-----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, HxCR2fRkWNw9GsZAYWZ7vmoRSrqn1KsmSrY2feNKocmNsn32wxaOfv+bW5y8ygJN YPPLLCXuv7TdKzyglpkVVQ== 0000931763-98-003254.txt : 19981230 0000931763-98-003254.hdr.sgml : 19981230 ACCESSION NUMBER: 0000931763-98-003254 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 46 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 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: 98777494 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, 1998 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................. New York Stock Exchange
--------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the outstanding common stock, par value $.01 per share (the "Common Stock"), of the registrant held by non-affiliates of the registrant as of December 21, 1998 was $403,982,560, based on the closing sale price of the Common Stock on the New York Stock Exchange on said date. For purpose of the foregoing sentence only, all directors are assumed to be affiliates. There were 73,270,566 shares of Common Stock of the registrant issued and outstanding as of December 21, 1998, including approximately 160,000 shares issuable upon the exchange of Certificates formerly representing the common stock of predecessor corporations acquired by the registrant. DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INCORPORATED DOCUMENT ----------------- Proxy Statement for the 1999 Annual Meeting of Stockholders............................... Part III
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PAGE ---- PART I ITEM 1. BUSINESS....................................................... 1 ITEM 2. PROPERTIES..................................................... 20 ITEM 3. LEGAL PROCEEDINGS.............................................. 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 25 ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT......................... 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS....................................................... 27 ITEM 6. SELECTED FINANCIAL INFORMATION................................. 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................... 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...... 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................................... 80 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 80 ITEM 11. EXECUTIVE COMPENSATION......................................... 80 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 80 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................................... 81
PART I 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 and into 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. GENERAL The Company is one of the nation's leading providers of outcomes-oriented, post-acute health care services, with a particular clinical expertise in the treatment of short-stay subacute patients in cost-effective alternate sites. The Company's services and products, which are provided in selected markets, include post-acute care, inpatient care, comprehensive inpatient and outpatient rehabilitation services, healthcare services and products (including institutional and home pharmacy services, respiratory and infusion therapy and durable medical equipment), physician services, hospital unit management and rehabilitation staffing. By providing this continuum of care in selected markets as a network of services, the Company believes that it will be better able to maintain or improve quality of care and control costs while coordinating the treatment of patients from the onset of illness to recovery. The Company seeks to cluster facilities and other post-acute health care services in and around large metropolitan areas and major medical centers with large acute care hospitals in order to optimize post-acute admissions. The Company operates in 40 states with significant concentrations of facilities and beds in eight states and several metropolitan markets. The Company operates 428 inpatient and assisted living facilities containing over 50,000 beds, as well as 41 institutional pharmacies servicing more than 125,000 beds. The Company also operates 175 outpatient rehabilitation clinics, provides contract therapy services at over 1,200 locations, operates 11 long- term acute care hospitals ("LTACs") and manages specialty medical programs in acute care hospitals through more than 100 hospital relationships. As a result of the Mariner Merger, the Company has increased the density of the services it provides in many of its markets, which management believes will result in revenue enhancement opportunities. These opportunities are expected to be realized by expanding the range of services offered within each market, increasing patient acuity levels within the Company's facilities, minimizing the cost of services provided and strengthening relationships with hospitals, physicians and third-party payors, including managed care organizations. The Company has embarked upon the integration of the operations of Mariner Health and the Company into one operating structure. The Company and Mariner Health engaged in the Mariner Merger after a strategic assessment of the strengths of both companies: the Company's strategic leadership, critical mass of inpatient facilities and ancillary services in key markets and strong pharmacy component, and Mariner Health's clinical reputation, clinical systems and census development programs. The Company has assembled a skilled and experienced management team consisting of executives from both companies. The Company has also determined where its corporate, regional, and shared services offices will be located and is in the process of completing its consolidation. The Company also is in the process of moving away from a divisional organization to one operating structure offering networked services in key markets. 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. INDUSTRY OVERVIEW The healthcare industry has become one of the largest sectors of the U.S. economy, representing 13.6% of the nation's gross domestic product ("GDP") in 1995. Care for the elderly encompasses a broad range of healthcare services, including inpatient services, rehabilitation services, home health care, assisted living and pharmacy services. In response to increasing demands for quality care in a cost effective setting, post-acute providers are increasingly providing care for patients with specialized needs. These patients typically do not require many of the services provided in an acute care hospital setting but still have medically complex conditions that require ongoing nursing and medical supervision as well as access to specialized equipment and services. The Company believes that the significant factors affecting its industry are changing demographics, government regulations, changing reimbursement methodologies, an increasing focus on cost containment and industry consolidation. Demographic Trends. According to the U.S. Bureau of the Census, 1997 Statistical Abstract of the United States, approximately 12.7% of the U.S. population, or approximately 33.9 million people, are over the age of 65. Furthermore, research indicates that the likelihood of using a nursing home increases with advanced age (65 years and older). In addition, the Census Bureau further estimates that both the 65-84 and the 85+ age groups will increase dramatically through 2050 as the "Baby-Boomer" generation ages. Specifically, the percentage of the total national population represented by those people in the 65-84 category is expected to increase from 11.3% in 1996 to 17.6% in the year 2030, before falling to 15.4% in 2050, while the 85+ age group is expected to rise from 1.4% in 1996, to 2.4% in 2030, and to 4.6% by 2050, more than triple the 1996 numbers. As the elderly population in the United States continues to increase, the Census Bureau estimates that the number of nursing facility residents will also increase, from 1.7 million in 1996 to 5.7 million in 2030. Government Restrictions on Long-Term Care Facilities. While the demand for long-term care is growing, regulatory factors have served to limit the supply of long-term care beds. The construction of new long-term care facilities and the addition of beds to existing facilities are restricted by regulation in many states, most of which require entities that desire to enter the local long-term care market to apply for and obtain Certificates of Need ("CON") or other approvals under similar laws. The application and approval process for a CON or such other approval generally involves approval by a state regulatory agency for the construction, acquisition or closure of a long-term care facility, the addition or reduction of beds at a facility, or the addition of services provided by a facility. The significant construction costs and start- up expenses in some markets may further limit the number of new beds. Reimbursement. Reimbursement rates for long-term care providers are highly regulated by state and federal governments. A recent Medicare program initiative for Part A patients, the Prospective Payment System ("PPS"), has altered the reimbursement methodology to which long-term care providers were accustomed. Prior to July 1, 1998, long-term care providers were reimbursed under the federal Medicare program based upon the cost of the services provided. Beginning on July 1, 1998, the federal government began to phase in PPS, under which long-term care providers are paid one of 44 per diem amounts for each of their Part A patients, including any ancillary care provided. PPS requires providers to prospectively manage the care of the patient and the resources that are consumed. Under PPS, each patient's clinical status is evaluated and placed into a payment category. The patient's payment category dictates the amount that the provider will receive to care for the patient on a daily basis. Accordingly, the ability to care for a patient with a high corresponding per diem reimbursement rate at a low cost will be critical to a company's success under PPS. Therefore, the ability to manage costs will be more important than ever before. In addition, recently enacted legislation has imposed limits on the amounts that can be charged for therapy services provided to Medicare Part B patients. These fee screens were published in November, 1998 and set forth the amounts that can be charged for specific Part B services provided. Previously, Medicare Part B therapy services were reimbursed on a cost basis. These fee screens will be effective January 1, 1999 as well as newly enacted overall per beneficiary limits of $1,500 per provider. Emphasis on Cost Containment--Escalating healthcare costs have caused governmental and other third party payors, including managed care providers, to implement cost containment initiatives. As a result, an 2 increasing proportion of subacute care is being delivered outside the acute care hospital setting. Subacute care refers to complex medical care and intensive nursing care and therapies provided to patients with higher acuity disorders. Management believes that this level of care and these services are appropriately delivered in a skilled nursing environment where clinical outcomes are comparable to those achieved in acute care settings and where the cost structure is significantly lower. Skilled nursing facilities are significantly less capital intensive and do not require the specialized equipment used in acute care hospitals. Labor costs are also lower than in hospitals, which typically have a higher physician to nursing staff ratio and significantly more administrative personnel, including nursing staff not fully dedicated to providing care. Because management believes that post-acute care providers can achieve successful outcomes at a lower cost than acute care hospitals, management believes that hospital discharge planners, physicians and managed care and insurance company case managers are referring an increasing number of patients to post-acute care facilities, including those operated by affiliates of acute care hospitals. Industry Consolidation. Currently, approximately 1.7 million people are cared for in approximately 15,000 long-term care facilities in the United States. Market share data suggests that the industry is fragmented, with the 30 largest operators accounting for less than 25% of these total beds. The post-acute care industry has become subject to increasing competitive pressure, increased government regulation and a changing reimbursement environment. As a result, management believes that there is a trend towards consolidation of smaller, local operators, which lack sophisticated management information systems and services, into larger, more sophisticated national competitors. BUSINESS STRATEGY The Company's strategy is to be a low cost provider of high-quality, post- acute health care services in select markets through the establishment of integrated networks of services with a particular emphasis on short-stay subacute patients. The Company believes that being a low cost provider will enhance its ability to respond to changes in reimbursement programs and managed care competition, including its ability to contract with payors on a case rate or capitated basis as well as with unaffiliated third parties with respect to the Company's ancillary services. Develop Industry Leading Infrastructure. The Company has devoted substantial time and resources integrating the operations of its predecessor corporations in order to realize significant benefits. The Company plans to continue the implementation of a "shared services" model under which the Company's product groups will utilize common information systems and financial reporting and accounting departments and the establishment of standard policies and procedures throughout the entire Company. Management believes that standardized operating processes and procedures throughout the Company will result in better, more consistent clinical care, improve quality and outcomes, and lower operating costs throughout the organization. Additionally management believes that information systems will play an important role in the PPS environment in establishing clinical protocols, case management, outcomes measurement, cost management and quality improvement. The Company believes its enhanced infrastructure, once completed, will enable it to market bundled services and integrate future acquisitions more efficiently as well as generate significant cost savings. Focus on Network Development in Core Markets. The Company's goal is to maintain and establish integrated networks of post-acute services in core markets by achieving a critical mass of inpatient facilities and related specialty medical businesses to form an integrated continuum of care. The Company will place strategic emphasis on: (i) expanding the services offered within its existing facilities; (ii) strategically managing its base of facilities and related services; and (iii) enhancing relationships with acute care hospitals, managed care providers and physicians. Attract and Care for Higher Acuity Patients. The Company intends to capitalize on the current trend towards reducing the length of patient stays in acute care hospitals by offering specialty medical services such as enteral, intravenous and respiratory therapies. Under PPS, care for patients requiring a high degree of therapy will be reimbursed at a higher rate than most other types of patients. Management believes that the Company's ability to care for higher acuity patients in a cost-effective manner will improve its payor mix, expand its customer base and increase operating margins. 3 Provide Ancillary Services to Unaffiliated Parties. In addition to providing pharmacy and rehabilitation services to its own facilities, the Company is a leading provider of ancillary services to unrelated third parties. The Company intends to continue to aggressively market these services to others. Actively Manage Portfolio of Facilities and Services. The Company plans to aggressively manage its facility base and the services it provides, particularly in its core markets. In this regard, the Company will pursue a strategy that includes acquisitions and new construction as well as the disposition of facilities and businesses. Dispositions of facilities and businesses will occur primarily in those markets where the Company does not plan on engaging in network development or where management does not see a significant strategic benefit in providing a particular service. OPERATIONS While the Company is in the process of moving away from a divisional organization towards an integrated operational structure, the Company's services will include five principal product groups. These product groups are: (i) Mariner Inpatient Services; (ii) American Pharmaceutical Services; (iii) Rehability Health; (iv) Prism Rehab Systems; and (v) Mariner Specialty Services. For the year ended September 30, 1998, on a pro forma basis reflecting the Apollo/LCA/GranCare Mergers and the Mariner Merger as if they had been completed as of the beginning of fiscal 1998, these product groups accounted for the approximate percentage of revenues set forth below:
