of Credit or any provision of this Agreement governing the rights or obligations of such LC Issuing Bank; (2) without the written consent of the then Administrative Agent, no Specified Change shall amend, modify or waive any provision of Article 9 or any other provision of this Agreement governing the rights or obligations of the Administrative Agent; and (3) without the written consent of all the Lenders, no Specified Change shall reduce the percentage specified in the definitions of "Required Lenders", and "Supermajority Lenders". (c) Without the written consent of the Required Lenders, no Specified Change shall (i) waive any of the conditions precedent set forth in Section 3.01 (except that the making of a Loan by any Lender on the date of initial Borrowing shall be deemed to constitute a waiver of such conditions precedent by such Lender), (ii) waive any Default or Event of Default and its consequences or (iii) amend, supplement or otherwise modify any provision of Section 8.01. (d) Without the written consent of all the Lenders, no Specified Change shall take any action which has the effect of releasing all or substantially all of the Collateral, except as expressly provided or permitted in this Agreement or any Collateral Document. (e) Without the written consent of all the Lenders, no Specified Change shall (i) consent to the assignment or transfer by any Borrower of any of its rights and obligations under the Financing Documents, other than in connection with any merger or consolidation permitted by this Agreement, (ii) increase the aggregate amount of the Credit Exposure of all Lenders or include, as indebtedness under this Agreement, any indebtedness of the MHG Companies other than the Borrowers' indebtedness under the Credit Facilities, (iii) permit the Tranche A Loans and Tranche A Commitment of any Lender, on the one hand, and the Tranche B Loans and Tranche B Commitment of such Lender, on the other hand, to be assigned on a non-pro rata basis, (iv) change the definition of "Tranche B Commencement Date", or (v) change the priority claim status of the Obligations. (f) Without the written consent of each Lender directly affected thereby, no Specified Change shall reduce the amount or extend the scheduled date of maturity of any Loan, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Commitment (it being understood that no amendment, modification or waiver of any condition precedent, covenant or Default shall (subject to clause (h) below) constitute an increase in or extension of the expiration date of any Commitment of any Lender, and that no increase in the available portion of any Commitment of any Lender shall constitute an increase in such Commitment of such Lender) or amend, modify or waive any provision of this subsection (f). 88 (g) Without the written consent of each Lender directly affected thereby, no Specified Change shall change (i) any provision hereof requiring payments with respect to the Tranche A Commitments and the Tranche A Loans to be allocated on a pro rata basis among the Lenders having Tranche A Exposure or (ii) any provision hereof requiring payments with respect to the Tranche B Commitments and the Tranche B Loans to be allocated on a pro rata basis among the Lenders having Tranche B Exposure. (h) Without the written consent of Supermajority Lenders, no Specified Change shall (i) waive, reduce or postpone any Unscheduled Mandatory Prepayment or unscheduled mandatory reduction of the Tranche A Commitments or the Tranche B Commitments pursuant to Section 2.08, (ii) change the definition of "Commitment Termination Date" if the effect of such change would be to extend the date of termination of the Commitments beyond the date on which the Commitments would terminate in the absence of such change, except as such dates may be extended by Required Lenders as expressly provided in such definition, (iii) increase the amount set forth in the definition of "Borrowing Base" for any period, or (iv) change Section 5.10 if the effect of such change would be to extend the date for filing a joint plan of reorganization acceptable to the Required Lenders to a date later than four months after the Petition Date. (i) Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Lenders, the Administrative Agent, all future holders of the Loans, and the Borrowers. Section 11.06 Successors and Assigns. ---------------------- (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers may not assign or otherwise transfer any of their rights under this Agreement (other than in connection with any merger or consolidation permitted by this Agreement) without the prior written consent of all the Lenders and the LC Issuing Banks. Any attempted assignment or transfer in contravention of the foregoing shall be null and void. (b) Any Lender may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in any or all of its Loans and/or its Tranche A Commitment and its Tranche B Commitment (on a pro rata basis) or its LC Exposure. If any Lender grants a participating interest to a Participant, whether or not upon notice to the MHG Companies and the Administrative Agent, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Financing Documents. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the MHG Companies or any other party under the Financing Documents, including the right to approve any Specified Change; provided that such participation agreement may provide that (A) such Lender will not agree to any Specified Change described in Section 11.05(f) without the consent of the Participant and (B) such Lender will agree to vote the Participant's participating interest with respect to any matter requiring a vote of all Lenders under the Security Agreement as 89 the Participant may direct. Each of the Borrowers agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Section 2.05(k) and Article 10 with respect to its participating interest. An assignment or other transfer which is not permitted by Section 11.06(c) or (d) shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Lender may at any time on or after the Closing Date assign to one or more (x) Eligible Assignees or (y) affiliates or Related Funds of such transferor Lender (each such Eligible Assignee, affiliate or Related Fund being an "Assignee") all, or a ratable portion (i.e., a pro rata assignment (based on the respective principal amounts thereof then outstanding or in effect) of both the Tranche A Commitment and the Tranche A Loans of the assigning Lender, on the one hand, and the Tranche B Commitment and the Tranche B Loans of such assigning Lender, on the other hand) of all, of its rights and obligations under the Credit Facilities, and such Assignee shall assume such rights and obligations, with notice to the Borrowers and with (and subject to) the consent of the Administrative Agent and each LC Issuing Bank (each such consent to be given or withheld in the sole discretion of the Administrative Agent or such LC Issuing Bank, as the case may be); provided that: (i) any assignment of only a ratable portion of the transferor Lender's rights and obligations shall be equivalent, in the case of each Assignee, to an initial Tranche A Commitment and Tranche B Commitment of not less than $5,000,000 in the aggregate; (ii) no such consent shall be required if (x) the Assignee is an affiliate or Related Fund of such transferor Lender, (y) the Assignee is already a Lender immediately prior to such assignment or (z) an Event of Default shall have occurred and be continuing when such assignment is made; provided that in each of the foregoing cases written notice of such assignment shall be given to the Administrative Agent and the Borrowers; (iii) such assignment may be made to an Assignee that is already a Lender, or made by a Lender to one of its Related Funds, without regard to the foregoing minimum assignment amount; (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment Agreement for its acceptance and recording in the Register at least two Business Days prior to the proposed effective date of such assignment; and (v) the Assignee under each such assignment (unless it is already a Lender) shall deliver to the Administrative Agent a completed Administrative Questionnaire. When (A) such an Assignment Agreement (together with an Administrative Questionnaire, if required) has been delivered to the Administrative Agent, (B) such assignment has been recorded in the Register, and (C) such Assignee has paid to such transferor Lender an amount equal to the purchase price agreed between them, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with outstanding Loans and/or Commitments as set forth in such instrument of assignment, and the transferor Lender shall be released from its 90 obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), (x) the Administrative Agent shall notify the Collateral Agent thereof and (y) the transferor Lender, the Administrative Agent and the Borrowers shall make appropriate arrangements so that, if required, a new Tranche A Note and a new Tranche B Note complying with the provisions of Section 2.03 is issued to the Assignee. In connection with any such assignment, the transferor Lender shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,500. If the Assignee is organized under the laws of a jurisdiction outside the United States, it shall deliver to the Borrowers and the Administrative Agent certification as to exemption from deduction or withholding of United States federal income taxes in accordance with Section 10.02. Anything contained herein to the contrary notwithstanding, the Administrative Agent shall not be required to accept and record assignments hereunder on more than one day during each week, and each assigning Lender shall coordinate each assignment with the Administrative Agent so that the proposed effective date of such assignment shall be the same date as the effective date of each other assignment during the relevant week by each other assigning Lender. (d) Any Lender may at any time assign all or any portion of its Loans or its Notes as security to a Federal Reserve Bank. No such assignment or pledge shall release the transferor Lender from its obligations hereunder. (e) The Administrative Agent shall maintain at its address at which notices are to be given to it pursuant to Section 11.01 a copy of each instrument of assignment delivered to it pursuant to subsection (c) of this Section 11.06 and a register for the recordation of the names and addresses of the Lenders, their respective Tranche A Commitments and Tranche B Commitments and the principal amounts of their respective Tranche A Loans and Tranche B Loans outstanding from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrowers, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender Party at any reasonable time and from time to time upon reasonable prior notice. (f) No Assignee, Participant or other transferee of any Lender's rights shall be entitled to receive any greater payment under Section 2.05(k), 10.01 or 10.02 than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrowers' prior written consent or by reason of the provisions of Section 10.01, or 10.02 requiring such Lender to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 11.07 Margin Stock. Each of the Lenders represents to the ------------ Administrative Agent and each of the other Lenders that it in good faith is not relying upon any Margin Stock as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 11.08 Governing Law; Submission to Jurisdiction. THIS ----------------------------------------- AGREEMENT, THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND SHALL BE 91 CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE BANKRUPTCY CODE (WITH RESPECT ONLY TO THOSE PROVISIONS OF THIS AGREEMENT WHICH, BY THEIR EXPRESS TERMS, ARE GOVERNED BY THE BANKRUPTCY CODE) AND THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. SUBJECT TO THE JURISDICTION OF THE COURT, EACH OF THE BORROWERS HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO ANY OF THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. EACH OF THE BORROWERS IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. Section 11.09 Counterparts; Integration. This Agreement and any ------------------------- amendment to this Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto were upon the same instrument. This Agreement (together with the other Financing Documents) constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Section 11.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY -------------------- IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER FINANCING DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.10. Section 11.11 Confidentiality. Each Lender Party agrees to keep any --------------- non-public information delivered or made available by any MHG Company to it confidential and to use such information only for the purpose of evaluating, approving, structuring and administering the Loans and Letters of Credit and negotiating and effectuating any plan of reorganization or any sale of assets under Bankruptcy Code Section 363; provided that nothing herein shall prevent any Lender Party from disclosing such information (i) to Persons employed or retained by such Lender Party who are engaged or expected to be engaged in evaluating, approving, structuring or administering the Loans and Letters of Credit or evaluating, negotiating or effectuating any plan of reorganization or any sale 92 of assets under Bankruptcy Code Section 363, (ii) to any other Person if reasonably incidental to the administration of the Loans or Letters of Credit, (iii) to any other Lender Party or to any Existing Lender, (iv) pursuant to any subpoena or express direction of any court or other authorized government agency or as otherwise required by law, (v) upon the request or demand of any bank regulatory agency, bank examiner or comparable authority, (vi) which has theretofore been publicly disclosed or is otherwise available to such Lender Party on a non-confidential basis from a source that is not, to its knowledge, subject to a confidentiality agreement with any MHG Company, (vii) in connection with any litigation to which any Lender Party or its subsidiaries or Parent may be a party, (viii) to the extent necessary in connection with the exercise of any remedy hereunder, (ix) to such Lender Party's affiliates, legal counsel and independent auditors, (x) to any actual or proposed Participant or Assignee that has signed a written agreement containing provisions substantially similar to this Section 11.11; (xi) any prospective acquirer of any Borrower, Healthcare Facility or other assets of any Borrower provided such Person agrees to keep such information confidential and use the same only for the purpose of evaluating and implementing such prospective acquisition; (xii) so long as consistent with Section 5.13, any replacement manager or potential replacement manager for any of the Healthcare Facilities that has signed a written agreement containing provisions substantially similar to this Section 11.11; or (xiii) any other Person approved by the Borrowers in writing. Any Lender Party that discloses confidential information to other Persons as contemplated by clause (i), (ii) or (ix) of the foregoing proviso shall inform such other Persons of the confidential nature of such information and shall instruct them to keep such information confidential (except for disclosures permitted by the foregoing proviso). Before any Lender Party discloses confidential information pursuant to clause (iv) or (vii) of the foregoing proviso, such Lender Party shall, to the extent permitted by law, use its best efforts to advise MHG of such proposed disclosure so that MHG may, in its discretion, seek an appropriate protective order. If and to the extent requested to do so by the Borrowers, the Administrative Agent may deliver copies of information supplied to it pursuant to Section 5.01 to any Person referred to in clause (x) or (xi) of the foregoing proviso. Anything herein to the contrary notwithstanding, no Lender Party shall have any liability with respect to disclosure of confidential information by electronic transmission, including, without limitation, facsimile, e-mail and internet communication, as long as such Lender Party exercises reasonable care in effecting such transmission. Section 11.12 Parties Including Trustees; Court Proceedings. This --------------------------------------------- Agreement and the other Financing Documents shall be binding upon, and inure to the benefit of, the successors of each Agent and each Lender, and the assigns, transferees and endorsees of each Agent and each Lender. The security interests and Liens created in this Agreement, the Collateral Documents and the other Financing Documents shall be and remain valid and perfected, and the claims of the Agents and Lenders hereunder valid and enforceable in accordance with the terms hereof, notwithstanding the discharge of any Borrower pursuant to 11 U.S.C. (S) 1141, the conversion of any Chapter 11 Case or any other bankruptcy case of any Credit Party to a case under Chapter 7 of the Bankruptcy Code, the dismissal of any Chapter 11 Case or any subsequent Chapter 7 case or the release of any Collateral from the property of any Credit Party. The security interests and Liens created in this Agreement, the Collateral Documents and the other Financing Documents shall be and remain valid and perfected without the necessity that any Agent or any Lender file financing statements or otherwise perfect its security interests or Liens under applicable law. This Agreement, the claims of 93 the Agents and Lenders hereunder, and all security interests or Liens created hereby or pursuant hereto or by or pursuant to the Collateral Documents or any other Financing Document shall at all times be binding upon Credit Parties, the estates of Credit Parties and any trustee appointed in any Chapter 11 Case or any Chapter 7 case, or any other successor in interest to Borrowers. This Agreement shall not be subject to Section 365 of the Bankruptcy Code. Section 11.13 MHG Appointed Attorney-In-Fact. Each Borrower other than ------------------------------ MHG hereby irrevocably appoints MHG as such Borrower's agent and attorney-in- fact, with full authority in the place and stead of such Borrower and in the name of such Borrower, the Borrowers, MHG or otherwise, from time to time in 's discretion to execute and deliver (and receive, where applicable) Notices of Borrowing, LC Requests, Prepayment Notices and other written notices and communications hereunder on behalf of the Borrowers to the Administrative Agent and the Lenders, and to deliver written and unwritten notices and communications to the foregoing effect, and each Lender Party shall be entitled to rely upon any such Notice of Borrowing, LC Request, Prepayment Notice, notice or communication as a notice, communication or consent, as the case may be, of the Borrowers, and shall incur no liability to any Borrower or the Borrowers in acting upon any such notice or communication, that such Lender Party believes in good faith to have been given by a duly authorized officer or other person authorized by MHG. Section 11.14 No Waiver. Anything contained herein or in any other --------- Financing Document to the contrary notwithstanding, no provision of this Agreement or any other Financing Document shall be construed as or deemed a waiver of (i) any claim by the Existing Lenders for substantive consolidation of MPAN and any of the MHG Companies or (ii) any defense to substantive consolidation of MPAN and any of the MHG Companies. Section 11.15 Survival of Agreements. The Borrowers hereby agree that, ---------------------- notwithstanding anything contained herein or in any other Financing Document and the repayment of the Obligations hereunder, (a) no Borrower shall obtain any additional financing in any of the Chapter 11 Cases under Section 364(d) of the Bankruptcy Code, and (b) the agreements of the Borrowers set forth in the preceding clause (a) and in Sections 5.01(k), 5.01(s), 5.11, 5.13, 7.05, 7.07, 7.17 and 11.03 shall survive the payment in full of the Obligations and the termination of the Commitments and shall not terminate until the effective date of a plan of reorganization in the Chapter 11 Cases. [Remainder of page intentionally left blank] 94 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BORROWERS: Mariner Health Group, Inc. Aid & Assistance, Inc. Beechwood Heritage Retirement Community, Inc. Bride Brook Nursing & Rehabilitation Center, Inc. Compass Pharmacy Services, Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Cypress Nursing Facility, Inc. Long Ridge Nursing and Rehabilitation Center, Inc. Longwood Rehabilitation Center, Inc. Mariner Health at Bonifay, Inc. Mariner Health Care, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Greater Laurel, Inc. Mariner Health Care of Inverness, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health Care of Metrowest, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Central, Inc. Mariner Health Home Care, Inc. Mariner Health of Florida, Inc. Mariner Health of Jacksonville, Inc. Mariner Health of Maryland, Inc. Mariner Health of Orlando, Inc. Mariner Health of Palmetto, Inc. Mariner Health of Seminole County, Inc. Mariner Health of Tampa, Inc. Mariner Health Resources, Inc. Mariner Physician Services, Inc. Mariner Practice Corporation S-1 Mariner - Regency Health Partners, Inc. MarinerSelect Staffing Solutions, Inc. Mariner Supply Services, Inc. MedRehab, Inc. MedRehab of Indiana, Inc. MedRehab of Louisiana, Inc. MedRehab of Missouri, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab. Corp. MHC Transportation, Inc. Mystic Nursing & Rehabilitation Center, Inc. National Health Strategies, Inc. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceuticals, Inc. Pinnacle Pharmaceutical Services, Inc. Pinnacle Rehabilitation, Inc. Pinnacle Rehabilitation of Missouri, Inc. Prism Care Centers, Inc. Prism Health Group, Inc. Prism Home Care Company, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Prism Hospital Ventures, Inc. Prism Rehab Systems, Inc. Regency Health Care Center of Seminole County Inc. Sassaquin Nursing & Rehabilitation Center, Inc. Tampa Medical Associates, Inc. The Ocean Pharmacy, Inc. Tri-State Health Care, Inc. Windward Health Care, Inc. By: ________________________________________ Boyd P. Gentry Vice President for each of the foregoing Borrowers S-2 IHS Rehab Partnership, Ltd. By: Mariner Health Care of Nashville, Inc., its General Partner By:___________________________________ Name: Title: Mariner Health Properties IV, Ltd. By: Mariner Health of Florida, Inc., its General Partner By:___________________________________ Name: Title: Mariner Health Properties VI, Ltd. By: Mariner Health of Florida, Inc., its General Partner By:___________________________________ Name: Title: Seventeenth Street Associates Limited Partnership By: Tri-State Health Care, Inc., its General Partner By:___________________________________ Name: Title: S-3 Allegis Health and Living Center at Heritage Harbour, L.L.C. By: Mariner Health of Maryland, Inc., its General Partner By:___________________________________ Name: Title: Notice Address for each Borrower: Mariner Post-Accute Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 Attention: Boyd Gentry Facsimile: (678) 443-6874 with copies to: Powell, Goldstein, Frazer & Murphy, LLP 191 Peachtree Street 16/th/ Floor Atlanta, GA 30303 Attention: Robert C. Lewinson, Esq. Facsimile: (404) 572-6999 and Stutman, Treister & Glatt Professional Corporation 3699 Wilshire Boulevard Suite 900 Los Angeles, CA 90010 Attention: Jeffrey H. Davidson, Esq. K. John Shaffer, Esq. Facsimile: (213) 251-5288 S-4 AGENTS AND LENDERS: PNC Bank, National Association, individually and as Administrative Agent, Collateral Agent and LC Issuing Bank By:___________________________________ Name: Title: Notice Address: One PNC Plaza 249 Fifth Avenue Pittsburgh, PA 15222-2707 Attention: Nancy Chiles Facsimile: (412) 762-2760 with a copy to: Buchanan Ingersoll Professional Corporation One Oxford Centre 301 Grant Street, 20/th/ Floor Pittsburgh, PA 15219-1410 Attention: Paula Zawadski, Esq. Facsimile: (412) 562-1041 S-5 First Union National Bank, individually and as Syndication Agent By:___________________________________ Name: Title: Notice Address: First Union Securities, Inc. First Union Securities NC0737 301 South College Street, TW5 Charlotte, NC 28288-0737 Attention: Christian Ullrich Facsimile: (704) 383-6249 with a copy to: Kennedy Covington Lobdell & Hickman, LLP Nations Bank Corporate Center Suite 4200 100 N. Tryon Street Charlotte, NC 28202-4006 Attention: Dean Warren, Esq. Facsimile: (704) 331-7598 S-6 [INTENTIONALLY DELETED] S-7 [INTENTIONALLY DELETED] S-8 Bank One, N.A., as a Lender By:___________________________________ Name: Title: Notice Address: American National Bank 120 South LaSalle Street, 6/th/ Floor Chicago, IL 60603 Attention: Geraldine King Facsimile: (312) 661-5906 S-9 Comerica Bank, as a Lender By:___________________________________ Name: Title: Notice Address: 500 Woodward Avenue, 9/th/ Floor Detroit, MI 48226 Attention: David Day Facsimile: (313) 961-1447 S-10 Credit Lyonnais New York Branch, as a Lender By:___________________________________ Name: Title: Notice Address: 1301 Sixth Avenue, 20/th/ Floor New York, NY 10019 Attention: John-Charles van Essche Facsimile: (212) 261-3259 S-11 [INTENTIONALLY DELETED] S-12 Bank Austria Creditanstalt-Corporate Finance, Inc., as a Lender By:___________________________________ Name: Title: Notice Address: Two Greenwich Plaza Greenwich, CT 06830 Attention: Jane E. Orndahl Facsimile: (203) 861-6413 S-13 [INTENTIONALLY DELETED] S-14 EX-10.96 12 REVOLVING CREDIT AND GUARANTY AGREEMENT EXHIBIT 10.96 ================================================================================ REVOLVING CREDIT AND GUARANTY AGREEMENT ================================================================================ Among MARINER POST-ACUTE NETWORK, INC. a Debtor and a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code as Borrower ----------- and THE SUBSIDIARIES OF THE BORROWER NAMED HEREIN, each a Debtor and a Debtor-in-Possession under Chapter 11 of the Bankruptcy Code as Guarantors ------------- and THE BANKS PARTY HERETO, and THE CHASE MANHATTAN BANK, as Administrative Agent, Documentation Agent -------------------------------------------- and Collateral Agent -------------------- CHASE SECURITIES INC., as Book Manager --------------- and --- Lead Arranger ------------- ================================================================================ Dated as of January 18, 2000 ================================================================================ REVOLVING CREDIT AND GUARANTY AGREEMENT TABLE OF CONTENTS
Page No. SECTION 1. DEFINITIONS...................................................................... 3 SECTION 1.01 Defined Terms..................................................... 3 SECTION 1.02 Terms Generally................................................... 21 SECTION 2. AMOUNT AND TERMS OF CREDIT....................................................... 21 SECTION 2.01 Commitment of the Banks........................................... 21 SECTION 2.02 Borrowing Base.................................................... 22 SECTION 2.03 Letters of Credit................................................. 22 SECTION 2.04 Issuance.......................................................... 24 SECTION 2.05 Nature of Letter of Credit Obligations Absolute................... 24 SECTION 2.06 Making of Loans................................................... 24 SECTION 2.07 Repayment of Loans; Evidence of Debt.............................. 25 SECTION 2.08 Interest on Loans................................................. 26 SECTION 2.09 Default Interest.................................................. 26 SECTION 2.10 Optional Termination or Reduction of Commitment................... 26 SECTION 2.11 Mandatory Prepayment; Commitment Termination; Cash Collateral................................................... 27 SECTION 2.12 Optional Prepayment of Loans...................................... 27 SECTION 2.13 Reserve Requirements; Change in Circumstances..................... 27 SECTION 2.14 Pro Rata Treatment, etc........................................... 28 SECTION 2.15 Taxes............................................................. 28 SECTION 2.16 Certain Fees...................................................... 31 SECTION 2.17 Commitment Fee.................................................... 31 SECTION 2.18 Letter of Credit Fees............................................. 31 SECTION 2.19 Nature of Fees.................................................... 31 SECTION 2.20 Priority and Liens................................................ 32 SECTION 2.21 Right of Set-Off.................................................. 33 SECTION 2.22 Security Interest in Letter of Credit Account..................... 34 SECTION 2.23 Payment of Obligations............................................ 34 SECTION 2.24 No Discharge; Survival of Claims.................................. 34 SECTION 2.25 Use of Cash Collateral............................................ 34 SECTION 3. REPRESENTATIONS AND WARRANTIES................................................... 34 SECTION 3.01 Organization and Authority........................................ 34 SECTION 3.02 Due Execution..................................................... 35 SECTION 3.03 Statements Made................................................... 35 SECTION 3.04 Financial Statements.............................................. 36 SECTION 3.05 Ownership......................................................... 36
i SECTION 3.06 Liens............................................................. 36 SECTION 3.07 Compliance with Law............................................... 37 SECTION 3.08 Insurance......................................................... 37 SECTION 3.09 The Orders........................................................ 37 SECTION 3.10 Use of Proceeds................................................... 37 SECTION 3.11 Litigation........................................................ 38 SECTION 3.12 Year 2000 Matters................................................. 38 SECTION 3.13 Health Care Permits............................................... 38 SECTION 4. CONDITIONS OF LENDING............................................................ 39 SECTION 4.01 Conditions Precedent to Initial Loans and Initial Letters of Credit......................................... 39 SECTION 4.02 Conditions Precedent to Each Loan and Each Letter of Credit.................................................. 43 SECTION 5. AFFIRMATIVE COVENANTS............................................................ 45 SECTION 5.01 Financial Statements, Reports, etc................................ 45 SECTION 5.02 Corporate Existence............................................... 47 SECTION 5.03 Insurance......................................................... 48 SECTION 5.04 Obligations and Taxes............................................. 48 SECTION 5.05 Notice of Event of Default, Investigations, Violations, etc................................................... 48 SECTION 5.06 Borrowing Base Certificate........................................ 49 SECTION 5.07 Maintenance of Concentration Accounts............................. 49 SECTION 5.08 Books and Records, Inspection and Collateral Review Rights..................................................... 49 SECTION 5.09 Conduct of Business and Maintenance of Existence,................. 50 etc. SECTION 5.10 Health Care Permits and Approvals................................. 50 SECTION 5.11 Financial Advisor................................................. 51 SECTION 6. NEGATIVE COVENANTS............................................................... 51 SECTION 6.01 Liens............................................................. 51 SECTION 6.02 Merger, etc....................................................... 51 SECTION 6.03 Indebtedness...................................................... 51 SECTION 6.04 Capital Expenditures.............................................. 52 SECTION 6.05 EBITDA............................................................ 52 SECTION 6.06 Guarantees and Other Liabilities.................................. 53 SECTION 6.07 Chapter 11 Claims................................................. 53 SECTION 6.08 Dividends; Capital Stock.......................................... 53 SECTION 6.09 Transactions with Affiliates...................................... 53 SECTION 6.10 Investments, Loans and Advances................................... 53 SECTION 6.11 Disposition of Assets............................................. 53 SECTION 6.12 Nature of Business................................................ 54 SECTION 6.13 Health Care Permits and Approvals................................. 54
ii SECTION 6.14 Census............................................................ 54 SECTION 6.15 Assumption of Provider Agreements................................. 55 SECTION 7. EVENTS OF DEFAULT................................................................ 55 SECTION 7.01 Events of Default................................................. 55 SECTION 8. THE AGENT........................................................................ 59 SECTION 8.01 Administration by Agent........................................... 59 SECTION 8.02 Advances and Payments............................................. 59 SECTION 8.03 Sharing of Setoffs................................................ 59 SECTION 8.04 Agreement of Required Banks....................................... 60 SECTION 8.05 Liability of Agent................................................ 60 SECTION 8.06 Reimbursement and Indemnification................................. 61 SECTION 8.08 Independent Banks................................................. 61 SECTION 8.09 Notice of Transfer................................................ 61 SECTION 8.10 Successor Agent................................................... 62 SECTION 9. GUARANTY......................................................................... 62 SECTION 9.01 Guaranty.......................................................... 62 SECTION 9.02 No Impairment of Guaranty......................................... 63 SECTION 9.03 Subrogation....................................................... 63 SECTION 10. MISCELLANEOUS.................................................................... 64 SECTION 10.01 Notices........................................................... 64 SECTION 10.02 Survival of Agreement, Representations and Warranties, etc................................................... 64 SECTION 10.03 Successors and Assigns............................................ 64 SECTION 10.04 Confidentiality................................................... 67 SECTION 10.05 Expenses.......................................................... 67 SECTION 10.06 Indemnity......................................................... 67 SECTION 10.07 CHOICE OF LAW..................................................... 68 SECTION 10.08 No Waiver......................................................... 68 SECTION 10.09 Extension of Maturity............................................. 68 SECTION 10.10 Amendments, etc................................................... 68 SECTION 10.11 Severability...................................................... 69 SECTION 10.12 Headings.......................................................... 69 SECTION 10.13 Execution in Counterparts......................................... 70 SECTION 10.14 Prior Agreements.................................................. 70 SECTION 10.15 Further Assurances................................................ 70 SECTION 10.16 WAIVER OF JURY TRIAL.............................................. 70
iii ANNEX A - Commitment Amounts EXHIBIT A-1- Form of First Day Order EXHIBIT A-2- Form of Interim Order EXHIBIT A-3- Form of Final Order EXHIBIT B - Form of Security and Pledge Agreement EXHIBIT C - Form of Opinion of Counsel EXHIBIT D - Form of Assignment and Acceptance EXHIBIT E - Form of Borrowing Base Certificate SCHEDULE 1.01 - Existing Agreements SCHEDULE 3.05 - Subsidiaries SCHEDULE 3.06 - Liens SCHEDULE 6.09 - Transactions with Affiliates iv REVOLVING CREDIT AND GUARANTY AGREEMENT Dated as of January 18, 2000 REVOLVING CREDIT AND GUARANTY AGREEMENT, dated as of January 18, 2000, among MARINER POST-ACUTE NETWORK, INC., a Delaware corporation (the "Borrower"), -------- a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, and each of the direct or indirect subsidiaries of the Borrower signatory hereto (each a "Guarantor" and collectively, the "Guarantors"), each --------- ---------- of which Guarantors referred to in this paragraph is a debtor and debtor-in- possession in a case pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrower and the Guarantors, each a "Case" and collectively, the ---- "Cases"), THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"), ----- ----- each of the other financial institutions from time to time party hereto (together with Chase, the "Banks") and THE CHASE MANHATTAN BANK, as agent (in ----- such capacity, the "Agent") for the Banks. ----- INTRODUCTORY STATEMENT ---------------------- On January 18, 2000, the Borrower and the Guarantors filed voluntary petitions with the Bankruptcy Court initiating the Cases and have continued in the possession of their assets and in the management of their business pursuant to Sections 1107 and 1108 of the Bankruptcy Code. The Borrower has applied to the Banks for a revolving credit and letter of credit facility in an aggregate principal amount not to exceed $100,000,000, all of the Borrower's obligations under which are to be guaranteed by the Guarantors. The proceeds of the Loans will be used for working capital and other general corporate purposes of the Borrower and the Guarantors consistent with the Budget hereinafter referred to (including periodic updates thereof). To provide guarantees and security for the repayment of the Loans, the reimbursement of any draft drawn under a Letter of Credit and the payment of the other obligations of the Borrower and the Guarantors hereunder and under the other Loan Documents (including, without limitation, the Obligations of the Borrower under Section 6.03(vi)), the Borrower and the Guarantors will provide to the Agent and the Banks the following (each as more fully described herein): (1) a guaranty from each of the Guarantors of the due and punctual payment and performance of the obligations of the Borrower hereunder; (2) an allowed administrative expense claim in each of the Cases pursuant to Section 364(c)(1) of the Bankruptcy Code having priority over all administrative expenses of the kind specified in Sections 503(b) and 507(b) of the Bankruptcy Code; (3) perfected first priority Liens, pursuant to Section 364(c)(2) of the Bankruptcy Code, upon all unencumbered property of the Borrower and the Guarantors (including, without limitation, all Accounts arising on and after the Filing Date (except as otherwise provided in the Orders, it being understood that any such Accounts on which the Agent and the Banks do not have such perfected first priority Liens shall be excluded from the Borrowing Base) but excluding assets subject to Permitted Adequate Protection Liens and other Permitted Liens and also excluding bankruptcy causes of action (it being understood that, notwithstanding such exclusion, the proceeds of such causes of action shall be available for the repayment of the Obligations)) and on all cash and cash equivalents in the Letter of Credit Account, provided that -------- following the Termination Date, amounts in the Letter of Credit Account shall not be subject to the Carve-Out hereinafter referred to; (4) perfected Liens, pursuant to Section 364(c)(3) of the Bankruptcy Code, upon all property of the Borrower and the Guarantors (other than the property referred to in paragraph (e) below that is subject to the existing Liens that presently secure the Borrower's and Guarantors' pre-petition Indebtedness under the Existing Agreements) that is subject to valid and perfected Liens in existence on the Filing Date (including without limitation, Accounts in existence as of the Filing Date that are subject to valid and perfected Liens in favor of the Real Estate Financiers) and to Permitted Liens, junior to such valid and perfected Liens; and (5) perfected first priority priming Liens, pursuant to Section 364(d)(1) of the Bankruptcy Code, upon all property of the Borrower and the Guarantors that is subject to (A) the existing Liens that presently secure the Borrower's and Guarantors' pre-petition Indebtedness under or in connection with (x) the Existing Credit Agreement (y) the Synthetic Guarantee and (z) the Deficiency Note (but subject to any Liens to which the Liens being primed hereby are subject on the Filing Date) and (B) any Liens granted after the Filing Date to provide adequate protection in respect of the Existing Agreements, which first priority priming Liens in favor of the Agent and the Banks shall be senior in all respects to all of such existing Liens under or in connection with the Existing Agreements, and to any Liens granted after the Filing Date to provide adequate protection in respect thereof. All of the claims and the Liens granted hereunder in the Cases to the Agent and the Banks shall be subject to the Carve-Out to the extent provided in Section 2.20. Accordingly, the parties hereto hereby agree as follows: SECTION 2. DEFINITIONS SECTION 2.1 Defined Terms ------------- As used in this Agreement, the following terms shall have the meanings specified below: "Account" means with respect to any Account Debtor, any right to ------- payment for goods sold or leased or for services rendered, whether or not earned by performance. "Account Debtor" shall mean, with respect to any Account, the obligor -------------- with respect to such Account. 2 "Additional Interim Credit" shall have the meaning given such term in ------------------------- Section 4.02(d) hereof. "Adjusted Eligible Accounts Receivable" shall mean Eligible Accounts ------------------------------------- Receivable minus the Dilution Reserve. ----- "Affiliate" shall mean, as to any Person, any other Person which, --------- directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, a Person (a "Controlled Person") shall be deemed to be "controlled by" another Person (a ----------------- "Controlling Person") if the Controlling Person possesses, directly or ------------------ indirectly, power to direct or cause the direction of the management and policies of the Controlled Person whether by contract or otherwise. "Agent" shall have the meaning set forth in the Introduction. ----- "Agreement" shall mean this Revolving Credit and Guaranty Agreement, --------- as the same may from time to time be further amended, modified or supplemented. "Alternate Base Rate" shall mean, for any day, a rate per annum ------------------- (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest ---------- per annum publicly announced from time to time by the Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced. "Base CD ------- Rate" shall mean the sum of (a) the quotient of (i) the Three-Month Secondary CD - ---- Rate divided by (ii) a percentage expressed as a decimal equal to 100% minus Statutory Reserves and (b) the Assessment Rate. "Three-Month Secondary CD Rate" ----------------------------- shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. "Federal Funds Effective Rate" shall mean, for any day, the ---------------------------- weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective 3 Rate or both for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Assessment Rate" shall mean for any date the --------------- annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Agent as the then current net annual assessment rate that will be employed in determining amounts payable by the Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or any successor) of time deposits made in dollars at the Agent's domestic offices. "Assignment and Acceptance" shall mean an assignment and acceptance ------------------------- entered into by a Bank and an Eligible Assignee, and accepted by the Agent, substantially in the form of Exhibit D. "Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978, as --------------- heretofore and hereafter amended, and codified as 11 U.S.C. Section 101 et seq. -- --- "Bankruptcy Court" shall mean the United States Bankruptcy Court for ---------------- the District of Delaware or any other court having jurisdiction over the Cases from time to time. "Banks" shall have the meaning set forth in the Introduction. ----- "Board" shall mean the Board of Governors of the Federal Reserve ----- System of the United States. "Borrower" shall have the meaning set forth in the Introduction. -------- "Borrowing" shall mean the incurrence of Loans made from all the Banks --------- on a single date. "Borrowing Base" means, an amount equal to the sum, without -------------- duplication of (i) 80% of "Inpatient" Eligible Accounts Receivable minus (a) the Reserve for Cost Report Liabilities in Excess of the Medicaid Contra and (b) the Reserve for Cost Report Liabilities in Excess of the Medicare Contra, (ii) 80% of "LTAC" Eligible Accounts Receivable minus (a) the Reserve for Cost Report Liabilities in Excess of the Medicaid Contra and (b) the Reserve for Cost Report Liabilities in Excess of the Medicare Contra, (iii) 75% of APS "Part B" Adjusted Eligible Accounts Receivable, (iv) 75% of APS "Private" Adjusted Eligible Accounts Receivable, (v) 75 % of APS "Medicaid" Adjusted Eligible Accounts Receivable, provided that (x) in no event shall the contribution to the Borrowing Base for any Division be less than zero; and (y) the sum contribution of "Part B", "Private" and "Medicaid" shall not be greater than 25% of the sum contribution of "Inpatient" and "LTAC". The Borrowing Base shall be computed as of the end of each fiscal month; provided that the Borrowing Base in effect at any time shall be determined by reference to the most recent 4 Borrowing Base Certificate delivered to the Agent, absent any error in such Borrowing Base Certificate. Borrowing Base component definitions may be fixed and revised from time to time solely by the Agent in the exercise of its reasonable judgment, with any changes in such definitions to be effective 10 days after delivery of notice thereof to the Borrower. "Borrowing Base Certificate" shall have the meaning set forth in -------------------------- Section 5.06. "Budget" shall have the meaning set forth in Section 4.01(i). ------ "Business Day" shall mean any day except a Saturday, Sunday or other ------------ day on which either (i) in the case of any action to be taken by the Bankruptcy Court or any filing with the Bankruptcy Court, the Court is "inaccessible" or is observing a "legal holiday" as provided in Rule 9006(a) of the Federal Rules of Bankruptcy Procedure, or (ii) in all other cases, any day on which banks in the State of New York are required or permitted to close (and, for a Letter of Credit, other than a day on which the Fronting Bank issuing such Letter of Credit is closed). "Capital Expenditures" shall mean, for any period, the aggregate of -------------------- all expenditures (whether (1) paid in cash and not theretofore accrued subsequent to the date of this Agreement or (2) not previously paid in cash but accrued as liabilities during such period and including that portion of Capitalized Leases which is capitalized on the consolidated balance sheet of the Borrower and the Guarantors) net of cash amounts received by the Borrower and the Guarantors from other Persons during such period in reimbursement of Capital Expenditures made by the Borrower and the Guarantors, excluding interest capitalized during construction, by the Borrower and the Guarantors during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant, equipment or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower and the Guarantors (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by the Borrower or any of the Guarantors to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets, to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced. "Capital Stock" shall mean any and all shares, interests, ------------- participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "Capitalized Lease" shall mean, as applied to any Person, any lease of ----------------- property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Carve-Out" shall have the meaning set forth in Section 2.20. --------- 5 "Cases" shall mean the Chapter 11 Cases of the Borrower and each of ----- the Guarantors pending in the Bankruptcy Court. "Change of Control" shall mean (i) the acquisition of ownership, ----------------- directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof), of shares representing more than 30% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (ii) the occupation of a majority of the seats (other than vacant seats) on the Board of Directors of the Borrower, after the Filing Date, by Persons who were neither (A) nominated by the Board of Directors of the Borrower nor (B) appointed by directors so nominated. "Chase" shall have the meaning set forth in the Introduction. ----- "Closing Date" shall mean the date on which this Agreement has been ------------ executed and the conditions precedent to the making of the initial Loans set forth in Section 4.01 have been satisfied or waived, which date shall occur promptly upon entry of the First Day Order, but not later than 15 days following the Filing Date. "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Collateral" shall mean the Collateral under the Security and Pledge ---------- Agreement. "Commitment" shall mean, with respect to each Bank, the commitment of ---------- each Bank hereunder in the amount set forth opposite its name on Annex A hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to this Agreement. "Commitment Fee" shall have the meaning set forth in Section 2.17. -------------- "Commitment Letter" shall mean that certain Commitment Letter dated ----------------- December 22, 1999 among the Agent, Chase Securities Inc. and the Borrower. "Commitment Percentage" shall mean at any time, with respect to each --------------------- Bank, the percentage obtained by dividing its Commitment at such time by the Total Commitment at such time. "Consummation Date" shall mean the date of the substantial ----------------- consummation (as defined in Section 1101 of the Bankruptcy Code and which for purposes of this Agreement shall be no later than the effective date) of a Reorganization Plan of the Borrower or any of the Guarantors that is confirmed pursuant to an order of the Bankruptcy Court. "Contractual Obligation" shall mean, as to any Person, any provision ---------------------- of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. 6 "Deficiency Note" shall mean that certain Deficiency Note, made by the --------------- Borrower, dated August 16, 1999 in the principal amount of $26,485,562.79 held by Bank of America, N.A. "Dilution Factor" shall mean with respect to any period, (a) the --------------- aggregate amount of all deductions, contractual adjustments, other negative adjustments, credit memos and write-offs with respect to Accounts during such period, divided by (b) the aggregate gross charges attributable to Accounts during such period. "Dilution Reserve" shall mean, as of any date, (a) the Dilution Factor ---------------- for the immediately preceding twelve-month period (ending as of the date of the calculation of the Borrowing Base then in effect, which such date is set forth on the applicable Borrowing Base Certificate) multiplied by the (b) Eligible Accounts Receivable on such date. "Division" shall mean, as of any date, a functional entity of the -------- Borrower such as "Inpatient", "LTAC", or "APS". "Dollars" and "$" shall mean lawful money of the United States of --------------- America. "EBITDA" shall mean, for any period, all as determined in accordance ------ with GAAP, the consolidated net income (or net loss) of the Borrower and the Guarantors for such period, plus (a) the sum of (i) depreciation expense, (ii) amortization expense, (iii) other non-cash expenses, (iv) provision for LIFO adjustment for inventory valuation, (v) net total Federal, state and local income tax expense, (vi) gross interest expense for such period less gross interest income for such period, (vii) extraordinary losses, (viii) any non- recurring charge or restructuring charge, (ix) the cumulative effect of any change in accounting principles and (x) "Chapter 11 expenses" (or "administrative costs reflecting Chapter 11 expenses") as shown on the Borrower's consolidated statement of income for such period less (b) ---- extraordinary gains plus or minus (c) the amount of cash received or expended, ---- ----- as the case may be, in such period in respect of any amount which, under clauses (iii) and (viii) above, was taken into account in determining EBITDA for such or any prior period. "Eligible Accounts Receivable" means, at the time of any determination ---------------------------- thereof, each Account that satisfies the following criteria at the time of creation and continues to meet the same at the time of such determination: such Account (i) arose from a completed, outright and lawful sale of goods or from the completed performance of patient-related services by the Borrower, any Guarantor or any Division in the ordinary course of business of the Borrower, any Guarantor or Division and in a manner consistent with current and historical business practices and (ii) is not ineligible for inclusion in the calculation of the Eligible Accounts Receivable pursuant to any of clauses (a) through (o) below or otherwise reasonably deemed by the Agent in good faith to be ineligible for inclusion in the calculation of Eligible Accounts Receivable as described below. Without limiting the foregoing, to qualify as an Eligible Accounts Receivable, an Account shall indicate as sole payee and as sole remittance party the Borrower, any Guarantor or any Division. In determining the amount to be so included, the face amount of an Account or Accounts shall be reduced by, without duplication, to the extent not reflected in such face amount, (a) the amount of all accrued and actual returns, contractual adjustments, discounts, claims, credits or credits 7 pending, charges, price adjustments, freight or other allowances (including any amount that the Borrower or a Division, as applicable, may be obligated to rebate to a customer pursuant to the terms of any agreement or understanding (written or oral)), (b) the aggregate amount of all limits and deductions provided for in this definition and elsewhere in this Agreement, (c) the aggregate amount of all cash received in respect of such Account but not yet applied by the Borrower or the applicable Division to reduce the amount of such Account; and (d) the aggregate amount, without duplication, of reconciling items which reduce otherwise Eligible Accounts Receivable to the amounts shown on the Borrower's consolidating financial statements. Unless otherwise approved from time to time in writing by the Agent, no Account shall be an Eligible Accounts Receivable if, without duplication: (1) such Account represents charges for which a bill, claim, or other similar form used for billing purposes has not been generated; or (2) such Account arises out of a cost report settlement or other similar transaction; or (3) such Account arises out of a sale made by the Borrower or a Division to an Affiliate of the Borrower or a Division or an Affiliate of any subsidiary of the Borrower or Division; or (4) such Account (i) is unpaid more than 120 days with respect to an invoice date aging; (ii) is unpaid more than 90 days with respect to a due date aging; (iii) is unpaid more than 60 days with respect to a balance forward aging; or (iv) has been written off the accounting records of the Borrower or a Division or has been otherwise designated on such accounting records as uncollectible; or (5) the Account Debtor with respect to such Account (i) is a creditor of the Borrower, Guarantor or the respective Division, (ii) has or has asserted a right of set off against the Borrower, Guarantor or its respective Division and (iii) has disputed its liability (whether by chargeback or otherwise) or made any claim with respect to the Account which has not been resolved, in each case, without duplication, only to the extent of the amount owed to each Account Debtor by the Borrower, Guarantor or respective Division, provided that the -------- total amount deducted from Eligible Accounts Receivable with respect to such Account Debtor shall not exceed the aggregate amount of all Accounts owed by such Account Debtor to the Borrower, Guarantor or respective Division (for calculation of this ineligible, for Medicare and Medicaid purposes, refer to Schedule 1, page 2 of the Borrowing Base Certificate); or (6) the Account Debtor is insolvent or the subject of any bankruptcy case or insolvency proceeding of any kind; or (7) the Account is not payable in Dollars or the Account Debtor is either not incorporated under the laws of the United States of America, any state thereof or the District of Columbia or is located outside or has its principal place of business or substantially all of its assets outside the United States; or 8 (8) the sale to the Account Debtor is on a bill-and-hold, guaranteed sale, extended terms or consignment or other similar basis; or (9) such Account does not comply in all material respects with the requirements of any applicable laws and regulations, whether federal, state or local (including Health Care Laws such as the rules and regulations of Governmental Authorities, JCAHO and other organizations exercising similar quasi-governmental or accreditation authority over hospitals or other facilities, the federal Consumer Credit Protection Act, the federal Truth in Lending Act and Regulation Z of the Board); or, (10) such Account represents an amount due directly from a patient (a natural person) and not a third party reimbursement agency, provided that in the case of the "Inpatient" Division no Account shall be excluded as a result of this clause (j) unless it is unpaid more than 30 days after the date of invoice; or (11) such Account represents an amount for which the third-party reimbursement agency is not obligated to pay because it has not yet been determined whether the patient meets all eligibility requirements, provided that in the case of the "Inpatient" Division no Account shall be excluded as a result of this clause (k) unless it is unpaid more than 60 days after the service date and the anticipated reimbursement agency is Medicaid from any state; or (12) such Account (i) is not solely and lawfully owned by the Borrower, Guarantor or a Division or the Borrower, Guarantor or Division does not have absolute title to such Account, (ii) is not subject to a valid and perfected first priority Lien in favor of the Agent for the benefit of the Banks, or (iii) does not otherwise conform in all material respects to the representations and warranties contained in the Loan Documents relating to Accounts; or (13) as to all or any part of such Account, a check, promissory note, draft, trade acceptance or other instrument for the payment of money has been received, presented for payment and returned uncollected for any reason; or (14) all Accounts of any single Account Debtor other than a Medicaid or Medicare Account Debtor which, in the aggregate, exceed 15% of the total amount of all gross Accounts for the applicable Division to the extent of such excess; or (15) such Medicaid Account with respect to the APS Division is billed utilizing a system other than the Borrower's QS1 system or other system so approved by the Agent. Notwithstanding the foregoing, "Eligible Accounts Receivable" shall not include: (a) a "credit reclass reserve" equal to the greater of 1% of "Inpatient's" gross Accounts aging balance or $2,000,000 and (b) any individual Account that (i) arises from discontinued operations of the Borrower, Guarantor or any Division or (ii) was generated through the provision of goods or services at any hospital that (x) has lost its accreditation from JCAHO, (y) has lost its ability to provide reimbursed services for federally or state funded programs or (z) is closed, abandoned or no longer 9 operating (other than pursuant to a sale of such Health Care Facility in an arms-length transaction permitted under this Agreement.) "Eligible Assignee" shall mean (i) a commercial bank having total ----------------- assets in excess of $1,000,000,000; (ii) a finance company, insurance company or other financial institution or fund, in each case acceptable to the Agent, which in the ordinary course of business extends credit of the type contemplated herein and has total assets in excess of $200,000,000 and whose becoming an assignee would not constitute a prohibited transaction under Section 4975 of ERISA; and (iii) any other financial institution satisfactory to the Borrower and the Agent. "Environmental Lien" shall mean a Lien in favor of any Governmental ------------------ Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not --------------- incorporated) which is a member of a group of which the Borrower is a member and which is under common control within the meaning of Section 414(b) or (c) of the Code and the regulations promulgated and rulings issued thereunder. "Event of Default" shall have the meaning given such term in Section ---------------- 7. "Existing Agreements" shall mean the Existing Credit Agreement, the ------------------- Synthetic Guarantee, the Deficiency Note, and all of the other agreements granting security interests and Liens in property and assets of the Borrower and the Guarantors to the Existing Lenders, including without limitation, the security agreements, mortgages and leasehold mortgages listed on Schedule 1.01 hereto, each of which documents was executed and delivered (to the extent party thereto) by the Borrower and the Guarantors prior to the Filing Date, as each may have been amended or modified from time to time. "Existing Credit Agreement" shall mean that certain Credit Agreement ------------------------- dated as of November 4, 1997 among the Borrower (formerly known as Paragon Health Network, Inc.), the several lenders from time to time party thereto, Chase, as administrative agent, and Bank of America, N.A. (formerly known as Nationsbank, N.A.), as documentation agent, as heretofore amended. "Existing Lenders" shall mean, collectively, those certain lenders to ---------------- the Borrower and the Guarantors (to the extent party thereto) under any of the Existing Agreements, together with any successors or assigns thereof. "Fees" shall collectively mean the Commitment Fees, Letter of Credit ---- Fees and other fees referred to in Sections 2.16, 2.17 and 2.18. 10 "Filing Date" shall mean January 18, 2000. ----------- "Final Order" shall have the meaning given such term in Section ----------- 4.02(d). "Financial Officer" shall mean the Chief Financial Officer, Treasurer ----------------- or Assistant Treasurer of the Borrower (or, in the case of a Guarantor, any Vice President in charge of financial matters). "First Day Order" shall have the meaning given such term in Section --------------- 4.01(b). "Fronting Bank" shall mean Chase or such other Bank (which other Bank ------------- shall be reasonably satisfactory to the Borrower) as may agree with Chase to act in such capacity. "Further Additional Credit" shall have the meaning given such term in ------------------------- Section 4.02(d). "GAAP" shall mean generally accepted accounting principles applied in ---- accordance with Section 1.02. "Governmental Authority" shall mean any federal, state, municipal or ---------------------- other governmental department, commission, board, bureau, agency or instrumentality or any court, in each case whether of the United States or foreign. "Guarantor" shall have the meaning set forth in the Introduction. --------- "Health Care Facility" shall mean any ownership or leasehold interest -------------------- in a facility which provides any level of geriatric care, home care, medical care (including, without limitation, sub-acute care), assisted living or rehabilitative services, whether licensed as a skilled nursing facility, intermediate care facility, personal care facility, out-patient clinic or hospital (including, without limitation, any long-term acute care hospital) or any products or services reasonably related thereto. "Health Care Law" shall mean any and all applicable current and future --------------- laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions or binding agreements issued, promulgated or entered into by the Food and Drug Administration, the Health Care Financing Administration, the Department of Health and Human Services ("HHS"), the Office of Inspector General --- of HHS, the Drug Enforcement Administration or any other Governmental Authority, including any state and/or local professional licensing laws, certificate of need laws and state reimbursement laws, in each case relating in any way to the conduct of the business of the Borrower or any Subsidiary and the provision of health care services generally. "Health Care Permit" shall mean every accreditation, authorization, ------------------ certificate of need, license or permit that is required by any applicable Governmental Authority to own, lease, operate or manage a Health Care Facility of the Borrower or any of its Subsidiaries. 11 "HRPT" shall mean SPTMNR Properties Trust, a Maryland real estate ---- investment trust, as successor in interest to Health and Retirement Properties Trust, a real estate investment trust organized under the laws of the State of Maryland. "Indebtedness" shall mean, at any time and with respect to any Person, ------------ and without duplication (i) all indebtedness of such Person for borrowed money, (ii) all indebtedness of such Person for the deferred purchase price of property or services (other than property, including inventory, and services purchased, and expense accruals and deferred compensation items arising, in the ordinary course of business), (iii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeal bonds arising in the ordinary course of business), (iv) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (v) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, to the extent required to be so recorded, (vi) all reimbursement, payment or similar obligations of such Person, contingent or otherwise, under acceptance, letter of credit or similar facilities and all obligations of such Person in respect of (x) currency swap agreements, currency future or option contracts and other similar agreements designed to hedge against fluctuations in foreign interest rates and (y) interest rate swap, cap or collar agreements and interest rate future or option contracts; (vii) all Indebtedness referred to in clauses (i) through (vi) above guaranteed directly or indirectly by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (A) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss in respect of such Indebtedness, (C) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (D) otherwise to assure a creditor against loss in respect of such Indebtedness, and (viii) all Indebtedness referred to in clauses (i) through (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Insufficiency" shall mean, with respect to any Plan, the amount, if ------------- any, of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA. "Interim Order" shall have the meaning given such term in Section ------------- 4.02(d). "Investments" shall have the meaning given such term in Section 6.10. ----------- "JCAHO" shall mean the Joint Commission on Accreditation of Healthcare ----- Organizations, or any similar successor organization thereto. 12 "Letter of Credit" shall mean any irrevocable letter of credit issued ---------------- pursuant to Section 2.03, which letter of credit shall be (i) a standby letter of credit, (ii) issued for purposes that are consistent with the ordinary course of business of the Borrower or any Guarantor, or for such other purposes as are reasonably acceptable to the Agent (including, without limitation, the replacement at the request of the Borrower of any expiring standby letter of credit issued under the Existing Credit Agreement), (iii) denominated in Dollars and (iv) otherwise in such form as may be reasonably approved from time to time by the Agent and the applicable Fronting Bank. "Letter of Credit Account" shall mean the account established by the ------------------------ Borrower under the sole and exclusive control of the Agent maintained at the office of the Agent at 270 Park Avenue, New York, New York 10017 designated as the "Mariner Post-Acute Network, Inc. Letter of Credit Account" that shall be used solely for the purposes set forth in Sections 2.03(b) and 2.11. "Letter of Credit Fees" shall mean the fees payable in respect of --------------------- Letters of Credit pursuant to Section 2.18. "Letter of Credit Outstandings" shall mean, at any time, the sum of ----------------------------- (i) the aggregate undrawn stated amount of all Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Letters of Credit and ---- not then reimbursed. "Lien" shall mean any mortgage, pledge, security interest, ---- encumbrance, lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall have the meaning given such term in Section 2.01. ---- "Loan Documents" shall mean this Agreement, the Letters of Credit, the -------------- Security and Pledge Agreement and any other instrument or agreement executed and delivered in connection herewith. "Material Adverse Effect" shall mean a material adverse effect on (a) ----------------------- the business, assets, property, condition (financial or otherwise) or prospects of the Borrower and the Guarantors taken as a whole or (b) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Agent or the Banks hereunder or thereunder; provided, -------- that a Material Adverse Effect shall not be deemed to have occurred solely on account of the commencement of the Cases or on account of facts and circumstances disclosed in writing to the Banks prior to the Filing Date. "Maturity Date" shall mean January 19, 2001. ------------- "MHG" shall mean Mariner Health Group, Inc., a Delaware corporation. --- "Medicaid or Medicare Account Debtor" shall mean any Account Debtor ----------------------------------- which is (i) the United States of America acting under the Medicaid/Medicare program established pursuant to the Social Security Act, (ii) any state or the District of Columbia acting pursuant to a health plan 13 adopted pursuant to Title XIX of the Social Security Act or (iii) any agent, carrier, administrator or intermediary for any of the foregoing. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in ------------------ Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" shall mean a Single Employer Plan, which (i) ---------------------- is maintained for employees of the Borrower or an ERISA Affiliate and at least one Person other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such Plan has been or were to be terminated. "Net Proceeds" shall mean, in respect of any sale of assets, the ------------ proceeds of such sale after the payment of or reservation for (i) expenses that are directly related to (or the need for which arises as a result of) the transaction of sale, including, but not limited to, related severance costs, taxes payable, brokerage commissions, professional expenses, escrow fees, title insurance fees, and other similar costs that are directly related to the sale and (ii) the amount secured by valid and perfected Liens, if any, that are senior to the Liens on such assets held by the Agent on behalf of the Banks. "NHP" shall mean Nationwide Health Properties, Inc., a Maryland --- corporation. "Obligations" shall mean (a) the due and punctual payment of principal ----------- of and interest on the Loans and the reimbursement of all amounts drawn under Letters of Credit, and (b) the due and punctual payment of the Fees and all other present and future, fixed or contingent, monetary obligations of the Borrower and the Guarantors to the Banks and the Agent under the Loan Documents. "Omega" shall mean Omega Healthcare Investors, Inc., a Maryland ----- corporation. "Orders" shall mean the First Day Order, the Interim Order and the ------ Final Order of the Bankruptcy Court referred to in Sections 4.01(b) and 4.02(d). "Original Required Banks" shall mean the Banks party to this Agreement ----------------------- on the date hereof having Commitments representing in excess of 50% of the Total Commitment, provided that, for the purposes of this definition, Highland Capital -------- Management, L.P. (or any of its Affiliates) shall be included as a Bank in determining the Original Required Banks, from and after the time at which it shall have received an assignment of a portion of Chase's Commitment hereunder, but only if such assignment shall have occurred within 30 days of the Filing Date. "Other Taxes" shall have the meaning given such term in Section 2.15. ----------- 14 "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any ---- successor agency or entity performing substantially the same functions. "Pension Plan" shall mean a defined benefit pension or retirement plan ------------ which meets and is subject to the requirements of Section 401(a) of the Code. "Permitted Adequate Protection Lien" shall mean (i) a Lien in favor of ---------------------------------- any of the Real Estate Financiers in the postpetition inventory, Accounts or other rights to payment relating to a particular Health Care Facility, Borrower, or Guarantor, as approved by the Bankruptcy Court after notice to the Agent, for the sole purpose of providing such holder of Indebtedness with "adequate protection" (as that term is used in Bankruptcy Code sections 361 through 364) to the extent (x) such holder as of the Filing Date held valid, enforceable and non-avoidable Liens in the prepetition inventory, Accounts or other rights to payment relating to such Health Care Facility, Borrower or Guarantor (as applicable), and (y) such holder's interests in such prepetition inventory, Accounts or other rights to payment are impaired or diminished as a result of the use, sale or lease of such inventory, Accounts or other rights to payment by the Borrower or Guarantors during the Cases; or (ii) other Liens for adequate protection approved by Required Lenders and by the Bankruptcy Court. "Permitted Investments" shall mean: --------------------- (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within twelve months from the date of acquisition thereof; (b) without limiting the provisions of paragraph (d) below, investments in commercial paper maturing within six months from the date of acquisition thereof and having, at such date of acquisition, a rating of at least "A-2" or the equivalent thereof from Standard & Poor's Corporation or of at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.; (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within six months from the date of acquisition thereof issued or guaranteed by or placed with (i) any domestic office of the Agent or the bank with whom the Borrower and the Guarantors maintain their cash management system, provided, that if such bank is not a Bank hereunder, such bank shall have entered into an agreement with the Agent pursuant to which such bank shall have waived all rights of setoff and confirmed that such bank does not have, nor shall it claim, a security interest therein, except to the extent of chargebacks for returned items and for fees charged for maintaining such cash management system, or (ii) any domestic office of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and is the principal banking Subsidiary of a bank holding company having a long-term unsecured debt rating of at least "A-2" or the equivalent thereof from Standard & Poor's Corporation or at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.; 15 (d) investments in commercial paper maturing within six months from the date of acquisition thereof and issued by (i) the holding company of the Agent or (ii) the holding company of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has (A) a combined capital and surplus in excess of $250,000,000 and (B) commercial paper rated at least "A-2" or the equivalent thereof from Standard & Poor's Corporation or of at least "P-2" or the equivalent thereof from Moody's Investors Service, Inc.; (e) investments in repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any office of a bank or trust company meeting the qualifications specified in clause (c) above; (f) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (a) through (e) above; and (g) to the extent owned on the Filing Date, investments in the capital stock of any direct or indirect Subsidiary of the Borrower. "Permitted Liens" shall mean (i) Liens imposed by law (other than --------------- Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (ii) Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than Environmental Liens and any Lien imposed under ERISA) in existence on the Filing Date or thereafter imposed by law and created in the ordinary course of business; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of- way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded) and interest of ground lessors, which do not interfere materially with the ordinary conduct of the business of the Borrower or any Guarantor, as the case may be, and which do not materially detract from the value of the property to which they attach or materially impair the use thereof to the Borrower or any Guarantor, as the case may be; (v) purchase money Liens (including Capitalized Leases) upon or in any property acquired or held in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness permitted by Section 6.03(iii) solely for the purpose of financing the acquisition of such property; (vi) Liens consisting of rights of patients in respect of patient trust accounts held pursuant to the Omnibus Budget and Reconciliation Act of 1987, 28 U.S.C., (S)483.10(C) and the regulations of the Health Care Financing Administration; (vii) Liens on unearned premium refunds and policy proceeds incurred in the ordinary course of business in connection with the purchase of casualty, health, and 16 other types of insurance; (viii) Permitted Adequate Protection Liens; (ix) other Liens securing other obligations of the Borrower and the Guarantors in an amount not to exceed $500,000 in the aggregate and (x) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (ix) above, provided that the principal amount of the obligation secured thereby is not - -------- increased and that any such extension, renewal or replacement is limited to the property originally encumbered thereby. "Person" shall mean any natural person, corporation, division of a ------ corporation, partnership, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "Plan" shall mean a Single Employer Plan or a Multiemployer Plan. ---- "Prepayment Date" shall mean the first Business Day that is at least --------------- thirty (30) days after the entry of the First Day Order (or if no First Day Order is entered, the Interim Order) or such later date as is satisfactory to the Original Required Banks by the Bankruptcy Court if the Final Order has not been entered by the Bankruptcy Court prior to the expiration of such thirty (30) day period. "Pre-Petition Agent" shall mean The Chase Manhattan Bank, as ------------------ administrative agent under the Existing Credit Agreement. "Pre-Petition Payment" shall mean a payment (by way of adequate -------------------- protection or otherwise) of principal or interest or otherwise on account of any pre-petition Indebtedness or trade payables or other pre-petition claims against the Borrower or any Guarantor. "Property" shall mean any right or interest in or to property of any -------- kind whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Capital Stock. "Real Estate Financiers" shall mean, collectively, HRPT, Omega, ---------------------- SouthTrust, NHP (insofar as inventory, but not Accounts or other rights to payment, are concerned) and holders of other Indebtedness in an aggregate amount for all such other Indebtedness not in excess of $1,000,000, as to which such holders as of the Filing Date hold valid, enforceable and non-avoidable Liens in the prepetition inventory, Accounts or other rights to payment relating to a Health Care Facility, the Borrower or a Guarantor (as applicable). "Register" shall have the meaning set forth in Section 10.03(d). -------- "Reorganization Plan" shall mean a plan of reorganization in any of ------------------- the Cases. "Required Banks" shall mean, at any time, Banks holding Loans -------------- representing in excess of 50% of the aggregate principal amount of such Loans outstanding or, if no such Loans are outstanding, Banks having Commitments representing in excess of 50% of the Total Commitment. 17 "Requirement of Law" shall mean, as to any Person, the Certificate or ------------------ Articles of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "Reserve for Cost Report Liabilities in Excess of the Medicaid Contra" -------------------------------------------------------------------- shall mean all net cost report liabilities remaining after excluding net cost report liabilities equal to or lesser than the Eligible Account Receivable for Medicaid (for calculation of this amount, see Schedule 1, page 2 of the Borrowing Base Certificate). "Reserve for Cost Report Liabilities in Excess of the Medicare Contra" -------------------------------------------------------------------- shall mean all net cost report liabilities remaining after excluding net cost report liabilities equal to or lesser than the Eligible Account Receivable for Medicare (for calculation of this amount, see Schedule 1, page 2 of the Borrowing Base Certificate). "Responsible Officer" shall mean, with respect to the Borrower or any ------------------- Guarantor, the chief executive officer, president, chief financial officer, treasurer or vice president in charge of financial matters thereof, but in any event, with respect to financial matters, the treasurer or vice president in charge of financial matters thereof. "Security and Pledge Agreement" shall have the meaning set forth in ----------------------------- Section 4.01(c). "Single Employer Plan" shall mean a single employer plan, as defined -------------------- in Section 4001(a)(15) of ERISA, that (i) is maintained for employees of the Borrower or an ERISA Affiliate or (ii) was so maintained and in respect of which the Borrower could have liability under Section 4069 of ERISA in the event such Plan has been or were to be terminated. "Social Security Act" shall mean the Social Security Act as codified ------------------- at 42 U.S.C. (S)1395 et. seq. "SouthTrust" shall mean SouthTrust Bank of Alabama, National ---------- Association, a national banking association, and its successors and assigns (including LaSalle National Bank, as trustee). "Statutory Reserves" shall mean on any date the percentage (expressed ------------------ as a decimal) established by the Board and any other banking authority which is for purposes of the definition of Base CD Rate, the then stated maximum rate of all reserves (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City, for new three month negotiable nonpersonal time deposits in dollars of $100,000 or more. Such reserve percentages shall include, without limitation, those imposed pursuant to said Regulation. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage. 18 "Subsidiary" shall mean, with respect to any Person (herein referred ---------- to as the "parent"), any corporation, association or other business entity ------ (whether now existing or hereafter organized) of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Super-majority Banks" shall have the meaning given such term in -------------------- Section 10.10(b). "Superpriority Claim" shall mean a claim against the Borrower and any ------------------- Guarantor in any of the Cases which is an administrative expense claim having priority over any or all administrative expenses of the kind specified in Sections 503(b) or 507(b) of the Bankruptcy Code. "Synthetic Guarantee" shall mean that certain Amended and Restated ------------------- Guarantee dated as of November 4, 1997, as heretofore amended, made by the Borrower and the Guarantors signatory thereto in favor of Chase, as administrative agent for the lenders under that certain Amended and Restated Credit Agreement dated as of November 4, 1997, as heretofore amended, to which FBTC Leasing Corp., among others, is a party, and the instruments and agreements executed in connection therewith (it being understood that the obligations of the Borrower and such Guarantors signatory thereto under or in connection with the Synthetic Guarantee and the instruments and agreements executed in connection therewith shall include, without limitation, such direct obligations as the Borrower and such Guarantors may have to FBTC Leasing Corp. and the other lenders party to such Amended and Restated Credit Agreement upon and after the entry of an order approving that certain Stipulation Acknowledging Ownership of Properties Subject to "Synthetic Lease Transactions" among certain parties including FBTC Leasing Corp., Chase as administrative agent, the Borrower and the Guarantors (including Living Centers Holding Corp.), as described in Section 4.02(e)). "Taxes" shall have the meaning given such term in Section 2.15. ----- "Termination Date" shall mean the earliest to occur of (i) the ---------------- Prepayment Date, (ii) the Maturity Date, (iii) the Consummation Date and (iv) the acceleration of the Loans and the termination of the Total Commitment in accordance with the terms hereof. "Termination Event" shall mean (i) a "reportable event", as such term ----------------- is described in Section 4043 of ERISA and the regulations issued thereunder (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC under Section 4043 of ERISA or such regulations) or an event described in Section 4068 of ERISA excluding events described in Section 4043(c)(9) of ERISA or 29 CFR (S)(S)2615.21 or 2615.23 and excluding events which would not be reasonably likely (as reasonably determined by the Agent) to have a material adverse effect on the financial condition, operations, business, properties or assets of the Borrower and the Guarantors taken as a whole, or (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a "substantial employer", as such term is defined in Section 4001(c) of ERISA, or the incurrence of liability by the Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the termination of a Multiple Employer Plan, or (iii) providing 19 notice of intent to terminate a Plan pursuant to Section 4041(c) of ERISA or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or (v) any other event or condition (other than the commencement of the Cases and the failure to have made any contribution accrued as of the Filing Date but not paid) which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the imposition of any liability under Title IV of ERISA (other than for the payment of premiums to the PBGC). "Total Commitment" shall mean, at any time, the sum of the Commitments ---------------- at such time. "Transferee" shall have the meaning given such term in Section 2.18. ---------- "Unused Total Commitment" shall mean, at any time, (i) the Total ----------------------- Commitment less (ii) the sum of (x) the aggregate outstanding principal amount of all Loans and (y) the aggregate Letter of Credit Outstandings. "Withdrawal Liability" shall have the meaning given such term under -------------------- Part I of Subtitle E of Title IV of ERISA. SECTION 2.2 Terms Generally. The definitions in Section 1.01 shall apply --------------- equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Sections, Exhibits and Schedules shall be deemed references to Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of determining compliance with any -------- ------- covenant set forth in Section 6, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in the Borrower's audited financial statements referred to in Section 3.04. SECTION 3. AMOUNT AND TERMS OF CREDIT. SECTION 3.1 Commitment of the Banks. ----------------------- 20 (1) Each Bank severally and not jointly with the other Banks agrees, upon the terms and subject to the conditions herein set forth (including, without limitation, the provisions of Section 2.25), to make revolving credit loans (each a "Loan" and collectively, the "Loans") to the Borrower at any time ---- ----- and from time to time during the period commencing on the date hereof and ending on the Termination Date (or the earlier date of termination of the Total Commitment) in an aggregate principal amount not to exceed, when added to such Bank's Commitment Percentage of the then aggregate Letter of Credit Outstandings (in excess of the ratable portion of the amount of cash then held in the Letter of Credit Account pursuant to Section 2.03(b) and allocable to such Bank), the Commitment of such Bank, which Loans may be repaid and reborrowed in accordance with the provisions of this Agreement. At no time shall the sum of the then outstanding aggregate principal amount of the Loans plus the then aggregate ---- Letter of Credit Outstandings exceed the lesser of (i) the Total Commitment of $100,000,000, as the same may be reduced from time to time pursuant to Section 2.10, and (ii) the Borrowing Base. (2) Each Borrowing shall be made by the Banks pro rata in accordance --- ---- with their respective Commitments; provided, however, that the failure of any -------- ------- Bank to make any Loan shall not in itself relieve the other Banks of their obligations to lend. SECTION 3.2 Borrowing Base. Notwithstanding any other provision of this -------------- Agreement to the contrary, the aggregate principal amount of all outstanding Loans plus the then aggregate Letter of Credit Outstandings shall not at any ---- time exceed the Borrowing Base and no Loan shall be made or Letter of Credit issued in violation of the foregoing. SECTION 3.3 Letters of Credit. ----------------- (1) Upon the terms and subject to the conditions herein set forth, the Borrower may request a Fronting Bank, at any time and from time to time after the date hereof and prior to the Termination Date, to issue, and, subject to the terms and conditions contained herein, such Fronting Bank shall issue, for the account of the Borrower or a Guarantor one or more Letters of Credit, provided that no Letter of Credit shall be issued if after giving effect to such - -------- issuance (i) the aggregate Letter of Credit Outstandings shall exceed $10,000,000 or (ii) the aggregate Letter of Credit Outstandings, when added to the aggregate outstanding principal amount of the Loans, would exceed the Total Commitment and, provided further that no Letter of Credit shall be issued if the -------- ------- Fronting Bank shall have received notice from the Agent or the Required Banks that the conditions to such issuance have not been met. (2) No Letter of Credit shall expire later than 60 days after the Maturity Date, provided that if any Letter of Credit shall be outstanding on the -------- Termination Date, the Borrower shall, at or prior to the Termination Date, except as the Agent may otherwise agree in writing, (i) cause all Letters of Credit which expire after the Termination Date to be returned to the Fronting Bank undrawn and marked "canceled" or (ii) if the Borrower is unable to do so in whole or in part, either (x) provide a "back-to-back" letter of credit to one or more Fronting Banks in a form satisfactory to such Fronting Bank and the Agent (in their sole discretion), issued by a bank satisfactory to such Fronting Bank and the Agent (in their sole discretion), is in an amount equal to 21 105% of the then undrawn stated amount of all outstanding Letters of Credit issued by such Fronting Banks and/or (y) deposit cash in the Letter of Credit Account in an amount equal to 105% of the then undrawn stated amount of all outstanding Letters of Credit as collateral security for the Borrower's reimbursement obligations in connection therewith, such cash to be remitted to the Borrower upon the expiration, cancellation or other termination or satisfaction of such reimbursement obligations. (3) The Borrower shall pay to each Fronting Bank, in addition to such other fees and charges as are specifically provided for in Section 2.18 hereof, such fees and charges in connection with the issuance and processing of the Letters of Credit issued by such Fronting Bank as are customarily imposed by such Fronting Bank from time to time in connection with letter of credit transactions. (4) Drafts drawn under each Letter of Credit shall be reimbursed by the Borrower in Dollars not later than the first Business Day following the date such draw is honored and shall bear interest from the date such draw is honored until the first Business Day following the date such draw is honored at a rate per annum equal to the Alternate Base Rate plus 3% and thereafter until ---- reimbursed in full at a rate per annum equal to the Alternate Base Rate plus 5% ---- (computed on the basis of the actual number of days elapsed over a year of 360 days). The Borrower shall effect such reimbursement (x) if such draw occurs prior to the Termination Date (or the earlier date of termination of the Total Commitment), in cash or through a Borrowing initiated by the Agent without the satisfaction of the conditions precedent set forth in Section 4.02 or (y) if such draw occurs on or after the Termination Date (or the earlier date of termination of the Total Commitment), in cash. Each Bank agrees to make the Loans described in clause (x) of the preceding sentence notwithstanding a failure to satisfy the applicable lending conditions thereto or the provisions of Sections 2.02 or 2.25. If such draw occurs on or after the Termination Date, the Borrower shall reimburse the Fronting Bank first from any cash deposit or cash proceeds of a back-to-back letter of credit in accordance with Section 2.03(b), and then from the Borrower's other assets. (5) Immediately upon the issuance of any Letter of Credit by any Fronting Bank, such Fronting Bank shall be deemed to have sold to each Bank other than such Fronting Bank and each such other Bank shall be deemed unconditionally and irrevocably to have purchased from such Fronting Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Bank's Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrower and the Guarantors under this Agreement with respect thereto. Upon any change in the Commitments pursuant to Section 10.03, it is hereby agreed that with respect to all Letter of Credit Outstandings, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment Percentages of the assigning and assignee Banks. Any action taken or omitted by a Fronting Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Fronting Bank any resulting liability to any other Bank. (6) In the event that a Fronting Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to such Fronting Bank pursuant to this Section, the Fronting Bank shall promptly notify the Agent, which shall promptly 22 notify each Bank of such failure, and each Bank shall promptly and unconditionally pay to the Agent for the account of the Fronting Bank the amount of such Bank's Commitment Percentage of such unreimbursed payment in Dollars and in same day funds. If the Fronting Bank so notifies the Agent, and the Agent so notifies the Banks prior to 11:00 a.m. (New York City time) on any Business Day, such Banks shall make available to the Fronting Bank such Bank's Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Bank shall not have so made its Commitment Percentage of the amount of such payment available to the Fronting Bank, such Bank agrees to pay to such Fronting Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Agent for the account of such Fronting Bank at the Federal Funds Effective Rate. The failure of any Bank to make available to the Fronting Bank its Commitment Percentage of any payment under any Letter of Credit shall not relieve any other Bank of its obligation hereunder to make available to the Fronting Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, but no Bank shall be responsible for the failure of any other Bank to make available to such Fronting Bank such other Bank's Commitment Percentage of any such payment. Whenever a Fronting Bank receives a payment of a reimbursement obligation as to which it has received any payments from the Banks pursuant to this paragraph, such Fronting Bank shall pay to each Bank which has paid its Commitment Percentage thereof, in Dollars and in same day funds, an amount equal to such Bank's Commitment Percentage thereof. SECTION 3.4 Issuance. Whenever the Borrower desires a Fronting Bank to -------- issue a Letter of Credit, it shall give to such Fronting Bank and the Agent at least two Business Days' prior written (including telegraphic, telex, facsimile or cable communication) notice (or such shorter period as may be agreed upon by the Agent, the Borrower and the Fronting Bank) specifying the date on which the proposed Letter of Credit is to be issued (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit and the name and address of the beneficiary thereof. SECTION 3.5 Nature of Letter of Credit Obligations Absolute. The ----------------------------------------------- obligations of the Borrower to reimburse the Banks for drawings made under any Letter of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation (it being understood that any such payment by the Borrower shall be without prejudice to, and shall not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by the Fronting Bank of any draft or the reimbursement by the Borrower thereof): (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any Guarantor may have at any time against a beneficiary of any Letter of Credit or against any of the Banks, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by a Fronting Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any other circumstance or happening 23 whatsoever, which is similar to any of the foregoing; or (vi) the fact that any Event of Default shall have occurred and be continuing. SECTION 3.6 Making of Loans. ---------------- (1) Each Bank may fulfill its Commitment with respect to any Loan by causing any lending office of such Bank to make such Loan; provided that any -------- such use of a lending office shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Each Bank shall, subject to its overall policy considerations, use reasonable efforts (but shall not be obligated) to select a lending office which will not result in the payment of increased costs by the Borrower pursuant to Section 2.13. (2) The Borrower shall give the Agent prior notice of each Borrowing hereunder of at least one Business Day (except as provided in the last sentence of this Section 2.06(b)), such notice shall be irrevocable and shall specify the amount of the proposed Borrowing (which shall not be less than $1,000,000) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such notice, to be effective, must be received by the Agent not later than 1:00 p.m., New York City time, on the first Business Day preceding the date on which such Borrowing is to be made except as provided in the last sentence of this Section 2.06(b). The Agent shall promptly notify each Bank of its proportionate share of such Borrowing and the date of such Borrowing. On the borrowing date specified in such notice, each Bank shall make its share of the Borrowing available at the office of the Agent at 270 Park Avenue, New York, New York 10017, no later than 12:00 noon, New York City time, in immediately available funds. Upon receipt of the funds made available by the Banks to fund any Borrowing hereunder, the Agent shall disburse such funds in the manner specified in the notice of borrowing delivered by the Borrower and shall use reasonable efforts to make the funds so received from the Banks available to the Borrower no later than 2:00 p.m. New York City time (other than as provided in the following sentence). With respect to Loans of $5,000,000 or less, the Banks shall make such Borrowings available to the Borrower by 4:00 p.m., New York City time, on the same Business Day that the Borrower gives notice to the Agent of such Borrowing by 12:00 noon, New York City time, provided that the Agent has -------- notified the Banks thereof by 2:00 p.m., New York City time, on such day. SECTION 3.7 Repayment of Loans; Evidence of Debt. ------------------------------------ (1) The Borrower hereby unconditionally promises to pay to the Agent for the account of each Bank the then unpaid principal amount of each Loan on the Termination Date. (2) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder. (3) The Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, (ii) the amount of any principal or interest due and payable or to become 24 due and payable from the Borrower to each Bank hereunder and (iii) the amount of any sum received by the Agent hereunder for the account of the Banks and each Bank's share thereof. (4) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and ----- ----- amounts of the obligations recorded therein; provided that the failure of any -------- Bank or the Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (5) Any Bank may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall execute and deliver to such Bank a promissory note payable to the order of such Bank (or, if requested by such Bank, to such Bank and its registered assigns) in a form furnished by the Agent and reasonably acceptable to the Borrower. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 10.03) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 3.8 Interest on Loans. ----------------- (1) Subject to the provisions of Section 2.09, each Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Alternate Base Rate plus 3%. ---- (2) Accrued interest on all Loans shall be payable in arrears on the last calendar day of each month, at maturity (whether by acceleration or otherwise), after such maturity on demand and upon any repayment or prepayment thereof (on the amount prepaid). SECTION 3.9 Default Interest. If the Borrower or any Guarantor, as the ---------------- case may be, shall default in the payment of the principal of or interest on any Loan or in the payment of any other amount becoming due hereunder (including, without limitation, the reimbursement pursuant to Section 2.03(d) of any draft drawn under a Letter of Credit), whether at stated maturity, by acceleration or otherwise, the Borrower or such Guarantor, as the case may be, shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 5%. ---- SECTION 3.10 Optional Termination or Reduction of Commitment. Upon at ----------------------------------------------- least two Business Days' prior written notice to the Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Unused Total Commitment. Each such reduction of the Unused Total Commitment shall be in the principal amount of $5,000,000 or any integral multiple thereof. Simultaneously with each reduction or termination of the Total Commitment, the Borrower shall pay to the Agent for the account of each Bank the Commitment Fee accrued on the amount of the Commitment of such Bank so terminated 25 or reduced through the date thereof. Any reduction of the Total Commitment pursuant to this Section shall be applied pro rata to reduce the Commitment of --- ---- each Bank. SECTION 3.11 Mandatory Prepayment; Commitment Termination; Cash -------------------------------------------------- Collateral. - ---------- (1) If at any time the aggregate principal amount of the outstanding Loans plus the aggregate Letter of Credit Outstandings exceeds the lesser of (x) the Total Commitment and (y) the Borrowing Base, the Borrower will within three Business Days (i) prepay the Loans in an amount necessary to cause the aggregate principal amount of the outstanding Loans plus the aggregate Letter of Credit ---- Outstandings to be equal to or less than the Total Commitment and/or the Borrowing Base, as the case may be, and (ii) if, after giving effect to the prepayment in full of the Loans, the aggregate Letter of Credit Outstandings in excess of the amount of cash held in the Letter of Credit Account exceeds the Total Commitment and/or the Borrowing Base, as the case may be, deposit into the Letter of Credit Account an amount equal to 105% of the amount by which the aggregate Letter of Credit Outstandings in excess of the amount of cash held in the Letter of Credit Account so exceeds the Total Commitment or Borrowing Base, as the case may be. (2) Upon the sale or other disposition of any of the properties the completion of which was financed with the proceeds of Loans as permitted by Section 3.10, the Borrower shall first apply that portion of the Net Proceeds thereof that is equal to the principal amount of Loans so utilized for such completion to the prepayment of the Loans. (3) Upon the Termination Date, the Total Commitment shall be terminated in full and the Borrower shall pay the Loans in full and, except as the Agent may otherwise agree in writing, if any Letter of Credit remains outstanding, deposit into the Letter of Credit Account an amount equal to 105% of the amount by which the sum of the aggregate Letter of Credit Outstandings exceeds the amount of cash held in the Letter of Credit Account, such cash to be remitted to the Borrower upon the expiration, cancellation, satisfaction or other termination of such reimbursement obligations, or otherwise comply with Section 2.03(b). SECTION 3.12 Optional Prepayment of Loans. The Borrower shall have the ---------------------------- right at any time and from time to time to prepay any Loans, in whole or in part, on the same Business Day if written, telex or facsimile notice is received by the Agent prior to 1:00 p.m., New York City time, and thereafter upon at least one Business Day's prior written, telex or facsimile notice to the Agent; provided, however, that each such partial prepayment shall be in multiples of - -------- ------- $1,000,000. Each notice of prepayment shall specify the prepayment date and the principal amount of the Loans to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Loan in the amount and on the date stated therein. The Agent shall, promptly after receiving notice from the Borrower hereunder, notify each Bank of the principal amount of the Loans held by such Bank which are to be prepaid, the prepayment date and the manner of application of the prepayment. SECTION 3.13 Reserve Requirements; Change in Circumstances. --------------------------------------------- 26 (1) If any Bank shall have determined that the adoption or effectiveness after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or any lending office of such Bank) or any Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's capital or on the capital of such Bank's holding company, if any, as a consequence of this Agreement, the Loans made by such Bank pursuant hereto, such Bank's Commitment hereunder or the issuance of, or participation in, any Letter of Credit by such Bank to a level below that which such Bank or such Bank's holding company could have achieved but for such adoption, change or compliance (taking into account Bank's policies and the policies of such Bank's holding company with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank or such Bank's holding company for any such reduction suffered. (2) A certificate of each Bank setting forth such amount or amounts as shall be necessary to compensate such Bank or its holding company as specified in paragraph (a) above, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Bank the amount shown as due on any such certificate delivered to it within 10 days after its receipt of the same. Any Bank receiving any such payment shall promptly make a refund thereof to the Borrower if the law, regulation, guideline or change in circumstances giving rise to such payment is subsequently deemed or held to be invalid or inapplicable. (3) Failure on the part of any Bank to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Bank's right to demand compensation with respect to such period or any other period. The protection of this Section shall be available to each Bank regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. SECTION 3.14 Pro Rata Treatment, etc. All payments and repayments of ----------------------- principal and interest in respect of the Loans (except as provided in Sections 2.13) shall be made pro rata among the Banks in accordance with the then outstanding principal amount of the Loans and/or participations in Letter of Credit Outstandings and all outstanding undrawn Letters of Credit (and the unreimbursed amount of drawn Letters of Credit) hereunder and all payments of Commitment Fees and Letter of Credit Fees (other than those payable to a Fronting Bank) shall be made pro rata among the Banks in accordance with their Commitments. All payments by the Borrower hereunder shall be (i) net of any tax applicable to the Borrower or Guarantor and (ii) made in Dollars in immediately available funds at the office of the Agent by 12:00 noon, New York City time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid in full. 27 SECTION 3.15 Taxes. ----- (1) Any and all payments by the Borrower or any Guarantor hereunder shall be made free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) taxes imposed on or measured by --------- the net income or overall gross receipts of the Agent or any Bank (or any transferee or assignee thereof, including a participation holder (any such entity being called a "Transferee")) and franchise taxes imposed on the Agent or ---------- any Bank (or Transferee) by the United States or any jurisdiction under the laws of which the Agent or any such Bank (or Transferee) is organized or in which the applicable lending office of any such Bank (or Transferee) is located or any political subdivision thereof or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which the Agent or such Bank (or Transferee) would not be subject to tax but for the execution and performance of this Agreement and (ii) taxes, levies, imposts, deductions, charges or withholdings ("Amounts") with respect to payments ------- hereunder to a Bank (or Transferee) in accordance with laws in effect on the later of the date of this Agreement and the date such Bank (or Transferee) becomes a Bank (or Transferee, as the case may be), but not excluding, with respect to such Bank (or Transferee), any increase in such Amounts solely as a result of any change in such laws occurring after such later date or any Amounts that would not have been imposed but for actions (other than actions contemplated by this Agreement) taken by the Borrower after such later date (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower or any ----- Guarantor shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Banks (or any Transferee) or the Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Bank (or Transferee) or the Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (2) In addition, the Borrower agrees to pay any current or future stamp or documentary taxes or any other excise or property taxes, charges, assessments or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). ----------- (3) The Borrower will indemnify each Bank (or Transferee) and the Agent for the full amount of Taxes and Other Taxes paid by such Bank (or Transferee) or the Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Such indemnification shall be made within 30 days after the date any Bank (or Transferee) or the Agent, as the case may be, makes written demand therefor. If a Bank (or Transferee) or the Agent shall become aware that it is entitled to receive a refund in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section, it shall promptly notify the Borrower of the availability of such 28 refund and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Bank (or Transferee) or the Agent receives a refund in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section, it shall promptly notify the Borrower of such refund and shall, within 30 days after receipt of a request by the Borrower (or promptly upon receipt, if the Borrower has requested application for such refund pursuant hereto), repay such refund to the Borrower (to the extent of amounts that have been paid by the Borrower under this Section with respect to such refund plus interest that is received by the Bank (or Transferee) or the Agent as part of the refund), net of all out-of- pocket expenses of such Bank (or Transferee) or the Agent and without additional interest thereon; provided that the Borrower, upon the request of such Bank (or -------- Transferee) or the Agent, agrees to return such refund (plus penalties, interest or other charges) to such Bank (or Transferee) or the Agent in the event such Bank (or Transferee) or the Agent is required to repay such refund. Nothing contained in this subsection (c) shall require any Bank (or Transferee) or the Agent to make available any of its tax returns (or any other information relating to its taxes that it deems to be confidential). (4) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Bank (or Transferee) or the Agent, the Borrower will furnish to the Agent, at its address referred to on the signature pages hereof, the original or a certified copy of a receipt evidencing payment thereof. (5) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section shall survive the payment in full of the principal of and interest on all Loans made hereunder. (6) Each Bank (or Transferee) that is organized under the laws of a jurisdiction outside the United States shall, if legally able to do so, prior to the immediately following due date of any payment by the Borrower hereunder, deliver to the Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including (A) Internal Revenue Service Form W-8 or W-9 and (B) Internal Revenue Service Form 1001 or Form 4224 and any other certificate or statement of exemption required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any subsequent version thereof or successors thereto, properly completed and duly executed by such Bank (or Transferee) establishing that such payment is (i) not subject to United States federal withholding tax under the Code because such payment is effectively connected with the conduct by such Bank (or Transferee) of a trade or business in the United States or (ii) totally exempt from United States federal withholding tax or subject to a reduced rate of such tax under a provision of an applicable tax treaty. Unless the Borrower and the Agent have received forms or other documents satisfactory to them indicating that such payments hereunder or are not subject to United States federal withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Agent shall withhold taxes from such payments at the applicable statutory rate. (7) The Borrower shall not be required to pay any additional amounts to any Bank (or Transferee) in respect of United States federal withholding tax pursuant to subsection (a) 29 above if the obligation to pay such additional amounts would not have arisen but for a failure by such Bank (or Transferee) to comply with the provisions of subsection (f) above. (8) Any Bank (or Transferee) claiming any additional amounts payable pursuant to this Section 2.15 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole reasonable determination of such Bank (or Transferee), be otherwise materially disadvantageous to such Bank (or Transferee). SECTION 3.16 Certain Fees. The Borrower shall pay to the Agent, for the ------------ respective accounts of the Agent and the Banks, the fees set forth in that certain letter dated December 22, 1999 among the Agent, Chase Securities Inc. and the Borrower at the times set forth therein. SECTION 3.17 Commitment Fee. The Borrower shall pay to the Banks a -------------- commitment fee (the "Commitment Fee") for the period commencing on the date the -------------- Commitment Letter is executed to the Termination Date or the earlier date of termination of the Commitment, computed (on the basis of the actual number of days elapsed over a year of 360 days) at the rate of one percent (1%) per annum on the average daily Unused Total Commitment. Such Commitment Fee, to the extent then accrued, shall be payable (x) monthly, in arrears, on the last calendar day of each month, (y) on the Termination Date and (z) as provided in Section 2.10 hereof, upon any reduction or termination in whole or in part of the Total Commitment. SECTION 3.18 Letter of Credit Fees. The Borrower shall pay with respect to --------------------- each Letter of Credit (i) to the Agent on behalf of the Banks a fee calculated (on the basis of the actual number of days elapsed over a year of 360 days) at the rate of three percent (3%) per annum on the daily average Letter of Credit Outstandings and (ii) to the Fronting Bank such Fronting Bank's customary fees for issuance, amendments and processing referred to in Section 2.03. In addition, the Borrower agrees to pay each Fronting Bank for its account a fronting fee in respect of each Letter of Credit issued by such Fronting Bank, for the period from and including the date of issuance of such Letter of Credit to and including the date of expiry or draw of such Letter of Credit, computed at a rate, and payable at times, to be determined by such Fronting Bank, the Borrower and the Agent. Accrued fees described in clause (i) of the first sentence of this paragraph in respect of each Letter of Credit shall be due and payable monthly in arrears on the last calendar day of each month and on the Termination Date, or such earlier date as the Total Commitment is terminated. Accrued fees described in clause (ii) of the first sentence of this paragraph in respect of each Letter of Credit shall be payable at times to be determined by the Fronting Bank, the Borrower and the Agent. SECTION 3.19 Nature of Fees. All Fees shall be paid on the dates due, in -------------- immediately available funds, to the Agent for the respective accounts of the Agent and the Banks, as provided herein and in the letter described in Section 2.16. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 3.20 Priority and Liens. ------------------ 30 (1) The Borrower and each of the Guarantors hereby covenants, represents and warrants that, upon entry of the First Day Order, the Obligations of the Borrower and the Guarantors hereunder and under the Loan Documents and in respect of Indebtedness permitted by Section 6.03 (vi): (i) pursuant to Section 364(c)(1) of the Bankruptcy Code, shall at all times constitute allowed administrative expense claims in the Cases having priority over all administrative expenses of the kind specified in Sections 503(b) or 507(b) of the Bankruptcy Code; (ii) pursuant to Section 364(c)(2) of the Bankruptcy Code, shall at all times be secured by perfected first priority Liens on all unencumbered pre-petition and post-petition property of the Borrower and the Guarantors (including, without limitation, all Accounts arising after the Filing Date, except as otherwise provided in subparagraph (iii) below or in the Orders, with any such Account on which the Agent and the Banks do not have a first priority perfected Lien being excluded from the Borrowing Base, but excluding bankruptcy causes of action, it being understood that, notwithstanding such exclusion, the proceeds of such causes of action shall be available for the repayment of the Obligations) and on all cash maintained in the Letter of Credit Account and any direct investments of the funds contained therein; (iii) pursuant to Section 364(c)(3) of the Bankruptcy Code, shall be secured by perfected Liens upon all pre-petition and post-petition property of the Borrower and the Guarantors (including, without limitation, Accounts in existence as of the Filing Date that are subject to valid and perfected Liens in favor of the Real Estate Financiers and the proceeds thereof, but not including property that is subject to existing Liens that presently secure the obligations of the Borrower and the Guarantors under the Existing Agreements as to which the Liens in favor of the Agent and the Banks will be as described in clause (iv) of this sentence) that is subject to valid and perfected Liens in existence on the Filing Date or to Permitted Liens, junior to such valid and perfected Liens; and (iv) pursuant to Section 364(d)(1) of the Bankruptcy Code, shall be secured by perfected first priority, senior priming Liens on all pre-petition and post- petition property of the Borrower and the Guarantors that is subject to (A) the existing Liens that secure the obligations of the Borrower and the Guarantors under and in connection with the Existing Agreements (subject to any Liens in existence on the Filing Date to which the Liens being primed hereby are subject or become subject) but excluding from such priming Liens (but not from the Liens described in clause (iii) of this sentence) the Liens of the Synthetic Agent to the extent of the Tranche B Loans and of FBTC Leasing Corp. to the extent of the Lessor Contributions and related obligations (under and as each such term is described in the Amended and Restated Credit Agreement that is referred to in the definition of the term "Synthetic Guarantee" herein) and (B) any Liens granted after the Filing Date to provide adequate protection in respect of the Existing Agreements; subject only to (x) in the event of the occurrence and during the continuance of an Event of Default or an event that would constitute an Event of Default with the giving of notice or lapse of time or both, the payment of (1) accrued and unpaid professional fees and disbursements theretofore incurred or incurred after the cure or waiver of such Event of Default or event, and (2) professional fees and disbursements incurred during the time of such continuance in an aggregate amount not in excess of $2,500,000, in each case by the Borrower, the Guarantors and any statutory committee appointed in the Cases and allowed by an order of the Bankruptcy Court and (y) the payment of unpaid fees pursuant to 28 U.S.C. (S) 1930 and to the Clerk of the Bankruptcy Court (collectively, the "Carve-Out"), provided that following --------- -------- the Termination Date amounts in the Letter of Credit Account shall not be subject to the Carve-Out, and provided, further, that, except as otherwise -------- ------- provided in the Orders, no portion of the Carve-Out shall be utilized for the payment of professional fees and disbursements incurred in connection with 31 any challenge to the amount, extent, priority, validity, perfection or enforcement of the indebtedness of the Borrower and the Guarantors owing to the Existing Lenders or to the collateral securing such indebtedness. The Banks agree that so long as no Event of Default or event which with the giving of notice or lapse of time or both would constitute an Event of Default shall have occurred, the Borrower and the Guarantors shall be permitted to pay compensation and reimbursement of expenses allowed and payable under 11 U.S.C. (S) 330 and 11 U.S.C. (S) 331, as the same may be due and payable, and the same shall not reduce the Carve-Out. (2) Subject to the Carve-Out and Permitted Liens, as to all real property the title to which is held by the Borrower or any of the Guarantors, or the possession of which is held by the Borrower or any of the Guarantors pursuant to a leasehold interest, the Borrower and each Guarantor hereby assigns and conveys as security, grants a security interest in, and (as applicable under relevant state law) conveys security title to, hypothecates, mortgages, pledges and sets over unto the Agent on behalf of the Banks (with the priorities described above) all of the right, title and interest of the Borrower and such Guarantor in all of such owned real property and in all such leasehold interests, together in each case with all of the right, title and interest of the Borrower and such Guarantor in and to all buildings, improvements, and fixtures related thereto, any lease or sublease thereof, all general intangibles relating thereto and all proceeds thereof. The Borrower and each Guarantor acknowledges that, pursuant to the Orders, the Liens in favor of the Agent on behalf of the Banks in all of such real property and leasehold instruments shall be perfected without the recordation of any mortgages, deeds of trust, deeds to secure debt or assignments. The Borrower and each Guarantor further agrees that, upon the request of the Agent, the Borrower and such Guarantor shall enter into separate fee and leasehold mortgages, deeds of trust, deeds to secure debt, collateral assignments or similar instruments in recordable form with respect to such properties on terms reasonably satisfactory to the Agent. SECTION 3.21 Right of Set-Off. Subject to the provisions of Section 7.01, ---------------- upon the occurrence and during the continuance of any Event of Default and the Carve-Out the Agent and each Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law and without further order of or application to the Bankruptcy Court, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Agent and each such Bank to or for the credit or the account of the Borrower or any Guarantor against any and all of the obligations of such Borrower or Guarantor now or hereafter existing under the Loan Documents, irrespective of whether or not such Bank shall have made any demand under any Loan Document and although such obligations may not have been accelerated. Each Bank and the Agent agrees promptly to notify the Borrower and Guarantors after any such set-off and application made by such Bank or by the Agent, as the case may be, provided that the failure to give such notice shall -------- not affect the validity of such set-off and application. The rights of each Bank and the Agent under this Section are in addition to other rights and remedies which such Bank and the Agent may have upon the occurrence and during the continuance of any Event of Default. SECTION 3.22 Security Interest in Letter of Credit Account. Pursuant to --------------------------------------------- Section 364(c)(2) of the Bankruptcy Code, the Borrower and the Guarantors hereby assign and pledge to the 32 Agent, for its benefit and for the ratable benefit of the Banks, and hereby grant to the Agent, for its benefit and for the ratable benefit of the Banks, a first priority security interest, senior to all other Liens, if any, in all of the Borrower's and the Guarantors' right, title and interest in and to the Letter of Credit Account and any direct investment of the funds contained therein. Cash held in the Letter of Credit Account shall not be available for use by the Borrower, whether pursuant to Section 363 of the Bankruptcy Code or otherwise. SECTION 3.23 Payment of Obligations. Subject to the provisions of Section ---------------------- 7.01, upon the maturity (whether by acceleration or otherwise) of any of the Obligations under this Agreement or any of the other Loan Documents of the Borrower and the Guarantors, the Banks shall be entitled to immediate payment of such Obligations without further application to or order of the Bankruptcy Court. SECTION 3.24 No Discharge; Survival of Claims. Each of the Borrower and -------------------------------- the Guarantors agrees that (i) its Obligations hereunder shall not be discharged by the entry of an order confirming a Plan of Reorganization (and each of the Borrower and the Guarantors, pursuant to Section 1141(d)(4) of the Bankruptcy Code, hereby waives any such discharge) and (ii) the Superpriority Claim granted to the Agent and the Banks pursuant to the Orders and described in Section 2.20 and the Liens granted to the Agent pursuant to the Orders and described in Sections 2.20 and 2.22 shall not be affected in any manner by the entry of an order confirming a Plan of Reorganization. SECTION 3.25 Use of Cash Collateral. Notwithstanding anything to the ---------------------- contrary contained herein, the Borrower shall not be permitted (i) to request a Borrowing under Section 2.06 or request the issuance of a Letter of Credit under Section 2.04 unless the Bankruptcy Court shall have entered the First Day Order or (ii) to request a Borrowing under Section 2.06 unless the Borrower and the Guarantors shall at that time have the use of all cash collateral subject to the Orders for the purposes described in Section 3.10. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce the Banks to make Loans and issue and/or participate in Letters of Credit hereunder, the Borrower and each of the Guarantors jointly and severally represent and warrant as follows: SECTION 4.1 Organization and Authority. Each of the Borrower and the -------------------------- Guarantors (i) is a corporation duly organized and validly existing under the laws of the State of its incorporation and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect; (ii) subject to the entry by the Bankruptcy Court of the First Day Order (or the Interim Order or the Final Order, when applicable) has the requisite corporate power and authority to effect the transactions contemplated hereby, and by the other Loan Documents to which it is a party, and (iii) subject to the entry by the Bankruptcy Court of the First Day Order (or the Interim Order or the Final Order, when applicable) has all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, and to conduct its business as now or currently proposed to be conducted. 33 SECTION 4.2 Due Execution. Upon the entry by the Bankruptcy Court of the ------------- First Day Order (or the Interim Order or the Final Order, when applicable), the execution, delivery and performance by each of the Borrower and the Guarantors of each of the Loan Documents to which it is a party (i) are within the respective corporate powers of each of the Borrower and the Guarantors, have been duly authorized by all necessary corporate action including the consent of shareholders where required, and do not (A) contravene the charter or by-laws of any of the Borrower or the Guarantors, (B) violate any law (including, without limitation, the Securities Exchange Act of 1934) or regulation (including, without limitation, Regulations T, U or X of the Board of Governors of the Federal Reserve System), or any order or decree of any court or governmental instrumentality, the violation of which could reasonably be expected to have a Material Adverse Effect, (C) conflict with or result in a breach of, or constitute a default under, any indenture, mortgage or deed of trust entered into after the Filing Date or any lease, agreement or other instrument entered into after the Filing Date binding on the Borrower or the Guarantors or any of their properties, in each case which conflict, breach or default could reasonably be expected to have a Material Adverse Effect, or (D) result in or require the creation or imposition of any Lien upon any of the property of any of the Borrower or the Guarantors other than the Liens granted pursuant to this Agreement, the other Loan Documents or the Orders; and do not require the consent, authorization by or approval of or notice to or filing or registration with any Governmental Authority other than the entry of the Orders. Upon the entry by the Bankruptcy Court of the First Day Order (or the Interim Order or the Final Order, when applicable), this Agreement has been duly executed and delivered by each of the Borrower and the Guarantors. This Agreement is, and each of the other Loan Documents to which the Borrower and each of the Guarantors is or will be a party, when delivered hereunder or thereunder, will be, a legal, valid and binding obligation of the Borrower and each Guarantor, as the case may be, enforceable against the Borrower and the Guarantors, as the case may be, in accordance with its terms and the Orders. SECTION 4.3 Statements Made. The information that has been delivered in --------------- writing by the Borrower or any of the Guarantors to the Agent or to the Bankruptcy Court in connection with any Loan Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent that any such statements constitute projections), taken as a whole and in light of the circumstances in which made, as of the date so delivered, contained no untrue statement of a material fact and did not omit to state a material fact necessary to make such statements not misleading; and, to the extent that any such information constitutes projections, such projections were prepared in good faith on the basis of assumptions, methods, data, tests and information believed by the Borrower or such Guarantor to be reasonable at the time such projections were furnished. SECTION 4.4 Financial Statements. The Borrower has furnished the Banks -------------------- with copies of (i) the audited consolidated financial statement and schedules of the Borrower for the fiscal year ended September 30, 1998 and (ii) the unaudited consolidated financial statement and schedules of the Borrower for the fiscal quarter ended June 30, 1999. Such financial statements present fairly the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of the Borrower and its consolidated Subsidiaries as of the dates thereof required to be disclosed by GAAP and such financial statements were prepared in 34 a manner consistent with GAAP, subject (in the case of such fiscal quarter statement) to normal year end adjustments. No material adverse change in the operations, business, properties, assets, prospects or condition (financial or otherwise) of the Borrower and its consolidated Subsidiaries, taken as a whole, has occurred from that set forth in the Borrower's consolidated financial statements for the fiscal year ended September 30, 1998 or the fiscal quarter ended June 30, 1999 other than those which have been disclosed to the Banks in writing and those which customarily occur as a result of events leading up to and following the commencement of a proceeding under Chapter 11 of the Bankruptcy Code and the commencement of the Cases (including, without limitation, those reflected in the financial projections heretofore made available to the Agent). SECTION 4.5 Ownership. Except as set forth on Schedule 3.05, (a) each of --------- the Persons listed on Schedule 3.05 is a wholly-owned, direct or indirect Subsidiary of the Borrower and (b) the Borrower owns no other Subsidiaries, whether directly or indirectly, other than MHG and the direct and indirect subsidiaries of MHG. SECTION 4.6 Liens. Except for Liens existing on the Filing Date as ----- reflected on Schedule 3.06 (which Schedules shall be deemed to include any Liens disclosed by the Lien search reports delivered to the Agent pursuant to Section 4.02(h) hereof, which reports are required to be satisfactory to the Agent and the Original Required Banks), there are no Liens of any nature whatsoever on any assets of the Borrower or any of the Guarantors other than Liens permitted pursuant to Section 6.01. Neither the Borrower nor the Guarantors are parties to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any assets of the Borrower or any Guarantor or otherwise result in a violation of this Agreement other than the Liens granted to the Agent and the Banks as provided for in this Agreement and Permitted Adequate Protection Liens. SECTION 4.7 Compliance with Law. Except as set forth in a letter dated ------------------- the Closing Date heretofore delivered to the Agent and the Banks (which letter need not duplicate disclosures referred to in Section 3.13) and except for matters which, singly or in the aggregate could not reasonably expected to have a Material Adverse Effect: (1) (i) To the knowledge of the Borrower or the Guarantors, the operations of the Borrower and the Guarantors comply in all material respects with all applicable environmental, health and safety statutes and regulations, including, without limitation, regulations promulgated under the Resource Conservation and Recovery Act (42 U.S.C. (S)(S) 6901 et seq.); (ii) to the -- --- Borrower's and each of the Guarantor's knowledge, none of the operations of the Borrower or the Guarantors is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure by the Borrower or any Guarantor is needed to respond to a release of any Hazardous Waste or Hazardous Substance (as such terms are defined in any applicable state or federal environmental law or regulations) into the environment; and (iii) to the Borrower's and each of the Guarantor's knowledge, the Borrower and the Guarantors do not have any material contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 35 (2) Neither the Borrower nor any Guarantor is, to the best of its knowledge, in violation of any law, rule or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority. SECTION 4.8 Insurance. All policies of insurance of any kind or nature --------- owned by or issued to the Borrower and the Guarantors, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage (including self insurance) as is customarily carried by companies of the size and character of the Borrower and the Guarantors. SECTION 4.9 The Orders. On the date of the making of the initial Loans or ---------- the issuance of the initial Letters of Credit hereunder, whichever first occurs, the First Day Order will have been entered and will not have been stayed, amended, vacated, reversed or rescinded (without the prior written consent of the Agent). On the date of the making of any Loan or the issuance of any Letter of Credit, the First Day Order, the Interim Order or the Final Order, as the case may be, shall have been entered and shall not have been amended, stayed, vacated or rescinded (without the prior written consent of the Agent). Upon the maturity (whether by the acceleration or otherwise) of any of the Obligations of the Borrower and the Guarantors hereunder and under the other Loan Documents, the Banks shall, subject to the provisions of Section 7.01 and the Carve-Out, be entitled to immediate payment of such Obligations, and to enforce the remedies provided for hereunder, without further application to or order by the Bankruptcy Court. SECTION 4.10 Use of Proceeds. The proceeds of the Loans shall be used for --------------- working capital and other general corporate purposes of the Borrower and the Guarantors consistent with the Budget (including periodic updates thereof), which shall include the completion, for not more than $8,800,000, of certain properties that, on the Filing Date, shall have been partially constructed with the proceeds of certain of the loans involving, among others, FBTC Leasing Corp. relating to the Synthetic Guarantee. SECTION 4.11 Litigation. Other than as set forth in a letter dated the ---------- Closing Date heretofore delivered to the Agent and the Banks or as disclosed pursuant to Section 5.05(b), there are no unstayed actions, suits or proceedings pending or, to the knowledge of the Borrower or the Guarantors, threatened against or affecting the Borrower or the Guarantors or any of their respective properties, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which if determined adversely to the Borrower or the Guarantors would have a Material Adverse Effect. SECTION 4.12 Year 2000 Matters. Any reprogramming required to permit the ----------------- proper functioning (but only to the extent that such proper functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000 of computer systems and other equipment containing embedded microchips, in either case owned or operated by the Borrower or any of its Subsidiaries or used or relied upon in the conduct of their business (including any such systems and other equipment supplied by others or with which the computer systems of the Borrower 36 or any of its Subsidiaries interface), and the testing of all such systems and other equipment as so reprogrammed, has been completed in all material respects. The costs to the Borrower and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing for the other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing embedded microchips due to the occurrence of the year 2000 could not reasonably be expected to result in a Default or Event of Default or to have a Material Adverse Effect. Except for any reprogramming referred to above, the computer systems of the Borrower and its Subsidiaries are and, with the ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient for the conduct of their business as currently conducted. SECTION 4.13 Health Care Permits. Other than as set forth in a letter ------------------- dated the Closing Date heretofore delivered to the Agent of the Banks: (1) Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect: (i) each of the Borrower and the Guarantors now has, and has no reason to believe it will not be able to maintain in effect, all Health Care Permits necessary for the lawful conduct of its business or operations wherever now conducted and as planned to be conducted, without limitation, the ownership and operation of its Health Care Facilities pursuant to all Requirements of Law, (ii) all such Health Care Permits are in full force and effect and have not been amended or otherwise modified, rescinded, revoked or assigned, (iii) the Borrower and each of the Guarantors is substantially complying with the requirements of each such Health Care Permit, and no event has occurred, and no condition exists, which, with the giving of notice, the passage of time, or both, would constitute a violation thereof, (iv) neither the Borrower nor any of the Guarantors has received any written notice of any violation of any Requirement of Law, (v) to the knowledge of the Borrower, no condition exists or event has occurred which in itself or with the giving of notice or the lapse of time, or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such Health Care Permit, (vi) there is no claim filed with any Governmental Authority of which the Borrower or any of the Guarantors has been notified in writing challenging the validity of any such Health Care Permit and (vii) the continuation, validity and effectiveness of all such Health Care Permits will not be adversely affected by the execution and performance of this Agreement or any of the other Loan Documents. (2) All Health Care Facilities owned, leased, managed or operated by the Borrower or any of the Guarantors are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that the Borrower or any of the Guarantors has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto. There are no proceedings pending or, to the knowledge of the Borrower, any proceedings threatened or investigations pending or threatened, by any Governmental Authority with respect to the Borrower's or any of its Subsidiaries' participation in the Medicare, Medicaid or related reimbursement programs and which could reasonably be expected to have a Material Adverse Effect. 