PRO FORMA YEAR ENDED SEPTEMBER 30, 1998 -------------------- Mariner Inpatient Services.............................. 73.3% American Pharmaceutical Services........................ 9.5% Prism Rehab Systems..................................... 9.7% Rehability Health....................................... 3.9% Mariner Specialty Services.............................. 3.6% ---- Total................................................. 100%
Mariner Inpatient Services Inpatient Services is the largest source of revenue for the Company. The Company operates 416 inpatient facilities and 12 freestanding assisted living facilities encompassing over 50,000 beds in 29 states, and 11 long-term acute care hospitals ("LTACs") encompassing 591 beds in three 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, toiletry and related services. Inpatient care is provided by registered nurses, licensed practicing nurses and certified nurses aides under the supervision of a Director of Nursing. Each facility also contracts with a local licensed physician to serve as its Medical Director, and establishes relationships with a number of independent local specialists, who are available to care for the facility's patients. The Company's inpatient facilities provide a broad range of case management services over the course of treatment, including, as appropriate, admission into the MarinerCare(R) programs, 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. 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. This product group is also responsible for the operation of the 11 LTACs that the Company owns, leases or manages. LTACs provide an intermediate place to which patients can be discharged from a short-term 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. 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. The Company also maintains the MarinerCare(R) clinical program in more than 50 of its facilities. This program is designed to address the medical requirements of a large group of patients with similar diagnoses in a high- quality, cost-effective manner. MarinerCare(R) programs are inpatient short- stay regimens based on defined protocols and utilize various medical services provided by the Company. These programs are focused on the needs of patients who are recuperating from a major injury, surgery or illness, and incorporate specific patient admission, evaluation and discharge criteria and standardized treatment protocols and regimens, which have been developed over several years based on the Company's clinical experience. Using these criteria, the Company evaluates which patients would benefit most from its programs prior to their admission. Upon admission, a care plan and projected discharge date are established for each patient. Throughout a patient's inpatient stay, the Company carefully monitors and evaluates the patient's progress and makes adjustments to the patient's treatment. Educating patients regarding their ailments and treatments also comprises a part of each program. MarinerCare(R) programs typically involve inpatient treatment periods of 20 to 45 days. At its inpatient facilities, the Company offers a mix of MarinerCare(R) programs tailored to serve the demands of the local markets. In the facilities it acquires, the Company intends to focus on treating subacute patients and implementing appropriate MarinerCare(R) programs or other clinical programs. The Company currently offers the following MarinerCare(R) programs in selected facilities: Orthopedic Recovery. Patients who are recovering from orthopedic surgery (such as joint replacements or amputations) or serious fractures may be admitted into this MarinerCare program as early as three days after surgery or injury. These patients typically require comprehensive rehabilitation, including physical or occupational therapies, following stabilization of their conditions or after surgery, and may require traction or fixation devices. Cardiac Recovery. Patients who are recuperating from heart attacks or heart surgery, or associated complications, are provided with the nursing and rehabilitation services necessary to enable them to enter an outpatient rehabilitation program. Pulmonary Management. Patients with acute or chronic lung disease, including those with tracheotomies and those who are on ventilators, are provided with short-term intensive programs of pulmonary, physical or occupational therapies. Vascular and Wound Management. Patients who are recovering from surgery for circulatory problems or from difficult-to-heal wounds or burns receive services designed to further the healing process, such as state-of-the-art dressing techniques, specialized bed therapies, nutritional support and physical or occupational therapies. 5 Oncology Management. Patients who have undergone surgery, chemotherapy, radiation, immunotherapy or hormone therapy as a result of cancer are provided with a range of services, including pain management and nutritional and psychological support. Stroke Recovery. Patients who are recovering from strokes and require treatment for related neurological and physical problems are provided with a range of services, including physical, occupational and speech therapy. Medically Complex. Under this program Mariner treats patients with medical complications that prolong their recuperative period from a major illness. These secondary complications must be resolved or brought under control before their primary diagnosis can be addressed. These patients typically require many ancillary services and therapies. The goal of this program is to return patients to their homes with or without support services when sufficiently recovered. American Pharmaceutical Services The Company's pharmaceutical services product group, American Pharmaceutical Services, Inc. ("APS"), is the fifth largest provider of institutional pharmacy services in the United States. Through 41 institutional pharmacies in 15 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. Prism Rehab Systems Prism Rehab Systems provides 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 provides a variety of rehabilitation management consulting services to post-acute and long-term care facilities. These consulting services focus on enhancing the quality of rehabilitation therapy and include supervision of clinical procedures, documentation and billing protocols, as well as monitoring of patient outcomes. The primary payor for Prism's services is the Medicare program. Accordingly, the initiation of PPS and the fee screen schedules and therapy caps for Part B Medicare patients to be implemented on January 1, 1999 are expected to have an adverse effect on Prism's operations. The objective of Prism's programs is to assist the patients in attaining their optimal level of functional independence. Rehabilitation services are instrumental in lowering the overall cost of care by reducing the length of a patient's stay and improving a patient's quality of life. Specialized management staff oversee these rehabilitation programs to ensure high-quality service delivery, program compliance and achievement of optimal outcomes for the patient. 6 Prism Rehab Systems rehabilitation programs are designed to assist inpatient facilities in providing comprehensive rehabilitation services and in attracting patients who would benefit from these services. The Company provides a contracting facility with the physical, occupational and speech therapists necessary to provide comprehensive rehabilitation services to the facility's patients. In selected facilities, the Company also provides MarinerCare(R) rehabilitation programs which include case management and quality assurance services, as well as coordination of admissions functions with key referral services. The Company also offers consulting services regarding managed care reimbursement and cost containment strategies to these facilities. By utilizing Prism Rehab Systems rehabilitation programs, the Company believes that inpatient facilities are able to offer a cost effective rehabilitation program which will make the facilities' service package more attractive to managed care organizations. In implementing a facility's rehabilitation programs, and in accordance with physician's orders, therapists screen patients in the facility to assess and identify those with functional problems. A therapist, together with the patient's attending physician and staff of the facility, designs a plan of care with specific long and short-term goals. Therapists with specializations appropriate for the patient's condition meet with the patient on a regular basis and render the prescribed rehabilitation services. The Company's therapists assist the facility in working with local hospitals, payors and managed care organizations to evaluate identified patients who may benefit from the facility's rehabilitation services. Rehabilitation services are typically rendered in a dedicated room located within the facility which is equipped with rehabilitation equipment. This product group also manages several pediatric programs, provides temporary staffing to schools, and provides therapists to clinics. Rehability Health Rehability Health operates the Company's outpatient rehabilitation clinics, hospital services, network administration and worksite programs. This product group currently operates 174 outpatient rehabilitation clinics in 18 states, with geographic concentrations of clinics in six major metropolitan areas. The primary focus of these clinics is rehabilitation services related to occupational, sports and other injuries that are treatable on an outpatient basis. In addition, Rehability Hospital Services provides inpatient and outpatient rehabilitation services under 43 contractual arrangements with acute-care hospitals. Rehability Health also offers rehabilitation services to corporations for their employees through its Work Health product line, a network of over 1,600 rehabilitation clinics, and through its Continuum Health Options, which provides rehabilitation services at the worksite. Occupational injuries and workers' compensation claims constitute the majority of Rehability Health's business. The primary payor for Rehability Health's services are private employers and their insurance carriers. Rehability Health received approximately 8% of its net patient revenues from the Medicare program for the year ended September 30, 1998. Accordingly, PPS and the fee screen schedules to be implemented on January 1, 1999 have not had and are not expected to have a material impact on Rehability Health. Mariner Specialty Services Mariner Specialty Services operates the Company's hospital program management, home health services and physician practice management businesses. Through its Specialty Services Group, the Company manages specialty medical programs in acute care hospitals through more than 100 hospital relationships in 19 states and 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 is considering various options with respect to its remaining home health and other specialty service operations. The service offerings for hospital program management include developing and managing specialty geriatric programs on behalf of acute care hospitals, including subacute skilled nursing, rehabilitation therapy, geriatric 7 mental health, respiratory therapy and geriatric primary care networks. The Company is generally responsible for managing the clinical and operational aspects of a prescribed program, including quality control. Following the design and implementation of a program, the Company provides a program administrator who is supported by a centralized staff of experts. The Company receives a management fee, typically based on the number of beds it manages. The service offerings for home health include home health, private duty nursing and hospice services. In addition, through its home health agencies, the Company provides skilled nursing, rehabilitation, pharmacy, infusion therapy and respiratory services and durable medical equipment and supplies to individuals needing such services in their homes, permitting the Company to continue to meet the nursing care needs of patients discharged from its facilities. SOURCES OF REVENUE The Company receives payments for services rendered to patients from the federal government under Medicare, from the various states where the Company operates under Medicaid and from private insurers and the patients themselves. The sources and amounts of the Company's patient revenues are determined by a number of factors, including licensed bed capacity of its facilities, occupancy rate, the payor mix, the type of services rendered to the patient and the rates of reimbursement among payor categories (private, Medicare and Medicaid). Changes in the mix of the Company's patients among the private pay, Medicare and Medicaid categories 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, 1998, the Company derived 29.9%, 31.5% and 38.6% 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). On a pro forma basis, the increasing trend in the percentage of revenues derived from private pay and Medicare sources has been attributable primarily to the growth in the Company's pharmacy, therapy, contract management and subacute operations. In addition, the Company's average reimbursement rate per patient day for Medicare patients has increased more rapidly than for Medicaid residents due primarily to the higher reimbursement rate associated with an increase in acuity level. 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. The Company anticipates that PPS and fee screens for Part B Medicare therapy services will further erode the profitability of Medicare patients as compared to Medicaid patients. The Company is in the process of evaluating the effect of the recently established PPS system for the Medicare program on its revenues. 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 will be 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. Regional level marketing will become increasingly important as the Company establishes networks of services in its key markets. 8 Information systems are being developed to provide marketing managers with the ability to assess competitors, identify and target referral sources and track several key indicators of sales performance for each local market. Implementation of this marketing and sales program will also provide the Company with the ability to manage and measure performance at both the local and national level allowing the Company to identify shifts in market trends as they occur. Local market sales efforts focus on establishing and maintaining cooperative relationships and networks with physicians, acute care hospitals and other healthcare providers, with an emphasis on specialists who treat ailments involving long-term care and rehabilitation. 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. In key markets, the Company's services are operated as part of a marketing cluster. This strategy creates a strong focus on identifying more cost effective methods to provide healthcare. There are opportunities to link services and offer multiple services to a single payor within these targeted markets. Development of programs to coordinate marketing efforts for all of the Company's services within each targeted market will improve the efficiency and effectiveness of its efforts, while creating an ability to offer a continuum of care for post-acute services. 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. The cluster market approach is expected to enhance the Company's ability to serve large providers of managed care within its targeted markets. Typically, patients referred by managed care providers, including HMOs and preferred provider organizations, generate higher revenues per patient day than Medicaid patients as a result of the higher acuity of the enrollees. Management believes that the Company's ability to provide subacute and specialty medical services at a lower cost than acute care hospitals is a competitive advantage in becoming the provider of choice for managed care providers. COMPLIANCE INITIATIVES In May 1998, the Company established the Office of Ethics and Compliance (the "Compliance Office") in order to formalize the adoption of a Company-wide ethics and compliance program. Located in Washington, D.C., the Compliance Office is headed by Eric M. Thorson, Senior Vice President-Office of Ethics and Compliance. Mr. Thorson has had extensive experience in the area of compliance and most recently served as Chief Investigator, United States Senate, Committee on Finance and as Chief Investigator, Permanent Subcommittee on Investigations prior to joining the Company. The purpose of the Compliance Office 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, Total Quality Management, Legal and Internal Audit Departments on compliance training issues, on quality of care issues and legal matters involving compliance issues. 