37 SECTION 5. CONDITIONS OF LENDING SECTION 5.1 Conditions Precedent to Initial Loans and Initial Letters of ------------------------------------------------------------ Credit. The obligation of the Banks to make the initial Loans or the Fronting - ------ Bank to issue the initial Letter of Credit, whichever may occur first, is subject to the following conditions precedent: (1) Supporting Documents. The Agent shall have received for each of -------------------- the Borrower and the Guarantors: (1) a copy of such entity's certificate of incorporation, as amended, certified as of a recent date by the Secretary of State of the state of its incorporation; (2) a certificate of such Secretary of State, dated as of a recent date, as to the good standing of and payment of taxes by that entity and as to the charter documents on file in the office of such Secretary of State; and (3) a certificate of the Secretary or an Assistant Secretary of that entity dated the date of the initial Loans or the initial Letter of Credit hereunder, whichever first occurs, and certifying (A) that attached thereto is a true and complete copy of the by-laws of that entity as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of that entity authorizing the Borrowings and Letter of Credit extensions hereunder, the execution, delivery and performance in accordance with their respective terms of this Agreement, the Loan Documents and any other documents required or contemplated hereunder or thereunder and the granting of the security interest in the Letter of Credit Account and other Liens contemplated hereby, (C) that the certificate of incorporation of that entity has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each officer of that entity executing this Agreement and the Loan Documents or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of that entity as to the incumbency and signature of the officer signing the certificate referred to in this clause (iii)). (2) First Day Order. --------------- (1) At the time of the making of the initial Loans or at the time of the issuance of the initial Letters of Credit, whichever first occurs, the Agent and the Banks shall have received a certified copy of an order of the Bankruptcy Court in substantially the form of Exhibit A-1 (the "First Day Order") approving the Loan Documents and --------------- granting the Superpriority Claim status and senior priming and other Liens described in Section 2.20 which First Day Order: (i) shall have been entered, with the consent or non-objection of a preponderance, as determined by the Agent in its sole judgment, of the Existing Lenders, upon an application or motion of the Borrower reasonably satisfactory in form and substance to the Agent, on such prior 38 notice to such parties (including the Existing Lenders) as may in each case be reasonably satisfactory to the Agent; (ii) shall authorize extensions of credit in an amount not in excess of $25,000,000; (iii) shall approve the payment by the Borrower of all of the Fees set forth in Section 2.16; (iv) shall be in full force and effect; and (v) shall not have been stayed, reversed, modified or amended in any respect without the prior written consent of the Agent (on behalf of the Original Required Banks), and, if the First Day Order is the subject of a pending appeal in any respect, neither the making of such Loans nor the issuance of such Letter of Credit nor the performance by the Borrower or any of the Guarantors of any of their respective obligations hereunder or under the Loan Documents or under any other instrument or agreement referred to herein shall be the subject of a presently effective stay pending appeal. (2) In addition, the First Day Order shall authorize the use by the Borrower and the Guarantors of any cash collateral in which any Existing Lender under the Existing Agreements may have an interest and shall provide, as adequate protection for the use of such cash collateral and the priming of the Liens granted pursuant to the Existing Agreements contemplated hereby and subject to the Carve-Out, for (A) a superpriority claim as contemplated by Section 507(b) of the Bankruptcy Code immediately junior to the claims under Section 364(c)(1) of the Bankruptcy Code held by the Agent and the Banks, (B) a replacement Lien on substantially all of the assets of the Borrower and the Guarantors having a priority immediately junior to, and subject to the same limitations as are applicable to, the priming and other Liens granted in favor of the Agent and the Banks hereunder and under the other Loan Documents (and, in the case of Accounts arising on or after the Filing Date out of the use of the properties that are subject as of the Filing Date to valid and perfected Liens in favor of the Real Estate Financiers, also junior to adequate protection Liens on such Accounts that may be granted in favor of the Real Estate Financiers), (C) the payment on a current basis of the reasonable fees and disbursements of respective professionals (including, but not limited to, the reasonable fees and disbursements of counsel and internal and third-party consultants, including financial consultants, and auditors) for the Pre-Petition Agent (including the payment on the Closing Date or as soon thereafter as is practicable of any unpaid pre-petition fees and expenses), the payment of counsel fees and disbursements of members of the Steering Committee acting under the Existing Credit Agreement and the continuation of the payment to the Pre-Petition Agent on a current basis of the administration fees that are provided for under the Existing Credit Agreement and (D) the payment to the Existing Lenders, so long as no Event of Default or event, which upon notice or lapse of time or both, would constitute an Event of Default shall have occurred and be continuing, of (x) any cash proceeds received by the Borrower pursuant to any settlement of the "prudent buyer" dispute with the Health Care Financing Administration and (y) 75% of the Net Proceeds of asset sales or dispositions permitted hereunder, the proceeds of which are not required to be applied to the Loans pursuant to Section 2.11(b). 39 (3) Insofar as the Department of Health and Human Services ("HHS") and the Healthcare Finance Administration ("HCFA") are --- ---- concerned, the condition in this Section shall be deemed to have been satisfied if either (x) the First Day Order shall contain a paragraph limiting the recoupment rights of HHS and HCFA as set forth in Exhibit A-1 or (y) HHS and the Borrower shall have entered into a stipulation with respect to Accounts that are included in the Borrowing Base on terms substantially similar to the terms of the stipulation entered into on November 4, 1999 between HHS and Sun Healthcare Group, Inc., et al., and otherwise satisfactory to the Agent and the Banks. ----- (3) Security and Pledge Agreement. The Borrower and each of the ----------------------------- Guarantors shall have duly executed and delivered to the Agent a Security and Pledge Agreement in substantially the form of Exhibit B (the "Security and ------------ Pledge Agreement"). - ---------------- (4) First Day Orders. All of the "first day orders" entered by the ---------------- Bankruptcy Court at the time of the commencement of the Cases shall be reasonably satisfactory in form and substance to the Agent and the Original Required Banks. (5) Opinion of Counsel. Unless the Agent shall have agreed that the ------------------ condition set forth in this Section may be satisfied at the time of the entry of the Interim Order, the Agent and the Banks shall have received the favorable written opinion of counsel to the Borrower and the Guarantors reasonably acceptable to the Agent and the Original Required Banks, dated the date of the initial Loans or the issuance of the initial Letter of Credit, whichever first occurs, substantially in the form of Exhibit C. (6) Payment of Fees. The Borrower shall have paid to the Agent the --------------- then unpaid balance of all accrued and unpaid Fees then due and payable under and pursuant to this Agreement and the letter referred to in Section 2.16. (7) Corporate and Judicial Proceedings. All corporate and judicial ---------------------------------- proceedings and all instruments and agreements in connection with the transactions among the Borrower, the Guarantors, the Agent and the Banks contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Agent and the Original Required Banks, and the Agent shall have received all information and copies of all documents and papers, including records of corporate and judicial proceedings, which the Agent may have reasonably requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate, governmental or judicial authorities. (8) Information. The Agent shall have received such information ----------- (financial or otherwise) as may be reasonably requested by the Agent and shall have discussed the Borrower's business plan heretofore delivered to the Agent with the Borrower's management and shall be reasonably satisfied with the nature and substance of such discussions. (9) Budget. The Agent shall have received from the Borrower a budget ------ detailing the Borrower's anticipated cash receipts and disbursements for the period through the Maturity Date 40 and setting forth the anticipated uses of the Commitment that is reasonably satisfactory in form and substance to the Agent and the Original Required Banks (the "Budget"). ------ (j) Compliance with Laws. The Borrower and the Guarantors shall have -------------------- granted the Agent access to and the right to inspect all reports, audits and other internal information of the Borrower and the Guarantors relating to environmental matters, and any third party verification of certain matters relating to compliance with environmental laws and regulations reasonably requested by the Agent, and the Agent shall be reasonably satisfied that the Borrower and the Guarantors are in compliance in all material respects with all applicable environmental laws and regulations and be reasonably satisfied that the costs of maintaining such compliance will not have a Material Adverse Effect. (k) Closing Documents. The Agent shall have received all documents ----------------- required by this Agreement reasonably satisfactory in form and substance to the Agent. SECTION 5.2 Conditions Precedent to Each Loan and Each Letter of Credit. ----------------------------------------------------------- The obligation of the Banks to make each Loan and of the Fronting Bank to issue each Letter of Credit, including the initial Loan and the initial Letter of Credit, is subject to the following conditions precedent: (1) Notice. The Agent shall have received a notice with respect to ------ such borrowing or issuance, as the case may be, as required by Section 2. (2) Representations and Warranties. All representations and ------------------------------ warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of each Borrowing or the issuance of each Letter of Credit hereunder with the same effect as if made on and as of such date except to the extent such representations and warranties expressly relate to an earlier date. (3) No Default. On the date of each Borrowing hereunder or the ---------- issuance of each Letter of Credit, no Event of Default or event which upon notice or lapse of time or both would constitute an Event of Default shall have occurred and be continuing. (4) Orders. The First Day Order shall be in full force and effect ------ and shall not have been stayed, reversed, modified or amended in any respect without the prior written consent of the Agent (on behalf of the Original Required Banks), provided, that (i) at the time of the making of any Loan or the -------- issuance of any Letter of Credit the aggregate amount of either of which, when added to the sum of the principal amount of all Loans then outstanding and the Letter of Credit Outstandings, would exceed the amount authorized by the First Day Order (collectively, the "Additional Interim Credit"), the Agent and each of ------------------------- the Banks shall have received a certified copy of an order of the Bankruptcy Court in substantially the form of Exhibit A-2 (the "Interim Order"), which, in ------------- any event, shall have been entered by the Bankruptcy Court no later than 10 days after the entry of the First Day Order and shall authorize extensions of credit in an amount not in excess of $50,000,000, taken together with the extensions of credit that were authorized by the First Day Order, and at the time of the extension of any Additional Interim Credit the Interim Order shall be 41 in full force and effect, and shall not have been stayed, reversed, modified or amended in any respect without the prior written consent of the Agent (on behalf of the Original Required Banks); and if either the First Day Order or the Interim Order is the subject of a pending appeal in any respect, neither the making of the Loans nor the issuance of any Letter of Credit nor the performance by the Borrower or any Guarantor of any of their respective obligations under any of the Loan Documents shall be the subject of a presently effective stay pending appeal and (ii) at the time of the making of any Loan or the issuance of any Letter of Credit the aggregate amount of either of which, when added to the sum of the principal amount of all Loans then outstanding and the Letter of Credit Outstandings, would exceed the amount authorized by the Interim Order (collectively, the "Further Additional Credit"), the Agent and each of the Banks ------------------------- shall have received a certified copy of an order of the Bankruptcy Court in substantially the form of Exhibit A-3 (the "Final Order"), which, in any event, ----------- shall have been entered by the Bankruptcy Court no later than 30 days after the entry of the First Day Order, and at the time of the extension of any Further Additional Credit the Final Order shall be in full force and effect, and shall not have been stayed, reversed, modified or amended in any respect without the prior written consent of the Agent (on behalf of the Original Required Banks); and if any of the First Day Order, the Interim Order or the Final Order is the subject of a pending appeal in any respect, neither the making of the Loans nor the issuance of any Letter of Credit nor the performance by the Borrower or any Guarantor of any of their respective obligations under any of the Loan Documents shall be the subject of a presently effective stay pending appeal. (5) Synthetic Leases. At the time of the extension of any Additional ---------------- Interim Credit, the Bankruptcy Court shall have "so ordered" a stipulation executed by, among others, the Borrower and FBTC Leasing Corp., in form and substance satisfactory to the Agent and the Original Required Banks, regarding the treatment of the "synthetic lease" transactions with FBTC Leasing Corp. (6) Payment of Fees. The Borrower shall have paid to the Agent the --------------- then unpaid balance of all accrued and unpaid Fees then due and payable under and pursuant to this Agreement and the letter referred to in Section 2.16. (7) Borrowing Base Certificate. The Agent shall have received the -------------------------- timely delivery of the most recent Borrowing Base Certificate required pursuant to Section 5.06. (8) UCC Searches. At the time of the making of the first Loan or ------------ the issuance of the first Letter of Credit following the entry of the Final Order, the Agent shall have received UCC searches conducted in the jurisdictions in which the Borrower and the Guarantors conduct business (dated as of a date reasonably satisfactory to the Agent), reflecting the absence of Liens and encumbrances on the assets of the Borrower and the Guarantors other than Liens granted (or otherwise permitted) under the Existing Agreements or Permitted Liens and such other Liens as may be satisfactory to the Agent and the Original Required Banks. (9) Usage. The use of such extension of credit shall be consistent ----- with the Budget, as updated from time to time. 42 (10) Overhead. No later than the date of the entry of the Interim -------- Order, the Bankruptcy Court shall have entered orders (in the cases of each of the Borrower and MHG), which orders may be included in the Orders and any corresponding orders in the MHG bankruptcy cases, in form and substance satisfactory to the Agent and the Original Required Banks, regarding the payment by MHG and its Subsidiaries that are debtors in cases under Chapter 11 of the Bankruptcy Code of a weekly overhead fee to the Borrower in an amount satisfactory to the Agent and the Original Required Banks that shall in no event be less than 5% of MHG's and such debtor Subsidiaries' net revenues for prior periods, excluding any management fees received from third parties and paid directly to the Borrower during such periods, and at the time of each extension of credit thereafter such orders shall be in full force and effect. The request by the Borrower for, and the acceptance by the Borrower of, each extension of credit hereunder shall be deemed to be a representation and warranty by the Borrower that the conditions specified in this Section have been satisfied or waived at that time. SECTION 6. AFFIRMATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the Letter of Credit Account, or in excess of the face amount of back-to-back letters of credit delivered, in each case pursuant to Section 2.03(b)), or any amount shall remain outstanding or unpaid under this Agreement, the Borrower and each of the Guarantors agree that, unless the Required Banks shall otherwise consent in writing, the Borrower and each of the Guarantors will: SECTION 6.1 Financial Statements, Reports, etc. In the case of the ---------------------------------- Borrower and the Guarantors, deliver to the Agent and each of the Banks: (1) On or before January 25, 2000, the Borrower's consolidated balance sheet and related consolidated statements of income, consolidated cash flows, and consolidated statement of changes in shareholders' equity, showing the consolidated financial condition and the consolidated results of operations of the Borrower and its Subsidiaries (excluding MHG and its Subsidiaries) as of and for the fiscal year ended September 30, 1999, such financial statements to be audited by Ernst & Young LLP or other independent public accountants of recognized national standing reasonably acceptable to the Original Required Banks and accompanied by an opinion of such accountants which (1) shall not be qualified in any material respect other than with respect to the Cases, (2) may contain an explanatory paragraph expressing doubt about the Borrower's ability to continue as a going concern, and (3) shall refer to the notes to the financial statements (which notes may state that the financial statements are not prepared in accordance with GAAP since GAAP would require that the accounts of MHG and its Subsidiaries be included in the Borrower's consolidated financial statements). Such consolidated financial statements shall include in the notes to the financial statements disclosure of segment information as required by Financial Accounting Standards Board Statement No. 131 "Disclosures and Segments of an Enterprise and Related Information" except that MHG and its Subsidiaries may be excluded. Such consolidated financial statements shall be accompanied by a certification by a Financial Officer of the Borrower certifying that such 43 consolidated financial statements fairly present the financial condition and results of operations of the Borrower and its Subsidiaries (excluding MHG and its Subsidiaries) on a consolidated basis in accordance with GAAP and that the segment disclosure (excluding MHG and its Subsidiaries) included in the notes to the consolidated financial statements have been prepared in accordance with GAAP (but for the exclusion of MHG and its Subsidiaries); (2) as soon as available, but no more than (i) 45 days after the end of each of November 1999, December 1999, January 2000 and February 2000 and (ii) 30 days after the end of each month thereafter, the unaudited consolidated and consolidating balance sheets, and related statements of income and cash flows of the Borrower and the Guarantors on a consolidated and consolidating basis and as of the close of such fiscal month and the then elapsed portion of the fiscal year together with (x) an update for the successive 13-week period of the Borrower's 13-week cash flow forecast previously delivered to the Agent and (y) a report of the EBITDA performance during the immediately preceding month of the real estate portfolios financed by the Real Estate Financiers; (3) concurrently with any delivery of financial statements under (a) or (b) above as applicable, (i) a certificate of a Financial Officer certifying such statements (A) certifying to the best of such Financial Officer's knowledge that no Event of Default or event which upon notice or lapse of time or both would constitute an Event of Default has occurred, or, if such an Event of Default or event has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (B) setting forth computations in reasonable detail satisfactory to the Agent demonstrating compliance with the provisions of Sections 6.03, 6.04, 6.05 and 6.14 and (ii) a certificate (which certificate may be limited to accounting matters and disclaim responsibility for legal interpretations) of such accountants accompanying the audited consolidated financial statements delivered under (a) above certifying that, in the course of the regular audit of the business of the Borrower and its Subsidiaries, such accountants have obtained no knowledge that an Event of Default has occurred and is continuing, or if, in the opinion of such accountants, an Event of Default has occurred and is continuing, specifying the nature thereof and all relevant facts with respect thereto; (4) as soon as possible, and in any event within 45 days of the Closing Date, a consolidated pro forma balance sheet of the Borrower's and the --- ----- Guarantors' financial condition as of the Filing Date; (5) within 30 days from the end of each fiscal quarter of the Borrower, an update of the Budget for the succeeding six-month period satisfactory in form and substance to the Agent and the Original Required Banks together with an analysis of budgeted to actual performance for the immediately preceding month (or a certificate from a Financial Officer of the Borrower that the Budget need not be updated); (6) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said commission, or with any national securities exchange, as the case may be; 44 (7) as soon as available and in any event (A) within 30 days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Single Employer Plan of the Borrower or such ERISA Affiliate has occurred and (B) within 10 days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any other Termination Event with respect to any such Plan has occurred, a statement of a Financial Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such ERISA Affiliate proposes to take with respect thereto; (8) promptly and in any event within 10 days after receipt thereof by the Borrower or any of its ERISA Affiliates from the PBGC copies of each notice received by the Borrower or any such ERISA Affiliate of the PBGC's intention to terminate any Single Employer Plan of the Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan; (9) if requested by the Agent, promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan of the Borrower or any of its ERISA Affiliates; (10) within 10 days after notice is given or required to be given to the PBGC under Section 302(f)(4)(A) of ERISA of the failure of the Borrower or any of its ERISA Affiliates to make timely payments to a Plan, a copy of any such notice filed and a statement of a Financial Officer of the Borrower setting forth (A) sufficient information necessary to determine the amount of the lien under Section 302(f)(3), (B) the reason for the failure to make the required payments and (C) the action, if any, which the Borrower or any of its ERISA Affiliates proposed to take with respect thereto; (11) promptly and in any event within 10 days after receipt thereof by the Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability by a Multiemployer Plan, (B) the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA, (C) the termination of a Multiemployer Plan within the meaning of Title IV of ERISA, or (D) the amount of liability incurred, or which may be incurred, by the Borrower or any ERISA Affiliate in connection with any event described in clause (A), (B) or (C) above; (12) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower or any Guarantor, or compliance with the terms of any material loan or financing agreements as the Agent, at the request of any Bank, may reasonably request; and (13) furnish to the Agent and its counsel promptly after the same is available, copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of the Borrower or any of the Guarantors with the Bankruptcy Court 45 in the Cases, or distributed by or on behalf of the Borrower or any of the Guarantors to any official committee appointed in the Cases. SECTION 6.2 Corporate Existence. Preserve and maintain in full force and ------------------- effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except (i)(A) if in the reasonable business judgment of the Borrower or such Guarantor, as the case may be, it is in its best economic interest not to preserve and maintain such rights, privileges, qualifications, permits, licenses and franchises, and (B) such failure to preserve the same could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (ii) as otherwise permitted in connection with sales of assets permitted by Section 6.11. SECTION 6.3 Insurance. (a) Keep its insurable properties insured at all --------- times, against such risks, including fire and other risks insured against by extended coverage, as is customary with companies of the same or similar size in the same or similar businesses; and maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by the Borrower or any Guarantor, as the case may be, in such amounts and with such deductibles as are customary with companies of the same or similar size in the same or similar businesses and in the same geographic area; and (b) maintain such other insurance or self insurance as may be required by law. SECTION 6.4 Obligations and Taxes. With respect to the Borrower and each --------------------- Guarantor, pay all its material obligations arising after the Filing Date promptly and in accordance with their terms and pay and discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property arising after the Filing Date, before the same shall become in default, as well as all material lawful claims for labor, materials and supplies or otherwise arising after the Filing Date which, if unpaid, would become a Lien or charge upon such properties or any part thereof; provided, however, that the Borrower and each Guarantor shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings (if the Borrower and the Guarantors shall have set aside on their books adequate reserves therefor). SECTION 6.5 Notice of Event of Default, Investigations, Violations, etc. ----------------------------------------------------------- Promptly give to the Agent notice in writing of: (1) any Event of Default or the occurrence of any event or circumstance which with the passage of time or giving of notice or both would constitute an Event of Default; (2) any litigation, investigations or proceeding which may exist at any time between the Borrower or any of the Guarantors and any Governmental Authority, which in either case could reasonably be expected to have a Material Adverse Effect; and 46 (3) the following events, as soon as possible and in any event within five Business Days (i) after obtaining knowledge thereof, the occurrence of any event that would (with the giving of notice, the passage of time, or both) be a violation of any Health Care Permit necessary for the lawful conduct of the business or operations of the Borrower or any of the Guarantors (other than those Health Care Permits the violation of which could not reasonably be expected to have a Material Adverse Effect), including, without limitation, the ownership and operation of its Health Care Facilities, (ii) after receipt thereof, any notice of any violation of any Requirements of Law which would (with the giving of notice, the passage of time, or both) cause any of the Health Care Permits referred to in clause (i) to be modified, rescinded or revoked and which the Borrower does not reasonably expect to be able to cure within a reasonable period of time, (iii) after receipt thereof, any notice, summons, citation, or other proceeding seeking to adversely modify in any material respect, revoke, or suspend any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of the Borrower or any of the Guarantors in any manner which could reasonably be expected to have a Material Adverse Effect, or (iv) after obtaining knowledge thereof, any revocation or involuntary termination of any Medicare provider agreement, Medicaid provider agreement, Medicare certification or Medicaid certification applicable to any of the Health Care Facilities of the Borrower or any of the Guarantors that could reasonably be expected to have a Material Adverse Effect. SECTION 6.6 Borrowing Base Certificate. Promptly deliver to the Agent, but -------------------------- in no event later than (i) the Closing Date for the month ended October 31, 1999, (ii) 60 days after the month ended November 30, 1999, (iii) 45 days after each of the months ended December 31, 1999 and January 31, 2000, and (iv) 30 days after the end of each calendar month thereafter (and, if requested by the Agent at any other time when the Agent reasonably believes that the then-existing Borrowing Base is materially inaccurate, as soon as reasonably available but no later than 10 days after the request), a completed Borrowing Base Certificate in substantially the form of Exhibit E hereto (the "Borrowing --------- Base Certificate") calculating and certifying the Borrowing Base as of the last - ---------------- day of such calendar month (or as of such other requested date, as the case may be), with supporting documentation (including, without limitation, the documentation described in Schedule 1 to Exhibit E), in each case signed on behalf of the Borrower by a Financial Officer thereof and certified as being complete and correct based on the Borrower's and applicable Division's accounting records. SECTION 6.7 Maintenance of Concentration Accounts. Continue to maintain ------------------------------------- with the Agent an account or accounts to be used by the Borrower and the Guarantors as their principal concentration accounts for day-to-day operations conducted by the Borrower and the Guarantors. SECTION 6.8 Books and Records, Inspection and Collateral Review Rights. ---------------------------------------------------------- (1) The Borrower will, and will cause each of the Guarantors to, keep proper books of record and account in which full, true and correct entries in conformity with GAAP in all material respects and all material Requirements of Law are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of the Guarantors to, permit any representatives designated by the Agent, upon reasonable prior notice, to visit and inspect its financial records and properties, to examine and make extracts from its books and records, and 47 to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. (2) The Borrower will, and will cause each of the Guarantors to, permit any representatives designated by the Agent (including any consultants, accountants, lawyers and appraisers retained by the Agent) to conduct evaluations and appraisals of the Borrower's computation of the Borrowing Base and the assets included in the Borrowing Base, all at such reasonable times and as often as reasonably requested. The Borrower shall pay the reasonable fees (including reasonable and customary internally allocated fees of employees of the Agent as to which invoices have been furnished) and expenses of any such representatives retained by the Agent as to which invoices have been furnished to conduct any such evaluation or appraisal, including the reasonable fees and expenses associated with collateral monitoring services performed by the Collateral Agent Services Group of the Agent. To the extent required by the Agent as a result of any such evaluation, appraisal or monitoring, the Borrower also agrees to modify or adjust the computation of the Borrowing Base (which may include maintaining additional reserves, modifying the advance rates or modifying the eligibility criteria for the components of the Borrowing Base). (3) In the event that historical accounting practices, systems or reserves relating to the components of the Borrowing Base are modified in a manner that is adverse to the Banks in any material respect, the Borrower will agree to maintain such additional reserves (for purposes of computing the Borrowing Base) in respect to the components of the Borrowing Base and make such other adjustments to its parameters for including the components of the Borrowing Base as the Agent shall reasonably require based upon such modifications. SECTION 6.10 Conduct of Business and Maintenance of Existence, etc. (a) (i) ------------------------------------------------------ Continue to engage in the business of owning, operating, managing and/or financing Health Care Facilities and providing other services or amenities customarily provided by, or other activities customarily undertaken by, Persons owning, operating, managing and/or financing Health Care Facilities, (ii) preserve, renew and keep in full force and effect its corporate existence (except as otherwise permitted by Section 6.11) and (iii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 6.11 and except, in the case of clause (iii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 6.10 Health Care Permits and Approvals. Take all action reasonably --------------------------------- necessary to (a) maintain in full force and effect all Health Care Permits reasonably necessary for the lawful conduct of its business or operations where now conducted and as planned to be conducted, including the ownership and operation of its Health Care Facilities, pursuant to all Requirements of Law and (b) to ensure that all Health Care Facilities owned, leased, managed or operated by the Borrower or any of the Guarantors are entitled to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent the Borrower or any of the Guarantors 48 has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, except, in each case, where a failure to do so could not reasonably be expected to have a Material Adverse Effect or would not be inconsistent with the Borrower's three-year business plan heretofore delivered to the Agent and the Banks. SECTION 6.11 Financial Advisor. Not later than 30 days following the Filing ----------------- Date, retain, pursuant to an order entered by the Bankruptcy Court, and thereafter continue the retention at all times of, a financial advisor acceptable to the Agent (it being understood that Conway Del Genio Gries & Co., LLC is acceptable to the Agent and the Original Required Banks), to assist the Borrower with its operational and financial restructuring, to monitor the Borrower's cash flows and financial position (and to report same to the Agent) and to make such financial advisor available to the Agent to discuss the Borrower's operations, financial performance and cash flow reports upon the Agent's reasonable request. SECTION 7. NEGATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Letter of Credit shall remain outstanding (in a face amount in excess of the amount of cash then held in the Letter of Credit Account, or in excess of the face amount of back-to-back letters of credit delivered, in each case pursuant to Section 2.03(b)) or any amount shall remain outstanding or unpaid under this Agreement, unless the Required Banks shall otherwise consent in writing, the Borrower and each of the Guarantors will not (and will not apply to the Bankruptcy Court for authority to): SECTION 7.1 Liens. Incur, create, assume or suffer to exist any Lien on any ----- asset of the Borrower or the Guarantors, now owned or hereafter acquired by the Borrower or any of such Guarantors, other than (i) Liens which were existing on the Filing Date as reflected on Schedule 3.06 hereto and Liens granted pursuant to the Existing Agreement; (ii) Liens in favor of the Existing Lenders as adequate protection granted pursuant to the Orders, which Liens are junior to the Liens contemplated hereby in favor of the Agent and the Banks, provided that -------- the First Day Order, the Interim Order and the Final Order provide that the holder of such junior Liens shall not be permitted to take any action to foreclose with respect to such junior Liens so long as any amounts shall remain outstanding hereunder or any Commitment shall be in effect; (iii) Permitted Liens; (iv) Liens in favor of the Agent and the Banks; and (v) Liens securing purchase money Indebtedness or Capitalized Leases permitted by Section 6.03(iii). SECTION 7.2 Merger, etc. Consolidate or merge with or into another Person. ----------- SECTIOn 7.3 Indebtedness. Contract, create, incur, assume or suffer to ------------ exist any Indebtedness, except for (i) Indebtedness under this Agreement; (ii) Indebtedness incurred prior to the Filing Date (including existing Capitalized Leases); (iii) Indebtedness incurred subsequent to the Filing Date secured by purchase money Liens or Capitalized Leases in an aggregate amount not to exceed $7,500,000 to the extent permitted by Section 6.04; (iv) Indebtedness arising from Investments among the Borrower and the Guarantors that are permitted hereunder; (v) Indebtedness 49 which is secured by a Lien permitted by Section 6.01; and (vi) Indebtedness owed to Chase or any of its banking Affiliates in respect of any overdrafts and related liabilities arising from treasury, depository and cash management services or in connection with any automated clearing house transfers of funds. SECTION 7.4 Capital Expenditures. (a) Make Capital Expenditures during each -------------------- month listed below in excess of the amount opposite such month, provided that if -------- the amount of the actual Capital Expenditures that are made during any month is less than the amount thereof that is permitted to be made during such month, the unused portion thereof may be carried forward to and made during the immediately following three months: Month Ending Capital Expenditures ------------ -------------------- January 31, 2000 $8,000,000 February 29, 2000 $3,000,000 March 31, 2000 $1,400,000 April 30, 2000 $1,400,000 May 31, 2000 $1,400,000 June 30, 2000 $1,400,000 July 31, 2000 $1,400,000 August 31, 2000 $1,400,000 September 30, 2000 $1,400,000 October 31, 2000 $1,400,000 November 30, 2000 $1,400,000 December 31, 2000 $1,400,000 (b) Make Capital Expenditures other than for normal routine maintenance or required to maintain applicable Health Care Permits in the case of any Health Care Facility that is leased from, or subject to a Lien in favor of, a Real Estate Financier. SECTION 7.5 EBITDA. Permit EBITDA during each month listed below to be ------ less than the amount specified opposite such month: Month Ending EBITDA ------------ ------ January 31, 2000 ($600,000) February 29, 2000 $1,650,000 March 31, 2000 $3,500,000 April 30, 2000 $3,400,000 May 31, 2000 $3,000,000 June 30, 2000 $1,800,000 July 31, 2000 $3,700,000 August 31, 2000 $2,600,000 September 30, 2000 $ 600,000 50 October 31, 2000 $4,300,000 November 30, 2000 $2,300,000 December 31, 2000 $2,500,000 SECTION 7.6 Guarantees and Other Liabilities. Purchase or repurchase (or -------------------------------- agree, contingently or otherwise, so to do) the Indebtedness of, or assume, guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance of any obligation or capability of so doing, or otherwise), endorse or otherwise become liable, directly or indirectly, in connection with the obligations, stock or dividends of any Person, except (i) for any guaranty of Indebtedness or other obligations of any Borrower or Guarantor if the Guarantor could have incurred such Indebtedness or obligations under this Agreement and (ii) by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. SECTION 7.7 Chapter 11 Claims. Incur, create, assume, suffer to exist or ----------------- permit any other Super-Priority Claim which is pari passu with or senior to the ---- ----- claims of the Agent and the Banks against the Borrower and the Guarantors hereunder, except for the Carve-Out. SECTION 7.8 Dividends; Capital Stock. Declare or pay, directly or ------------------------ indirectly, any dividends or make any other distribution or payment, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of capital stock (or any options, warrants, rights or other equity securities or agreements relating to any capital stock), or set apart any sum for the aforesaid purposes, provided that -------- any Guarantor may pay dividends or make distributions or other payments to its direct parent or to the Borrower. SECTION 7.9 Transactions with Affiliates. Except as set forth on ---------------------------- Schedule 6.09, sell or transfer any property or assets to, or otherwise engage in any other material transactions with, any of its Affiliates (other than the Borrower and the Guarantors), other than in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Guarantor than could be obtained on an arm's-length basis from unrelated third parties, and other than the overhead payment arrangements described in Section 4.02(j). SECTION 7.10 Investments, Loans and Advances. Purchase, hold or acquire ------------------------------- any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment in, any other Person (including, without limitations, to MHG or any of its Subsidiaries or any Subsidiary of the Borrower that is not a Guarantor or that has not commenced a Case) (all of the foregoing, "Investments"), except for ----------- (i) ownership by the Borrower or the Guarantors of the capital stock of each of the Subsidiaries listed on Schedule 3.05, (ii) Permitted Investments and (iii) advances and loans among the Borrower and the Guarantors in the ordinary course of business. SECTION 7.11 Disposition of Assets. Sell or otherwise dispose of any --------------------- assets (including, without limitation, the capital stock of any Subsidiary) except for (i) sales of inventory, fixtures and equipment in the ordinary course of business, (ii) sales of surplus equipment no longer used or useful in its business, (iii) sales of assets described in a letter dated the Closing Date, 51 heretofore delivered to the Agent and the Banks upon terms reasonably acceptable to the Agent and the Required Banks and (iv) sales or other dispositions of other assets having a fair market value not exceeding $500,000 in the aggregate. SECTION 7.12 Nature of Business. Modify or alter in any material manner ------------------ the nature and type of its business as conducted at or prior to the Filing Date or the manner in which such business is conducted (except as required by the Bankruptcy Code), it being understood that asset sales permitted by Section 6.11 shall not constitute such a material modification or alteration. SECTION 7.13 Health Care Permits and Approvals. Engage in any activity that --------------------------------- (a) constitutes or, with the giving of notice, the passage of time, or both, would result in a material violation of, any Health Care Permit necessary for the lawful conduct of its business or operations or (b) constitutes or, with the giving of notice, the passage of time, or both, would result in the loss by any Health Care Facility owned or leased by the Borrower or any of the Guarantors of the right to participate in, and receive payment under, the appropriate Medicare, Medicaid and related reimbursement programs, and any similar state or local government-sponsored program, to the extent that the Borrower or such Guarantor has decided to participate in any such program, and to receive reimbursement from private and commercial payers and health maintenance organizations to the extent applicable thereto, in each case, except where the loss of such Health Care Permit or rights to participate in or receive payments under such programs could not reasonably be expected to have a Material Adverse Effect or would not be inconsistent with the Borrower's three-year business plan heretofore delivered to the Agent and the Banks. SECTION 7.14 Census. Allow the patient census of the Borrower's and the ------ Guarantors' Health Care Facilities when taken as a whole, during each month listed below, to fall below the percentage of the number of licensed available beds in such Health Care Facilities, taken as a whole (computed in a manner consistent with reporting practices existing on the Filing Date) set forth opposite such month: Month Ending Percentage ------------ ---------- January 31, 2000 83.0% February 29, 2000 83.0% March 31, 2000 83.8% April 30, 2000 84.0% May 31, 2000 84.0% June 30, 2000 84.0% July 31, 2000 84.0% August 31, 2000 83.5% September 30, 2000 84.5% October 31, 2000 84.5% November 30, 2000 84.5% December 31, 2000 84.5% 52 SECTION 7.15 Assumption of Provider Agreements. Assume, without the --------------------------------- prior written consent of the Agent, any provider agreement between the Borrower, any Guarantor and any Governmental Authority. SECTION 7.16 Overhead. Permit any modification, amendment or alteration -------- in any material respect of the orders (or of the applicable paragraphs of the Orders and any corresponding orders in the MHG bankruptcy cases) referred to in Section 4.02(j) or render any management services to MHG or any of its Subsidiaries so long as any failure by MHG or its Subsidiaries to pay the fees that are provided for thereunder, or to perform any of its other obligations thereunder, shall have occurred and be continuing for more than 7 days. SECTION 8. EVENTS OF DEFAULT SECTION 8.1 Events of Default. In the case of the happening of any of ----------------- the following events and the continuance thereof beyond the applicable period of grace if any (each, an "Event of Default"): ---------------- (1) any material representation or warranty made by the Borrower or any Guarantor in this Agreement or in any Loan Document or in connection with this Agreement or the credit extensions hereunder or any material statement or representation made in any report, financial statement, certificate or other document furnished by the Borrower or any Guarantors to the Banks under or in connection with this Agreement, shall prove to have been false or misleading in any material respect when made or delivered; or (2) default shall be made in the payment of any (i) Fees or interest on the Loans or reimbursable costs and expenses when due, and such default shall continue unremedied for more than two (2) Business Days or (ii) principal of the Loans or other amounts payable by the Borrower hereunder (including, without limitation, reimbursement obligations or cash collateralization in respect of Letters of Credit but excluding those provided for in clause (i) above), when and as the same shall become due and payable, whether at the due date thereof (including the Prepayment Date) or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; or (3) default shall be made by the Borrower or any Guarantor in the due observance or performance of any covenant, condition or agreement contained in Section 6 hereof; or (4) default shall be made by the Borrower or any Guarantor in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Agreement or any of the other Loan Documents and such default shall continue unremedied for more than fifteen (15) days (or, in the case of a default under Sections 5.05, 5.09 or 5.10, for more than ten (10) days after a Responsible Officer has knowledge of such default); or (5) any of the Cases shall be dismissed or converted to a case under Chapter 7 of the Bankruptcy Code; a trustee under Chapter 7 or Chapter 11 of the Bankruptcy Code, a responsible officer or an examiner with enlarged powers relating to the operation of the business (powers beyond those set forth in Section 1106(a)(3) and (4) of the Bankruptcy Code) under Section 1106(b) of the 53 Bankruptcy Code shall be appointed in any of the Cases and the order appointing such trustee, responsible officer or examiner shall not be reversed or vacated within 30 days after the entry thereof; or an application shall be filed by the Borrower or any Guarantor for the approval of any other Super-Priority Claim (other than the Carve-Out) in any of the Cases which is pari passu with or ---- ----- senior to the claims of the Agent and the Banks against the Borrower or any Guarantor hereunder, or there shall arise or be granted any such pari passu or ---- ----- senior Super-Priority Claim; or (6) the Bankruptcy Court shall enter an order or orders granting relief from the automatic stay applicable under Section 362 of the Bankruptcy Code to the holder or holders of any security interest to permit foreclosure (or the granting of a deed in lieu of foreclosure or the like) on any assets of the Borrower or any of the Guarantors which have a value in excess of $500,000 in the aggregate; or (7) a Change of Control shall occur; or (8) the Borrower shall fail to deliver a certified Borrowing Base Certificate when due and such default shall continue unremedied for more than three (3) Business Days; or (9) any material provision of any Loan Document shall, for any reason, cease to be valid and binding on the Borrower or any of the Guarantors, or the Borrower or any of the Guarantors shall so assert in any pleading filed in any court; or (10) an order of the Bankruptcy Court shall be entered reversing, amending, supplementing, staying for a period in excess of 10 days, vacating or otherwise modifying either of the Orders or terminating the use of cash collateral by the Borrower or the Guarantors pursuant to the Orders; or (11) any judgment or order as to a post-petition liability or debt for the payment of money in excess of $500,000 not covered by insurance shall be rendered against the Borrower or any of the Guarantors and the enforcement thereof shall not have been stayed; or (12) any non-monetary judgment or order with respect to a post- petition event shall be rendered against the Borrower or any of the Guarantors which does or would reasonably be expected to (i) cause a material adverse change in the financial condition, business, prospects, operations or assets of the Borrower and the Guarantors taken as a whole on a consolidated basis, (ii) have a material adverse effect on the ability of the Borrower or any of the Guarantors to perform their respective obligations under any Loan Document, or (iii) have a material adverse effect on the rights and remedies of the Agent or any Bank under any Loan Document, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (13) except as permitted by the Orders, the Borrower or the Guarantors shall make any Pre-Petition Payment other than Pre-Petition Payments authorized by the Bankruptcy Court (x) not in excess of $20,000,000 in respect of certain critical vendors and valid reclamation claims, (y) in respect of accrued payroll and related expenses and employee benefits as of the Filing Date, and 54 (z) payments in accordance with other "first day" orders approved by the Agent and the Original Required Banks; or (14) any Termination Event described in clauses (iii) or (iv) of the definition of such term shall have occurred and shall continue unremedied for more than 10 days and the sum (determined as of the date of occurrence of such Termination Event) of the Insufficiency of the Plan in respect of which such Termination Event shall have occurred and be continuing and the Insufficiency of any and all other Plans with respect to which such a Termination Event (described in such clauses (iii) or (iv)) shall have occurred and then exist is equal to or greater than $5,000,000; or (15) (i) the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate does not have reasonable grounds to contest such Withdrawal Liability and is not in fact contesting such Withdrawal Liability in a timely and appropriate manner, and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $5,000,000 allocable to post-petition obligations or requires payments exceeding $500,000 per annum; or (16) the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years that include the date hereof by an amount exceeding $5,000,000; or (17) the Borrower or any ERISA Affiliate shall have committed a failure described in Section 302(f)(1) of ERISA (other than the failure to make any contribution accrued and unpaid as of the Filing Date) and the amount determined under Section 302(f)(3) of ERISA is equal to or greater than $5,000,000; or (18) it shall be determined (whether by the Bankruptcy Court or by any other judicial or administrative forum) that the Borrower or any Guarantor is liable for the payment of claims arising out of any failure to comply (or to have complied) with applicable environmental laws or regulations the payment of which will have a material adverse effect on the financial condition, business, properties, operations or assets of the Borrower or the Guarantors, taken as a whole, and the enforcement thereof shall not have been stayed; or (19) any Medicaid or Medicare Account Debtor or any other Governmental Authority makes any reduction from or otherwise withholds, through setoff, recoupment or otherwise, any amounts due to such Account Debtor from any Account or Accounts arising from healthcare services provided in the then current cost/rate period, other than (i) any "qualified overpayments" as defined in the stipulation (related to Medicare overpayments) with HHS referred 55 to in Section 4.01(b)(iii), and (ii) other reductions or withholdings through setoff, recoupment or otherwise, in an aggregate amount that is not in excess of $1,000,000 (excluding for purposes of this clause (ii), however, reductions, setoffs or recoupments that arise in the normal course of business and that are recorded as liabilities or are adequately provided for by retro settlement reserves on the books of the Borrower and the Guarantors, in each case in accordance with GAAP, and that represent reductions, setoffs or recoupments in connection with (x) North Carolina, Colorado or Nebraska Medicaid, (y) nursing facility Medicare bad debts for deductibles and coinsurance and (z) long-term acute care hospitals); then, and in every such event and at any time thereafter during the continuance of such event, and without further order of or application to the Bankruptcy Court, the Agent may, and at the request of the Required Banks, shall, by notice to the Borrower (with a copy to counsel for the Official Creditors' Committee appointed in the Cases, to counsel for the Pre-Petition Agent and to the United States Trustee for the District of Delaware), take one or more of the following actions, at the same or different times (provided, that with respect to clause -------- (iv) below and the enforcement of Liens or other remedies with respect to the Collateral under clause (v) below, the Agent shall provide the Borrower (with a copy to counsel for the Official Creditors' Committee in the Cases, to counsel for the Pre-Petition Agent and to the United States Trustee for the District of Delaware) with five (5) Business Days' written notice prior to taking the action contemplated thereby and provided, further, that upon receipt of notice referred --------- ------- to in the immediately preceding clause with respect to the accounts referred to in clause (iv) below, the Borrower may continue to make ordinary course disbursements from such accounts (other than the Letter of Credit Account) but may not withdraw or disburse any other amounts from such accounts): (i) terminate forthwith the Total Commitment; (ii) declare the Loans then outstanding to be forthwith due and payable, whereupon the principal of the Loans together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower and the Guarantors, anything contained herein or in any other Loan Document to the contrary notwithstanding; (iii) require the Borrower and the Guarantors upon demand to forthwith deposit in the Letter of Credit Account cash in an amount which, together with any amounts then held in the Letter of Credit Account, is equal to the sum of 105% of the then outstanding Letters of Credit (and to the extent the Borrower and the Guarantors shall fail to furnish such funds as demanded by the Agent, the Agent shall be authorized to debit the accounts of the Borrower and the Guarantors maintained with the Agent in such amount five (5) Business Days after the giving of the notice referred to above); (iv) set-off amounts in the Letter of Credit Account or any other accounts maintained with the Agent and apply such amounts to the obligations of the Borrower and the Guarantors hereunder and in the other Loan Documents; and (v) exercise any and all remedies under the Loan Documents and under applicable law available to the Agent and the Banks. 56 SECTION 9. THE AGENT SECTION 9.1 Administration by Agent. The general administration of the ----------------------- Loan Documents shall be by the Agent. Each Bank hereby irrevocably authorizes the Agent, at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Loan Documents as are delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto (including the release of Collateral in connection with any transaction that is expressly permitted by the Loan Documents). The Agent shall have no duties or responsibilities except as set forth in this Agreement and the remaining Loan Documents. SECTION 9.2 Advances and Payments --------------------- (1) On the date of each Loan, the Agent shall be authorized (but not obligated) to advance, for the account of each of the Banks, the amount of the Loan to be made by it in accordance with its Commitment hereunder. Should the Agent do so, each of the Banks agrees forthwith to reimburse the Agent in immediately available funds for the amount so advanced on its behalf by the Agent, together with interest at the Federal Funds Effective Rate if not so reimbursed on the date due from and including such date but not including the date of reimbursement. (2) Any amounts received by the Agent in connection with this Agreement (other than amounts to which the Agent is entitled pursuant to Sections 2.16, 8.06, 10.05 and 10.06), the application of which is not otherwise provided for in this Agreement shall be applied, first, in accordance with each ----- Bank's Commitment Percentage to pay accrued but unpaid Commitment Fees or Letter of Credit Fees, and second, in accordance with each Bank's Commitment Percentage ------ to pay accrued but unpaid interest and the principal balance outstanding and all unreimbursed Letter of Credit drawings. All amounts to be paid to a Bank by the Agent shall be credited to that Bank, after collection by the Agent, in immediately available funds either by wire transfer or deposit in that Bank's correspondent account with the Agent, as such Bank and the Agent shall from time to time agree. SECTION 9.3 Sharing of Setoffs. Each Bank agrees that if it shall, ------------------ through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, including, but not limited to, a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim and received by such Bank under any applicable bankruptcy, insolvency or other similar law, or otherwise, obtain payment in respect of its Loans as a result of which the unpaid portion of its Loans is proportionately less than the unpaid portion of the Loans of any other Bank (a) it shall promptly purchase at par (and shall be deemed to have thereupon purchased) from such other Bank a participation in the Loans of such other Bank, so that the aggregate unpaid principal amount of each Bank's Loans and its participation in Loans of the other Banks shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to the obtaining of such payment was to the principal amount of all Loans outstanding prior to the obtaining of such payment and (b) such other adjustments shall be made from time to time as shall be equitable to ensure that the Banks share such payment pro-rata, provided that if any such non-pro-rata payment is thereafter recovered or otherwise set aside such purchase of participations shall be rescinded (without interest). The Borrower expressly consents to the foregoing arrangements and agrees that any Bank holding (or deemed to 57 be holding) a participation in a Loan may exercise any and all rights of banker's lien, setoff (in each case, subject to the same notice requirements as pertain to clause (iv) of the remedial provisions of Section 7.01) or counterclaim with respect to any and all moneys owing by the Borrower to such Bank as fully as if such Bank held a Note and was the original obligee thereon, in the amount of such participation. SECTION 9.4 Agreement of Required Banks. Upon any occasion requiring or --------------------------- permitting an approval, consent, waiver, election or other action on the part of the Required Banks, action shall be taken by the Agent for and on behalf or for the benefit of all Banks upon the direction of the Required Banks, and any such action shall be binding on all Banks. No amendment, modification, consent, or waiver shall be effective except in accordance with the provisions of Section 10.10. SECTION 9.5 Liability of Agent. ------------------ (1) The Agent when acting on behalf of the Banks, may execute any of its respective duties under this Agreement by or through any of its respective officers, agents, and employees, and neither the Agent nor its directors, officers, agents, employees or Affiliates shall be liable to the Banks or any of them for any action taken or omitted to be taken in good faith, or be responsible to the Banks or to any of them for the consequences of any oversight or error of judgment, or for any loss, unless the same shall happen through its gross negligence or willful misconduct. The Agent and its respective directors, officers, agents, employees and Affiliates shall in no event be liable to the Banks or to any of them for any action taken or omitted to be taken by them pursuant to instructions received by them from the Required Banks or in reliance upon the advice of counsel selected by it. Without limiting the foregoing, neither the Agent, nor any of its respective directors, officers, employees, agents or Affiliates shall be responsible to any Bank for the due execution, validity, genuineness, effectiveness, sufficiency, or enforceability of, or for any statement, warranty, or representation in, this Agreement, any Loan Document or any related agreement, document or order, or shall be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower of any of the terms, conditions, covenants, or agreements of this Agreement or any of the Loan Documents. (2) Neither the Agent nor any of its respective directors, officers, employees, agents or Affiliates shall have any responsibility to the Borrower or the Guarantors on account of the failure or delay in performance or breach by any Bank or by the Borrower or the Guarantors of any of their respective obligations under this Agreement or any of the Loan Documents or in connection herewith or therewith. (3) The Agent, in its capacity as Agent hereunder, shall be entitled to rely on any communication, instrument, or document reasonably believed by such person to be genuine or correct and to have been signed or sent by a person or persons believed by such person to be the proper person or persons, and such person shall be entitled to rely on advice of legal counsel, independent public accountants, and other professional advisers and experts selected by such person. SECTION 9.6 Reimbursement and Indemnification. Each Bank agrees (i) to --------------------------------- reimburse (x) the Agent for such Bank's Commitment Percentage of any expenses and fees incurred for the benefit of the Banks under this Agreement and any of the Loan Documents, including, without limitation, counsel fees and compensation of agents and employees paid for services rendered on 58 behalf of the Banks, and any other expense incurred in connection with the operations or enforcement thereof not reimbursed by the Borrower or the Guarantors and (y) the Agent for such Bank's Commitment Percentage of any expenses of the Agent incurred for the benefit of the Banks that the Borrower has agreed to reimburse pursuant to Section 10.05 and has failed to so reimburse and (ii) to indemnify and hold harmless the Agent and any of its directors, officers, employees, agents or Affiliates, on demand, in the amount of its proportionate share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any of them in any way relating to or arising out of this Agreement or any of the Loan Documents or any action taken or omitted by it or any of them under this Agreement or any of the Loan Documents to the extent not reimbursed by the Borrower or the Guarantors (except such as shall result from their respective gross negligence or willful misconduct). SECTION 9.7 Rights of Agent. It is understood and agreed that Chase shall --------------- have the same rights and powers hereunder (including the right to give such instructions) as the other Banks and may exercise such rights and powers, as well as its rights and powers under other agreements and instruments to which it is or may be party, and engage in other transactions with the Borrower or any Guarantor, as though it were not the Agent of the Banks under this Agreement. SECTION 9.8 Independent Banks. Each Bank acknowledges that it has decided ----------------- to enter into this Agreement and to make the Loans hereunder based on its own analysis of the transactions contemplated hereby and of the creditworthiness of the Borrower and the Guarantors and agrees that the Agent shall bear no responsibility therefor. SECTION 9.9 Notice of Transfer. The Agent may deem and treat a Bank party ------------------ to this Agreement as the owner of such Bank's portion of the Loans for all purposes, unless and until a written notice of the assignment or transfer thereof executed by such Bank shall have been received by the Agent. SECTION 9.10 Successor Agent. The Agent may resign at any time by giving --------------- written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent, which shall be reasonably satisfactory to the Borrower. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of a least $100,000,000, which shall be reasonably satisfactory to the Borrower. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 10. GUARANTY SECTION 10.1 Guaranty -------- 59 (1) Each of the Guarantors unconditionally and irrevocably guarantees the due and punctual payment and performance by the Borrower of the Obligations. Each of the Guarantors further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and it will remain bound upon this guaranty notwithstanding any extension or renewal of any of the Obligations. The Obligations of the Guarantors shall be joint and several. (2) Each of the Guarantors waives presentation to, demand for payment from and protest to the Borrower or any other Guarantor, and also waives notice of protest for nonpayment. The Obligations of the Guarantors hereunder shall not be affected by (i) the failure of the Agent or a Bank to assert any claim or demand or to enforce any right or remedy against the Borrower or any other Guarantor under the provisions of this Agreement or any other Loan Document or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of any of the Loan Documents; (iv) the release, exchange, waiver or foreclosure of any security held by the Agent for the Obligations or any of them; (v) the failure of the Agent or a Bank to exercise any right or remedy against any other Guarantor; or (vi) the release or substitution of any Guarantor or any other Guarantor. (3) Each of the Guarantors further agrees that this guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Agent or a Bank to any security held for payment of the Obligations or to any balance of any deposit, account or credit on the books of the Agent or a Bank in favor of the Borrower or any other Guarantor, or to any other Person. (4) Each of the Guarantors hereby waives any defense that it might have based on a failure to remain informed of the financial condition of the Borrower and of any other Guarantor and any circumstances affecting the ability of the Borrower to perform under this Agreement. (5) Each Guarantor's guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the Obligations which might otherwise constitute a defense to this Guaranty. Neither of the Agent, nor any of the Banks makes any representation or warranty in respect to any such circumstances or shall have any duty or responsibility whatsoever to any Guarantor in respect of the management and maintenance of the Obligations. (6) Subject to the provisions of Section 7.01, upon the Obligations becoming due and payable (by acceleration or otherwise), the Banks shall be entitled to immediate payment of such Obligations by the Guarantors upon written demand by the Agent, without further application to or order of the Bankruptcy Court. SECTION 10.2 No Impairment of Guaranty. The obligations of the Guarantors ------------------------- hereundershall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations. Without limiting the 60 generality of the foregoing, the obligations of the Guarantors hereunder shall not be discharged or impaired or otherwise affected by the failure of the Agent or a Bank to assert any claim or demand or to enforce any remedy under this Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of the Guarantors or would otherwise operate as a discharge of the Guarantors as a matter of law, unless and until the Obligations are paid in full. SECTION 10.3 Subrogation. Upon payment by any Guarantor of any sums to ----------- the Agent or a Bank hereunder, all rights of such Guarantor against the Borrower arising as a result thereof by way of right of subrogation or otherwise, shall in all respects be subordinate and junior in right of payment to the prior final and indefeasible payment in full of all the Obligations. If any amount shall be paid to such Guarantor for the account of the Borrower, such amount shall be held in trust for the benefit of the Agent and the Banks and shall forthwith be paid to the Agent and the Banks to be credited and applied to the Obligations, whether matured or unmatured. SECTION 11. MISCELLANEOUS SECTION 11.1 Notices. Notices and other communications provided for ------- herein shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be mailed, telegraphed, telexed, transmitted, cabled or delivered to the Borrower, or any Guarantor in care of the Borrower, at One Ravinia Drive, Suite 1500, Atlanta, Georgia 30346, Attention: Senior Vice President and Treasurer, with copies to Stutman, Treister & Glatt, P.C., 3699 Wilshire Boulevard, Suite 900, Los Angeles, California 90010, Attn: Jeffrey H. Davidson, Esq. and K. John Shaffer, Esq., and to Powell, Goldstein, Frazer & Murphy, LLP, Sixteenth Floor, 191 Peachtree Street, N.E., Atlanta, Georgia 30303, Attn.: Robert C. Lewinson, Esq., and to a Bank or the Agent to it at its address set forth on Annex A, or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail; or when delivered to the telegraph company, charges prepaid, if by telegram; or when receipt is acknowledged, if by any telegraphic communications or facsimile equipment of the sender; or on the first Business Day after delivery to an overnight courier (charges prepaid); or when received, if by hand delivery; in each case addressed to such party as provided in this Section 10.01 or in accordance with the latest unrevoked written direction from such party; provided, however, that in the case of notices to the Agent notices pursuant to the preceding sentence with respect to change of address and pursuant to Section 2 shall be effective only when received by the Agent. SECTION 11.2 Survival of Agreement, Representations and Warranties, etc. ---------------------------------------------------------- All warranties, representations and covenants made by the Borrower or any Guarantor herein or in any certificate or other instrument delivered by it or on its behalf in connection with this Agreement shall be considered to have been relied upon by the Banks and shall survive the making of the Loans herein contemplated regardless of any investigation made by any Bank or on its behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as the Commitments have not been terminated. All statements 61 in any such certificate or other instrument shall constitute representations and warranties by the Borrower and the Guarantors hereunder with respect to the Borrower. SECTION 11.3 Successors and Assigns. ---------------------- (1) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent and the Banks and their respective successors and assigns. Neither the Borrower nor any of the Guarantors may assign or transfer any of their rights or obligations hereunder without the prior written consent of all of the Banks. Each Bank may sell participations to any Person in all or part of any Loan, or all or part of its Commitment, in which event, without limiting the foregoing, the provisions of Section 2.13 shall inure to the benefit of each purchaser of a participation (provided that such participant shall look solely to the seller of such participation for such benefits and the Borrower's and the Guarantors' liability, if any, under Sections 2.13 and 2.15 shall not be increased as a result of the sale of any such participation) and the pro rata treatment of payments, as described in Section 2.14, shall be --- ---- determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower and each of the Guarantors relating to the Loans, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement (provided that such Bank may grant its participant the right to consent to such Bank's execution of amendments, modifications or waivers which (i) reduce any Fees payable hereunder to the Banks, (ii) reduce the amount of any scheduled principal payment on any Loan or reduce the principal amount of any Loan or the rate of interest payable hereunder or (iii) extend the maturity of the Borrower's obligations hereunder). The sale of any such participation shall not alter the rights and obligations of the Bank selling such participation hereunder with respect to the Borrower. (2) Each Bank may assign to one or more Banks or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment and the same portion of the related Loans at the time owing to it), provided, however, that -------- ------- (i) other than in the case of an assignment to a Person at least 50% owned by the assignor Bank, or by a common parent of both, or to another Bank, the Agent and the Fronting Bank must give their respective prior written consent to such assignment, which consent will not be unreasonably withheld, (ii) the aggregate amount of the Commitment and/or Loans of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall, unless otherwise agreed to in writing by the Borrower and the Agent, in no event be less than $1,000,000 or such lesser amount as is equal to the remaining Commitment and/or Loans of the assignor thereof and (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance with blanks appropriately completed, together with a processing and recordation fee of $3,500 (for which the Borrower shall have no liability). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be within ten Business Days after the execution thereof (unless otherwise agreed to in writing by the Agent), (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) the Bank thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an 62 assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (3) By executing and delivering an Assignment and Acceptance, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Bank assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents; (ii) such Bank assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any Guarantor or the performance or observance by the Borrower or any Guarantor of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 3.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such Bank assignor or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms thereto, together with such powers as are reasonably incidental hereof; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement are required to be performed by it as a Bank. (4) The Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Loans owing to, each Bank from time to time (the "Register"). The entries in -------- the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Guarantors, the Agent and the Banks shall treat each Person the name of which is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time to time upon reasonable prior notice. (5) Upon its receipt of an Assignment and Acceptance executed by an assigning Bank and the assignee thereunder together with the fee payable in respect thereto, the Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled and consented to by the Agent and the Fronting Bank (to the extent such consent is required hereunder), (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt written notice thereof to the Borrower (together with a copy thereof). No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (6) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.03, disclose to the assignee or 63 participant or proposed assignee or participant, any information relating to the Borrower or any of the Guarantors furnished to such Bank by or on behalf of the Borrower or any of the Guarantors; provided that prior to any such disclosure, -------- each such assignee or participant or proposed assignee or participant shall agree in writing to be bound by the provisions of Section 10.04. (7) The Borrower hereby agrees, to the extent set forth in the Commitment Letter, to actively assist and cooperate with the Agent in the Agent's efforts to sell participations herein (as described in Section 10.03(a)) and assign to one or more Banks or Eligible Assignees a portion of its interests, rights and obligations under this Agreement (as set forth in Section 10.03(b)). SECTION 11.4 Confidentiality. Each Bank agrees to keep any information --------------- delivered or made available by the Borrower or any of the Guarantors to it confidential from anyone other than persons employed or retained by such Bank who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Bank -------- from disclosing such information (i) to any other Bank, (ii) upon the order of any court or administrative agency, (iii) upon the request or demand of any regulatory agency or authority, (iv) which has been publicly disclosed other than as a result of a disclosure by the Agent or any Bank which is not permitted by this Agreement, (v) in connection with any litigation to which the Agent, any Bank, or their respective Affiliates may be a party to the extent reasonably required, (vi) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vii) to such Bank's legal counsel and independent auditors, and (viii) to any actual or proposed participant or assignee of all or part of its rights hereunder subject to the proviso in Section 10.03(f). Each Bank shall use reasonable efforts to notify the Borrower of any required disclosure under clause (ii) of this Section. SECTION 11.5 Expenses. Whether or not the transactions hereby -------- contemplated shall be consummated, the Borrower and the Guarantors agree to pay all reasonable out-of-pocket expenses incurred by the Agent (including but not limited to the reasonable fees and disbursements of Morgan, Lewis & Bockius LLP, special counsel for the Agent, any other counsel that the Agent shall retain and any internal or third-party appraisers, consultants and auditors advising the Agent and Chase Securities Inc.) as to which invoices have been furnished, in connection with the preparation, execution, delivery and administration of this Agreement and the other Loan Documents, the making of the Loans and the issuance of the Letters of Credit, the perfection of the Liens contemplated hereby, the syndication of the transactions contemplated hereby, the reasonable and customary costs, fees and expenses of the Agent in connection with its monthly and other periodic field audits, monitoring of assets (including reasonable and customary internally allocated fees related to the initial and ongoing Borrowing Base examinations), the costs of electronic communications services and publicity expenses, and, during the continuance of an Event of Default, all reasonable out-of-pocket expenses incurred by the Banks and the Agent in the enforcement or protection of the rights of any one or more of the Banks or the Agent in connection with this Agreement or the other Loan Documents, including but not limited to the reasonable fees and disbursements of any counsel for the Banks or the Agent. Such payments shall be made on the date of the First Day Order and thereafter on demand, promptly upon delivery of a statement setting forth such costs and expenses. Whether or not the transactions hereby contemplated shall be consummated, the Borrower and the Guarantors agree to reimburse the Agent and Chase Securities Inc. for the expenses set forth in the Commitment Letter and the reimbursement provisions thereof 64 are hereby incorporated herein by reference. The obligations of the Borrower and the Guarantors under this Section shall survive the termination of this Agreement and/or the payment of the Loans. SECTION 11.6 Indemnity. The Borrower and each of the Guarantors agree --------- to indemnify and hold harmless the Agent, Chase Securities Inc. and the Banks and their directors, officers, employees, agents and Affiliates (each an "Indemnified Party") from and against any and all expenses, losses, claims, ----------------- damages and liabilities incurred by such Indemnified Party arising out of claims made by any Person in any way relating to the transactions contemplated hereby, but excluding therefrom all expenses, losses, claims, damages, and liabilities to the extent that they are determined by the final judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party. The obligations of the Borrower and the Guarantors under this Section shall survive the termination of this Agreement and/or the payment of the Loans. SECTION 11.7 CHOICE OF LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS ------------- SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE, WITHOUT TAKING INTO ACCOUNT ANY CONFLICT OF LAWS PRINCIPLES THEREOF, AND THE BANKRUPTCY CODE. SECTION 11.8 No Waiver. No failure on the part of the Agent or any of --------- the Banks to exercise, and no delay in exercising, any right, power or remedy hereunder or any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. SECTION 11.9 Extension of Maturity. Should any payment of principal of --------------------- or interest or any other amount due hereunder become due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. SECTION 11.10 Amendments, etc. ---------------- (1) No modification, amendment or waiver of any provision of this Agreement or the other Loan Documents, and no consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Banks, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given; provided, however, that no such modification or amendment shall -------- ------- without the written consent of the Bank affected thereby (x) increase the Commitment of a Bank (it being understood that a waiver of an Event of Default shall not constitute an increase in the Commitment of a Bank), or (y) reduce the principal amount of any Loan or the rate of interest payable thereon, or extend any date for the payment of interest hereunder or reduce any Fees payable hereunder or extend the final maturity of the Borrower's obligations hereunder; and, provided, further, that no such modification or amendment shall without the -------- ------- written consent of (A) all of the Banks (i) amend or modify any provision of this Agreement which provides for the unanimous 65 consent or approval of the Banks, (ii) amend this Section 10.10 or the definition of Required Banks or (iii) amend or modify the Super-Priority Claim status of the Banks contemplated by Section 2.20; or (iv) release all or any substantial portion of the Liens granted to the Agent hereunder (other than in connection with dispositions permitted hereunder), under the Orders or under any other Loan Document, or release any Guarantor; or (B) Banks holding Loans representing at least 66-2/3% of the aggregate principal amount of the Loans outstanding, or if no Loans are outstanding, Banks having Commitments representing at least 66-2/3% of the Total Commitment to (i) amend any of the advance rates set forth in the definition of the term "Borrowing Base", (ii) increase the maximum principal amounts of extensions of credit permitted prior to the entry of the Final Order by Sections 4.01(b)(i) or 4.02(d), (iii) decrease the percentage of net revenues required to be paid to the Borrower by MHG in calculating the weekly overhead payment as described in Section 4.02(j) or otherwise modify, waive or amend the condition precedent set forth therein or (iv) modify, waive or amend the provisions of Section 6.16.. No such amendment or modification may adversely affect the rights and obligations of the Agent or any Fronting Bank hereunder or any Bank in the capacity referred to in Section 6.03(v) without its prior written consent. No notice to or demand on the Borrower or any Guarantor shall entitle the Borrower or any Guarantor to any other or further notice or demand in the same, similar or other circumstances. Each assignee under Section 10.03(b) shall be bound by any amendment, modification, waiver, or consent authorized as provided herein, and any consent by a Bank shall bind any Person subsequently acquiring an interest on the Loans held by such Bank. No amendment to this Agreement shall be effective against the Borrower or any Guarantor unless signed by the Borrower or such Guarantor, as the case may be. (2) Notwithstanding anything to the contrary contained in Section 10.10(a), in the event that the Borrower requests that this Agreement be modified or amended in a manner which would require the unanimous consent of all of the Banks (or the consent described in clause (B) of the first sentence of Section 10.10(a)) and such modification or amendment is agreed to by the Super- majority Banks (as hereinafter defined), then with the consent of the Borrower and the Super-majority Banks, the Borrower and the Super-majority Banks shall be permitted to amend the Agreement without the consent of the Bank or Banks which did not agree to the modification or amendment requested by the Borrower (such Bank or Banks, collectively the "Minority Banks") to provide for (w) the -------------- termination of the Commitment of each of the Minority Banks, (x) the addition to this Agreement of one or more other financial institutions (each of which shall be an Eligible Assignee), or an increase in the Commitment of one or more of the Super-majority Banks, so that the Total Commitment after giving effect to such amendment shall be in the same amount as the Total Commitment immediately before giving effect to such amendment, (y) if any Loans are outstanding at the time of such amendment, the making of such additional Loans by such new financial institutions or Super-majority Bank or Banks, as the case may be, as may be necessary to repay in full the outstanding Loans of the Minority Banks immediately before giving effect to such amendment and (z) such other modifications to this Agreement as may be appropriate. As used herein, the term "Super-majority Banks" shall mean, at any time, Banks holding Loans representing at least 66-2/3% of the aggregate principal amount of the Loans outstanding, or if no Loans are outstanding, Banks having Commitments representing at least 66- 2/3% of the Total Commitment. SECTION 11.11 Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such 66 prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 11.12 Headings. Section headings used herein are for convenience -------- only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 11.13 Execution in Counterparts. This Agreement may be executed -------------------------- in any number of counterparts, each of which shall constitute an original, but all of which taken together shall constitute one and the same instrument. SECTION 11.14 Prior Agreements. This Agreement represents the entire ---------------- agreement of the parties with regard to the subject matter hereof and the terms of any letters and other documentation entered into between the Borrower or a Guarantor and any Bank or the Agent prior to the execution of this Agreement which relate to Loans to be made hereunder shall be replaced by the terms of this Agreement (except as otherwise expressly provided herein with respect to the Commitment Letter and the fee letter referred to therein, including without limitation the Borrower's agreement to actively assist the Agent in the syndication of the transactions contemplated hereby referred to in Section 10.03(g) and including also the provisions of Section 2.16). SECTION 11.15 Further Assurances. Whenever and so often as reasonably ------------------ requested by the Agent, the Borrower and the Guarantors will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things as may be necessary and reasonably required in order to further and more fully vest in the Agent all rights, interests, powers, benefits, privileges and advantages conferred or intended to be conferred by this Agreement and the other Loan Documents. SECTION 11.16 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE GUARANTORS, -------------------- THE AGENT AND EACH BANK HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. [SIGNATURE PAGES FOLLOW] 67 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and the year first written. BORROWER: MARINER POST-ACUTE NETWORK, INC. By: _______________________________ Name: Title: GUARANTORS: AMERICAN MEDICAL INSURANCE BILLING SERVICES, INC. AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN-CAL MEDICAL SERVICES, INC. AMERRA PROPERTIES, INC. AMS GREEN TREE, INC. AMS PROPERTIES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. 68 BRIAN CENTER OF CENTRAL COLUMBIA, INC. CAMBRIDGE BEDFORD, INC. CAMBRIDGE EAST, INC. CAMBRIDGE NORTH, INC. CAMBRIDGE SOUTH, INC. CLINTONAIRE NURSING HOME, INC. CONNERWOOD HEALTHCARE, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY CRESTMONT HEALTH CENTER, INC. DEVCON HOLDING COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE LTD., L.P. EVERGREEN HEALTHCARE, INC. FRENCHTOWN NURSING HOME, INC. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VILLAGE GREEN, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE, INC. HAWK'S-PERIMETER, INC. HERITAGE NURSING HOME, INC. 69 HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSTMASTERS, INC. INTERNATIONAL HEALTH CARE MANAGEMENT, INC. INTERNATIONAL X-RAY, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS - EAST, INC. LIVING CENTERS - PHCM, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. MADONNA NURSING CENTER, INC. MED-THERAPY REHABILITATION SERVICES, INC. MIDDLEBELT NURSING HOME, INC. MIDDLEBELT-HOPE NURSING HOME, INC. NAN-DAN CORP. NATIONAL HERITAGE REALTY, INC. NIGHTINGALE EAST NURSING CENTER, INC. OMEGA/INDIANA CARE CORP. PROFESSIONAL HEALTH CARE MANAGEMENT, INC. PROFESSIONAL RX SYSTEMS, INC. REHABILITY HEALTH SERVICES, INC. RENAISSANCE MENTAL HEALTH CENTER, INC. ST. ANTHONY NURSING HOME, INC. SUMMIT HOSPITAL HOLDINGS, INC. SUMMIT HOSPITAL OF EAST GEORGIA, INC. SUMMIT HOSPITAL OF SOUTHEAST ARIZONA, INC. 70 SUMMIT HOSPITAL OF SOUTHEAST TEXAS, INC. SUMMIT HOSPITAL OF SOUTHWEST LOUISIANA, INC. SUMMIT HOSPITAL OF WEST GEORGIA, INC. SUMMIT INSTITUTE FOR PULMONARY MEDICINE AND REHABILITATION, INC. SUMMIT INSTITUTE OF AUSTIN, INC. SUMMIT INSTITUTE OF WEST MONROE, INC. SUMMIT MEDICAL HOLDINGS, LTD. SUMMIT MEDICAL MANAGEMENT, INC. By: _______________________________ Name: Title: [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 71 THE CHASE MANHATTAN BANK, Individually and as Agent By: _______________________________ Name: Title: BANK OF AMERICA, N.A. By: _______________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By: _______________________________ Name: Title: FOOTHILL CAPITAL CORPORATION By: _______________________________ Name: Title: GOLDMAN SACHS CREDIT PARTNERS L.P. By: _______________________________ Name: Title: VAN KAMPEN PRIME RATE INCOME TRUST By: Van Kampen Investment Advisory Corp. By: _______________________________ Name: Title: 72 THE BANK OF NOVA SCOTIA By: _______________________________ Name: Title: WACHOVIA BANK, N.A. By: _______________________________ Name: Title: 73 ANNEX A to REVOLVING CREDIT AND GUARANTY AGREEMENT Dated as of January , 1999 ----------------------------
Commitment Commitment Banks Amount Percentage - ----- ------ ---------- The Chase Manhattan Bank 380 Madison Avenue $ 26,000,000 26.0000% New York, NY 10017 Attn: Ms. Agnes Levy Bank of America, N.A. $ 12,500,000 12.5000% 335 Madison Avenue New York, NY 10017 Attn: Fred Zagar General Electric Capital $ 12,500,000 12.5000% Corporation 60 Long Ridge Road Stamford, CT 06927 Attn: William Magee Foothill Capital Corporation $ 12,500,000 12.5000% 11111 Santa Monica Blvd. #1500 Los Angeles, CA 90025 Attn: Mr. Edward Stearns Goldman Sachs Credit $ 12,500,000 12.5000% Partners L.P. Bank Loan Trading 85 Broad Street, 27th Floor New York, NY 10004 Attn: Mr. Jody LaNasa Van Kampen Prime Rate $ 9,500,000 9.5000% Income Trust 1 Parkview Plaza Oakbrook Terrace, IL 60181 Attn: Mr. Brian Buscher The Bank of Nova Scotia $ 9,500,000 9.5000%