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 Office 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. Simultaneously with the establishment of the Compliance Office, the Company adopted a comprehensive Business Ethics Policy and has undertaken a Company- wide compliance training initiative. The purpose of this program is to emphasize to the Company's employees their obligation not to engage in inappropriate behavior 9 and, where appropriate, to report allegations of inappropriate actions to the Compliance Office, which then investigates the matter. The Company plans to roll out additional compliance training for senior management, key employees and supervisory personal during 1999. The Company will continue to train all new employees as part of the new employee orientation. 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 and is applied consistently across the entire Company. The Company believes that these initiatives will enable the Company to become an industry leader in the area of compliance and improve the quality of its services. MANAGEMENT INFORMATION SYSTEMS The Company has devoted and will continue to devote substantial time and resources towards integrating the existing information systems of its constituent corporations. Management expects to complete the installation of a new client-server based financial and payroll/human resource software package during 1999. The new software is expected to provide more timely retrieval of financial and operating data and enhanced analytical review capabilities, thereby increasing the utility and functionality of the Company's information systems. In preparation for this implementation, the Company completed a business process review of its financial and payroll/human resource processing procedures. This business process review was designed so that maximum benefit from the functionality offered by the new client-server software package could be attained, best practices could be adopted for financial and payroll/human resource processing based on procedures currently in use both within and outside the industry and customization of software could be minimized. Management expects the combination of the client-server implementation and business process review to strategically position the Company to operate under a shared services model. Benefits of a shared services model are expected to include standardized financial reporting, streamlined human resource management and increased access to critical and time-sensitive information across the Company. The ability to measure clinical and financial outcomes is central to the Company's delivery of care and to the Company's success under PPS. The Company has implemented a program designed to measure a patient's functional ability on admission, at discharge and, for certain patients, six weeks after discharge. Patients' rehabilitation potentials are evaluated using a standardized measurement system, which rates a patient's independence in performing a number of basic activities of daily living. This rating system permits the Company to initially assess whether the patient will benefit from the Company's programs, document the severity of a patient's initial impairment and measure the outcome and cost of the patient's recuperation. Using a case management approach, a patient's progress is continually monitored so that the appropriate level of care is being delivered at the right time and in the appropriate setting under the applicable clinical program. The Company believes that its standardized approaches to delivering care and measuring outcomes are particularly attractive to managed care organizations and large third-party payors because they facilitate such organizations' and payors' increasing desire to be provided with outcomes data in order to manage and contain costs. In the PPS environment, the ability to manage costs will be increasingly important. Under PPS, the acuity level of a patient and the level of ancillary services required will determine the per diem reimbursement rate for that patient. Accordingly, providing care to high acuity patients at a low cost will be critical to the Company's success. The Company believes that effective information management systems will assist the Company in maintaining uniform clinical protocols, case management procedures, outcomes measurement procedures, cost management procedures and billing and reporting procedures throughout the entire Company. Ultimately, once, these protocols and procedures have been implemented at the Company's facilities, the Company believes that they will enable the Company to operate more efficiently under PPS. QUALITY ASSURANCE The Company is implementing a uniform, comprehensive quality assurance program based on the Mariner Health model. This program seeks to ensure that facilities meet the Company's standards, which include 10 comprehensive training requirements and satisfactory results on patient satisfaction surveys. The Company's quality assurance program includes a training program for all new employees and periodic training programs for clinical personnel. The Company believes that its utilization of standardized protocols will facilitate its clinical staffs' training and skill retention. The Company has also developed a patient satisfaction questionnaire which is included in each patient's discharge package. Facility administrators' performance reviews and bonuses are dependent in part upon the results of the facility's quality as measured by regulatory surveys and its patient and family satisfaction questionnaire. 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. The Company has implemented an enhanced Company wide compliance program that it believes will reduce the Company's exposure to third party claims in the future. See "Business -- Compliance Initiatives." Medicare and Medicaid. The Medicare program was enacted in 1965 to provide a nationwide, federally funded health insurance program for the elderly. The Medicaid program is a joint federal-state cooperative arrangement established for the purpose of enabling states to furnish medical assistance on behalf of aged, blind, or disabled individuals, or members of families with dependent children, whose income and resources are insufficient to meet the costs of necessary medical services. All of the Company's nursing facilities, assisted living facilities, home health agencies and hospices, pharmacies, and rehabilitation clinics are licensed under applicable state law and are certified or approved (other than the assisted living facilities) 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, long-term acute care ("LTAC") hospitals and home health agencies for reasonable direct and indirect allowable costs incurred in providing "routine service" (as defined by the program and subject to certain limits) as well as capital costs and ancillary costs. Pursuant to the Balanced Budget Act of 1997 (the "Balanced Budget Act") discussed below, Medicare is phasing-in a prospective payment system ("PPS") for skilled nursing facilities and home health services starting with cost reporting periods beginning on or after July 1, 1998 for skilled nursing facilities and October 1, 2000 for home health agencies. Medicare revenues and Medicaid reimbursement rates have historically been determined from annual cost reports filed by the Company which 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 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 rehabilitation divisions to its nursing facilities, and reductions to costs claimed for therapy services for alleged failures to comply with prudent buyer requirements. 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. Adjustments to the Company's cost reports historically have not had a material adverse effect on its operating results. However, there can be no assurance that future adjustments to such cost reports or 11 unsuccessful appeals of current adjustments will not have a material adverse effect on the Company's operating results. 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--Healthcare Regulatory Matters." Balanced Budget Act--Medicare. The Balanced Budget Act, enacted on August 5, 1997, made numerous changes to the Medicare and Medicaid programs which 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 is being 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 will be 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. The Balanced Budget Act also imposed a per beneficiary cap of $1,500 per provider per therapy service provided, also effective January 1, 1999. The Balanced Budget Act also instituted consolidated billing for skilled nursing facility services, under which payments for non-physician Part B services for beneficiaries no longer eligible for Part A skilled nursing facility care 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 indefinitely. Likewise, the Balanced Budget Act required the Secretary of the Department of Health and Human Services ("HHS") to establish a PPS system for home health services, to be implemented beginning October 1, 1999. Subsequent legislation in 1998 delayed the effective date until October 1, 2000. The law also contains provisions affecting outpatient rehabilitation agencies and providers, including a 10 percent reduction in operating and capital costs for 1998, a fee schedule for therapy services beginning in 1999, and the application of per beneficiary therapy caps currently applicable to independent therapists to all outpatient rehabilitation services beginning in 1999. With regard to hospices, the Balanced Budget Act limits reimbursement by setting the payment rate increase at a market basket minus 1.0 percentage point for fiscal years 1998 through 2002. The law also institutes a number of reforms of the hospice benefit, including a provision that hospices can be reimbursed based on the location where care is furnished (rather than the location of the hospice), effective for cost reporting periods beginning on or after October 1, 1997. Other provisions limited Medicare payments for certain drugs and biologicals, durable medical equipment and parenteral and enteral nutrients and supplies. On May 12, 1998, the Health Care Financing Administration ("HCFA") released the nursing home PPS rates for skilled nursing facilities that are in effect from July 1, 1998 through September 30, 1998. As of November 30, 1998, 174 of the Company's facilities were operating under PPS. PPS has resulted in more intense price competition and lower margins among ancillary service providers (including the Company's pharmacy, therapy, and hospital services subsidiaries). However, while the Company believes that PPS will also provide opportunities for efficiently operated, low cost providers to achieve economies of scale, there can be no assurance that the Company will be successful in reducing its costs of services below the PPS reimbursement rates or the Medicare Part B therapy fee screen rates. While Congress has implemented PPS with respect to skilled nursing facilities, no action was taken with respect to LTAC's. However, the Balanced Budget Act mandated that HHS formulate a legislative proposal to develop a PPS system for specialty medical care programs within acute care hospitals. The Company anticipates that this will occur, but cannot anticipate when it will occur. 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 12 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. However, no assurance can be given that these providers in order to meet quality and safety standards. 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 ultimately will not 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 legislation on healthcare reform will ultimately be implemented or whether other changes in the administration or interpretation of governmental healthcare programs will occur. Management anticipates that 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 used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted by Health Care Finance Administration ("HCFA") 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, home health agencies and hospices 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 13 upon the measure to be taken to bring the facility or service provider into compliance. Under certain circumstances, however, such as repeat violations or perceived severity of the violations, the federal and/or state agencies have the authority to take adverse actions against a facility or provider, including the imposition of monetary fines, the decertification of a facility or provider from participation in the Medicare and/or Medicaid programs, or licensure revocation. No such enforcement action against a facility or provider has had a material adverse impact on the Company 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. 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 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 Health Insurance Portability and Accountability Act of 1996 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 14 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. The Company has received a request for documents with respect to certified nurse assistant ("CNA's") billing practices at 20 inpatient facilities. 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." Certificate of Need. CON statutes and regulations control the development and expansion of healthcare services and facilities in certain states. The CON process is intended to promote quality healthcare at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities. CON or similar laws generally require that approval be obtained from the designated state health planning agency for certain acquisitions and capital expenditures, and that such agency determine that a need exists prior to the expansion of existing facilities, construction of new facilities, addition of beds, acquisition of major items of equipment or introduction of new services. Additionally, several states have instituted moratoria on new CONs or the approval of new beds. CONs or other similar approvals may be required in connection with the Company's future acquisitions and/or expansions. There can be no assurance that the Company will be able to obtain the CONs or other approvals necessary for any or all such projects. Contract Management Regulation. Contract managers of geriatric mental health centers, subacute care units, specialty acute hospitals and senior health centers are not typically subject to direct regulation, although the Company may be held responsible for violations of certain federal and state laws, such as the referral restrictions and fraud provisions (if the contract manager is providing billing services) described above. Further, the facilities managed by the Company on a contract basis will be subject to regulation. Management contracts with these facilities may hold the Company accountable in certain instances to a facility which is cited for non-compliance with regulatory requirements. Further, there can be no assurance that the facilities managed by the Company will not be subject to statutory or regulatory changes which might adversely impact these facilities and, indirectly, the Company's contract management business. 15 Therapy Regulation. The Company furnishes therapy services on a contract basis to certain providers and to patients in most of its facilities, as well as through its outpatient clinics. In most instances, the providers bill Medicare for reimbursement of the amounts paid to the Company for these services. HCFA has the authority to establish limits on the amount Medicare reimburses for therapy services. For services other than inpatient hospital services, these limits are equivalent to the reasonable amount that would have been paid if provider employees had furnished the services. On January 30, 1998, HCFA issued its new salary equivalency guidelines which change Medicare reimbursement rates for contracted therapy services. Under salary equivalency, the Company is reimbursed for contracted therapy services based on the time spent on the premises by the contract therapist times a fixed rate, depending on the service provided. While the new rates for physical therapy represent an increase over what the Company previously received for such services, the new rates for occupational therapy and speech language pathology represent decreases from what the Company previously received. The salary equivalency guidelines will remain in effect until the facility at which such services are provided, including the Company's facilities and other facilities serviced by the Company's therapy subsidiaries, start billing under PPS. The Company believes that while salary equivalency had a slight adverse effect on its therapy revenue, the Company does not believe that salary equivalency will have a material adverse effect on the Company's consolidated revenues. Effective January 1, 1999 a per provider limit of $1,500 applies to all rehabilitation therapy services provided under Medicare Part B ($1,500 for physical and speech-language pathology services, and a separate $1,500 for occupational therapy services). Additionally, effective January 1, 1999, Medicare Part B therapy services will no longer be reimbursed on a cost basis. Payment for each service provided will be based on fee screen schedules published in November, 1998. Pharmacy Regulation. Pharmacy operations are subject to regulation by the various states in which the Company conducts its business as well as by the federal government. The Company's pharmacies are regulated under the Food, Drug and Cosmetic Act and the Prescription Drug Marketing Act, which are administered by the United States Food and Drug Administration. Under the Comprehensive Drug Abuse Prevention and Control Act of 1970, which is administered by the United States Drug Enforcement Administration ("DEA"), the pharmacies, as dispensers of controlled substances, must register with the DEA, file reports of inventories and transactions and provide adequate security measures. Failure to comply with such requirements could result in civil or criminal penalties. The Company believes that its pharmacy operations are in substantial compliance with such regulations. Home Health/Hospice. Recent legislation requires that home health agencies, among other things, re-enroll in the Medicare program every three years and, at the time of re-enrollment, submit to an independent audit of their records and practices. On September 19, 1997, the OIG issued its report on "Hospice Patients in Nursing Homes" which made findings of lower frequency of services, the overlap of services and the questionable enrollment in hospice by certain nursing home patients, and concluded that current payment levels for hospice care in nursing homes may be excessive. The OIG recommended that HCFA seek legislation to modify Medicare or Medicaid payments for hospice patients living in nursing homes. Until such legislation is adopted, the Company is unable to predict what impact it will have on the current payment structure. 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. HCFA is to develop a comprehensive plan to fight waste, fraud, and abuse in the Medicare program, and to report to the President in early 1999. 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 16 public scrutiny of the nursing home industry. In the ensuing months, 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 the Medicare and Medicaid programs, and the impositions of fines. While no facilities operated by the Company have had Medicare contracts terminated, a number have had fines imposed. The Company evaluates each fine imposition and either pays the fine as assessed or appeals the assessment. 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 or other sanctions. OIG Fiscal Year 1999 Work Plan. In November of 1998, the OIG released its fiscal year 1999 Work Plan, which summarizes the major projects the OIG intends to pursue in each of HHS' major operating areas, including HCFA. Eleven review initiatives concerning nursing homes were announced. Several initiatives indicated a heightened emphasis within the OIG on quality of care issues, and several involve an evaluation of the reasonableness of and costs associated with therapy services provided in skilled nursing facilities. Other nursing home reviews will include the implementation of PPS, pre-PPS reimbursement of ancillary medical supplies, and whether mental health services in nursing homes continue to be inappropriately billed. Reviews related to drug reimbursement will include an assessment of the impact of infusion therapy suppliers' charges on nursing home cost reports. 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. Competition in the institutional pharmaceutical and the rehabilitation services markets ranges from small local operators to companies that are national in scope and distribution capability. In order to enhance its ability to compete at both the national and regional market level, the Company intends to implement certain marketing and information systems initiatives. See "--Marketing" and "--Management Information Systems." INSURANCE The Company maintains, on behalf of itself and its subsidiaries, insurance coverages that it deems adequate. The Company also requires that physicians practicing at its inpatient facilities carry medical malpractice insurance to cover their individual practice. Moreover, insurance coverage for punitive damages is not available in certain states, and proceedings involving claims of punitive damages are pending in certain of these states. Moreover, given the current regulatory enforcement and litigation environment, there can be no assurance that the Company's insurance coverages will be adequate to satisfy any future adverse determinations against the Company. See "Business-- Regulation," "Legal Proceedings" and Note 18 to the Consolidated Financial Statements. 17 EMPLOYEES The Company employs over 65,000 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 has collective bargaining agreements with unions representing employees at 16 facilities and with employee counsels at two of its 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. 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 Position and Results of Operations--Liquidity and Capital Resources" contains information concerning the ability of the Company to service its debt obligations and other financial commitments as they come due; "Business" contains information concerning the effects of PPS on the Company's operations; "Business-Strategy" contains information regarding management's belief concerning the growth opportunities available to the Company; and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000" contains information concerning management's belief regarding the Company's and third parties' readiness to face 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) 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. (ii) The Company derives substantial portions of its revenues from third- party payors, including government reimbursement programs such as Medicare and Medicaid, and some portions of its revenues from nongovernmental sources, such as commercial insurance companies, health maintenance organizations and other charge-based contracted payment sources. Both government and non government payors have undertaken cost-containment measures designed to limit payments to healthcare providers. There can be no assurance that payments under governmental and nongovernmental 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 of the Company. (iii) The Company is subject to extensive federal, state and local regulations governing licensure, conduct of operations at existing facilities, construction of new facilities, purchase or lease of existing facilities, addition of new services, certain capital expenditures, cost-containment and reimbursement for services rendered. The failure to obtain or renew required regulatory approvals or licenses, the failure to comply 18 with applicable regulatory requirements, the delicensing of facilities owned, leased or operated by the Company or the disqualification of the Company from participation in certain federal and state reimbursement programs, or the imposition of harsh enforcement sanctions could have a material adverse effect upon the operations of the Company. (iv) There can be no assurance that the Company will be able to continue its substantial growth or be able to fully implement its strategy to develop and its business strategies for its inpatient services, pharmaceutical services, rehabilitation services, or specialty services divisions. (v) 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 or the extent to which it will be able to remedy issues associated with embedded chips in critical medical devices located in the Company's facilities, which may malfunction as a result of the Year 2000 Issue. (vi) 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. 19 ITEM 2. PROPERTIES The Company operates 428 long-term care facilities (416 skilled nursing facilities and 12 free standing assisted living facilities) with over 50,000 licensed beds located in 29 states. Licensed beds represent the number of beds for which a license has been issued and may vary from the actual beds available for use. The average occupancy rate for the Company's inpatient facilities (excluding LTACs) was 84.9% for the year ended September 30, 1998 on a pro forma basis after giving effect to the Apollo/LCA/GranCare Mergers and the Mariner Merger. The Company operates the following facilities:
OWNED LEASED MANAGED TOTAL ----------------- ----------------- ---------------- ----------------- FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS FACILITIES BEDS ---------- ------ ---------- ------ ---------- ----- ---------- ------ Alabama................. 7 788 -- -- -- -- 7 788 Arizona................. 4 506 10 1,211 -- -- 14 1,717 California.............. 5 610 34 3,813 4 385 43 4,808 Colorado................ 23 2,340 11 1,320 -- -- 34 3,660 Connecticut............. 2 250 1 90 -- -- 3 340 Delaware................ -- -- -- -- 1 99 1 99 Florida................. 27 3,256 1 120 2 369 30 3,745 Georgia................. 5 570 6 740 -- -- 11 1,310 Iowa.................... 1 82 6 417 -- -- 7 499 Illinois................ 13 1,158 6 747 1 206 20 2,111 Indiana................. -- -- 3 429 -- -- 3 429 Louisiana............... -- -- 8 1,423 -- -- 8 1,423 Maryland................ 11 1,839 2 368 1 138 14 2,345 Massachusetts........... 5 576 -- -- 6 809 11 1,385 Michigan................ 13 1,807 -- -- -- -- 13 1,807 Mississippi............. 1 121 10 1,103 -- -- 11 1,224 Nebraska................ 7 590 -- -- -- -- 7 590 New Jersey.............. -- -- -- -- 1 180 1 180 North Carolina.......... 30 3,574 4 600 1 60 35 4,234 Ohio.................... 1 93 1 100 -- -- 2 193 Oklahoma................ -- -- 1 161 -- -- 1 161 Pennsylvania............ 2 205 -- -- -- -- 2 205 South Carolina.......... 4 565 9 964 -- -- 13 1,529 Tennessee............... 2 210 4 483 -- -- 6 693 Texas................... 57 6,790 44 4,690 2 260 103 11,740 Virginia................ -- -- 5 314 1 60 6 374 West Virginia........... 1 186 -- -- -- -- 1 186 Wisconsin............... 7 1,240 8 926 -- -- 15 2,166 Wyoming................. 4 401 2 140 -- -- 6 541 --- ------ --- ------ --- ----- --- ------ Total................... 232 27,757 176 20,159 20 2,566 428 50,482 === ====== === ====== === ===== === ======
20 In addition to long-term care facilities, the Company operates 175 outpatient rehabilitation clinics in 18 states and 41 institutional pharmacies in 15 states, as follows:
STATE CLINICS PHARMACIES ----- ------- ---------- Alabama................................................. -- 1 Arkansas................................................ -- 2 California.............................................. 3 -- Colorado................................................ -- 2 Connecticut............................................. 4 -- Florida................................................. 22 10 Georgia................................................. 5 2 Illinois................................................ 2 2 Indiana................................................. -- 1 Kansas.................................................. 7 -- Kentucky................................................ 2 -- Louisiana............................................... 5 2 Maryland................................................ 3 1 Massachusetts........................................... -- 1 Mississippi............................................. 9 1 Missouri................................................ 19 -- Nevada.................................................. 1 -- New Jersey.............................................. -- 1 North Carolina.......................................... 28 2 South Carolina.......................................... 10 -- Tennessee............................................... 16 1 Texas................................................... 28 12 Virginia................................................ 8 -- Wisconsin............................................... 3 -- --- --- Total................................................... 175 41 === ===
Substantially all of the Company's outpatient rehabilitation clinics and institutional pharmacy facilities are leased under "triple net" leases. Subject to the exceptions set forth below, the Company's hospital services division enters into contracts with acute care hospitals for the management of geriatric specialty programs, generally located inside such hospitals. Such management contracts do not generally involve the lease or purchase of any property. The Company's LTAC product line operates 11 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 Texas........................... 4 302 2 76 6 378 --- --- --- --- --- --- Total........................... 8 495 3 96 11 591 === === === === === ===
The LTAC product line acquired eight of its LTAC's in an acquisition consummated in July 1998. On a pro forma basis giving effect to this acquisition the occupancy rate for the Company's LTAC's for the year ended September 30, 1998 was 41.49%. Certain of the above properties serve as collateral for various mortgage debt instruments or capitalized lease obligations. See Notes 10 and 17 to the Consolidated Financial Statements. The Company regularly reviews its portfolio of properties and intends to divest those properties which it believes do not meet quality or financial performance standards or do not fit strategically into the Company's operations. 21 ITEM 3. LEGAL PROCEEDINGS As is typical in the healthcare industry, the Company is and will be subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which will be greater for higher acuity residents receiving services from the Company than for other long-term care residents. The Company is, from time to time, subject to such negligence claims and other litigation. In addition, resident, visitor, and employee injuries will also subject the Company to the risk of litigation. The Company has experienced an increasing trend in the past year 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 several large judgments against long-term care providers, other than the Company, in the last year 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 investigations of long-term care providers, particularly in the area of false claims, as well as an increase in enforcement actions resulting from the investigations. 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. 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 or in the aggregate, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. 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 Health Care Center, Inc. Case No. 96 CV 4449, asserting five claims for relief, including third-party beneficiary, tortious interference and negligence per se causes of action arising out of quality of care issues at a healthcare facility formerly owned by GranCare. Pursuant to the Third Amended Complaint, the class claims were finally identified as third- party beneficiary of contract; breach of contract; tortious interference with contract; fraud; and negligence per se. In addition to the class claims, the named plaintiffs each asserted claims for promissory estoppel and violation of the Colorado Consumer Protection Act. On March 15, 1998, the court entered an order in which it certified a class action in the matter. The court has only certified the class with respect to the issue of liability and the various class rights to restitution. The court determined that emotional distress damages are of such an individualized and personal nature that the class-wide request for emotional distress damages was not appropriate for class treatment. On May 7, 1998, plaintiff's counsel orally dismissed her promissory estoppel claims on behalf of the named plaintiffs. In response to the Company's Motion to Dismiss All Claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds, on October 30, 1998, the court partially granted the Company's motions, dismissing the claims of all plaintiffs who were at all times during the class period Medicare/Medicaid patients, for lack of jurisdiction. The court further dismissed all restitution claims for the remaining plaintiffs, except those relating to emotional distress for the period beginning with their stay at defendants' facility and ending at the moment that they first received any Medicare/Medicaid benefits. No restitution claims of any sort were allowed on the claims for tortuous interference, fraud and negligence per se. In its order, the court requested a conference relative to whether the class was large enough to justify continuing the case as a class action. After this order, at the request of plaintiffs' counsel, the court stayed all activity and allowed plaintiffs to file a Motion for Reconsideration. Plaintiffs' Motion for Reconsideration was filed, as ordered, on November 16, 1998, and the court denied plaintiffs' motion on November 19, 1998. On December 10, 1998, the court certified as a final judgment that portion of its order of October 30, 1998 dismissing for lack of jurisdiction all the claims of plaintiffs who were at all relevant times Medicare or Medicaid patients. The court further stayed all remaining proceedings pending 22 resolution of any appeal of the certified final judgment, and vacated the trial which had been scheduled for March 15, 1999. The Company intends to vigorously contest the remaining alleged claims and the certification of the various classes. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States Attorney's Office for the Eastern District of Texas (Beaumont) advising that the office is involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation is the result of a qui tam complaint (which involves a private citizen requesting the federal government to intervene in an action because of an alleged violation of a federal statute) filed under seal against the Company, and the AUSA is investigating the allegations in order to determine if the United States will intervene in the proceedings. The AUSA has requested that the Company voluntarily produce a substantial amount of documents, including medical records of former residents. In November 1997, counsel for the Company met with the AUSA and the parties engaged in discussions on whether the voluntary production of former residents' medical records can be accomplished without violating the residents' rights to privacy and confidentiality. Based upon the information currently known about the complaint, the Company believes that given an opportunity to address the allegations, the AUSA will find intervention by the United States is without merit. In December 1997, the Company advised the AUSA that absent the United States agreeing to protect the confidentiality of the residents' medical records, and to prevent unauthorized disclosure of the information requested to non-government personnel, the Company would not agree to a voluntary production. The Company has reopened discussions with the Department of Justice regarding the Company's position on the alleged claims. The Company will vigorously contest the alleged claims if the complaint is pursued. In 1997, the Department of Justice ("DOJ") advised the Company that the United States had declined to intervene in the qui tam complaint filed against The Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries of the Company (and of LCA before the Apollo/LCA/GranCare Mergers) in the federal district court for the Western District of North Carolina. The individual plaintiff has continued to pursue the alleged claims that BCC and Med-Therapy caused certain therapists to make improper therapy record entries with respect to screening services, and that any claims filed with Medicare for payments based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. The Company continues to vigorously contest these claims. Although the plaintiff's original complaint was dismissed for failure to state a claim, in September 1998, the court denied the Company's motion to dismiss an amended complaint. The parties have recently engaged in settlement negotiations, and if the case does not settle, discovery will commence. In connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless the Company from and against any and all loss, expense, damage, penalty and liability which could result from this claim, subject to further adjustment. Mr. Beaver's indemnity requires any payment to the Company to be in the form of shares of the Company's common stock. 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 is currently pending in the United States District Court for the Middle District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiffs filed a motion to remand on June 22, 1998 and the Company filed a motion to dismiss on June 30, 1998. The Company is currently awaiting the outcome of these motions. The complaint has only been recently filed and no discovery has been conducted. Accordingly, the information available to the Company is very limited and the Company is unable to assess at this point the magnitude of the allegations. The Company intends to vigorously contest the request for class certification as well as all alleged claims made by the plaintiffs. 23 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 interest in Valley X-Ray was acquired by a predecessor corporation as an incidental part of a large acquisition. International X-Ray was not involved in the operation of 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 dismissal of GranCare as a party, and the briefing on the second motion regarding International X-Ray has been completed and awaits scheduling. On September 18, 1998, the Company was served with an administrative subpoena issued by the OIG. The subpoena was addressed to "Paragon Health Network, Inc." The subpoena seeks, among other things, certain records of twenty specified current or former LCA nursing facilities. The Company has been advised that the investigation is civil in nature and focuses on nursing facilities and nurse aide services. The government has not disclosed the origin of this civil administrative investigation or its intended scope. 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 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 asserts 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. The Company removed this case to Federal Court on November 2, 1998, and the matter is currently pending in the United States District Court for the Middle District of Florida, Tampa Division, case no 98-2240-CIV-T-17C. The plaintiffs filed a Motion to Remand on November 13, 1998, and the Company will be presenting a brief in opposition. The complaint has only been recently filed and no discovery has been conducted. Thus, the information available to the Company is very limited. At this point, the Company is unable to access the magnitude of the allegations. The Company intends to vigorously contest all claims, including all issues relating to the attempted certification of any alleged class. In October, 1998, the Custodian of Records of Cambridge Bedford, Inc., also known as Bedford Villa Nursing Center ("Bedford"), a wholly-owned subsidiary of the Company, was served an administrative subpoena issued by the OIG. The subpoena seeks, among other things, general information on corporate ownership and organizational structure, therapy and physician service arrangements, and medical records of eleven former residents of Bedford. Bedford has been advised that the investigation is civil in nature, and the OIG has assured the facility that the OIG will follow all applicable federal laws, including the Privacy Act, that pertain to the confidentiality of medical records, and that Bedford will face no violation of confidentiality or privacy laws in producing the patient medical records requested. The Company is cooperating with the investigation and has transmitted documents responsive to the subpoena on November 17, 1998. In November, 1998, Bedford also received a subpoena duces tecum from the DOJ, through the U.S. Attorney's Office in Detroit, Michigan, requesting certain patient medical records as the result of a criminal investigation of a named physician. The Company has been advised that the facility is not a subject or target of the investigation. The Company is cooperating with the U.S. Attorney's Office. 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of the stockholders of the Company was held on July 28, 1998 in Atlanta, Georgia. At that time, the following matters were voted on (the votes for, against and abstentions for each matter are summarized below):
VOTES VOTES FOR AGAINST ABSTENTIONS ---------- --------- ----------- 1. Approval of issuance of Company common stock to former stockholders of Mariner Health Group, Inc. in connection with the Mariner Merger........................... 31,721,175 69,411 25,356 2. Approval of amendment to the Company's Amended and Restated Certificate of Incorporation (the "Certificate") to change the name of the Company from "Paragon Health Network, Inc." to "Mariner Post-Acute Network, Inc."....... 31,725,339 65,418 25,185 3. Approval of amendment to the Certificate to increase the authorized number of shares of Company common stock to 500 million shares........................... 27,316,038 4,476,299 23,605 4. Approval of increase in shares of Company common stock available for issuance under the Company's 1997 Long-Term Incentive Plan by four million shares.............. 29,450,448 2,302,925 62,569
ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT
NAME AGE POSITION - ---- --- -------- Keith B. Pitts.......... 41 Chairman of the Board, Chief Executive Officer and Director Arthur W. Stratton, Jr., 52 Vice Chairman of the Board, President, Chief Operating Officer M.D.................... and Director Thomas P. Dixon......... 50 President--Prism Rehab Systems William R. Korslin...... 48 President--American Pharmaceutical Services David L. Ward........... 43 President--Rehability Health Charles B. Carden....... 54 Executive Vice President and Chief Financial Officer R. Jeffrey Taylor....... 49 Executive Vice President, Development Ann E. Weiser........... 41 Senior Vice President, Human Resources Susan Thomas Whittle.... 50 Senior Vice President, General Counsel and Secretary
Keith B. Pitts serves as Chairman of the Board and Chief Executive Officer of the Company and has served in such capacity since November 4, 1997. In addition, Mr. Pitts served as President of the Company from November 4, 1997 to July 31, 1998. From August 1997 to November 4, 1997 Mr. Pitts served as a consultant to Apollo in connection with the transactions pursuant to which Apollo acquired its interest in the Company. From February 1997 to August 1997 Mr. Pitts was a consultant to Tenet Healthcare Corp. Mr. Pitts served as the Executive Vice President and Chief Financial Officer of OrNda HealthCorp, a healthcare service provider in the United States, from August 1992 until its merger with Tenet Healthcare Corp. in January 1997. Prior to joining OrNda HealthCorp, from July 1991 to August 1992, Mr. Pitts was a partner in Ernst & Young LLP's Southeast Region Health Care Consulting Group, and from January 1988 to July 1991 he was a partner and Regional Director of Ernst & Young LLP's Western Region Health Care Consulting Group. Mr. Pitts is a director of Sunburst Hospitality Corporation, a publicly traded corporation engaged in the hotel business, as well as several private corporations. Arthur W. Stratton, Jr., M.D. is Vice Chairman of the Board, President and Chief Operating Officer of the Company and has served in such capacity since July 31, 1998. Dr. Stratton was Chairman of the Board and Chief 25 Executive Officer of Mariner Health, serving in such capacities from 1988 to July 31, 1998. He also served as President of Mariner from its inception to May 1994 and from February 1995 through July 31, 1998. Thomas P. Dixon is President of Prism Rehab Systems and has served in such capacity since November 4, 1997. From January 1996 until October 1997, Mr. Dixon served as Chief Operating Officer of Prism. Prior to January 1996, Mr. Dixon served as Senior Vice President of Prism, and President of Prism's rehabilitation division, and served in such capacities since co-founding Prism in September 1992. William R. Korslin is President--American Pharmaceutical Services and has served in such capacity since November 4, 1997. Prior to that Mr. Korslin served as a Vice President of LCA from September 1995 and as President of American Pharmaceutical Services, Inc. ("APS"), LCA's pharmaceutical services subsidiary, from May 1994 until April 1998. Mr. Korslin joined APS in July 1987 as General Manager Enteral Services. From 1989 through 1992, he served as Eastern Area Vice President of APS and, from 1992 to 1994, Mr. Korslin was Senior Vice President in charge of all field operations of APS. David L. Ward is President--Rehability Health and has served in such capacity since November 4, 1997. Prior to this, Mr. Ward served as an officer of LCA's American Rehability Services division since joining LCA in May 1996. Prior to joining LCA, Mr. Ward served in a variety of management positions with NovaCare, Inc., a national provider of rehabilitation services to long- term and other healthcare facilities since January 1988, including the Southern States Regional President of NovaCare's Outpatient Division, the Arizona Regional President for NovaCare's Hospital Division, NovaCare's Vice President of Organizational Planning and Development, the Southwestern Vice President of NovaCare's Contract Services Division, the Western Vice President of NovaCare's Contract Services Division and NovaCare's National Sales Manager. Charles B. Carden is Executive Vice President and Chief Financial Officer of the Company and has served in such capacity since November 4, 1997. Prior to that, Mr. Carden served as Executive Vice President and Chief Financial Officer of LCA since October 1996. Before joining LCA, Mr. Carden was Chief Financial Officer of Leaseway Transportation Corp., where he was employed for 14 years. He also has held various supervisory and analytical positions in corporate finance with Ford Motor Company. R. Jeffrey Taylor is Executive Vice President, Development of the Company and has served in such capacity since July 31, 1998. Mr. Taylor served as Senior Vice President, Development of the Company from November 19, 1997 to July 31, 1998. Prior to that, Mr. Taylor served as Senior Vice President of GranCare since January 1997, as President of GranCare's ancillary services division from November 1996 through January 1997, and as President of GCI Renal Care, Inc., a subsidiary of GranCare, from February 1996 through November 1996. Before joining GranCare, Mr. Taylor was Chief Executive Officer of American Outpatient Services Corporation, a dialysis company, from July 1994 to February 1996. From January 1992 to June 1994 he was President of Weisman, Taylor, Simpson & Sabatino, a health care merchant banking firm based in California. From 1982 through 1991 Mr. Taylor served in several executive capacities with American Medical International, Inc. including General Counsel and Executive Vice President, Chief Administrative Officer. Ann E. Weiser is Senior Vice President, Human Resources of the Company and has served in such capacity since January 1, 1998. Prior to that, Ms. Weiser served as Senior Vice President-Human Resources for RR Donnelley & Sons Company from August 1996 until October 1997. Prior to this, Ms. Weiser served as Vice President Human Resources at Kraft Foods, Inc. from August 1989 through August 1996. 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. 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKETS AND SALES PRICES OF COMMON EQUITY SECURITIES The Company's common stock was traded on the New York Stock Exchange ("NYSE") under the symbol "LCA," through November 4, 1997 and "PGN" through July 31, 1998. Since August 1, 1998, the Company's common stock has been traded on the NYSE under the symbol "MPN." The high and low sales prices for each quarter for the last two fiscal years is presented in the table below. On November 24, 1997, the Board of Directors of the Company declared a three-for- one stock split to stockholders of record as of December 15, 1997 and which was paid on December 30, 1997. The information below has been adjusted to give effect to this stock split.
1998 1997 ---------------- ------------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ------- -------- --------- --------- December 31................................ $20 3/4 $16 1/4 $ 9 7/16 $ 9 3/16 March 31................................... 21 1/2 17 1/16 11 3/4 11 1/4 June 30.................................... 21 13 7/8 13 1/4 12 15/16 September 30............................... 17 1/4 4 7/8 13 11/16 12 1/2
NUMBER OF STOCKHOLDERS As of December 21, 1998, there were approximately 1,900 owners of record of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends on its common stock since inception and it does not currently anticipate paying any such dividends on its common stock in the future. The Company's Senior Credit Facility, indenture with respect to the Company's outstanding Senior Subordinated Notes, and various other note agreements contain covenants which effectively limit the ability of the Company to pay cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Note 10 to the Consolidated Financial Statements. UNREGISTERED STOCK SALES In connection with the acquisition of Professional Rehability, Inc. and certain affiliated companies, on May 1, 1998 the Company issued 1,147,225 shares of its common stock as part of the consideration. These were issued pursuant to the exemption from registration contained in Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). In connection with the acquisition by merger of Summit Medical Holdings, Ltd. on July 13, 1998, the Company issued 1,043,358 shares of its common stock as part of the consideration. These were issued pursuant to the exemption from registration contained in Rule 506 of Regulation D promulgated under the Securities Act. 27 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 ("BCC") as though the transaction occurred on September 30, 1993; 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. All dollar amounts are presented in thousands, except per share amounts.