74 1 Liberty Plaza New York, NY 10006 Attn: Mr. Alex Clarke Wachovia Bank, N.A. $ 5,000,000 5.0000% 191 Peachtree Street, N.E., GA-212 Atlanta, GA 30303 Attn: Mr. Kevin Harrison Total $100,000,000 100.0000% ============ ======== 75 Exhibit A-1 to the Revolving Credit and Guaranty Agreement FORM OF FIRST DAY ORDER 76 Exhibit A-2 to the Revolving Credit and Guaranty Agreement FORM OF INTERIM ORDER 77 Exhibit A-3 to the Revolving Credit and Guaranty Agreement FORM OF FINAL ORDER [To be substantially in the form as the Interim Order] 78 Exhibit B to the Revolving Credit and Guaranty Agreement FORM OF SECURITY AND PLEDGE AGREEMENT 79 Exhibit C to the Revolving Credit and Guaranty Agreement FORM OF OPINION OF COUNSEL 80 Exhibit D to the Revolving Credit and Guaranty Agreement FORM OF ASSIGNMENT AND ACCEPTANCE 81 Exhibit E to the Revolving Credit and Guaranty Agreement FORM OF BORROWING BASE CERTIFICATE EXISTING AGREEMENTS [TO BE SATISFACTORY TO THE BANKS] 82 SCHEDULE 1.01 EXISTING AGREEMENTS [TO BE SATISFACTORY TO THE BANKS] 83 SCHEDULE 3.05 SUBSIDIARIES [TO BE SATISFACTORY TO THE BANKS] [Designate Guarantors and Non-Filed Subsidiaries] 84 SCHEDULE 3.06 LIENS [TO BE SATISFACTORY TO THE BANKS] 85 SCHEDULE 6.09 TRANSACTIONS WITH AFFILIATES [TO BE SATISFACTORY TO THE BANKS] i EX-10.97 13 SECURITY AND PLEDGE AGREEMENT EXHIBIT 10.97 EXHIBIT B to Revolving Credit and Guaranty Agreement SECURITY AND PLEDGE AGREEMENT SECURITY AND PLEDGE AGREEMENT (the "Agreement"), dated as of January 18, --------- 2000 by and between MARINER POST-ACUTE NETWORK, INC., a Delaware corporation (the "Borrower"), and each of the direct or indirect subsidiaries of the -------- Borrower party hereto (together with the Borrower, the "Grantors"), each a -------- debtor and debtor-in-possession under Chapter 11 of the Bankruptcy Code, and THE CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for the financial ----- institutions and other lenders (the "Banks") party to the Credit Agreement (as ----- hereinafter defined). WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Agent, the Banks and the Grantors are entering into a Revolving Credit and Guaranty Agreement dated as of the date hereof (as amended, modified or supplemented from time to time, the "Credit Agreement"); and ---------------- WHEREAS, unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined; and WHEREAS, it is a condition precedent to the making of Loans and the issuance of Letters of Credit that the Grantors shall have granted a security interest, pledge and lien on (x) all cash maintained in the Letter of Credit Account pursuant to Section 364(c)(2) of the Bankruptcy Code and (y) certain of the Grantors' assets and properties and the proceeds thereof pursuant to Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code; and WHEREAS, the grant of such security interest, pledge and lien has been authorized pursuant to Sections 364(c)(2), 364(c)(3) and 364(d)(1) of the Bankruptcy Code by the First Day Order, and, after the entry thereof, will have been so authorized by the Interim Order and the Final Order (collectively, the "Orders"); and - ------- WHEREAS, to supplement the Orders without in any way diminishing or limiting the effect of the Orders or the security interest, pledge and lien granted thereunder, the parties hereto desire to more fully set forth their respective rights in connection with such security interest, pledge and lien; and WHEREAS, this Agreement has been approved by the Orders; 1 NOW, THEREFORE, in consideration of the premises and in order to induce the Banks to make Loans and issue Letters of Credit, the Grantors hereby agree with the Agent as follows: SECTION 1. Grant of Security and Pledge. Each of the Grantors hereby ----------------------------- transfers, grants, bargains, sells, conveys, hypothecates, assigns, pledges and sets over to the Agent for its benefit and the ratable benefit of the Banks and hereby grants to the Agent for its benefit and the ratable benefit of the Banks, a perfected pledge and security interest in all of the Grantors' right, title and interest in and to the following (the "Collateral") which pledge and ---------- security interest shall have the priorities set forth in Orders and shall be subject to the Carve-Out: (1) all present and future accounts, accounts receivable and other rights of each of the Grantors to payment for goods sold or leased or for services rendered (except those evidenced by instruments or chattel paper), whether now existing or hereafter arising and wherever arising, and whether or not they have been earned by performance (collectively, the "Accounts"); -------- (2) all goods and merchandise now owned or hereafter acquired by each of the Grantors wherever located, whether in the possession of a Grantor or of a bailee or other person for sale, storage, transit, processing, use or otherwise consisting of whole goods, components, supplies, materials, or consigned, returned or repossessed goods) which are held for sale or lease or to be furnished (or have been furnished) under any contract of service or which are raw materials, work-in-process, finished goods or materials used or consumed in such Grantor's business or processed by or on behalf of any Grantor (collectively, the "Inventory"); --------- (3) all machinery, all manufacturing, distribution, selling, data processing and office equipment, all furniture, furnishings, appliances, fixtures and trade fixtures, tools, tooling, molds, dies, vehicles, vessels, aircraft and all other goods of every type and description (other than Inventory), in each instance whether now owned or hereafter acquired by each of the Grantors and wherever located (collectively, the "Equipment"); --------- (4) all works of art now owned or hereafter acquired by each of the Grantors, including, without limitation, paintings, sketches, drawings, prints, sculptures, crafts, tapestries, porcelain, carvings, artifacts, renderings and designs; (5) all rights, interests, choses in action, causes of action, claims and all other intangible property of each of the Grantors of every kind and nature (other than Accounts, Trademarks, Patents and Copyrights), in each instance whether now owned or hereafter acquired by such Grantor, including, without limitation, all general intangibles, but excluding causes of action under the Bankruptcy Code (it being understood and agreed, however, that the proceeds of any such causes of action shall be available to repay the Obligations); all corporate and other business records; all loans, royalties, and other obligations receivable; all inventions, designs, trade secrets, computer programs, software, printouts and other computer materials, goodwill, registrations, copyrights, licenses, franchises, customer lists, credit files, correspondence, and advertising materials (to the extent the same are assignable); all customer and supplier contracts, firm sale orders, rights under license and franchise agreements (including all license agreements with any other Person in 2 connection with any of the Patents and Trademarks or such other Person's names or marks, whether such Grantor is a licensor or licensee under any such license agreement but only to the extent such license agreements are assignable), and other contracts and contract rights; all interests in partnerships and joint ventures; all tax refunds and tax refund claims; all right, title and interest under leases, subleases, licenses and concessions and other agreements to the extent assignable relating to real or personal property; all payments due or made to each of the Grantors in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property by any person or governmental authority; all deposit accounts (general or special) with any bank or other financial institution; all credits with and other claims against carriers and shippers; all rights to indemnification; all reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interest in trusts; all proceeds of insurance of which each of the Grantors is beneficiary; and all letters of credit, guaranties, liens, security interest and other security held by or granted to each of the Grantors; and all other intangible property, whether or not similar to the foregoing (collectively, the "General Intangibles"); ------------------- (6) all chattel paper, all instruments, all notes and debt instruments and all payments thereunder and instruments and other property from time to time delivered in respect thereof or in exchange therefor, and all bills of lading, warehouse receipts and other documents of title and documents, in each instance whether now owned or hereafter acquired by each of the Grantors; (7) all property or interests in property now or hereafter acquired by each of the Grantors which may be owned or hereafter may come into the possession, custody or control of the Agent or any agent or affiliate of the Agent in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and all rights and interests of each of the Grantors, now existing or hereafter arising and however and wherever arising, in respect of any and all (i) notes, drafts, letters of credits, stocks, bonds, and debt and equity securities, whether or not certificated, and warrants, options, puts and calls and other rights to acquire or otherwise relating to the same; (ii) money (including all cash and cash equivalents held in the Letter of Credit Account (as defined and referred to in the Credit Agreement)); (iii) proceeds of loans, including, without limitation, Loans made under the Credit Agreement; and (iv) insurance proceeds and books and records relating to any of the property covered by this Agreement; together, in each instance, with all accessions and additions thereto, substitutions therefor, and replacements, proceeds and products thereof; (8) all trademarks, trade names, trade styles, service marks, prints and labels on which said trademarks, trade names, trade styles and service marks have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof, or any other country or political subdivision thereof (except for "intent to use" applications for trademark or service mark registrations filed pursuant to Section 1(b) of the Lanham Act, unless and until an Amendment to Allege Use or a Statement of Use under Sections 1(c) and 1(d) of said Act has been filed), all whether now owned or hereafter acquired by 3 each of the Grantors, including, but not limited to, those described in Schedule 3 annexed hereto and made a part hereof, and all reissues, extensions or renewals thereof and all licenses thereof (together, in each case, with the goodwill of the business connected with the use of, and symbolized by each such trademark, service mark, trade name and trade dress, all of the foregoing being herein referred to as the "Trademarks"); ---------- (9) all letters patent of the United States or any other country, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, all whether now owned or hereafter acquired by each of the Grantors, including, but not limited to, those described in Schedule 4 annexed hereto and made a part hereof, and (ii) all reissues, continuations, continuations-in-part or extensions thereof and all licenses thereof (all of the foregoing being herein referred to as the "Patents"); ------- (10) all copyrights of the United States, or any other country, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Copyright Office or in any similar office or agency of the United States, any State thereof, or any other country or political subdivision thereof, all whether now owned or hereafter acquired by each of the Grantors, including, but not limited to, those described in Schedule 5 hereto and all renewals and extensions thereof and all licenses thereof (all of the foregoing being herein referred to as the "Copyrights"); - ----------- (11) all books, records, ledger cards and other property at any time evidencing or relating to the Accounts, Equipment, General Intangibles, Trademarks, Patents or Copyrights; (12) (i) all the shares of capital stock owned by each Grantor, as applicable, listed on Schedule 6 hereto of the issuers listed thereon (individually, an "Issuer", and collectively, the "Issuers") and all shares of ------ ------- capital stock of any Issuer obtained in the future by such Grantor and the certificates representing or evidencing all such shares (the "Pledged Shares"); -------------- all other property which may be delivered to and held by the Agent in respect of the Pledged Shares pursuant to the terms hereof; (iii) subject to Section 9 below, all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed, in respect of, in exchange for or upon the conversion of the securities referred to in clauses (i) and (ii) above; and (iv) subject to Section 9 below, all rights and privileges of each Grantor, as applicable, with respect to the securities and other property referred to in clauses (i), (ii) and (iii) (the items referred to in clauses (i) through (iv) being collectively called the "Pledged Collateral"); ------------------ (13) all other personal property of each of the Grantors, whether tangible or intangible, and whether now owned or hereafter acquired; and (14) all proceeds and products of any of the foregoing, in any form, including, without limitation, any claims against third parties for loss or damage to or destruction of any or all of the foregoing and to the extent not otherwise included, all (i) payments under insurance (whether 4 or not the Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral and (ii) cash. Notwithstanding anything contained herein to the contrary, the total amount of shares of capital stock or other ownership interests of any Person pledged pursuant to this Agreement that is not incorporated or organized in the United States shall in no event exceed sixty-six percent (66%) of the total outstanding shares of capital stock or such other ownership interests thereof. SECTION 2. Security for Obligations. This Agreement and the Collateral ------------------------ secure the payment of all obligations of each of the Grantors, now or hereafter existing, under the Credit Agreement and the other Loan Documents (and any other documents in respect of such obligations), and in respect of Indebtedness permitted by Section 6.03(vi) of the Credit Agreement, whether for principal, interest, fees, expenses or otherwise, and all obligations of each of the Grantors now or hereafter existing under or in respect of this Agreement (all such obligations of the Grantor being herein called the "Obligations"). ----------- SECTION 3. Delivery of Pledged Collateral; Other Action. Upon written -------------------------------------------- request by the Agent (and without further order of the Bankruptcy Court), all certificates or instruments representing or evidencing the Pledged Collateral not subject to a pledge in favor of any Real Estate Financier shall be delivered to and held by the Agent pursuant hereto and shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. All such certificates or instruments previously delivered by the Grantors to the Pre-Petition Agent shall be deemed to be held by the Agent. Upon the occurrence and during the continuance of any Event of Default, the Agent shall have the right (for the ratable benefit of the Banks), at any time in its discretion and upon giving notice to the Grantors of its intent to exercise such rights, to transfer to or to register in the name of the Agent or any of its nominees any or all of the Pledged Collateral. SECTION 4. Representations and Warranties. Each Grantor, jointly and ------------------------------ severally, represents and warrants (but only with regard to itself) as follows: (1) All of the Inventory and/or Equipment is located at the places specified in Schedule 1 hereto. The chief places of business and chief executive offices of each of the Grantors and the offices where each Grantor keeps its records concerning any Accounts and all originals of all chattel paper which evidence any Account are located at the places specified in Schedule 2 hereto. All trade names under which each of the Grantors have sold and will sell Inventory are listed on Schedule 3 hereto. (2) Each of the Grantors owns the Collateral free and clear of any lien, security interest, charge or encumbrance except for the security interest created by this Agreement and except as permitted under Section 6.01 of the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except (x) such as may have been filed in favor of the Agent relating to this Agreement and (y) in favor of any holder of a Lien permitted under Section 6.01 of the Credit Agreement. 5 (3) As of the Filing Date, no Grantor owns any material Trademarks, Patents or Copyrights or has any material Trademarks, Patents or Copyrights registered in, or the subject of pending applications in, the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, other than those described in Schedules 3, 4 and 5 hereto. The registrations for the Collateral disclosed on such Schedules 3, 4 and 5 hereto are valid and subsisting and in full force and effect. None of the material Patents or Copyrights have been abandoned or dedicated. (4) The Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. (5) Each Grantor, as the case may be, is the legal and beneficial owner of the Pledged Shares as described on Schedule 6 free and clear of any lien, security interest, option or other charge or encumbrance, except for the security interest created by this Agreement and the Orders and Liens permitted under Section 6.01. (6) Except as disclosed on Schedule 6, the Pledged Shares described in Section 1(l) hereof constitute all of the issued and outstanding shares of stock of each of the Issuers and no Issuer is under any contractual obligation to issue any additional shares of stock or any other securities, rights or indebtedness. (7) Except for the Orders, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the grant and pledge by each of the Grantors of the security interests granted hereby or for the execution, delivery or performance of this Agreement by each of the Grantors. SECTION 5. Further Assurances. ------------------ (1) Each of the Grantors agrees that from time to time, at the expense of the Grantors, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce any of its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, and without further order of the Bankruptcy Court, each of the Grantors will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary, or as the Agent may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby. (2) Each Grantor hereby authorizes the Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor where permitted by law. (3) Each Grantor will furnish to the Agent from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with 6 the Collateral as the Agent may reasonably request in connection with any prospective sale of Collateral pursuant to Section 15 hereof, all in reasonable detail. SECTION 6. As to Equipment and Inventory. Each Grantor shall: ----------------------------- (1) Keep the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places specified therefor in Schedule 1 hereto or, upon 30 days' written notice to the Agent following any transfer thereof to a different jurisdiction, at other places in jurisdictions where all action required by Section 5 shall have been taken to assure the continuation of the perfection of the security interest of the Agent (for its benefit and the ratable benefit of the Banks) with respect to the Equipment and Inventory. (2) Subject to provisions of the Credit Agreement, maintain or cause to be maintained in good repair, working order and condition, excepting ordinary wear and tear and damage due to casualty, all of the Equipment, and make or cause to be made all appropriate repairs, renewals and replacements thereof, to the extent not obsolete and consistent with past practice of such Grantor, as quickly as practicable after the occurrence of any loss or damage thereto which are necessary or reasonably desirable to such end, except where the failure to do any of the foregoing would not result in a Material Adverse Effect. (3) Until satisfaction in full of the Obligations, at any time when an Event of Default has occurred and is continuing: (i) each Grantor will perform any and all reasonable actions requested by the Agent to enforce the Agent's security interest in the Inventory and all of the Agent's rights hereunder, such as subleasing warehouses to the Agent or its designee (to the extent such subleases are not prohibited), placing and maintaining signs, appointing custodians, transferring Inventory to warehouses, and delivering to the Agent warehouse receipts and documents of title in the Agent's name; (ii) if any Inventory is in the possession or control of any of the Grantors' agents, contractors or processors or any other third party, each such Grantor will notify the Agent thereof and will notify such agents, contractors or processors or third party of the Agent's security interest therein and, upon request, instruct them to hold all such Inventory for the Agent and such Grantor's account, as their interests may appear, and subject to the Agent's instructions; (iii) the Agent shall have the right to hold all Inventory subject to the security interest granted hereunder; and (iv) the Agent shall have the right to take possession of the Inventory or any part thereof and to maintain such possession on such Grantor's premises or to remove any or all of the Inventory to such other place or places as the Agent desires in its sole discretion. If the Agent exercises its right to take possession of the Inventory, such Grantor, upon the Agent's demand, will assemble the Inventory and make it available to the Agent at such Grantor's premises at which it is located. 7 SECTION 7. As to Accounts. -------------- (1) Each Grantor shall keep its chief place of business and chief executive office and the offices where it keeps its records concerning the Accounts, and the offices where it keeps all originals of all chattel paper which evidence Accounts, at the location or locations therefor specified in Section 4(a) or, upon 15 days' prior written notice to the Agent, at such other locations in a jurisdiction where all actions required by Section 5 shall have been taken with respect to the Accounts. Each Grantor will hold and preserve such records and chattel paper and will permit representatives of the Agent, at any time during normal business hours and upon reasonable prior written notice, to inspect and make abstracts from such records and chattel paper in accordance with Section 5.08 of the Credit Agreement. (2) Except as otherwise provided in this subsection (b), each Grantor shall continue to collect in accordance with its customary practice, at its own expense, all amounts due or to become due to such Grantor under the Accounts and, prior to the occurrence and continuance of an Event of Default, such Grantor shall have the right to adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon, all in accordance with its customary practices. In connection with such collections, the Grantors may, upon the occurrence and during the continuation of an Event of Default, take (and at the direction of the Agent shall take) such action as the Grantors or the Agent may reasonably deem necessary or advisable to enforce collection of the Accounts; provided, that upon written notice by the Agent to any Grantor, -------- following the occurrence and during the continuation of an Event of Default, of its intention so to do but subject to subsection (c) below, the Agent shall have the right to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to the Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to such Grantor thereunder directly to the Agent and, upon such notification and at the expense of such Grantor, to enforce collection of any such Accounts, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as such Grantor might have done. After receipt by such Grantor of the notice referred to in the proviso to the preceding sentence, and unless ------- and until such notice is rescinded by the Agent by written notice to such Grantor (i) all amounts and proceeds (including instruments) received by such Grantor in respect of the Accounts shall be received in trust for the benefit of the Agent (for the ratable benefit of the Banks) hereunder, shall be segregated from other funds of the Grantors and shall be forthwith paid over to the Agent in the same form as so received (with any necessary endorsement) to be held as cash collateral and either (A) released to the Grantors if such Event of Default shall have been cured or waived or (B) if such Event of Default shall be continuing, applied as provided by Section 15, and (ii) the Grantors shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. (3) Notwithstanding the provisions of Section 7, the Agent shall not collect or enforce payment of any Account, the Account Debtor of which is a Governmental Authority (a "Governmental Account") if and to the extent that such -------------------- collection or enforcement is prohibited under 42 U.S.C. (S)(S)1395(g) or 1396(a) or under any comparable provision of federal or state law. To the 8 extent the Agent's rights as to any Governmental Account are limited pursuant to this Section 7, upon the occurrence and during the continuation of an Event of Default, each Grantor will (i) use its reasonable and diligent best efforts to collect and enforce payment of such Governmental Account, (ii) immediately deposit in the exact form received, duly indorsed by such Grantor to the Agent if required, in a collateral account maintained under the sole dominion and control of the Agent, subject to withdrawal by the Agent for the account of the Banks only as provided in Section 16, and until so turned over, shall be held by such Grantor in trust for the Agent and the Banks, segregated from other funds of such Grantor and (iii) upon written demand by the Agent at any time and from time to time, remit (and cause the depository bank for such collateral account to remit) directly to the Agent, as proceeds of the Collateral and for application to the payment of the Obligations pursuant to Section 16, all finally collected funds on deposit in such collateral account. SECTION 8. As to Trademarks, Patents and Copyrights. ---------------------------------------- (1) Each Grantor shall, either itself or through licensees, continue to use the Trademarks as each is currently used in the Grantor's business in order to maintain the Trademarks in full force free from any claim of abandonment for nonuse and each such Grantor will not (and will not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated, unless such failure to use a Trademark is not reasonably likely to have a material adverse effect on the condition (financial or otherwise), operation or properties of the Grantors taken as a whole. (2) No Grantor will do any act, or omit to do any act, whereby the Patents or Copyrights may become abandoned or dedicated and each such Grantor shall notify the Agent immediately if it knows of any reason or has reason to know that any application or registration may become abandoned or dedicated, unless such abandonment or dedication is not reasonably likely to have a material adverse effect on the condition (financial or otherwise), operations or properties of the Grantors taken as a whole. (3) No Grantor will, either itself or through any agent, employee, licensee or designee, (i) file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof or (ii) file any assignment of any patent or trademark, which such Grantor may acquire from a third party, with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivision thereof, unless such Grantor shall, within 30 days after the date of ------ such filing, notify the Agent thereof, and, upon request of the Agent, execute and deliver any and all assignments, agreements, instruments, documents and papers as the Agent may request to evidence the Agent's interest in such Patent or Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby, and such Grantor hereby constitutes the Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all lawful acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (4) Each Grantor will take all necessary steps in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or 9 agency in any other country or any political subdivision thereof, to maintain in all material respects each application and registration of all material Trademarks, Patents and Copyrights, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings. (5) Each Grantor will, without further order of the Bankruptcy Court, perform all acts and execute and deliver all further instruments and documents, including, without limitation, assignments for security in form suitable for filing with the United States Patent and Trademark Office, and the United States Copyright Office, respectively, reasonably requested by the Agent at any time to evidence, perfect, maintain, record and enforce the Agent's interest in all material Trademarks, Patents and Copyrights or otherwise in furtherance of the provisions of this Agreement, and each Grantor hereby authorizes the Agent to execute and file one or more accurate financing statements (and similar documents) or copies thereof or of this Security Agreement with respect to material Patents, Trademarks and Copyrights signed only by the Agent. (6) Each Grantor will, upon acquiring knowledge of any use by any person of any term or design likely to cause confusion with any material Trademark, promptly notify the Agent of such use, and if requested by the Agent, shall join with the Agent, at such Grantor's expense, in such action as the Agent, in its reasonable discretion, may deem advisable for the protection of the Agent's interest in and to the Trademarks. SECTION 9. As to the Pledged Collateral; Voting Rights; Dividends; Etc. ------------------------------------------------------------ (1) So long as no Event of Default shall have occurred and be continuing and no written notice thereof shall have been given by the Agent to the Grantors revoking all of the following rights pursuant to Section 9(b)(i) hereof: (1) the Grantors (as applicable) shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; (2) notwithstanding the provisions of Section 1 hereof, such Grantors shall be entitled to receive and retain any and all dividends and other distributions paid in respect of the Pledged Collateral; provided, that any and all -------- (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, and (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in- surplus, 10 (C) cash paid, payable or otherwise distributed in respect of, or in redemption of, or in exchange for, any Pledged Shares; shall be, and shall be forthwith delivered to the Agent, to hold as Pledged Collateral and shall, if received by any of the Grantors, be received in trust for the benefit of the Agent, be segregated from the other property or funds of such Grantor, and be forthwith delivered to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement); and (3) the Agent shall execute and deliver (or cause to be executed and delivered) to the Grantors (as applicable) all such proxies and other instruments as the Grantors (as applicable) may reasonably request for the purpose of enabling such Grantor to exercise the voting and other rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends which it is authorized to receive and retain pursuant to paragraph (ii) above; (2) Upon the occurrence and during the continuance of an Event of Default: (1) upon written notice from the Agent to the Grantors (as applicable) to such effect, all rights of such Grantors (as applicable) to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 9(a)(i) and to receive the dividends which it would otherwise be authorized to receive and retain pursuant to Section 9(a)(ii) shall cease, and all such rights shall thereupon become vested in the Agent, who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral any such dividends; and (2) all dividends which are received by such Grantors contrary to the provisions of paragraph (i) of this Section 9(b) shall be received in trust for the benefit of the Agent, shall be segregated from other funds of the Grantors and shall be forthwith paid over to the Agent as Pledged Collateral in the same form as so received (with any necessary endorsement). SECTION 10. Insurance. Upon the occurrence and during the continuance of --------- any Event of Default, all insurance payments in respect of Inventory and Equipment shall be held, applied and paid to the Agent as specified in Section 15 hereof. SECTION 11. Transfers to Others; Liens; Additional Shares. Each Grantor --------------------------------------------- shall not: (1) Sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except for dispositions otherwise permitted by the Credit Agreement. (2) Create or suffer to exist any lien, security interest or other charge or encumbrance upon or with respect to any of the Collateral to secure any obligation of any person or 11 entity, except for the security interest created by this Agreement and the Orders, or except as otherwise permitted by the Credit Agreement. (3) Each of the Grantors (as applicable) agrees that it will (i) cause each of the Issuers that are wholly-owned Subsidiaries not to issue any stock or other securities in addition to or substitution for the Pledged Shares issued by such Issuer, except to the respective Grantor and (ii) pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all such additional shares of stock or other securities of each Issuer of the Pledged Shares. SECTION 12. Agent Appointed Attorney-in-Fact. Each Grantor hereby -------------------------------- irrevocably appoints the Agent such Grantor's attorney-in-fact (which appointment shall be irrevocable and deemed coupled with an interest), with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time in the Agent's discretion, upon and during the occurrence and continuation of an Event of Default, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (1) to obtain and adjust insurance required to be paid to the Agent pursuant to Section 10, (2) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, (3) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (i) or (ii) above, (4) to receive, endorse and collect all instruments made payable to the Grantors representing any dividend or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same, and (5) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. SECTION 13. Agent May Perform. If any Grantor fails to perform any ----------------- agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Agent incurred in connection therewith (as to which invoices have been furnished) shall be payable by the Grantors under Section 16(b). SECTION 14. The Agent's Duties. The powers conferred on the Agent ------------------ hereunder are solely to protect its interest and the interests of the Banks in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no 12 duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral, including, without limitation, ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Agent has or is deemed to have knowledge of such matters. SECTION 15. Remedies. If any Event of Default shall have occurred and be -------- continuing, and subject to the provisions of Section 7 of the Credit Agreement: (1) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, and without application to or order of the Bankruptcy Court, all the rights and remedies of a secured party on default under the Uniform Commercial Code and also may (i) require each Grantor to, and each Grantor hereby agrees that it will at its expense and upon request of the Agent forthwith, assemble all or part of the Collateral as directed by the Agent and make it available to the Agent at a place to be designated by the Agent which is reasonably convenient to both parties and (ii) without notice except as specified in the following sentence, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Agent may deem commercially reasonable. Each Grantor agrees that, to the extent notice of such sale shall be required by law, at least ten days' notice to the Grantors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (2) The Agent may instruct the Grantors not to make any further use of the Patents, Copyrights or Trademarks or any mark similar thereto for any purpose to the extent that such use would be inconsistent with the exercise by the Agent of any other remedies under this Section. (3) The Agent may license, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any of the Trademarks, Patents or Copyrights throughout the world for such term or terms, on such conditions, and in such manner, as the Agent shall in its sole discretion determine; provided, -------- however, that any such license shall not conflict with any existing license or sublicense. (4) The Agent may (without assuming any obligations or liability thereunder), at any time, enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of the Grantors in, to and under any one or more license agreements with respect to the Collateral, and take or refrain from taking any action under any thereof, and each of the Grantors hereby releases the Agent from, and agrees to hold the Agent free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such license agreement except claims involving gross negligence, willful misconduct or bad faith of the Agent. 13 (5) In the event of any such license, assignment, sale or other disposition of the Collateral, or any of it, each Grantor shall supply its know- how and expertise relating to the Trademarks, Patents or Copyrights, and its customer lists and other records relating to the Trademarks, Patents or Copyrights to the Agent or its designee. (6) In order to implement the assignment, sale or other disposal of any of the Trademarks, Patents or Copyrights, the Agent may, at any time, pursuant to the authority granted in Section 12 hereof, execute and deliver on behalf of the Grantors, one or more instruments of assignment of the Trademarks, Patents or Copyrights (or any application of registration thereof), in form suitable for filing, recording or registration in any country. (7) All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section 16 hereof) in whole or in part against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Obligations shall be paid over to the Grantors or to whomsoever may be lawfully entitled to receive such surplus. (8) If at any time when the Agent shall determine to exercise its right to sell all or any part of the Pledged Collateral pursuant to this Section 15, such Pledged Collateral or the part thereof to be sold shall not be effectively registered under the Securities Act of 1933, as amended, and as from time to time in effect, and the rules and regulations thereunder (the "Securities Act"), the Agent is hereby expressly authorized to sell such Pledged -------------- Collateral or such part thereof by private sale in such manner and under such circumstances as the Agent may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Agent, in compliance with applicable securities laws, (a) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Collateral or such part thereof shall have been filed under such Securities Act, (b) may approach and negotiate with a restricted number of potential purchasers to effect such sale and (c) may restrict such sale to purchasers as to their number, nature of business and investment intention including without limitation to purchasers each of whom will represent and agree to the satisfaction of the Agent that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Collateral, or part thereof, it being understood that the Agent may cause or require each Grantor, and each Grantor hereby agrees upon the written request of the Agent, to cause (i) a legend or legends to be placed on the certificates to be delivered to such purchasers to the effect that the Pledged Collateral represented thereby have not been registered under the Securities Act and setting forth or referring to restrictions on the transferability of such securities; and (ii) the issuance of stop transfer instructions to such Issuer's transfer agent, if any, with respect to the Pledged Collateral, or, if such Issuer transfers its own securities, a notation in the appropriate records of such Issuer. In the event of any such sale, each Grantor does hereby consent and agree that the Agent shall incur no responsibility or liability for selling all or any part of the Pledged Collateral at a price which the Agent may deem reasonable 14 under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were public and deferred until after registration as aforesaid. SECTION 16. Indemnity and Expenses. ---------------------- (1) Each Grantor, jointly and severally, agrees to indemnify the Agent from and against any and all claims, losses and liabilities growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities directly arising from the Agent's own gross negligence, willful misconduct or bad faith. (2) The Grantors will upon demand pay to the Agent the amount of any and all reasonable expenses (as to which invoices have been furnished), including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Agent hereunder or (iv) the failure by any of the Grantors to perform or observe any of the provisions hereof. (3) The Grantors assume all responsibility and liability arising from the use of the Trademarks, Patents and Copyrights. (4) Each of the Grantors agrees that the Agent does not assume, and shall have no responsibility for, the payment of any sums due or to become due under any agreement or contract included in the Collateral or the performance of any obligations to be performed under or with respect to any such agreement or contract by any of the Grantors, and except as the same may have resulted from the gross negligence, willful misconduct or bad faith of the Agent, each of the Grantors hereby jointly and severally agree to indemnify and hold the Agent harmless with respect to any and all claims by any person relating thereto. SECTION 17. Security Interest Absolute. All rights of the Agent and -------------------------- security interests hereunder, and all obligations of each of the Grantors hereunder, shall be absolute and unconditional, irrespective of any circumstance which might constitute a defense available to, or a discharge of, any guarantor or other obligor in respect of the Obligations. SECTION 18. Amendments; Etc. No amendment or waiver of any provision of --------------- this Agreement, nor any consent to any departure by any of the Grantors herefrom, shall in any event be effective unless the same shall be in writing and signed by the party against whom enforcement is sought, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 19. Addresses for Notices. All notices and other communications --------------------- provided for hereunder shall be in writing and shall be given in accordance with the applicable provisions of the Credit Agreement. 15 SECTION 20. Continuing Security Interest. This Agreement shall create a ---------------------------- continuing security interest in the Collateral and shall (i) remain in full force and effect until payment in full of the Obligations, (ii) be binding upon each of the Grantors, their successors and assigns and (iii) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each of the Banks and their respective successors, transferees and assigns. Upon the payment in full of the Obligations, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to the Grantors subject to any existing liens, security interests or encumbrances on such Collateral. Upon any such termination, the Agent will, at the Grantor's expense, execute and deliver to the Grantors such documents as the Grantors shall reasonably request to evidence such termination. SECTION 21. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York, except as required by mandatory provisions of law and except to the extent that the validity or perfection of the security interest hereunder, or remedies hereunder, in respect of any particular Collateral are governed by the laws of a jurisdiction other than the State of New York and by Federal law (including, without limitation, the Bankruptcy Code) to the extent the same has pre-empted the law of the State of New York or such other jurisdiction. SECTION 22. Headings. Section headings in this Agreement are included -------- herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. [SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF, each of the Grantors and the Agent have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written. GRANTORS: MARINER POST-ACUTE NETWORK, INC. By:__________________________________ Name: Title: AMERICAN MEDICAL INSURANCE BILLING SERVICES, INC. AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN-CAL MEDICAL SERVICES, INC. AMERRA PROPERTIES, INC. AMS GREEN TREE, INC. 16 AMS PROPERTIES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. CAMBRIDGE BEDFORD, INC. CAMBRIDGE EAST, INC. CAMBRIDGE NORTH, INC. CAMBRIDGE SOUTH, INC. CLINTONAIRE NURSING HOME, INC. CONNERWOOD HEALTHCARE, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY CRESTMONT HEALTH CENTER, INC. DEVCON HOLDING COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE LTD., L.P. EVERGREEN HEALTHCARE, INC. FRENCHTOWN NURSING HOME, INC. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. 