YEARS ENDED SEPTEMBER 30, ------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) INCOME STATEMENT DATA: Net revenues.......... $2,035,529 $1,140,288 $1,114,491 $893,869 $708,873 Income (loss) from op- erations............. (94,072) 95,108 89,556 57,005 49,468 Interest expense, net................ 114,302 16,852 12,461 10,817 10,894 Equity earnings/minority interests.......... (562) (735) (156) (204) 1,603 Extraordinary loss.. (11,275) -- -- -- -- Net income (loss)... (209,652) 43,917 43,180 24,234 26,616 Pro forma taxes(1).... -- -- -- 599 899 Pro forma net income (loss)(1)............ (209,652) 43,917 43,180 23,635 25,717 Earnings (loss) per share--basic(2)...... $ (4.31) $ 0.75 $ 0.72 $ 0.43 $ 0.52 Pro forma earnings (loss) per share-- basic(1)(2).......... $ (4.31) $ 0.75 $ 0.72 $ 0.42 $ 0.50 Earnings (loss) per share--diluted(2)(3). $ (4.31) $ 0.73 $ 0.71 $ 0.42 $ -- Pro forma earnings (loss) per share-- diluted(1)(2)(3)..... $ (4.31) $ 0.73 $ 0.71 $ 0.41 $ -- Weighted average number of shares outstanding--basic (in thousands)(2).... 48,601 58,613 60,372 56,553 51,240 Weighted average number of shares outstanding--diluted (in thousands)(2).... 48,601 59,808 60,946 57,134 -- OPERATING STATISTICS: Number of centers (end of period)........... 428 202 206 294 288 Average occupancy rate................. 84.1% 82.9% 83.9% 85.1% 85.2% Percentage of patient revenues from: Private............. 29.9% 33.4% 31.9% 25.5% 23.7% Medicare............ 31.5 25.7 25.5 23.9 17.5 Medicaid............ 38.6 40.9 42.6 50.6 58.8 Percentage operating margin............... (4.6)% 8.3% 8.0% 6.4% 7.0% SEPTEMBER 30, ------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- -------- -------- BALANCE SHEET DATA: Working capital....... $ 350,216 $ 102,104 $ 101,091 $ 34,631 $ 14,955 Total assets.......... 3,036,651 874,367 809,612 730,708 525,639 Long term debt, in- cluding current por- tion................. 2,024,115 295,959 276,448 216,910 206,097 Stockholders' equity.. 397,014 375,283 329,315 303,596 172,018 Total capitalization.. 2,421,129 671,242 605,763 520,506 378,115
- -------- (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. (3) Diluted weighted average number of shares outstanding not available. 28 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. GENERAL The Company provides a diverse range of services in the health care continuum including post-acute care, inpatient care, comprehensive inpatient and outpatient rehabilitation services, health care services and products (including institutional and home pharmacy services, respiratory and infusion therapy and durable medical equipment), physician services, hospital unit management and rehabilitation staffing. The Company's revenues and profitability will be 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. On a pro forma basis (taking into account both the GranCare Merger and the Mariner Merger, as if the transactions had occurred on October 1, 1997), the Company's percentage of total net patient revenues derived from Medicaid and Medicare programs were 37.0% and 30.8%, respectively, for the year ended September 30, 1998. 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, on a pro forma basis, taking into account both the GranCare Merger and the Mariner Merger, accounted for 32.2% of the Company's total net patient revenues for the year ended September 30, 1998. RESULTS OF OPERATIONS Revenues from nursing home operations accounted for $1.5 billion of the Company's $2.0 billion total net revenues for fiscal 1998. Nursing home revenues are derived from the provision of two basic services: routine services ($1,105.3 million or 72.3% in fiscal year 1998) and ancillary services ($422.8 million or 27.7% in fiscal year 1998) and are a function of occupancy rates in the Company's long-term care facilities and payor mix. 29 As identified in the following table, fiscal 1998 weighted average occupancy increased by 1.2% over fiscal 1997 weighted average occupancy, 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, ---------------------- 1998 1997 1996 ------ ------ ------ Weighted average licensed bed count................ 46,395 23,028 25,498 Total average residents............................ 39,476 19,095 21,405 Average occupancy.................................. 84.1% 82.9% 83.9%
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. Managed care as a payor source to health care providers is expected to increase over the next several years. The Company has increased its managed care contracting capabilities and has created a system which allows the centralized case management of these patients within targeted markets. However, the impact to the Company of this payor source can not be determined at this time. Reimbursement rates from government sponsored programs, such as Medicare and Medicaid, are strictly regulated and subject to funding appropriations from federal and state governments. Changes in reimbursement rates, including the implementation of PPS and the fee screen schedules and therapy caps for Part B Medicare patients beginning in 1999, may adversely affect the Company. See "Business--Regulation." Revenues derived from the Company's pharmacy and therapy groups are also influenced by payor mix. The table below presents the approximate percentage of the Company's net patient revenues derived from the various sources of payment for the periods indicated:
YEARS ENDED SEPTEMBER 30, ---------------------------- 1998 1997 1996 -------- -------- -------- Private pay.................................. 29.9% 33.4% 31.9% Medicare..................................... 31.5% 25.7% 25.5% Medicaid..................................... 38.6% 40.9% 42.6%
The percentage of revenues derived from private pay sources declined for fiscal year 1998, primarily as a result of the GranCare Merger. GranCare has 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 34.2%. The GranCare Merger reduced the percentage of private pay revenue by 5.0% while the Mariner Merger increased the percentage of private pay revenue by 0.7%. The combined mix of private pay and Medicare was 61.4% for fiscal 1998 as compared to 59.1% for fiscal 1997. This was primarily attributable to growth in the Company's non-nursing home operations and the GranCare Merger because GranCare's facilities historically had a higher Medicare payor mix than LCA's. The net revenues from the non-nursing home operations, which are primarily reimbursed by private pay and Medicare sources, result in a reduction of the percentage of net revenues derived from the Medicaid program. In addition, average reimbursement rates for Medicare patients have 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 generates a higher level of net revenue per patient day, profitability is not proportionally increased due to the additional costs associated with the required higher level of care and other services for such residents. The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until annual cost reports are audited or otherwise reviewed and settled with the applicable 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. The Company believes that it has properly recorded revenue under 30 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. For cost reporting periods beginning on or after July 1, 1998, the Medicare program will change its method of payment to a fixed per diem rate under the adopted PPS system. See "Business--Regulation" and "Liquidity and Capital Resources-- Healthcare Regulatory Matters" and Note 1 to Consolidated Financial Statements. Costs and expenses, excluding depreciation, amortization, recapitalization, indirect merger and other expenses, and impairment of long-lived assets, primarily consist of salaries, wages, and employee benefits. Various federal, state, and local regulations impose, depending on the services provided, a variety of regulatory standards for the type, quality and level of personnel required to provide care or services. These regulatory requirements have an impact on staffing levels, as well as the mix of staff, and therefore impact total costs and expenses. See "Business--Regulation." The cost of ancillary services, which includes pharmaceuticals, is also affected by the level of service provided and patient acuity. General and administrative 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. FISCAL 1998 COMPARED TO FISCAL 1997 Net revenues comprising nursing home and non-nursing home operations totaled $2.0 billion for the year ended September 30, 1998, an increase of $895.2 million or 78.5%, as compared to fiscal 1997. Revenues from nursing home operations increased by $780.0 million, which included the acquisition of GranCare effective November 1, 1997 of $700.4 million, and the acquisition of Mariner Health effective July 31, 1998 of $129.2 million. 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. Non-nursing home operations contributed $115.2 million of the increase, consisting of an increase of $33.6 million for pharmacy services, an increase of $14.6 million for therapy services, and an increase of $67.0 million from home health, hospital services and other. Pharmacy services net revenues increased by $5.6 million as a result of the Mariner Merger and other 1998 acquisitions. The increase in therapy services net revenues included a $27.2 million increase in therapy services net revenues resulting from the Mariner Merger and other 1998 acquisitions. Home health, hospital services, and other revenue increased by $67.0 million as a result of the GranCare and Mariner Mergers and other 1998 acquisitions. In September 1998 the Company entered into a sales agreement to dispose of the majority of its hospice entities. The Company is evaluating its options with respect to its remaining hospice and home health agencies. Pre-tax recapitalization, indirect merger and other expenses totaled $87.3 million for the year ended September 30, 1998, of which $66.2 million related to the Apollo/LCA/GranCare Mergers, and $12.0 million related to the Mariner Merger. Approximately $69.3 million of these expenses were paid as of September 30, 1998. The Company anticipates recording an additional charge during fiscal year 1999 to close an existing shared service center acquired in the Mariner Merger and continue the implementation of its shared service centers consolidation. In the fourth quarter of fiscal year 1998 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 SFAS 121. The non-cash accounting charge was determined 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 31 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 as a result of reduced Medicare reimbursement due to PPS. Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.7 million during fiscal 1998, was completed during the fourth quarter of fiscal 1998. Nursing facilities and home health agencies to be disposed of had a carrying value of $54.8 million at September 30, 1998. 31--1 Insurance expense totaled $59.0 million for the year ended September 30, 1998, an increase of $32.8 million or 125.6% as compared to fiscal 1997. Of this amount, $12.8 million resulted from the GranCare and Mariner Mergers and $14.9 million resulted from a non-cash increase in reserves at the Company's wholly-owned insurance subsidiary related to increased development factors primarily on claims incurred prior to fiscal 1998. Effective March 31, 1998, the Company terminated its self-insurance programs through its wholly-owned insurance subsidiaries and purchased through a third party insurance company a traditional indemnity insurance policy for workers' compensation liabilities and general and professional liability insurance with aggregate self-insurance retention limits. Costs and expenses excluding recapitalization, indirect merger and other expenses and impairment of long-lived assets totaled $1.9 billion for the year ended September 30, 1998, an increase of $863.9 million or 82.9% as compared to fiscal 1997. Approximately $671.0 million, or 77.7% of the increase, was due to the acquisition of GranCare while approximately $116.2 million, or 13.5% of the increase, was due to the acquisition of Mariner Health. Excluding GranCare and Mariner Health, costs for payroll and employee benefits decreased by $2.6 million, while ancillary and general and administrative expenses increased by $19.6 and $3.1 million, respectively. The increase in ancillary costs was the result of higher ancillary service billings in the nursing home operations and higher pharmaceutical supply costs related to the increase in pharmacy services revenue. Provision for bad debts increased by $3.3 million or 12.4% for the year ended September 30, 1998, which included $8.8 million from the GranCare and Mariner Mergers and which was partially offset by a $4.9 million reduction at the Company's therapy operations. The Company reported a $94.1 million loss from operations for the year ended September 30, 1998 as compared to $95.1 million of income from operations for fiscal 1997, largely as a result of the effect of the $135.8 million non-cash charge for impairment of long-lived assets and the $87.3 million recapitalization, indirect merger and other expenses discussed above. Results of operations for fiscal year 1998 were adversely affected by lower Medicare census in the Company's facilities and higher than expected operating costs and the transition to the PPS environment. 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. 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 for the year ended September 30, 1998 was approximately (36)% compared to 43.3% for the same period in 1997. The effective income tax rate reflected the continuation of previously existing non-deductible items and the lower pre-tax book income, as well as the establishment of a valuation allowance to reduce the amount of the deferred tax asset realized in the current year. 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. FISCAL 1997 COMPARED TO FISCAL 1996 Net revenues comprising nursing home and non-nursing home operations totaled $1.1 billion for the year ended September 30, 1997, an increase of $25.8 million or 2.3%, as compared to fiscal 1996. Revenues from nursing home operations decreased by $28.5 million, which included $63.5 million due to divestitures, primarily the disposition of the DevCon operations in the fourth quarter of fiscal 1996, and an $8.0 million reduction due to lower average occupancy rates. Rate increases of $30.2 million and higher ancillary service billings of $13.8 million resulting from the improvement in mix, primarily Medicare, partially offset the nursing home revenue decreases. Non-nursing home revenue increased by $54.3 million which consisted of an increase of $69.3 million 32 for pharmacy services, a decrease of $26.3 million for therapy services, and an increase of $11.3 million from home health, hospital services and other. The acquisition of pharmacies in fiscal year 1996 that occurred late in the year primarily caused the increase in pharmacy services revenue. The closure of approximately 30 clinics during fiscal 1996 that no longer met the Company's financial or operating objectives resulted in a decrease in therapy services revenue. The increase in home health, hospital services and other is primarily due to the purchase of Colorado Home Care, Inc. in January 1997 and the purchase of the remaining 50% interest in Heart of America Hospice, LLC during fiscal year 1997. Costs and expenses totaled $1.0 billion for the year ended September 30, 1997, an increase of $20.2 million or 2.0%, as compared to fiscal 1996. Excluding divestitures, costs for payroll and employee benefits, ancillary, and insurance expense increased by $19.2, $38.1 and $3.7 million, respectively. The increase in ancillary services expenses was primarily the result of higher pharmaceutical costs related to the increase in pharmacy services revenue. Divestitures, primarily DevCon, reduced total expenses by $53.0 million. The provision for bad debt expense increased by $9.6 million for the year ended September 30, 1997, which included a reduction of $1.9 million due to collection of a note receivable and another receivable that was substantially reserved. The remaining increase of $11.5 million was primarily due to an increase in average days outstanding for accounts receivable related to the increase in pharmacy revenues, which have a higher provision for bad debts, and focused Medicare reviews in several states for therapy operations, which delays the payment cycle for Medicare receivables while each claim receives a medical review. In addition, the centralization of billing and collection for therapy operations resulted in delayed billing and a longer billing cycle which resulted in an increase in average days outstanding for receivables. In order to improve the collection process, therapy operations have improved the timeliness of billing, implemented new collection procedures, and opened three new regional collections sites for the clinics. Therapy operations were partially removed from focused billing review in Texas during the third fiscal quarter and fully removed in October 1997, although certain other states remain on billing review. Although significant reductions in average days outstanding were achieved during the fourth quarter of fiscal 1997, average days outstanding for the therapy operations remain high compared to historical levels. As a result, the Company recorded an additional provision for bad debts of $5.0 million during the fourth quarter to reserve for potential uncollectibility on the older accounts. Merger and acquisition costs increased total expenses in fiscal year 1997 by $2.6 million compared to a reduction of costs and expenses in fiscal 1996 of $1.1 million from non-recurring items. The merger and acquisition costs of $2.6 million for fiscal 1997 were related to the Apollo/LCA/GranCare Mergers. The $1.1 million reduction of expense from non-recurring items for 1996 consisted of a $2.0 million gain from the receipt of life insurance proceeds on the former President of the Rehabilitation Services Group, a $22.5 million gain in September 1996 on the sale of the DevCon operations, a $2.9 million charge primarily related to the closure of the Company's medical supplies business and write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement, and a $20.5 million impairment loss. Net interest expense totaled $16.9 million for the year ended September 30, 1997, an increase of $4.4 million as compared to the same period for fiscal 1996. The increase reflected interest expense to finance the higher average level of working capital during fiscal year 1997, additional debt to purchase $20.0 million of the Company's common stock late in fiscal 1996, and acquisitions, investments, and other capital expenditures during fiscal 1997. The provision for income taxes totaled $33.6 million in fiscal year 1997, a decrease of $0.2 million from fiscal year 1996. The 1997 effective tax rate of 43.3% was 0.5% lower than the 1996 effective rate as a result of lower amortization of non-deductible goodwill amortization and higher tax credits which were partially offset by non-deductible merger and acquisition costs. 33 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 coming of the Year 2000, the Company is in the process of evaluating and addressing issues that could arise in connection with the potential inability of computer programs to recognize dates that follow December 31, 1999 (the "Year 2000 Issue"). The Year 2000 Issue presents 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. To date, the Company's main focus with respect to the Year 2000 Issue has been to ensure that its company-wide information systems will function properly in the Year 2000 and beyond. To address issues inherent in operating disparate information systems utilized by the Company's predecessor corporations, following the Apollo/LCA/GranCare Mergers the Company decided to complete the installation of a new client- server based financial and payroll/human resources software package. The installation of the new system is in progress and the Company anticipates that it will be fully operational on or about October 1, 1999. The Company expects that its corporate systems exposure to the Year 2000 Issue will be substantially eliminated by approximately May 1999, at which time the Company's non-Year 2000 compliant corporate systems will have been replaced. All other systems to be replaced are currently Year 2000 compliant. The Company has received assurances from the manufacturer that the new systems are Year 2000 compliant. The implementation of these systems was not in response to the Year 2000 Issue. In addition to its primary information system, certain of the Company's business lines also use business line specific information systems. In this regard, the Company has formed a committee with members from each of the Company's business lines as well as representatives from the purchasing, legal, accounting, payroll, and risk management areas of the Company (the "Year 2000 Committee"). This committee will report to the Company's senior management and will be responsible for identifying those business line specific systems potentially effected by the Year 2000 Issue, as well as identifying and inventorying those medical devices in the Company's facilities that could be effected. The Committee is in the process of evaluating the extent to which these systems or medical devices may be impacted by the Year 2000 Issue. The Year 2000 Committee plans to report its initial assessment to the Company's Board in February 1999. The Company is in the process of remediating all local area networks ("LANs"), software and individual computers and anticipates that the process will be substantially complete by July 1999. With respect to these items, the Company has not expended significant costs related to the Year 2000 Issue and is remedying the Year 2000 Issue through replacing computers and software in the ordinary course. On a going forward basis the Company is endeavoring to ensure that all software and hardware purchased is Year 2000 compliant through testing and inserting appropriate language into its purchase contracts. The Company has also contacted, and will continue to contact, its key suppliers to gain assurance that they will be year 2000 compliant. This process will be ongoing, although most key suppliers who have responded to inquiries have indicated that they expect to be Year 2000 compliant in a timely fashion. In addition, because the Company maintains a broad base of vendors and suppliers, it does not believe that it is at risk with respect to any individual vendor or supplier who may be noncompliant. To date, the Company has expended $4.3 million to remedy problems associated with the Year 2000 Issue and estimates that it will expend an additional approximately $8.2 million in the future. This amount does not include funds necessary to remedy Year 2000 Issues in the Company's facilities. The Company is aware of the potential for problems associated with the heating, ventilation and air conditioning ("HVAC") and other systems in its facilities, which may contain embedded chips that may cause 34 these systems to shut down following December 31, 1999. Although the Company is conducting a facility by facility examination to determine which facilities and systems are susceptible to the Year 2000 Issue, the Company does not believe that there is significant risk in this area. Most of the Company's facilities are older and thus do not have systems that are dependent on embedded chips. In the newer facilities and those facilities where Year 2000 Issues are found to exist, the Company plans on remediating any potential problems. The Company believes that this remediation will be completed on or before July 1999 and that the costs associated therewith, together with the costs of remedying issues with respect to embedded chips, will approximate $3.0 million. With respect to the Company's customers, the largest source of the Company's revenues is the state and federal governments through the Medicaid and Medicare programs, respectively. The Company is reimbursed under these programs through fiscal intermediaries. The Health Care Financing Administration ("HCFA"), the government agency that administers the Medicare program, has publicly stated that it will be Year 2000 compliant by December 31, 1998 and has required all fiscal intermediaries to be Year 2000 compliant by the same date. HCFA has also stated that it expects state Medicaid agencies to be Year 2000 compliant by March 31, 1999. However, recent reports by the General Accounting Office report that the various states may not meet this schedule. Because the Company has no control over these entities, in the event the fiscal intermediaries and the state and federal governments are not Year 2000 compliant, the timely receipt of the Company's receivables may be adversely affected. A significant delay in the receipt of its receivables would have a material adverse effect on the Company's financial condition and results of operations. The Company believes that the principal risks for the Company from the Year 2000 Issue are from the embedded computer chips found in certain critical medical devices in the Company's facilities and from the potential for delay in the receipt of payment from third-party payors. With respect to identified medical devices, the Company plans to evaluate the devices to determine if they are susceptible to the Year 2000 Issue and, where appropriate, to contact the manufacturers regarding remedying the Year 2000 Issue. In the event the Company is unable to complete any required upgrades prior to December 31, 1999, the Company will remove the effected devices from service. Although the third party payor payables issue is not within the Company's control the Company plans to ascertain whether the commitments in the previous paragraph are kept following the end of the calendar year. LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY Cash and cash equivalents were $3.3 million at September 30, 1998. Working capital was $350.2 million, an increase of $248.0 million during the year ended September 30, 1998. Cash used in operations was $15.5 million which was net of approximately $69.3 million in payments for recapitalization, indirect merger, and other expenses. Excluding the acquisition of accrued expenses in the GranCare and Mariner Mergers, accrued expenses and other current liabilities increased by $23.7 million primarily as a result of accruals related to costs, primarily severance, for the Mariner Merger. Excluding the acquisition of accounts payable in the GranCare and Mariner Mergers, accounts payable decreased by $21.5 million primarily as a result of the $19.0 million termination fees paid to Vitalink and Manor Care, Inc. in consideration of the termination of a non-competition agreement in conjunction with the GranCare Merger. Under Medicare cost reimbursement programs, final reimbursement and payment for services is based on filing annual cost reports and reaching a final settlement 12 to 24 months after filing. During the previous fiscal year, the Company experienced an increase in the number of exception requests and administrative appeal processes necessary to reach final settlement. These increased exception processes and administrative appeal processes have increased the required time needed to collect final settlements for open cost report years. With the implementation of PPS, payments for services will be entirely determined on a claim by claim basis after patient discharge. The Company receives payment for nursing facility services based on rates set by individual state Medicaid programs. Although payment cycles for these programs vary, payments generally are made within 30 to 60 days 35 of services provided. The federal Medicare program, currently changing from a cost-based reimbursement program to fixed per diem amount under PPS (See "-- Changes in Healthcare Legislation"), with respect to those facilities still reimbursed on a cost basis, pays interim rates based on estimated costs of services on a 30 to 45-day basis. Final cost settlements, based on the difference between audited costs and interim rates are paid following final cost report audits by Medicare fiscal intermediaries. Because of the cost report and audit process, final settlement may not occur until up to 24 months after each facility's Medicare year end. Specialty medical services generally increase the amount of payments received on a delayed basis. The Company is also moving to a single operating platform for the inpatient group's accounts receivable. At September 30, 1998, approximately 79% of the former GranCare facilities had been converted to the Company's field-based accounts receivable system. All former Mariner Health facilities are scheduled to be converted to the Company's field-based accounts receivable system during fiscal 1999. The Company is reviewing the aging of the Mariner Health accounts receivable and related allowance and may record a charge during fiscal year 1999 to conform the Mariner Health reserve calculation to the calculation utilized by the Company. In July of 1998 when PPS was initially implemented, the fiscal intermediaries were not prepared to reimburse the Company and other providers under the new system. Accordingly, the fiscal intermediaries continued to reimburse providers based on their interim payment rates. Effective October 1, 1998, the fiscal intermediaries were required to begin reimbursing providers based on the PPS rates, and the Company believes that substantially all of the fiscal intermediaries are in compliance. With respect to the period between the implementation of PPS and October 1, 1998, a settlement process will occur whereby the difference between the PPS rate and the interim rate will be paid to the provider or to the fiscal intermediary. The Company only had 17 facilities that might be affected by this settlement process and the Company does not believe that this process will have a material effect on the Company's results of operations. Once the fiscal intermediaries begin reimbursing providers based on the PPS rates, the Company will submit claims monthly and be reimbursed 14 days following the receipt by the fiscal intermediary of claims for which no dispute is outstanding, and there will be no cost report and audit process. The Company has experienced a delay in the submission of its PPS claims for reimbursement due to system conversion issues and the problems associated with adapting to a new reimbursement system. However, the Company does not believe that these delays have had or will have a material adverse effect on the Company. Cash used in investing activities was $211.8 million in the twelve months ended September 30, 1998, as compared to $77.3 million for the year ended September 30, 1997. Investing activities for the year ended September 30, 1998 included the use of $81.1 million related to the Mariner Merger, $28.8 million related to the acquisition of Professional Rehabilitation, Inc., $25.0 million related to the acquisition of certain long-term care facilities, $7.4 million related to various pharmacy acquisitions and $17.0 million to purchase certain LTAC's. Deposits and Other primarily included a deposit to Health and Retirement Properties Trust ("HRPT") of $15 million reduced by the cash received in the GranCare Merger. See "--Other Significant Indebtedness." Other investing activities for the year ended September 30, 1998 included $65.2 million for routine capital expenditures. Capital expenditures are expected to be funded by cash from operations or the Revolving Credit Facility (defined below). Financing activities provided $216.3 million during the year ended September 30, 1998. Cash provided by financing activities included $232.8 million from the issuance of 17.8 million shares of common stock to Apollo and certain other investors, $815.0 million in proceeds from the Senior Credit Facility, and $448.9 million in proceeds from the offering of the Notes (defined below under "--Senior Subordinated Notes"). Cash of $735.2 million was used to purchase approximately 90.5% of the issued and outstanding stock of the Company in conjunction with the Recapitalization Merger, $563.3 million to repay substantially all amounts outstanding under the Company's and GranCare's previous credit facilities, and $30.2 million to pay financing fees associated with the Senior Credit Facility and the Notes. Senior Credit Facility. As of September 30, 1998, the Senior Credit Facility consisted of four components: a 6 1/2 year term loan facility in an aggregate principal amount of $315 million (the "Tranche A Term Loan 36 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. The Senior Credit Facility originally called for Term Loans to be amortized in quarterly installments approximating $0.0, $6.6 million, $12.3 million, $12.9 million, $14.1 million, $46.5 million, $59.8 million and $20.0 million in fiscal years 1998 through 2006, respectively. Principal amounts outstanding under the Revolving Credit Facility will be due and payable in April 2005. As of September 30, 1998, there was $21.0 million borrowed under the Revolving Credit Facility and approximately $6.7 million in letters of credit outstanding. The principal amounts of the Tranche A Term Loans and the Revolving Credit Facility mentioned above reflect increases to those facilities of $75 million and $25 million, respectively, as part of the First Amendment to the Senior Credit Facility effective on July 31, 1998, consummated in connection with the consummation of the Mariner Merger. As a result of the