17 GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VILLAGE GREEN, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE, INC. HAWK'S-PERIMETER, INC. HERITAGE NURSING HOME, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSTMASTERS, INC. INTERNATIONAL HEALTH CARE MANAGEMENT, INC. INTERNATIONAL X-RAY, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS - EAST, INC. LIVING CENTERS - PHCM, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS HOLDING COMPANY 18 LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. MADONNA NURSING CENTER, INC. MED-THERAPY REHABILITATION SERVICES, INC. MIDDLEBELT NURSING HOME, INC. MIDDLEBELT-HOPE NURSING HOME, INC. NAN-DAN CORP. NATIONAL HERITAGE REALTY, INC. NIGHTINGALE EAST NURSING CENTER, INC. OMEGA/INDIANA CARE CORP. PROFESSIONAL HEALTH CARE MANAGEMENT, INC. PROFESSIONAL RX SYSTEMS, INC. REHABILITY HEALTH SERVICES, INC. RENAISSANCE MENTAL HEALTH CENTER, INC. ST. ANTHONY NURSING HOME, INC. SUMMIT HOSPITAL HOLDINGS, INC. SUMMIT HOSPITAL OF EAST GEORGIA, INC. SUMMIT HOSPITAL OF SOUTHEAST ARIZONA, INC. SUMMIT HOSPITAL OF SOUTHEAST TEXAS, INC. SUMMIT HOSPITAL OF SOUTHWEST LOUISIANA, INC. SUMMIT HOSPITAL OF WEST GEORGIA, INC. SUMMIT INSTITUTE FOR PULMONARY MEDICINE AND REHABILITATION, INC. SUMMIT INSTITUTE OF AUSTIN, INC. SUMMIT INSTITUTE OF WEST MONROE, INC. SUMMIT MEDICAL HOLDINGS, LTD. SUMMIT MEDICAL MANAGEMENT, INC. By: _______________________________ Name: Title: 19 THE CHASE MANHATTAN BANK as Agent By:_____________________________ Name: Title: 20 EX-10.98 14 SECURITY AGREEMENT EXHIBIT 10.98 SECURITY AGREEMENT SECURITY AGREEMENT dated as of January 20, 2000 ("Agreement") among MARINER HEALTH GROUP, INC. ("MHG") and the OTHER BORROWERS (this and other capitalized terms used in this introduction and the recitals below are defined in Section 1 hereof), each as debtor and debtor-in-possession, PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent and for purposes of Section 6 hereof, First Union National Bank. WHEREAS, the Borrowers are entering into the Credit Agreement described in Section 1 below, pursuant to which the Borrowers intend to borrow funds and obtain letters of credit, all on the terms and conditions set forth therein; WHEREAS, the Borrowers are willing to secure their obligations under the Credit Agreement and the other Financing Documents by granting Liens on their respective assets to the Collateral Agent as provided in this Agreement and the other Collateral Documents; WHEREAS, the Lenders and the LC Issuing Bank are not willing to make loans or maintain, issue or participate in letters of credit under the Credit Agreement unless the foregoing obligations of the Borrowers are secured by Liens on their assets as provided in the Collateral Documents; and WHEREAS, upon any foreclosure or other enforcement of the Collateral Documents, the net proceeds of the relevant Collateral are to be received by or paid over to the Collateral Agent and applied as provided in Section 15 of this Agreement; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions. Terms defined in the Credit Agreement and not otherwise defined herein have, as used herein, the respective meanings provided for therein. The following additional terms, as used herein, have the following meanings: "Accounts" means, with respect to any Grantor, all " accounts" (as defined in the UCC) now owned or hereafter acquired by such Grantor, and also means and includes all Medicare Receivables, Medicaid Receivables, VA Receivables, accounts receivable, contract rights, book debts, notes, drafts and other obligations or indebtedness owing to such Grantor arising from the performance of services by it and/or the sale, lease or exchange of goods or other property by it (including, without limitation, any such obligation or indebtedness which might be characterized as an account, contract right or general intangible under the Uniform Commercial Code in effect in any applicable jurisdiction) and all of such Grantor's rights in, to and under all contracts or purchase orders for goods, services or other property, and all of such Grantor's rights to any goods, services or other property represented by any of the foregoing and all monies due to or to become due to such Grantor under all contracts for the performance of services by it and/or the sale, lease or exchange of goods or other property by it (whether or not yet earned by performance on the part of such Grantor), in each case whether now existing or hereafter arising or acquired, including, without limitation, the right to receive the proceeds of said contracts and purchase orders and all collateral security and guarantees of any kind given by any Person with respect to any of the foregoing. "Borrowers" means Mariner Health Group, Inc. and each of its Subsidiaries party as a "Borrower" to the Credit Agreement. "Cash Distributions" means dividends, interest and other payments and distributions made in cash upon or with respect to the Collateral. "Cash Management System" means the cash management system of the Borrowers described in the Credit Agreement. "Cash Proceeds Account" has the meaning set forth in Section 7(d). "Casualty Proceeds Account" has the meaning set forth in Section 7(b). "Collateral" means all property, whether now owned or hereafter acquired, in which a security interest or other Lien is granted or purported to be granted to the Collateral Agent pursuant to the Collateral Documents. When used with respect to a specific Grantor, the term "Collateral" means all such property in which such a security interest or other Lien is granted or purported to be granted to the Collateral Agent by such Grantor. "Collateral Accounts" means the Casualty Proceeds Accounts, the Cash Proceeds Accounts and the LC Collateral Account. "Collateral Agent" means PNC Bank, National Association, in its capacity as Collateral Agent for the holders of the Secured Obligations under the Collateral Documents, and its successors in such capacity. "Collateral Documents" means this Agreement, the Mortgages and all other supplemental or additional security agreements, mortgages or similar instruments delivered pursuant hereto or thereto. "Concentration Account Bank" has the meaning set forth in Section 6(a). "Concentration Accounts" has the meaning set forth in Section 6(a). "Contingent Secured Obligation" means, at any time, any Secured Obligation (or portion thereof) that is contingent in nature at such time, including (without limiting the generality of the foregoing): (i) any obligation to reimburse a bank for drawings not yet made under a letter of credit issued by such bank, or any Guarantee of any such obligation; (ii) any obligation to provide collateral to or for the benefit of a bank to secure reimbursement obligations arising from drawings not yet made under a letter of credit issued by such bank, or any Guarantee of any such obligation; and 2 (iii) any other Secured Obligation which is contingent in nature at the time of determination. "Copyright License" means any agreement now or hereafter in existence granting to any Grantor, or pursuant to which any Grantor has granted to any other Person, any right to use, copy, reproduce, distribute, prepare derivative works, display or publish any records or other materials on which a Copyright is in existence or may come into existence. "Copyrights" means all the following: (i) all copyrights under the laws of the United States or any other country (whether or not the underlying works of authorship have been published), all registrations and recordings thereof, all copyrightable works of authorship (whether or not published), and all applications for copyrights under the laws of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, (ii) all renewals thereof, (iii) all claims for, and rights to sue for, past or future infringements of any of the foregoing, and (iv) all income, royalties, damages and payments now or hereafter due or payable with respect to any of the foregoing, including, without limitation, damages and payments for past or future infringements thereof. "Credit Agreement" means the Debtor-In-Possession Credit Agreement dated as of January 20, 2000 among the Borrowers, the Lenders, First Union National Bank, as Syndication Agent, PNC Capital Markets, Inc. and First Union Securities, Inc., as Co-Arrangers and PNC Bank, National Association, as Collateral Agent and Administrative Agent, and as an issuing bank for Letters of Credit thereunder, as amended from time to time. "Documents" means, with respect to any Grantor, all "documents" (as defined in the UCC) or other receipts covering, evidencing or representing goods, now owned or hereafter acquired by such Grantor. "Enforcement Notice" means a notice delivered to the Collateral Agent by the Administrative Agent pursuant to Section 8.03 of the Credit Agreement directing the Collateral Agent to exercise one or more specific rights or remedies under the Collateral Documents. "Equipment" means, with respect to any Grantor, all "equipment" (as defined in the UCC) now owned or hereafter acquired by it, wherever located. "Equity Interest" means (i) in the case of a corporation, any shares of its capital stock, (ii) in the case of a limited liability company, any membership interest therein, (iii) in the case of a partnership, any partnership interest (whether general or limited) therein, (iv) in the case of any other business entity, any participation or other interest in the equity or profits thereof or (v) any warrant, option or other right to acquire any Equity Interest described in the foregoing clauses (i), (ii), (iii) and (iv). "General Intangibles" means, with respect to any Grantor, all "general intangibles" (as defined in the UCC) now owned or hereafter acquired by such Grantor, including, without limitation, (i) all obligations or indebtedness owing to such Grantor (other than Accounts) from whatever source arising, (ii) all Intellectual Property, goodwill, trade names, service marks, trade 3 secrets, permits and licenses, (iii) all rights or claims in respect of refunds for taxes paid and (iv) all rights in respect of any pension plan or similar arrangement maintained for employees of any member of the ERISA Group. "Goods" means, with respect to any Grantor, all "goods" (as defined in the UCC) now owned or hereafter acquired by it, wherever located. "Grantor" means any Borrower. "Instruments" means, with respect to any Grantor, all "instruments", "chattel paper" or "letters of credit" (each as defined in the UCC) evidencing, representing, arising from or existing in respect of, relating to, securing or otherwise supporting the payment of, any Account or other obligation or indebtedness owing to such Grantor, including (but not limited to) promissory notes, drafts, bills of exchange and trade acceptances, now owned or hereafter acquired by such Grantor. "Intellectual Property" means (i) Patents, (ii) Patent Licenses, (iii) Trademarks, (iv) Trademark Licenses, (v) Copyrights and (vi) Copyright Licenses, and all rights in or under any of the foregoing. "Inventory" means, with respect to any Grantor, all "inventory" (as defined in the UCC), now owned or hereafter acquired by it, wherever located. "LC Collateral Account" has the meaning set forth in Section 7(e). "Liquid Investments" has the meaning set forth in Section 7(g). "Medicaid Receivable" means any Account with respect to which the obligor is a state governmental authority (or agent thereof) obligated to pay, pursuant to federal or state Medicaid program statutes or regulations, for services rendered to eligible beneficiaries thereunder. "Medicare Receivable" means any Account with respect to which the obligor is a federal governmental authority (or agent thereof) obligated to pay, pursuant to federal Medicare program statutes or regulations, for services rendered to eligible beneficiaries thereunder. "Non-Contingent Secured Obligation" means at any time any Secured Obligation (or portion thereof) that is not a Contingent Secured Obligation at such time. "Notice of Redirection" has the meaning set forth in Section 6. "Patent License" means any agreement now or hereafter in existence granting any Grantor, or pursuant to which any Grantor has granted to any other Person, any right with respect to any Patent or any invention now or hereafter in existence, whether patentable or not, whether a patent or application for patent is in existence on such invention or not, and whether a patent or application for patent on such invention may come into existence or not. "Patents" means (i) all letters patent and design letters patent of the United States or any other country and all applications for letters patent and design letters patent of the United States 4 or any other country, including, without limitation, applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, (ii) all reissues, divisions, continuations, continuations- in-part, revisions and extensions thereof, (iii) all claims for, and rights to sue for, past or future infringements of any of the foregoing and (iv) all income, royalties, damages and payments now or hereafter due or payable with respect to any of the foregoing, including, without limitation, damages and payments for past or future infringements thereof. "Perfection Certificate" means, with respect to any Grantor, a certificate substantially in the form of Exhibit A hereto, completed and supplemented with --------- the schedules and attachments contemplated thereby to the satisfaction of the Collateral Agent, and duly executed by a duly authorized officer of such Grantor. "Permitted Liens" means (i) the Security Interests and (ii) the other Liens on the Collateral permitted to be created or assumed or to exist pursuant to Section 7.02 of the Credit Agreement. "Personal Property Collateral" means at any time, with respect to any Grantor, all its property included in the Collateral at such time, other than its Real Property Collateral. "Personal Property Security Interests" means the security interests in Personal Property Collateral granted by the Grantors under the Collateral Documents. "Pledged Equity Interests" means at any time all Equity Interests included in the Collateral at such time. "Pledged Equity Securities" means at any time all "certificated securities" (as such term is defined in Article 8 of the UCC) that evidence or represent Pledged Equity Interests at such time. "Pledged Instruments" means at any time all Instruments included in the Collateral at such time. "Pledged LLC Interest" means at any time any membership interest or similar interest in a limited liability company that is included in the Pledged Equity Interests at such time. "Pledged Partnership Interest" means at any time any partnership interest (whether general or limited) that is included in the Pledged Equity Interests at such time. "Post-Petition Interest" means any interest which accrues after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of the Borrowers, whether or not such interest is allowed or allowable as a claim in any such proceeding. "Proceeds" means, with respect to any Grantor, all proceeds of, and all other profits, products, rents or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or other realization upon, its Collateral, including without limitation all claims of such Grantor against third parties for loss of, damage to or 5 destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any of its Collateral, and any condemnation or requisition payments with respect to any of its Collateral, in each case whether now existing or hereafter arising. "Real Property Collateral" means at any time, with respect to any Grantor, all its real property (including leasehold interests in real property) included in the Collateral at such time. "Real Property Security Interests" means the security interests in Real Property Collateral granted by the Grantors under the Mortgages and the other Collateral Documents. "Secured Obligations" means the Obligations including, without limitation, Obligations arising under this Agreement. "Secured Parties" means the holders from time to time of the Secured Obligations. "Secured Parties Requesting Notice" means, at any time, each Secured Party which has, at least five Business Days prior thereto, delivered to the Collateral Agent a written notice (a) stating that it holds one or more Secured Obligations and wishes to receive copies of the notices referred to in Section 16(i) and (b) setting forth its address or facsimile number to which copies of such notices should be sent. "Security Interests" means the Personal Property Security Interests and the Real Property Security Interests. "Trademark License" means any agreement now or hereafter in existence granting to any Grantor, or pursuant to which any Grantor has granted to any other Person, any right to use any Trademark. "Trademarks" means: (i) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, brand names, trade dress, prints and labels on which any of the foregoing have appeared or appear, package and other designs, and any other source or business identifiers, and general intangibles of like nature, and the rights in any of the foregoing which arise under applicable law, (ii) the goodwill of the business symbolized thereby or associated with each of them, (iii) all registrations and applications in connection therewith, including, without limitation, registrations and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country or any political subdivision thereof, (iv) all renewals thereof, (v) all claims for, and rights to sue for, past or future infringements of any of the foregoing and (vi) all income, royalties, damages and payments now or hereafter due or payable with respect to any of the foregoing, including, without limitation, damages and payments for past or future infringements thereof. "UCC" means the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided that if, by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of any Security Interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, "UCC" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non- perfection. 6 "VA Receivable" means any Account with respect to which the obligor is the Veterans' Administration or any successor thereto (or any agent thereof). SECTION 2. Representations and Warranties. Each Grantor represents and warrants that: (a) As of the Closing Date, such Grantor owns the Equity Interests listed as being owned by it in Schedule 3 to the Credit Agreement, free and clear of any Lien other than Permitted Liens. All shares of capital stock identified in such Schedule as being beneficially owned by such Grantor have been duly authorized and validly issued, are fully paid and non-assessable, and are subject to no option to purchase or similar right of any Person. Such Grantor is not and will not become a party to or otherwise bound by any agreement, other than the Financing Documents and the Organizational Documents of the issuer of such Pledged Equity Interests, which restricts in any manner the rights of any present or future holder of any Pledged Equity Interest with respect thereto. (b) Such Grantor has good and marketable title to all of its Collateral, free and clear of any Liens other than Permitted Liens. Such Grantor has taken all actions necessary under the UCC to perfect its interest in any Accounts purchased or otherwise acquired by it, as against its assignors and creditors of its assignors. (c) Other than granting Permitted Liens, such Grantor has not performed any acts that might prevent the Collateral Agent from enforcing any of the provisions of the Collateral Documents or that would limit the Collateral Agent in any such enforcement. No financing statement, security agreement, mortgage or similar or equivalent document or instrument covering all or any part of the Collateral owned by it is on file or of record in any jurisdiction in which such filing or recording would be effective to perfect or record a Lien on such Collateral, except financing statements, mortgages or other similar or equivalent documents with respect to Permitted Liens. After the Closing, no Collateral owned by it will be in the possession of any Person (other than such Grantor) asserting any claim thereto or security interest therein (except Permitted Liens), except that (i) the Collateral Agent or its designee may have possession of Collateral as contemplated hereby and (ii) cash and Temporary Cash Investments may be held in the Concentration Accounts or in other accounts to the extent permitted by Section 7.13 of the Credit Agreement. (d) Such Grantor has delivered a Perfection Certificate to the Collateral Agent. The information set forth therein is correct and complete as of the Closing Date. (e) The Security Interests constitute valid security interests in all Collateral owned by such Grantor, thereby securing its Secured Obligations, and, upon entry of the Interim Borrowing Order or the Borrowing Order, constitute security interests therein prior to all other Liens other than Liens permitted under the Credit Agreement to be senior in priority to the liens of the Lenders. (f) Such Grantor's Collateral is insured in accordance with, and to the extent required by, the requirements of the Credit Agreement. 7 SECTION 3. The Security Interests. (a) In order to secure the full and punctual payment of its Secured Obligations in accordance with the terms thereof, each Grantor hereby pledges and assigns to the Collateral Agent and grants to the Collateral Agent for the benefit of the Secured Parties a continuing security interest in and to all right, title and interest of such Grantor in, to and under all of the following property of such Grantor, whether now owned or existing or hereafter acquired or arising and regardless of where located: (i) all Accounts; (ii) all Documents; (iii) all Equipment; (iv) all General Intangibles; (v) all Goods; (vi) all Instruments; (vii) all Inventory; (viii) all Equity Interests in other Persons now or hereafter beneficially owned by such Grantor, all rights and privileges of such Grantor with respect to such Equity Interests, and all dividends, distributions and other payments with respect thereto; (ix) all Real Property; (x) all books and records (including, without limitation, customer lists, credit files, computer programs, printouts and other computer materials and records) of such Grantor pertaining to any of its Collateral; (xi) such Grantor's ownership interest in all Deposit Accounts in the Cash Management System including, without limitation, the Collateral Accounts, all cash deposited therein from time to time, all Liquid Investments made with amounts on deposit therein and all of such Grantor's other monies and property of any kind in the possession or under the control of the Collateral Agent; and (xii) all Proceeds of the collateral described in the foregoing clauses (i) through (xi). (b) The Security Interests are granted as security only and shall not subject the Collateral Agent or any other Secured Party to, or transfer or in any way affect or modify, any obligation or liability of any Grantor with respect to any of the Collateral or any transaction in connection therewith. 8 Notwithstanding the foregoing, the security interest granted under clause (xi) shall be subject to rights in favor of any bank administering any account in the Cash Management System under any applicable order of the Court or under Applicable Law. SECTION 4. Delivery of Certain Collateral. (a) On the Closing Date, each Grantor is delivering to the Collateral Agent as Collateral hereunder all stock certificates or other certificates representing Equity Interests in other Persons then owned by it and not previously delivered to the "Collateral Agent" under the Existing Credit Facilities. All such previously delivered certificates held on the Closing Date by such "Collateral Agent" shall be deemed held by the Collateral Agent hereunder. (b) After the Closing Date, if any Grantor receives (i) any stock certificate or other certificate representing Equity Interests in another Person then owned by it or (ii) any Instrument, in which a security interest is granted pursuant to Section 3 hereof, such Grantor will immediately deliver such certificate or Instrument to the Collateral Agent to be held by it as Collateral hereunder. (c) Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, each Grantor may retain for collection in the ordinary course any Instruments received by it in the ordinary course of business, and the Collateral Agent shall, promptly upon request by such Grantor, make appropriate arrangements for making any other Instrument pledged by such Grantor hereunder available to it for purposes of presentation, collection or renewal (any such arrangement to be effected, to the extent deemed appropriate by the Collateral Agent, against trust receipt or like document). (d) All Pledged Equity Securities delivered to the Collateral Agent hereunder will be delivered in suitable form for transfer by delivery, or accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Collateral Agent. All Pledged Instruments delivered to the Collateral Agent hereunder will be endorsed to the order of the Collateral Agent, or accompanied by duly executed instruments of assignment, all in form and substance satisfactory to the Collateral Agent. SECTION 5. Further Assurances; Covenants. Each Grantor covenants as follows: (a) It will not change its name, identity or corporate structure in any manner unless permitted by Section 7.03 of the Credit Agreement and unless such Grantor shall have given the Collateral Agent prior notice thereof and delivered an updated Perfection Certificate. (b) It will not change (i) the location of its chief executive office or principal place of business or (ii) the locations where it keeps or holds any Collateral or any records relating thereto from the applicable locations described in its Perfection Certificate (after the delivery of such Perfection Certificate), unless such Grantor shall have given the Collateral Agent prior notice thereof. It will not in any event change the location of any Collateral owned by it if such change would cause the Security Interests in such Collateral to lapse or, if perfected prior to such change of location, cease to be perfected. (c) It will, from time to time, at its expense, execute, deliver, file and record any statement, assignment, instrument, document, agreement or other paper and take any other action 9 (including, without limitation, any Intellectual Property Filings and any filings of financing or continuation statements under the UCC) that from time to time may be reasonably necessary or desirable, or that the Collateral Agent may reasonably request, in order to create, preserve, perfect, confirm or validate the Security Interests in such Grantor's Collateral or to enable the Collateral Agent and the other Secured Parties to obtain the full benefits of the Collateral Documents, or to enable the Collateral Agent to exercise and enforce any of its rights, powers and remedies thereunder with respect to any of such Grantor's Collateral. To the extent permitted by applicable law, such Grantor authorizes the Collateral Agent to execute and file such financing statements or continuation statements without such Grantor's signature appearing thereon. Such Grantor agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. Such Grantor shall pay the costs of, or incidental to, any recording or filing of any such financing or continuation statements in which it is named as the debtor. Such Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all Intellectual Property Filings required or so requested for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; and such power, being coupled with an interest, shall be irrevocable until such Grantor's Collateral is released pursuant to Section 18. (d) At least 30 days before it takes any action contemplated by Section 5(a) or 5(b), such Grantor will, at its expense, cause to be delivered to the Collateral Agent an officer's certificate, in form and substance satisfactory to the Collateral Agent, to the effect that all financing statements and amendments or supplements thereto, continuation statements and other documents required to be recorded or filed in order to perfect and protect the Security Interests against all creditors of and purchasers from such Grantor (except any continuation statements specified in such officer's certificate that are to be filed more than six months after the date thereof) have been filed in each filing office necessary for such purpose and that all filing fees and taxes, if any, payable in connection with such filings have been paid to the Collateral Agent or otherwise paid in full. (e) If any of its Collateral is at any time in the possession or control of any warehouseman, bailee or agent, such Grantor will notify such warehouseman, bailee or agent of the Security Interests and instruct it to hold all such Collateral for the Collateral Agent's account subject to the Collateral Agent's instructions. (f) It shall keep full and accurate books and records relating to its Collateral, and stamp or otherwise mark such books and records in such manner as the Collateral Agent may reasonably request in order to reflect the Security Interests. (g) It shall use its best efforts, consistent with past practices, to cause to be collected from its account debtors, as and when due, any and all amounts owing under or on account of each of its Accounts (including, without limitation, Accounts which are delinquent, such Accounts to be collected in accordance with lawful collection procedures) and shall apply forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Accounts. Subject to the rights of the Collateral Agent and the other Secured Parties hereunder if an Event of Default shall have occurred and be continuing, such Grantor may allow in the ordinary course of business as adjustments to amounts owing under its Accounts (i) an extension or renewal of the time or times of payment, or settlement for less than the total unpaid 10 balance, which such Grantor finds appropriate in accordance with sound business judgment and (ii) refunds or credits, all in accordance with such Grantor's ordinary course of business consistent with its historical collection practices. The reasonable costs and expenses (including, without limitation, attorney's fees) of collection, whether incurred by such Grantor or the Collateral Agent, shall be borne by such Grantor. (h) If an Enforcement Notice is in effect, such Grantor will, consistent with the terms of the Credit Agreement, the Interim Borrowing Order and the Borrowing Order, if requested to do so by the Collateral Agent, promptly notify (and such Grantor hereby authorizes the Collateral Agent so to notify) each account debtor in respect of any of its Accounts or Instruments that such Collateral has been assigned to the Collateral Agent hereunder, and that any payments due or to become due in respect of such Collateral are to be made directly to the Collateral Agent or its designee. (i) Such Grantor will not sell, lease, exchange, assign or otherwise dispose of, or grant any option with respect to, any of its Collateral; provided that, unless an Enforcement Notice is in effect, such Grantor may sell, lease or exchange its Inventory and surplus or worn-out Equipment in the ordinary course of business and such Grantor may sell any of its Collateral if (x) the sale thereof does not violate any covenant in the Credit Agreement and (y) in the case of an Asset Sale, the Net Cash Proceeds thereof are applied to prepay Loans if required by and as provided in Section 2.08 of the Credit Agreement. Concurrently with any sale or exchange permitted by the foregoing proviso, the Security Interests in the assets sold or exchanged (but not in any Proceeds arising from such sale or exchange) shall cease immediately without any further action on the part of the Collateral Agent or any other Secured Party. Upon any such release of the Security Interests with respect to particular Collateral, the Collateral Agent will, at the expense of the relevant Grantor, execute and deliver to such Grantor such documents as such Grantor shall reasonably request to evidence the release of such Security Interests. (j) Such Grantor will, promptly upon request, provide to the Collateral Agent all information and evidence it may reasonably request concerning its Collateral to enable the Collateral Agent to enforce the provisions of the Collateral Documents. (k) Such Grantor shall notify the Collateral Agent promptly if it knows that any application or registration relating to any material Intellectual Property owned or licensed by it may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Copyright Office, the United States Patent and Trademark Office or any court) regarding such Grantor's ownership of such material Intellectual Property, its right to register or patent the same, or its right to keep and maintain the same. If any of such Grantor's rights to any material Intellectual Property are infringed, misappropriated or diluted by a third party, such Grantor shall notify the Collateral Agent within 30 days after it learns thereof and shall, unless such Grantor shall reasonably determine that any such action would be of negligible value, economic or otherwise, promptly sue for infringement, misappropriation or dilution and to recover any and all damages for such infringement, misappropriation or dilution, and take such other actions as such Grantor shall reasonably deem appropriate under the circumstances to protect such Intellectual Property. 11 SECTION 6. Concentration Accounts. (a) MHG shall establish one or more accounts (collectively, the "Concentration Accounts") which shall be maintained under the sole dominion and control of the Collateral Agent with First Union National Bank (in such capacity, the "Concentration Account Bank") and into which all deposits and collected cash owned by the Borrowers shall be deposited from time to time. (b) In relationship to the Concentration Bank and all persons and entities other than the Borrowers, and notwithstanding designation of any of the Concentration Accounts as in the name of MHG, the Collateral Agent, for the benefit of itself and the Lenders, shall possess sole dominion and control over all of the items from time to time on deposit in the Concentration Accounts and their proceeds, and the Concentration Bank shall be the Collateral Agent's agent for the purpose of holding and collecting such items and their proceeds. The Borrowers hereby expressly acknowledge and agree that, except as expressly provided in clause (c) of this Section 6, the Borrowers do not have any dominion or control over the use of, or any right or power to withdraw any funds contained in, to direct any payment from, or to debit, the Concentration Accounts. The Collateral Agent hereby acknowledges for the benefit of the Borrowers that the Collateral Agent holds all amounts on deposit from time to time in the Concentration Accounts, and all proceeds thereof, as collateral security for the obligations of the Borrowers under the Financing Documents. (c) Subject to clause (d) of this Section 6, the Collateral Agent hereby delegates to MHG, prior to delivery by the Collateral Agent to the Concentration Bank and MHG of written notice substantially in the form of Exhibit B annexed --------- hereto (any such notice a "Notice of Redirection"), the exclusive right to instruct the Concentration Bank with respect to matters relating to the operation and administration of the Concentration Accounts and to withdraw funds contained in, to direct payments from, and to debit the Accounts; provided that, -------- upon the delivery by the Collateral Agent to the Concentration Bank and the Company of a Notice of Redirection, such delegation shall terminate, in which case the Collateral Agent shall thereafter have the exclusive right with respect to all such matters relating to the Concentration Accounts and to take all such actions with respect thereto, unless and until the Collateral Agent notifies the Concentration Bank to the contrary; and provided further, that nothing in this -------- ------- Agreement shall affect the obligation of the Borrowers to maintain the Cash Management System as required under the Credit Agreement. The Concentration Bank may rely on all instructions given to it by MHG in accordance with this clause (c) as fully as if such instructions were given by the Collateral Agent. The Concentration Bank may rely upon any Notice of Redirection and any other instructions received from the Collateral Agent without independent determination of whether the Lenders have authorized issuance of such notice or other instructions or whether such notice or other instructions are otherwise validly given, and shall have no liability or responsibility to the Borrowers, the Collateral Agent, any Lender or any other party by reason of any action taken in conformity with any such Notice of Redirection or other instruction received from the Collateral Agent. (d) The Borrowers hereby agree that except as the Collateral Agent and the Concentration Bank may otherwise agree in advance, no funds and deposits in the Concentration Accounts shall be invested except pursuant to (i) the "Amended and Restated CashPivot Agreement" (the "CashPivot Agreement"), a copy of which is attached as Exhibit C or (ii) the "Repurchase Master Agreement" (the "Repurchase --------- Agreement"), a copy of which is attached 12 as Exhibit D, in either case, only upon the approval of the Court. The Borrowers --------- hereby assign to the Collateral Agent, as additional collateral for the Obligations, a security interest in the Borrowers' interest in (i) the CashPivot Trust Account and the MMA Account, as each is defined in the CashPivot Agreement, as well as in any other funds that may from time to time be the subject of investments pursuant to the CashPivot Agreement and (ii) the Securities, as defined in the Repurchase Agreement. (e) The Concentration Bank shall deliver its regular bank statements with respect to the Accounts to the Borrowers and the Collateral Agent at their notice addresses specified in Section 9. (f) If an Enforcement Notice is in effect, the Collateral Agent may, consistent with the terms of the Interim Borrowing Order and the Borrowing Order, (i) instruct the Concentration Account Bank to retain, in any Concentration Account, the CashPivot Trust Account or the MMA Account maintained by it, all cash or other funds and deposits then held by it in the Concentration Account, the CashPivot Trust Account or the MMA Account, (ii) instruct the Concentration Account Bank to cease investing any funds and deposits in the Concentration Account pursuant to the Cash Payout Agreement and/or (iii) withdraw any amounts held in any Concentration Account, the CashPivot Trust Account or the MMA Account and apply such amounts in the manner specified in Section 15. (g) The Concentration Bank shall in no event be liable or otherwise responsible to the Borrowers, the Collateral Agent, any Lender or any other person, firm or corporation for any action taken or any omission under or with respect to this Agreement in the absence of the Concentration Bank's own gross negligence or willful misconduct. The Borrowers agree to indemnify, pay and hold the Concentration Bank and its officers, directors, employees and agents (collectively the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto) which may be imposed on, incurred by, or asserted against such Indemnitees, in any manner relating to or arising out of this Agreement or the Concentration Accounts (the "Indemnified Liabilities"); provided that the Borrowers shall not -------- have any obligations to an Indemnitee hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of such Indemnitee. Nothing in this Agreement shall be construed to limit any right of the Concentration Bank to close or terminate the Concentration Account or any other account in the Cash Management System or otherwise to terminate its relationship with any Borrower. SECTION 7. Collateral Accounts. (a) Promptly after the Collateral Agent determines that any Casualty Proceeds are to be deposited pursuant to Section 5.08 of the Credit Agreement with respect to property of any Grantor, the Collateral Agent shall establish an account (such Grantor's "Casualty Proceeds Account") with the Collateral Agent, in the name and under the exclusive control of the 13 Collateral Agent, into which all Casualty Proceeds to be deposited with respect to property of such Grantor shall be deposited from time to time. (b) So long as no Enforcement Notice is in effect, Casualty Proceeds to be released from a Casualty Proceeds Account pursuant to Section 5.08(a)(i) of the Credit Agreement shall be distributed by the Collateral Agent to the relevant Grantor at such times and in such amounts as such Grantor shall request for the purpose of restoring, repairing, replacing or rebuilding the asset in respect of which such Casualty Proceeds were received. Any such request shall be accompanied by a certificate of a Financial Officer describing in reasonable detail the restoration, repair, replacement or rebuilding for which such funds have been or will be expended and the date (which shall not be later than 30 days after the date of such certificate) by which such Grantor is obligated to make such payment, provided that no such certificate shall be required if the aggregate Casualty Proceeds requested for the restoration, repair, replacement or rebuilding of the relevant asset is less than $100,000 with respect to any Casualty Event. If immediately available cash on deposit in any Grantor's Casualty Proceeds Account is not sufficient to make any such distribution to it, the Collateral Agent shall cause to be liquidated, as promptly as practicable, such Liquid Investments in such Casualty Proceeds Account as shall be required to obtain sufficient cash to make such distribution and, notwithstanding any other provision of this Section 7, such distribution shall not be made until such liquidation has taken place. (c) So long as no Enforcement Notice is in effect, the Collateral Agent shall distribute to the Administrative Agent, at its request from time to time, the amounts on deposit in the Casualty Proceeds Account which are required to be applied to prepay Loans in accordance with Section 2.08(e) of the Credit Agreement. (d) Promptly after the Collateral Agent determines that any cash proceeds of any Grantor's Collateral are to be realized upon any exercise of remedies pursuant to the Collateral Documents, the Collateral Agent shall establish an account with respect to such Grantor (such Grantor's "Cash Proceeds Account") with the Collateral Agent, in the name and under the exclusive control of the Collateral Agent, into which all such cash proceeds of such Grantor's Collateral shall be deposited from time to time (unless required to be deposited in another Collateral Account). This subsection (e) shall not apply to any cash proceeds that are deposited in a Concentration Account and are not required to be deposited in any Collateral Account. (e) Promptly after the Collateral Agent determines that any cash collateral is to be deposited to secure LC Reimbursement Obligations pursuant to Section 8.04 of the Credit Agreement or in the event any prepayment amounts are applied pursuant to Section 2.08 of the Credit Agreement to reduce the Tranche A Commitments below the aggregate amount of the LC Exposure, the Collateral Agent shall establish a cash collateral account (the "LC Collateral Account") with the Collateral Agent, in the name and under the exclusive control of the Collateral Agent, into which all cash collateral deposited pursuant to said Section 2.08(h) or 8.04 shall be deposited. If and when any LC Issuing Bank pays a draft drawn under any outstanding Letter of Credit on which any deposit in the LC Collateral Account was based, the amount so paid by it (but not more than the amount in the LC Collateral Account at the time) shall, promptly after such LC Issuing Bank notifies the Collateral Agent of such payment, be withdrawn by the Collateral Agent from the LC Collateral Account and paid to the relevant LC 14 Issuing Bank or the Lenders, as appropriate. If at any time the amount in the LC Collateral Account exceeds the aggregate amount then required to pay all unreimbursed drawings under, and to cover all possible subsequent drawings under, all outstanding Letters of Credit on which any deposits in the LC Collateral Account were based, the excess amount shall, so long as no Enforcement Notice is in effect, be withdrawn by the Collateral Agent and paid to the Borrowers. If immediately available cash on deposit in the LC Collateral Account is not sufficient to make any distribution referred to in this subsection (e), the Collateral Agent shall cause to be liquidated, as promptly as practicable, such Liquid Investments in the LC Collateral Account as shall be required to obtain sufficient cash to make such distribution and, notwithstanding any other provision of this Section 7, such distribution shall not be made until such liquidation has taken place. (f) Amounts on deposit in any Collateral Account shall be invested and re- invested from time to time in such Liquid Investments as MHG, as agent or attorney-in-fact for the relevant Grantor shall direct. Any income received with respect to the balance from time to time standing to the credit of any Collateral Account, including any interest or capital gains on Liquid Investments, shall remain, or be deposited, in such Collateral Account. All right, title and interest in and to the cash amounts on deposit from time to time in any Collateral Account together with any Liquid Investments from time to time made pursuant to this subsection (f) shall vest in the Collateral Agent, shall constitute part of the relevant Grantor's Collateral hereunder and shall not constitute payment of its Secured Obligations until applied thereto as provided in Section 15. If an Enforcement Notice is in effect, any amounts held in any Collateral Account shall be retained in such Collateral Account and, if and when requested by the Administrative Agent, shall be withdrawn by the Collateral Agent and applied in the manner specified in Section 15. (g) For purposes hereof, "Liquid Investments" means any Temporary Cash Investment that (i) matures within 30 days after it is acquired by or for the account of the Collateral Agent and (ii) in order to provide the Collateral Agent, for the benefit of the Secured Parties, with a perfected security interest therein, either: (i) is issued in the name of the Collateral Agent or a financial intermediary acting for its account or is evidenced by a negotiable certificate or instrument which (together with any appropriate instrument of transfer) is delivered to, and held by, the Collateral Agent or an agent thereof (which shall not be any Grantor or any of its Affiliates) in a State where possession thereof perfects the Security Interest therein; or (ii) if not so issued or evidenced, is a Temporary Cash Investment which is subject to pledge under applicable law and regulations and as to which (in the opinion of counsel to the Collateral Agent) appropriate measures shall have been taken to perfect the relevant Security Interest. (h) For the purposes hereof, any accounts presently existing pursuant to the Existing Credit Facilities that correspond to accounts which are required to be created pursuant to the provisions of this Section 7 shall be deemed to be the same accounts as are required to be created for the purposes of this Section 7; provided, that the terms of such accounts shall be deemed to be governed exclusively by the provisions of the Financing Documents and all amounts therein 15 shall be applied as set forth herein until all the Commitments shall have expired or been terminated, all Letters of Credit shall have expired or been canceled or been secured with cash collateral in an amount and on terms satisfactory to the relevant LC Issuing Bank, and all outstanding Secured Obligations shall have been paid in full, whereupon any amounts remaining in such accounts shall be governed by and distributed in accordance with the provisions of the Existing Credit Facilities. SECTION 8. Record Ownership of Pledged Equity Securities. If directed to do so by the Required Lenders at any time when an Event of Default has occurred and is continuing, the Collateral Agent shall cause the Pledged Equity Securities (or any portion thereof specified in such directions) to be transferred of record into the name of the Collateral Agent or its nominee. Promptly upon receiving any such directions, the Collateral Agent will notify each relevant Grantor thereof. Each Grantor will promptly give to the Collateral Agent copies of any notices and other communications received by it with respect to Pledged Equity Securities registered in its name, and the Collateral Agent will promptly give to such Grantor copies of any notices and other communications received by the Collateral Agent with respect to such Grantor's Pledged Equity Securities registered in the name of the Collateral Agent or its nominee. So long as no Enforcement Notice is in effect, the Collateral Agent shall pay over to each relevant Grantor all Cash Distributions received by the Collateral Agent upon or with respect to any Pledged Equity Securities held of record in the name of the Collateral Agent or its nominee. SECTION 9. Right to Vote Pledged Equity Securities. (a) Unless an Enforcement Notice directing the Collateral Agent to vote the Pledged Equity Securities is in effect, each Grantor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the Pledged Equity Securities owned by it, and the Collateral Agent shall, upon receiving a written request from such Grantor, deliver to such Grantor or as specified in such request such proxies, powers of attorney, consents, ratifications and waivers in respect of any of such Pledged Equity Securities which are registered in the name of the Collateral Agent or its nominee as shall be specified in such request and be in form and substance satisfactory to the Collateral Agent. Unless an Enforcement Notice directing the Collateral Agent to do so is in effect, the Collateral Agent shall have no right to take any action which the owner of a Pledged Partnership Interest or Pledged LLC Interest is entitled to take with respect thereto, except the right to receive and retain payments and other distributions to the extent provided in Section 10. (b) If an Enforcement Notice directing the Collateral Agent to do so is in effect, the Collateral Agent shall have the right to the extent permitted by law (and, in the case of a Pledged Partnership Interest or Pledged LLC Interest, by the relevant partnership agreement, operating agreement or other governing document) and each Grantor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consents, ratifications and waivers, and take any other action with respect to any or all of the Pledged Equity Interests with the same force and effect as if the Collateral Agent were the absolute and sole owner thereof. SECTION 10. Right to Receive Distributions on Collateral. Subject to Section 18, the Collateral Agent shall have the right to receive and to retain as Collateral hereunder all dividends, interest and other payments and distributions made upon or with respect to the Pledged Equity Interests and each Grantor shall take all such action as the Collateral Agent may 16 reasonably deem necessary or appropriate to give effect to such right; provided that, unless an Enforcement Notice is in effect, this sentence shall not apply to Cash Distributions. All such dividends, interest and other payments and distributions which are received by any Grantor (except Cash Distributions received when no Enforcement Notice is in effect) shall be received in trust for the benefit of the Secured Parties and shall be segregated from other assets of such Grantor and shall, promptly upon such Grantor's receipt thereof, be delivered or paid over to the Collateral Agent in the same form as received (with any necessary endorsements or executed assignments in blank), together with a statement identifying the source of such Collateral and stating that it is being delivered to the Collateral Agent to be held as Collateral under this Agreement. If an Enforcement Notice is withdrawn pursuant to Section 21 (and no other Enforcement Notice is then in effect), the Collateral Agent's right to retain Cash Distributions under this Section 10 shall cease and the Collateral Agent shall pay over to the relevant Grantor(s) any Cash Distributions retained by it during the continuance of such Enforcement Notice. SECTION 11. General Authority. Each Grantor hereby irrevocably appoints the Collateral Agent its true and lawful attorney, with full power of substitution, in the name of such Grantor, any Secured Party or otherwise, for the sole use and benefit of the Secured Parties, but at the expense of such Grantor, to the extent permitted by law to exercise, at any time and from time to time while an Enforcement Notice directing it to do so is in effect, all or any of the following powers with respect to all or any of such Grantor's Collateral: (i) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due upon or by virtue thereof, (ii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (iii) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectually as if the Collateral Agent were the absolute owner thereof, and (iv) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto; provided that the Collateral Agent shall give such Grantor not less than ten days' prior written notice of the time and place of any sale or other intended disposition of any Personal Property Collateral owned by such Grantor and such other notices as may be required by the Credit Agreement, the Interim Borrowing Order and the Borrowing Order, except any such Personal Property Collateral which threatens to decline speedily in value or is of a type customarily sold on a recognized market. The Collateral Agent and each Grantor agree that such notice constitutes "reasonable notification" within the meaning of Section 9- 504(3) of the UCC. SECTION 12. Remedies Upon Enforcement Notice. (a) Upon being instructed to do so in an Enforcement Notice or in written instructions given by the Required Lenders at any time while an Enforcement Notice is in effect, the Collateral Agent may exercise (or cause its co- 17 agents and co-trustees, if any, to exercise) any or all of the remedies available to it (or to such co-agents or co-trustees) under the Collateral Documents. (b) Upon being instructed to do so in an Enforcement Notice or in written instructions given by the Required Lenders at any time while an Enforcement Notice is in effect, the Collateral Agent may exercise on behalf of the Secured Parties all the rights of a secured party under the UCC (whether or not in effect in the jurisdiction where such rights are exercised) with respect to any Collateral and, in addition, the Collateral Agent may, without being required to give any notice, except as provided in the Credit Agreement, the Interim Borrowing Order and the Borrowing Order or herein or as may be required by mandatory provisions of law, withdraw all cash and Temporary Cash Investments held in any of the Collateral Accounts or Concentration Accounts and apply such cash and Temporary Cash Investments and other cash, if any, then held by it as Collateral as specified in Section 15 and, if there shall be no such cash or if such cash shall be insufficient to pay all the Secured Obligations in full, sell the Collateral or any part thereof at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery, and at such price or prices as the Required Lenders shall have advised the Collateral Agent are satisfactory. Any Secured Party may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale). The Collateral Agent is authorized, in connection with any such sale, if it deems it advisable so to do, to restrict the prospective bidders on or purchasers of any of the securities included in the Collateral to a limited number of sophisticated investors who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such securities, to cause to be placed on any security included in the Collateral a legend to the effect that such security has not been registered under the Securities Act of 1933 and may not be disposed of in violation of the provisions of said Act, and to impose such other limitations or conditions in connection with any such sale as the Collateral Agent deems necessary or advisable in order to comply with said Act or any other law. Each Grantor agrees that it will execute and deliver such documents and take such other action as the Collateral Agent deems necessary or advisable in order that any such sale may be made in compliance with law. Upon any such sale the Collateral Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of any Grantor which may be waived, and each Grantor, to the extent permitted by law, hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted. Notice of any such sale shall be given to the relevant Grantor(s) as required by Section 11 (including, as required by the Credit Agreement, the Interim Borrowing Order and the Borrowing Order) and shall in case of a public sale, state the time and place fixed for such sale, in case of sale at a broker's board or on a securities exchange, state the board or exchange at which such sale is to be made and the day on which the Collateral, or the portion thereof so being sold, will first be offered for sale at such board or exchange, and in case of a private sale, state the day after which such sale may be consummated. Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Collateral Agent may fix in the notice of such sale. At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Collateral Agent may determine. The Collateral Agent shall not be obligated to make any such sale pursuant to any such notice. The Collateral Agent may, without notice or 18 publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Collateral Agent until the selling price is paid by the purchaser thereof, but the Collateral Agent shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. Upon being instructed to do so by the Required Lenders in an Enforcement Notice or in written instructions given at any time while an Enforcement Notice is in effect, the Collateral Agent, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. The foregoing provisions of this subsection shall apply to Real Property Collateral only to the extent permitted by applicable law and the provisions of any applicable Mortgage or other document. (c) For the purpose of enforcing any and all rights and remedies under this Agreement, the Collateral Agent may (i) require each Grantor to, and each Grantor agrees that it will, at its expense and upon the request of the Collateral Agent, forthwith assemble all or any part of its Personal Property Collateral as directed by the Collateral Agent and make it available at a place designated by the Collateral Agent which is, in its opinion, reasonably convenient to the Collateral Agent and such Grantor, whether at the premises of such Grantor or otherwise, (ii) to the extent permitted by applicable law, enter, with or without process of law and without breach of the peace, any premises where any of the Personal Property Collateral is or may be located, and without charge or liability to it seize and remove such Personal Property Collateral from such premises, (iii) have access to and use such Grantor's books and records relating to its Collateral and (iv) prior to the disposition of its Personal Property Collateral, store or transfer it without charge in or by means of any storage or transportation facility owned or leased by such Grantor, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent the Collateral Agent deems appropriate and, in connection with such preparation and disposition, use without charge any trademark, trade name, copyright, patent or technical process used by such Grantor. The Collateral Agent may also render any or all of such Personal Property Collateral unusable at such Grantor's premises and may dispose of such Personal Property Collateral on such premises without liability for rent or costs. The foregoing provisions of this subsection shall apply to Real Property Collateral only to the extent permitted by applicable law and the provisions of any applicable Mortgage or other document. (d) Without limiting the generality of the foregoing, if an Enforcement Notice is in effect, (i) the Collateral Agent may, upon proper notice as provided in Section 11 hereof, license, or sublicense, whether general, special or otherwise, and whether on an exclusive or non-exclusive basis, any Intellectual Property included in the Collateral throughout the world for such term or terms, on such conditions and in such manner as the Collateral Agent shall in its sole discretion determine; provided that such licenses do not conflict with any existing licenses or sublicenses; 19 (ii) the Collateral Agent may, upon proper notice as provided in Section 11 hereof (without assuming any obligations or liability thereunder), at any time and from time to time, in its sole and reasonable discretion, enforce (and shall have the exclusive right to enforce) against any licensee or sublicensee all rights and remedies of any Grantor in, to and under any of its Intellectual Property and take or refrain from taking any action under any thereof, and each Grantor hereby releases the Collateral Agent and each of the other Secured Parties from, and agrees to hold the Collateral Agent and each of the other Secured Parties free and harmless from and against any claims and expenses arising out of, any lawful action so taken or omitted to be taken with respect thereto, except for claims and expenses arising from the Collateral Agent's or such Secured Party's gross negligence or willful misconduct; and (iii) upon request by the Collateral Agent (which shall not be construed as implying any limitation on the rights or powers of the Collateral Agent), each Grantor will execute and deliver to the Collateral Agent a power of attorney, in form and substance satisfactory to the Collateral Agent, for the implementation of any lease, assignment, license, sublicense, grant of option, sale or other disposition of an Intellectual Property owned by such Grantor or any action related thereto. In the event of any such disposition pursuant to this Section, subject to confidentiality restrictions imposed on such Grantor in any license or similar agreement, and upon request by the Collateral Agent, such Grantor shall supply its know-how and expertise relating to or the products or services made or rendered in connection with Patents, and its customer lists and other records relating to such Intellectual Property and to the distribution of said products or services, to the Collateral Agent. SECTION 13. Fees and Expenses; Indemnification. The Borrowers agree that they will forthwith upon demand pay to the Collateral Agent: (i) the amount of any taxes which the Collateral Agent may have been required to pay by reason of the Security Interests or to free any of the Collateral from any Lien thereon; (ii) the amount of any and all reasonable out-of-pocket expenses, including transfer taxes and reasonable fees and disbursements of counsel and of any other experts, which the Collateral Agent may incur in connection with (w) the administration or enforcement of this Agreement, including such expenses as are incurred to preserve the value of the Collateral and the validity, perfection, rank and value of any Security Interest, and all insurance expenses and all expenses of protecting, storing, warehousing, appraising, insuring, handling, maintaining and shipping any Collateral, (x) the collection, sale or other disposition of any Collateral, (y) the exercise by the Collateral Agent of any of the rights or powers conferred upon it hereunder or (z) any Enforcement Notice; (iii) the amount of any fees that the Borrowers shall have agreed in writing to pay to the Collateral Agent and that shall have become due and payable in accordance with such written agreement; and 20 (iv) the amount required to indemnify the Collateral Agent for, or hold it harmless and defend it against, any loss, liability or expense (including the reasonable fees and expenses of its counsel and any experts or co-agents appointed hereunder) incurred or suffered by the Collateral Agent in connection with this Agreement, except to the extent that such loss, liability or expense arises from the Collateral Agent's gross negligence or willful misconduct or a breach of any duty that the Collateral Agent has under this Agreement (after giving effect to Sections 14 and 16). Any such amount not paid to the Collateral Agent on demand shall bear interest for each day until paid at a rate per annum equal to the Tranche A Default Rate. SECTION 14. Limitation on Duty of Collateral Agent in Respect of Collateral. Beyond the exercise of reasonable care in the custody and preservation thereof, the Collateral Agent shall have no duty as to any Collateral in its possession or control or in the possession or control of any agent or bailee or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. The Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if such Collateral is accorded treatment substantially equal to that which it accords its own property, and shall not be liable or responsible for any loss or damage to any of the Collateral, or for any diminution in the value thereof, by reason of any act or omission of any agent or bailee selected by the Collateral Agent in good faith or by reason of any act or omission by the Collateral Agent pursuant to instructions from the Required Lenders (including, without limitation, any voting instruction pursuant to Section 9), except to the extent that such liability arises from the Collateral Agent's gross negligence or willful misconduct. SECTION 15. Application Of Proceeds. (a) Upon being instructed to do so in an Enforcement Notice or in written instructions given by the Required Lenders at any time while an Enforcement Notice is in effect, the Collateral Agent shall apply the proceeds of any sale of, or other realization upon, all or any part of the Collateral, any cash held in the Cash Proceeds Accounts and any cash withdrawn by it from the Concentration Accounts in the following order of priorities: first, to pay the expenses of such sale or other realization, including reasonable compensation to agents of and counsel for the Collateral Agent, and all expenses, liabilities and advances incurred or made by the Collateral Agent in connection with the Collateral Documents, and any other amounts then due and payable to the Collateral Agent pursuant to Section 13 hereof and to the other Agents pursuant to Section 11.03 of the Credit Agreement; second, to pay the unpaid principal of the Secured Obligations ratably (or provide for the payment thereof pursuant to subsection (b) of this Section), until payment in full of the principal of all Secured Obligations shall have been made (or so provided for); third, to pay all interest (including Post-Petition Interest) on the Secured Obligations and all letter of credit fees and commitment fees payable under the Credit Agreement ratably, until payment in full of all such interest and fees shall have been made; 21 fourth, to pay all other Secured Obligations ratably (or provide for the payment thereof pursuant to subsection (b) of this Section), until payment in full of all such other Secured Obligations shall have been made (or so provided for); and finally, to pay to the relevant Grantor or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from the proceeds of the Collateral owned by it. The Collateral Agent may make such distributions hereunder in cash or in kind or, on a ratable basis, in any combination thereof. (b) If at any time any portion of any monies collected or received by the Collateral Agent would, but for the provisions of this subsection (b), be payable pursuant to subsection (a) of this Section in respect of a Contingent Secured Obligation, the Collateral Agent shall not apply any monies to pay such Contingent Secured Obligation but instead shall request the holder thereof, at least 10 days before each proposed distribution hereunder, to notify the Collateral Agent as to the maximum amount of such Contingent Secured Obligation if then ascertainable (e.g., in the case of a letter of credit, the maximum amount available for subsequent drawings thereunder). If the holder of such Contingent Secured Obligation does not notify the Collateral Agent of the maximum ascertainable amount thereof at least two Business Days before such distribution, such holder shall not be entitled to share in such distribution. If such holder does so notify the Collateral Agent as to the maximum ascertainable amount thereof, the Collateral Agent will allocate to such holder a portion of the monies to be distributed in such distribution, calculated as if such Contingent Secured Obligation were outstanding in such maximum ascertainable amount. However, the Collateral Agent shall not apply such portion of such monies to pay such Contingent Secured Obligation, but instead shall hold such monies or invest such monies in Liquid Investments at the direction of MHG as agent and attorney-in-fact for the relevant Grantor. The Collateral Agent shall hold all such monies and all such Liquid Investments and the net proceeds thereof in trust until such time as all or part of such Contingent Secured Obligation becomes a Non-Contingent Secured Obligation, whereupon the Collateral Agent at the request of the relevant Secured Party shall apply the amount so held in trust to pay such Non-Contingent Secured Obligation; provided that, if the other Secured Obligations theretofore paid pursuant to the same clause of subsection (a) (i.e., clause second or fourth) were not paid in full, the Collateral Agent shall apply the amount so held in trust to pay the same percentage of such Non-Contingent Secured Obligation as the percentage of such other Secured Obligations theretofore paid pursuant to the same clause of subsection (a). If (i) the holder of such Contingent Secured Obligation shall advise the Collateral Agent that no portion thereof remains in the category of a Contingent Secured Obligation and (ii) the Collateral Agent still holds any amount held in trust pursuant to this subsection (b) in respect of such Contingent Secured Obligation (after paying all amounts payable pursuant to the preceding sentence with respect to any portions thereof that became Non- Contingent Secured Obligations), such remaining amount shall be applied by the Collateral Agent in the order of priorities set forth in subsection (a) of this Section. (c) In making the payments and allocations required by this Section, the Collateral Agent may rely upon information supplied to it pursuant to Section 16(f). All distributions made by the Collateral Agent pursuant to this Section shall be final (except in the event of manifest 22 error) and the Collateral Agent shall have no duty to inquire as to the application by the Secured Parties of any amount distributed to them. SECTION 16. Concerning The Collateral Agent. (a) The Collateral Agent is authorized to take all such action as is provided or permitted to be taken by it as Collateral Agent under the Collateral Documents and all other action reasonably incidental thereto. As to any matters not expressly provided for herein or in an Enforcement Notice or in written requests, directions or instructions given as expressly provided in Section 6, 7, 9, 12 or 15 , including, without limitation, the timing and methods of realization upon the Collateral, the Collateral Agent shall act or refrain from acting in accordance with written instructions from the Required Lenders or, in the absence of such instructions, in accordance with its discretion (subject to Section 16(c)); provided that the Collateral Agent shall not be obligated to comply with any such instructions that are inconsistent with the provisions of the Collateral Documents. (b) The Collateral Agent shall not be responsible for the existence, genuineness or value of any Collateral or for the validity, perfection, priority or enforceability of the Security Interests in any Collateral, whether impaired by operation of law or by reason of any action or omission to act on its part under the Collateral Documents. The Collateral Agent shall have no duty to ascertain or inquire as to the performance or observance of any of the terms of this Agreement, the Credit Agreement or any other agreement relating to the Secured Obligations. (c) The obligations of the Collateral Agent under the Collateral Documents are only those expressly set forth therein. In any case in which the Collateral Agent is authorized to exercise any power or discretion, the Collateral Agent may refrain from such exercise unless directed in writing by the Required Lenders to act in the manner specified in such direction. Without limiting the generality of the foregoing, the Collateral Agent shall not be required to take any action with respect to any Enforcement Notice, except as expressly provided in Sections 12 and 15. (d) The Collateral Agent may: (i) consult with legal counsel (who may be counsel for any MHG Company) and (ii) to the extent that the Collateral Agent in good faith deems it appropriate in connection with its duties hereunder to do so, consult with independent public accountants and other experts selected by it in connection with any matter arising under the Collateral Documents and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. (e) Neither the Collateral Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection with any Collateral Document in accordance with directions set forth in an Enforcement Notice or with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. However, nothing in this subsection (e) shall affect any rights any Grantor may have (x) against the Required Lenders for requesting the Administrative Agent to give the 23 directions set forth in an Enforcement Notice or (y) against the Required Lenders for giving any other consent, request, notice or instruction. Neither the Collateral Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with any Collateral Document, (ii) the performance or observance of any of the covenants or agreements of any Grantor or (iii) the validity, effectiveness or genuineness of any Collateral Document or any other instrument or writing furnished in connection therewith. The Collateral Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile or similar writing) believed by it to be genuine or to be signed by the proper party or parties. (f) For all purposes of the Collateral Documents, including without limitation determining from time to time the amounts of the Secured Obligations, whether a Secured Obligation is a Contingent Secured Obligation or not, or whether any notice, direction or instruction has been given by the Required Lenders or any other Secured Party or Secured Parties entitled to give the same under any provision of the Collateral Documents, the Collateral Agent shall be entitled to rely upon information from the following sources (and may refrain from acting on the basis of such information until two Business Days after it receives all such information required to enable it to take such action): (i) the Administrative Agent for information as to the Lender Parties and their respective Secured Obligations outstanding under the Credit Agreement (including whether any action has been taken or instruction given by the Required Lenders); (ii) any Secured Party for information as to itself and its Secured Obligations, to the extent that the Collateral Agent has not received such information from the Administrative Agent; and (iii) any Grantor for information as to any Secured Party and its Secured Obligations, to the extent that the Collateral Agent has not received such information from the sources referred to in clauses (i) and (ii) above. (g) The Collateral Agent shall have no liability to any Grantor or any Secured Party for actions taken in reliance on such information, except to the extent that such liability arises from the Collateral Agent's gross negligence or willful misconduct. (h) The Collateral Agent may resign at any time (effective upon acceptance by a successor Collateral Agent of its appointment hereunder) by giving written notice thereof to the Administrative Agent, each of the Secured Parties Requesting Notice and the Borrowers. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Collateral Agent gives notice of resignation, the retiring Collateral Agent may, on behalf of the Secured Parties, appoint a successor Collateral Agent, which shall be a commercial bank organized or licensed under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Collateral Agent hereunder by a successor Collateral Agent, such successor Collateral Agent shall thereupon 24 succeed to and become vested with all the rights and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder. After any retiring Collateral Agent's resignation hereunder as Collateral Agent, the provisions of this Section and Sections 13 and 14 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Collateral Agent. (i) Within two Business Days after it receives or sends any notice referred to in this subsection (i), the Collateral Agent shall send to the Administrative Agent and each of the Secured Parties Requesting Notice, copies of any Enforcement Notice received by the Collateral Agent, any notice withdrawing an Enforcement Notice received by the Collateral Agent pursuant to Section 21 and any other notice given by the Collateral Agent to any Grantor, or received by it from any Grantor, pursuant to Section 11, 12, 15 or 18. The Collateral Agent shall also send to the Grantors copies of any Enforcement Notice or any notice withdrawing an Enforcement Notice received by the Collateral Agent. (j) The Collateral Agent may refuse to act on any notice, direction or instruction from the Administrative Agent, the Required Lenders or any Secured Party, or any agent, trustee or similar representative thereof which, in the Collateral Agent's opinion, is contrary to law or the provisions of any Collateral Document, is unduly prejudicial to Secured Parties not joining in such notice, direction or instruction or may expose the Collateral Agent to liability (unless the Collateral Agent shall have been adequately indemnified for such liability by the Secured Parties that gave, or instructed the Administrative Agent to give, such notice, direction or instruction). SECTION 17. Appointment of Co-Collateral Agents. At any time or times, in order to comply with any legal requirement in any jurisdiction, the Collateral Agent may appoint another bank or trust company or one or more other persons, either to act as co-agent or co-agents, jointly with the Collateral Agent, or to act as separate agent or agents on behalf of the Secured Parties with such power and authority as may be necessary for the effectual operation of the provisions of any Collateral Document and may be specified in the instrument of appointment (which may, in the discretion of the Collateral Agent, include provisions for the protection of such co-agent or separate agent similar to the provisions of Section 16). SECTION 18. Termination of Security Interests; Release of Collateral. (a) When (i) all the Commitments shall have expired or been terminated, (ii) all Letters of Credit shall have expired or been canceled or been secured with cash collateral in an amount and on terms satisfactory to the relevant LC Issuing Bank, and (iii) all outstanding Secured Obligations shall have been paid in full, the Security Interests shall terminate and all rights to each item of Collateral shall revert to the Grantor that owns such item of Collateral. (b) At any time before the Security Interests terminate pursuant to subsection (a) of this Section, so long as an Enforcement Notice is not in effect, the Collateral Agent shall, upon the written request of the Borrowers and the approval of the Court (to the extent that such Court approval is required pursuant to an order of the Court or the Bankruptcy Code), release any of the Collateral (but not all or substantially all of the Collateral) with the prior written consent of the Required Lenders. Upon any such termination of the Security Interests or release of Collateral, the Collateral Agent will, at the expense of the relevant Grantor, execute and deliver 25 to such Grantor such documents as such Grantor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. SECTION 19. [** Reserved **] SECTION 20. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party in the manner set forth in the Credit Agreement. SECTION 21. Withdrawal of Enforcement Notice. An Enforcement Notice, once given, shall remain in effect unless and until the Required Lenders notify the Collateral Agent that they wish to withdraw such Enforcement Notice, no monies have been applied to pay any Secured Obligations pursuant to Section 15 (except pursuant to clause first thereof) as a result of such Enforcement Notice and the Collateral Agent determines that the withdrawal of such Enforcement Notice will not result in any liability or unreimbursed loss to the Collateral Agent by reason of actions taken by it in reliance thereon. SECTION 22. Waivers, Remedies Not Exclusive. No failure on the part of the Collateral Agent to exercise, and no delay in exercising and no course of dealing with respect to, any right or remedy under any Collateral Document shall operate as a waiver thereof; nor shall any single or partial exercise by the Collateral Agent of any right or remedy under the Credit Agreement or any Collateral Agreement preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies specified in the Collateral Documents and the Credit Agreement are cumulative and are not exclusive of any other rights or remedies provided by law. SECTION 23. Successors And Assigns. This Agreement is for the benefit of the Collateral Agent and the Secured Parties and their respective successors and assigns, and in the event of an assignment of all or any of the Secured Obligations, the rights of the holder thereof hereunder, to the extent applicable to the indebtedness so assigned, shall be deemed transferred with such indebtedness. This Agreement shall be binding on the Grantors and their respective successors and assigns. SECTION 24. Changes In Writing. Neither this Agreement nor any provision hereof may be amended, waived, discharged or terminated except in accordance with Section 11.05 of the Credit Agreement. SECTION 25. NEW YORK LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE BANKRUPTCY CODE (WITH RESPECT ONLY TO THOSE PROVISIONS OF THE AGREEMENT WHICH, BY THEIR EXPRESS TERMS, ARE GOVERNED BY THE BAKRUPTCY CODE) AND, EXCEPT WITH RESPECT TO CONCENTRATION ACCOUNTS AND OTHER CASH MANAGEMENT SYSTEM ACCOUNTS (WHICH SHALL CONTINUE TO BE GOVERNED BY THE LAW OF JURISDICTION(S) SPECIFIED IN AGREEMENTS EXECUTED WITH RESPECT TO SUCH ACCOUNTS), THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO 26 CONFLICTS OF LAWS PRINCIPLES, EXCEPT AS OTHERWISE REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT REMEDIES PROVIDED BY THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK ARE GOVERNED BY THE LAWS OF SUCH JURISDICTION. SECTION 26. Severability. If any provision of any Collateral Document is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, the other provisions of the Collateral Documents shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Collateral Agent and the Secured Parties in order to carry out the intentions of the parties thereto as nearly as may be possible; and the invalidity or unenforceability of any provision thereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. [Remainder of page intentionally left blank] 27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. BORROWERS: - --------- Mariner Health Group, Inc. Aid & Assistance, Inc. Beechwood Heritage Retirement Community, Inc. Bride Brook Nursing & Rehabilitation Center, Inc. Compass Pharmacy Services, Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Cypress Nursing Facility, Inc. Long Ridge Nursing and Rehabilitation Center, Inc. Long Wood Rehabilitation Center, Inc. Mariner Health at Bonifay, Inc. Mariner Health Care, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Great Laurel, Inc. Mariner Health Care of Inverness, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health Care of Metrowest, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Central, Inc. Mariner Health Home Care, Inc. Mariner Health of Florida, Inc. Mariner Health of Jacksonville, Inc. Mariner Health of Maryland, Inc. Mariner Health of Orlando, Inc. Mariner Health of Palmetto, Inc. Mariner Health of Seminole County, Inc. Mariner Health of Tampa, Inc. Mariner Health Resources, Inc. Mariner Physician Services, Inc. Mariner Practice Corporation S-1 Mariner - Regency Health Partners, Inc. MarinerSelect Staffing Solutions, Inc. Mariner Supply Services, Inc. MedRehab, Inc. MedRehab of Indiana, Inc. MedRehab of Louisiana, Inc. MedRehab of Missouri, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab. Corp. MHC Transportation, Inc. Mystic Nursing & Rehabilitation Center, Inc. National Health Strategies, Inc. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceuticals, Inc. Pinnacle Pharmaceutical Services, Inc. Pinnacle Rehabilitation, Inc. Pinnacle Rehabilitation of Missouri, Inc. Prism Care Centers, Inc. Prism Health Group, Inc. Prism Home Care Company, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Prism Hospital Ventures, Inc. Prism Rehab Systems, Inc. Regency Health Care Center of Seminole County, Inc. Sassaquin Nursing & Rehabilitation Center, Inc. Tampa Medical Associates, Inc. The Ocean Pharmacy, Inc. Tri-State Health Care, Inc. Windward Health Care, Inc. By: ____________________________________ Boyd P. Gentry Vice President for each of the foregoing Borrowers S-2 IHS Rehab Partnership, Ltd. By: Mariner Health Care Of Nashville, Inc., its General Partner By:___________________________________ Name: Title: Mariner Health Properties IV, Ltd. By: Mariner Health Of Florida, Inc., its General Partner By:___________________________________ Name: Title: Mariner Health Properties VI, Ltd. By: Mariner Health Of Florida, Inc., its General Partner By:___________________________________ Name: Title: Seventeenth Street Associates Limited Partnership By: Tri-state Health Care, Inc., its General Partner By:___________________________________ Name: Title: S-3 Allegis Health and Living Center at Heritage Harbour, L.L.C. By: Mariner Health of Maryland, Inc., its Managing Member By:___________________________________ Name: Title: S-4 PNC Bank, National Association, as Collateral Agent By: _________________________________ Name: Title: S-5 LIMITED JOINDER. First Union National Bank ("First Union") joins in this - --------------- Security Agreement for the sole purpose of evidencing its agreement to serve as "Concentration Bank" subject to the terms, provisions and protections of Section 6; neither execution nor any term or provision of this Security Agreement shall be interpreted or construed as a representation, warranty or other affirmation by First Union as to the validity or priority of any security interest or agreement between and among the Borrowers, the Collateral Agent, and Lenders or any other party, or to impose upon First Union any obligation or responsibility except as expressly provided in Section 6 of the Security Agreement. First Union National Bank, as Concentration Bank By: _________________________________ Name: Title: S-6 EXHIBIT A to Security Agreement PERFECTION CERTIFICATE The undersigned, an authorized officer of [NAME OF GRANTOR], a [jurisdiction of incorporation] corporation/1/ (the "Company"), hereby certifies with reference to the Security Agreement dated as of January __,2000 among the Company, the other Grantors and PNC Bank, National Association, as Collateral Agent (terms defined therein being used herein as therein defined), to the Collateral Agent and each other Lender Party as follows: 1. Names/1/ (a) The exact corporate name of the Company as it appears in its certificate of incorporation is as follows: (b) Set forth below is each other corporate name the Company has had since its organization, together with the date of the relevant change. (c) Except as set forth in Schedule 1, the Company has not changed its identity or corporate structure in any way within the past five years. [Changes in identity or corporate structure would include mergers, consolidations and acquisitions, as well as any change in the form, nature or jurisdiction of corporate organization. If any such change has occurred, include in Schedule 1 the information required by paragraphs 1, 2 and 3 of this certificate as to each acquiree or constituent party to a merger or consolidation.] (d) The following is a list of all other names (including trade names or similar appellations) used by the Company or any of its divisions or other business units at any time during the past five years: 2. Current Locations. (a) The chief executive office of the Company is located at the following address: (b) The following are all the locations where the Company maintains any books or records relating to any Accounts: (c) The following are all the places of business of the Company not identified above: _______________ /1/ Modify as needed for any Grantor that is not a corporation. A-1 (d) The following are all the locations where the Company maintains any Inventory not identified above: (e) The following are the names and addresses of all Persons other than the Company which have possession of any of the Company's Inventory: 3. Prior Locations. (a) Set forth below is the information required by subparagraphs 2(a), 2(b) and 2(c) above with respect to each location or place of business maintained by the Company at any time during the past five years: (b) Set forth below is the information required by subparagraphs 2(d) and 2(e) above with respect to each location or bailee where or with whom Inventory has been lodged at any time during the past four months: 4. Unusual Transactions. Except as set forth in Schedule 4, all Accounts have been originated by the Company and all Inventory and Equipment has been acquired by the Company in the ordinary course of its business. 5. File Search Reports. Attached hereto as Schedule 5(A) is a true copy of a file search report from the Uniform Commercial Code filing officer in each jurisdiction identified in paragraph 2 or 3 above with respect to each name set forth in paragraph 1 above. Attached hereto as Schedule 5(B) is a true copy of each financing statement or other filing identified in such file search reports. 6. UCC Filings. A duly signed financing statement on Form UCC-1 in the form required by Collateral Agent pursuant to the Security Agreement has been provided to the Collateral Agent for due filing in the Uniform Commercial Code filing office in each jurisdiction identified in paragraph 2 hereof. A-2 IN WITNESS WHEREOF, the undersigned has executed this Perfection Certificate this __ day of __________, 2000. By: ____________________________ Name: Title: A-3 EXHIBIT B to Security Agreement [Letterhead of Collateral Agent] Notice of Redirection _______________, 2000 First Union National Bank NC0737 301 South College Street, TW5 Charlotte, NC 28288-0737 Attn: __________ Re: ________________, Account Nos. _____________ (the "Accounts") Ladies and Gentlemen: Reference is made to that certain Security Agreement dated as of January ___, 2000 (the "Security Agreement") among you, us, as Collateral Agent, and Mariner Health Group, Inc. and the other borrowers party thereto pursuant to which we, for our benefit and for the benefit of Lenders (as defined in the Security Agreement), were given exclusive dominion and control over the Accounts. This notice is given in accordance with the terms of the Security Agreement. Effective immediately and continuing until we shall authorize you in writing to do otherwise, we hereby (i) give you notice of our sole control over the Accounts and all financial assets credited thereto and instruct you not to accept any direction, instructions or entitlement order with respect to the Accounts or the financial assets credited thereto from any person other than the undersigned, and (ii) direct you to transfer, by wire transfer of immediately available funds not later than 3:00 p.m. E.S.T. on each banking day, all collected funds contained in the Accounts in accordance with the following transfer instructions: [insert appropriate transfer instructions] Very truly yours, PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By:________________________________ Title:_____________________________ B-1 Exhibit C [See Attached] C-1 Exhibit D [See Attached] D-1 EX-21 15 SUBSIDIARIES OF MARINER POST-ACUTE NETWORK, INC. EXHIBIT 21 Mariner Post-Acute Network Subsidiaries December 6, 1999 Aid & Assistance, Inc. Allegis Health and Living Center at Heritage Harbour, L.L.C. American Geriatric Management Services, Inc. American Pharmaceutical Services, Inc. American Rehability Services, Inc. American-Cal Medical Services, Inc. Amerra Properties, Inc. AMS Green Tree, Inc. AMS Properties, Inc. APS - Summit Care Pharmacy, L.L.C. APS Holding Company, Inc. APS Pharmacy Management, Inc. Beechwood Heritage Retirement Community, Inc. Brian Center Health & Rehabilitation/Tampa, Inc. Brian Center Health & Retirement/Alleghany, Inc. Brian Center Health & Retirement/Bastian, Inc. Brian Center Health & Retirement/Wallace, Inc. Brian Center Management Corporation Brian Center Nursing Care/Austell, Inc. Brian Center Nursing Care/Fincastle, Inc. Brian Center Nursing Care/Hickory, Inc. Brian Center Nursing Care/Powder Springs, Inc. Brian Center of Asheboro, Inc. Brian Center of Central Columbia, Inc. Bride Brook Nursing & Rehabilitation Center, Inc. Brightview of Bel Air, LLC Cambridge Bedford, Inc. Cambridge East, Inc. Cambridge North, Inc. Cambridge South, Inc. Clintonaire Nursing Home, Inc. Compass Pharmacy Services of Maryland, Inc. Compass Pharmacy Services of Texas, Inc. Compass Pharmacy Services, Inc. Connerwood Healthcare, Inc. Coordinated Home Health Services, Inc. Cornerstone Health Management Company Crestmont Health Center, Inc. Cypress Nursing Facility, Inc. Devcon Holding Company EH Acquisition Corp. EH Acquisition Corp. II EH Acquisition Corp. III Evergreen HealthCare Ltd., L.P. Evergreen Healthcare, Inc. Frenchtown Nursing Home, Inc. GC Services, Inc. GCI Bella Vita, Inc. Subsidiaries December 6, 1999 - -------------------------------------------------------------------------------- GCI Camellia Care Center, Inc. GCI Colter Village, Inc. GCI East Valley Medical & Rehabilitation Center, Inc. GCI Faith Nursing Home, Inc. GCI Health Care Centers, Inc. GCI Indemnity, Inc. GCI Jolley Acres, Inc. GCI Palm Court, Inc. GCI Prince George, Inc. GCI Rehab, Inc. GCI Springdale Village, Inc. GCI Therapies, Inc. GCI Village Green, Inc. GCI-Cal Health Care Centers, Inc. GCI-Cal Therapies Company GCI-Wisconsin Properties, Inc. Global Healthcare Center - Bethesda, L.L.C. GranCare Home Health Services, Inc. GranCare Nursing Services And Hospice, Inc. GranCare of Michigan, Inc. GranCare of North Carolina, Inc. GranCare of Northern California, Inc. GranCare South Carolina, Inc. GranCare, Inc. Heritage Nursing Home, Inc. Heritage of Louisiana, Inc. HMI Convalescent Care, Inc. Hospice Associates of America, Inc. HostMasters, Inc. IHS Rehab Partnership, Ltd. International Health Care Management, Inc. International X-Ray, Inc. LC Management Company LCA Insurance Co. Ltd. LCA Operational Holding Company LCR, Inc. Living Centers - East, Inc. Living Centers - PHCM, Inc. Living Centers - Rocky Mountain, Inc. Living Centers - Southeast Development Corporation Living Centers - Southeast, Inc. Living Centers Development Company Living Centers Holding Company Living Centers LTCP Development Company Living Centers of Texas, Inc. Long Ridge Nursing and Rehabilitation Center, Inc. Longwood Rehabilitation Center, Inc. Madonna Nursing Center, Inc. Mariner - Regency Health Partners, Inc. Page 2 Subsidiaries December 6, 1999 - -------------------------------------------------------------------------------- Mariner Health at Bonifay, Inc. Mariner Health Care of Atlantic Shores, Inc. Mariner Health Care of Deland, Inc. Mariner Health Care of Fort Wayne, Inc. Mariner Health Care of Greater Laurel, Inc. Mariner Health Care of Inverness, Inc. Mariner Health Care of Lake Worth, Inc. Mariner Health Care of MacClenny, Inc. Mariner Health Care of Metrowest, Inc. Mariner Health Care of Nashville, Inc. Mariner Health Care of North Hills, Inc. Mariner Health Care of Orange City, Inc. Mariner Health Care of Palm City, Inc. Mariner Health Care of Pinellas Point, Inc. Mariner Health Care of Port Orange, Inc. Mariner Health Care of Southern Connecticut, Inc. Mariner Health Care of Toledo, Inc. Mariner Health Care of Tuskawilla, Inc. Mariner Health Care of West Hills, Inc. Mariner Health Care, Inc. Mariner Health Central, Inc. Mariner Health Group, Inc. Mariner Health Home Care, Inc. Mariner Health of Bel Air, LLC Mariner Health of Florida, Inc. Mariner Health of Forest Hill, LLC Mariner Health of Jacksonville, Inc. Mariner Health of Maryland, Inc. Mariner Health of Orlando, Inc. Mariner Health of Palmetto, Inc. Mariner Health of Seminole County, Inc. Mariner Health of Tampa, Inc. Mariner Health Properties IV, LTD. Mariner Health Properties VI, LTD. Mariner Health Resources, Inc. Mariner Healthcare Management Company Mariner Physician Services, Inc. Mariner Post-Acute Network, Inc. Mariner Practice Corporation Mariner Supply Services, Inc. MarinerSelect Staffing Solutions, Inc. Med-Therapy Rehabilitation Services, Inc. MedRehab of Indiana, Inc. Medrehab of Louisiana, Inc. MedRehab of Missouri, Inc. MedRehab, Inc. Merrimack Valley Nursing & Rehabilitation Center, Inc. Methuen Nursing & Rehabilitation Center, Inc. MHC Rehab Corp. Page 3 Subsidiaries December 6, 1999 - -------------------------------------------------------------------------------- MHC Transportation, Inc. Middlebelt Nursing Home, Inc. Middlebelt-Hope Nursing Home, Inc. Mystic Nursing & Rehabilitation Center, Inc. Nan-Dan Corp. National Health Strategies, Inc. National Heritage Realty, Inc. New Hanover/Mariner Health, LLC Nightingale East Nursing Center, Inc. Ocean Pharmacy, Inc. Omega/Indiana Care Corp. Park Terrace Nursing & Rehabilitation Center, Inc. Pendleton Nursing & Rehabilitation Center, Inc. Pinnacle Care Corporation Pinnacle Care Corporation of Huntington Pinnacle Care Corporation of Nashville Pinnacle Care Corporation of Seneca Pinnacle Care Corporation of Sumter Pinnacle Care Corporation of Williams Bay Pinnacle Care Corporation of Wilmington Pinnacle Care Management Corporation Pinnacle Pharmaceutical Services, Inc. Pinnacle Pharmaceuticals, Inc. Pinnacle Rehabilitation of Missouri, Inc. Pinnacle Rehabilitation, Inc. Prism Care Centers, Inc. Prism Health Group, Inc. Prism Home Care Company, Inc. Prism Home Care, Inc. Prism Home Health Services, Inc. Prism Hospital Ventures, Inc. Prism Rehab Systems, Inc. Professional Health Care Management, Inc. Professional Rx Systems, Inc. Regency Health Care Center of Seminole County, Inc. Rehability Health Services, Inc. Renaissance Mental Health Center, Inc. River Parishes Rehabilitation Center Partnership Sassaquin Nursing & Rehabilitation Center, Inc. Seventeenth Street Associates Limited Partnership St. Anthony Nursing Home, Inc. Summit Hospital Holdings, Inc. Summit Hospital of East Georgia, Inc. Summit Hospital of Southeast Arizona, Inc. Summit Hospital of Southeast Texas, Inc. Summit Hospital of Southwest Louisiana, Inc. Summit Hospital of West Georgia, Inc. Summit Institute for Pulmonary Medicine and Rehabilitation, Inc. Summit Institute of Austin, Inc. Page 4 EX-23 16 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (No. 333-57339 (as amended), 333-62859 and 333-39485 (as amended)) pertaining to (i) the 1995 Non-Employee Director Stock Option Plan and Outstanding Options of Mariner Health Group, Inc.; (ii) the Paragon Health Network, Inc. Employee Stock Purchase Plan, and (iii) the Paragon Health Network, Inc. Long-Term Incentive Plan; GranCare, Inc. 401(k) Savings Plan; GranCare, Inc. 1996 Stock Incentive Plan; GranCare, Inc. 1996 Replacement Stock Option Plan; GranCare, Inc. Outside Directors' Stock Incentive Plan; and Evergreen Healthcare, Inc. Employees' 401(k) Profit Sharing Plan, of our report dated January 19, 2000, with respect to the consolidated financial statements and schedule of Mariner Post-Acute Network, Inc. included in this Annual Report (Form 10-K) for the year ended September 30, 1999. Ernst & Young LLP January 19, 2000 Atlanta, Georgia EX-27 17 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 71,817 0 394,637 87,066 22,866 441,656 793,261 333,708 1,274,971 2,387,571 113,618 0 0 737 (1,386,756) 1,274,971 2,272,580 2,272,580 0 0 3,713,241 142,474 195,261 (1,778,396) 0 (1,778,282) 0 0 0 (1,778,282) (24.21) (24.21)
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