increased principal amount of the Tranche A Term Loans, aggregate amortization of the Term Loans increased to the following approximate quarterly amounts: $0.0, $8.4 million, $15.8 million, $16.6 million, $18.2 million, $48.5 million, $59.8 million and $20.0 million in fiscal years 1998 through 2006, respectively. Interest on outstanding borrowings 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. As of September 30, 1998, the Applicable Margins in the pricing matrix pertaining to Revolving Loans and Tranche A Term Loans ranged from 0% to 1.25% for loans based on ABR ("ABR Loans"), and from 0.75% to 2.25% for loans based on the Eurodollar Rate ("Eurodollar Loans"). The Applicable Margin for Tranche B Term Loans was 1.50% and 2.50% ABR Loans and Eurodollar Loans, and 1.75% and 2.75% for Tranche C Term Loans based on ABR and the Eurodollar Rate, respectively. As of September 30, 1998, the Applicable Margin in effect for Revolving Loans and Tranche A Term Loans was 1.25% for ABR Loans and 2.25% for Eurodollar Loans. Accordingly, as of such date the applicable interest rates (in each case first for ABR Loans and then for Eurodollar Loans) were as follows: for Revolving Loans and Tranche A Term Loans, 9.0% and 7.6%; for Tranche B Term Loans, 9.3% and 7.8%; and for Tranche C Term Loans, 9.5% and 8.1%. Subsequent to the Company's fiscal year end, the Senior Credit Facility was amended (the "Second Amendment") effective December 23, 1998 to provide the Company and its subsidiaries with additional flexibility under certain of the Senior Credit Facility's financial and operational covenants in exchange for, among other things, a modification of the related pricing matrix. As a result, the applicable interest rate margin for Revolving Loans and Tranche A Term Loans under the ABR will range from 0.25% to 1.25% and for loans under the Eurodollar rate from 1.75% to 2.75%. The applicable interest rate margin for Tranche B Term Loans under the ABR will be 2.25% and will be 3.25% for Eurodollar loans. The applicable interest rate margin for Tranche C Term Loans under the ABR will be 2.50% and will be 3.50% for Eurodollar loans. Accordingly, as of September 30, 1998, the resultant interest rates (in each case first for ABR Loans and then for Eurodollar Loans) were as follows: for Revolving Loans and Tranche A Term Loans, 9.0% and 8.1%; for Tranche B Term Loans, 10.0% and 8.6%; and for Tranche C Term Loans, 10.3% and 8.8%. The covenants contained in the Senior Credit Facility, among other things, restrict the ability of the Company to dispose of assets, repay other indebtedness or amend other debt instruments, pay dividends, make 37 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. Subject in each case to certain exceptions, the following amounts are required to be applied, as mandatory prepayments, to prepay the Term Loans: (i) 75% of the net cash proceeds of the sale or issuance of equity by the Company; (ii) 100% of the net cash proceeds of the incurrence of certain indebtedness; (iii) 75% of the net cash proceeds of any sale or other disposition by the Company or any of its subsidiaries of any assets excluding the sale of inventory and obsolete or worn-out property, and subject to a limited exception for reinvestment of such proceeds within 12 months; and (iv) 75% of excess cash flow for each fiscal year, which percentage will be reduced to 50% in the event the Company's leverage ratio as of the last day of such fiscal year is not greater than 4.50 to 1.00. Mandatory prepayments will be applied pro rata to the unmatured installments of the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans; provided, however, that as long as any Tranche A Term Loans remain outstanding, each holder of a Tranche B Term Loan or a Tranche C Term Loan will have the right to refuse any such mandatory prepayment otherwise allocable to it, in which case the amount so refused will be applied as an additional prepayment of the Tranche A Term Loans. The Company also has the right to prepay the Senior Credit Facility, in whole or in part, at its option. Partial prepayments must be in minimum amounts of $1.0 million. Amounts applied as prepayments of the Revolving Credit Facility may be reborrowed; amounts prepaid under the Term Loans may not be reborrowed. Senior Subordinated Notes. 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 will mature on November 1, 2007. The net proceeds from this offering, along with proceeds from the Senior Credit Facility, were used to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness and to pay costs and expenses associated with the 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. Other Significant Indebtedness and Commitments. In connection with the Apollo/LCA/GranCare Mergers, the Company became a party to various agreements between GranCare and Health and Retirement Properties Trust ("HRPT") and Omega Healthcare Investors, Inc. ("Omega"). HRPT was the holder of a mortgage loan to AMS Properties, Inc. ("AMS Properties"), a wholly-owned subsidiary of the Company, dated October 1, 1994, in the aggregate principal amount of $11.5 million (the "HRPT Loan"). The HRPT Loan was secured, in part, by mortgage and security agreements dated as of March 31, 1995 (collectively, the "HRPT Mortgage") in favor of HRPT and encumbering two nursing facilities in Wisconsin owned by AMS Properties. HRPT was also the lessor with respect to certain facilities leased by AMS Properties and GCI Health Care Centers, Inc. ("GCIHCC"). In connection with certain transactions effected in February 1997 by GranCare's predecessor with Vitalink, Vitalink (i) paid a cash consent fee to HRPT in the amount of $10 million, which was promptly reimbursed by GranCare immediately following the consummation of certain transactions with Vitalink and (ii) entered into a limited guaranty (not to exceed $15 million in the aggregate) of the obligations by GranCare, AMS and GCIHCC under a master lease agreement dated June 30, 1992 with respect to seven nursing facilities located in Arizona, California and South Dakota (the "GCIHCC Lease"), the HRPT Loan and the HRPT Mortgage (collectively, the "HRPT Obligations") for so long as such obligations remained outstanding. To support Vitalink's limited 38 guaranty of the foregoing obligations, GranCare caused an irrevocable letter of credit to be issued to Vitalink in the event Vitalink made any payments under the limited guaranty (the "HRPT Letter of Credit"). In connection with obtaining HRPT's consent to the 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 received an unlimited guaranty by the Company and all subsidiaries of the Company having an ownership interest in AMS and/or GCIHCC (individually, a "Tenant Entity" and collectively, the "Tenant Entities") which guaranty is secured by a cash collateral deposit of $15 million, the earned interest on which is retained by HRPT. The performance by the Tenant Entities of their respective obligations to HRPT continues to be secured by a pledge of one million shares of HRPT common stock beneficially owned by GranCare and, as part of the HRPT/GranCare Restructuring, GranCare agreed to waive the ability to request a release of such collateral upon the attainment of certain financial conditions. Accordingly, the Company does not have the ability to sell these shares to meet any capital requirements. The terms of the leases between HRPT and the Tenant Entities were extended to January 31, 2013, constituting lease extensions ranging from 3 to 7 years and the aggregate base rental for all facilities leased from HRPT (excluding the Exchange Facilities (as defined below)) increased by $500,000 per year. AMS Properties also prepaid the $11.5 million HRPT Loan and HRPT released the HRPT Mortgage upon completion of a like-kind exchange transaction whereby the Tenant Entities exchanged (the "Exchange Transaction") five nursing facilities (the two nursing facilities previously subject to the HRPT Mortgage and three nursing facilities then owned by the Company (collectively the "Exchange Facilities")) for four nursing facilities owned by HRPT. Following completion of the Exchange Transaction, the Tenant Entities leased back the Exchange Facilities for an aggregate annual rent amount equal to the aggregate rent on the four HRPT facilities. In consideration of, and contemporaneously with, the HRPT/GranCare Restructuring, the Company paid HRPT a one time restructuring payment of $10 million. The Company also paid an aggregate amount of $19.0 million to Vitalink and Manor Care in connection with the settlement of certain litigation initiated by Vitalink and Manor Care seeking to enjoin the consummation of the GranCare Merger. A wholly-owned subsidiary of the Company, Professional Health Care Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note executed on August 14, 1997 (the "Omega Note") in favor of Omega, and under the related Michigan loan agreement dated as of June 7, 1992 as amended (the "Omega Loan Agreement"). All $58.8 million was outstanding as of September 30, 1998. 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 15.0% per annum which is paid monthly. Additional interest accrues on the outstanding principal of the Omega Note at the rate of 1% per annum. Such interest is compounded annually and is due and payable on a pro rata basis at the time of each principal payment or prepayment. Beginning October 1, 2002, quarterly amortizing installments of principal in the amount of $1.5 million will also become due and payable on the first day of each calendar quarter. The entire outstanding principal amount of the Omega 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. Payment of the Omega Note after acceleration upon the occurrence of an event of default will result in a prepayment penalty in the nature of a "make whole" premium. In addition to the interest on the Omega Note described in the preceding paragraph, and as a condition to obtaining Omega's consent to the February 1997 transaction between Vitalink and GranCare, PHCMI agreed to pay additional interest to Omega in the amount of $20,500 per month, through and including July 1, 2002. If the principal balance of the Omega 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 39 annum to the prepayment date; less (iii) the amount of such additional interest paid to Omega prior to the prepayment date. 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. PHCMI has satisfied this test in the past without the contribution of additional equity, and management believes that it will continue to do so in the future. Mariner Health Senior Credit Facility. As of September 30, 1998, 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 Lenders"), and PNC Bank, National Association ("PNC Bank"), as agent for the Mariner Lenders (the "Mariner Agent"). As of September 30, 1998, approximately $357.0 million of loans and $12.0 million of letters of credit were outstanding. The Mariner Health Senior Credit Facility terminates on January 3, 2000, and provides for prime rate and Eurodollar - based interest rate options. The borrowing availability and rate of interest vary depending upon specified financial ratios, with applicable interest rate margins originally ranging between 0% and 0.25% for prime-base borrowings, and between 0.50% and 1.75% for Eurodollar - based advances. As of November 30, 1998, the applicable margins were 0% for prime-based revolving loans and 1.25% for Eurodollar-based loans. The Mariner Health Senior Credit Facility also 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") 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 will initially be 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 (as the latter term is defined below under "--Other Factors Affecting Liquidity and Capital Resources"). 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 40 made a $210 million senior secured term loan to Mariner Health (the "Mariner Term Loan"). Proceeds of the Term Loan were applied to reduce outstandings 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 Term Loan matures 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. 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 Term Loan. 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 Term Loan 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 Term Loan 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. 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. 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 and the Mariner Trustee entered into an amendment to the Mariner Indenture which permitted Mariner to designate a third-party to purchase any Mariner Notes tendered pursuant to the Change of Control Purchase. Mariner Health designated a financial institution as a third-party purchaser, and on September 21, 1998 such financial institution acquired all $40,661,000 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, the financial institution 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 Tendered Mariner Notes remain outstanding and are owned and controlled by such third-party purchaser. The Company's obligations under the Total Return Swap are guaranteed by Mariner Health and substantially all of the subsidiaries of Mariner Health. Other Mariner Health Indebtedness. As of September 30, 1998, Mariner Health and its subsidiaries had approximately $64.8 million of facility-specific mortgage and other term loan indebtedness outstanding and $71.2 million in capital lease obligations. Healthcare Regulatory Matters. The Balanced Budget Act enacted in August 1997 (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, over the next five years. Approximately 50% of the savings will be achieved through a reduction in the growth of payments to providers and physicians. 41 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 Balanced Budget Act also required the establishment of an interim payment system for home health services for cost reporting periods beginning on or after October 1, 1997. The interim payment system continues per visit limits and establishes new per beneficiary annual cost limits. A permanent prospective payment system for home health services will be established by October 1, 2000. On May 12, 1998, the Health Care Financing Administration released the nursing home PPS rates for Part A Medicare Patients that are in effect from July 1, 1998 through September 30, 1999. The Company's experience thus far under PPS indicates that PPS has resulted in more intense price competition and lower margins among ancillary service providers (including the Company's pharmacy, therapy, and hospital services subsidiaries) as well as lower overall reimbursement and margins for the Company's skilled nursing facilities. 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. The Company is not able to predict whether any states will adopt changes in their Medicaid reimbursement programs, or, if adopted and implemented, what effect such initiatives would have on the Company. On January 30, 1998, the Health Care Financing Administration issued its new salary equivalency guidelines which change Medicare reimbursement rates for contracted therapy services. Under salary equivalency, the Company is reimbursed for contracted therapy services based on the time spent on the premises by the contract therapist times a fixed rate, depending on the service provided. While the new rates for physical therapy represent an increase over what the Company previously received for such services, the new rates for occupational therapy and speech language pathology represent decreases from what the Company previously received. The salary equivalency guidelines will remain in effect until the facility at which such services are provided, including the Company's facilities and other facilities serviced by the Company's therapy subsidiaries, start billing under PPS. The Company believes that while salary equivalency had a slight adverse effect on its therapy revenue, the Company does not believe that salary equivalency has had a material adverse effect on the Company's consolidated revenues. 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 are effective for services rendered following December 31, 1998. The fee screens have only recently been published and the Company has not yet determined what effect they will have on the Company's results of operations. In the event that the fee screens are not sufficient to cover the cost of the therapy services provided, they would have a material adverse effect on the Company. 42 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. The Company is appealing these adjustments, certain of which are significant. Certain of these are based on the fiscal intermediaries' denials of the exception to the related organizations principle with regard to services and supplies furnished by the Company's pharmacy and rehabilitation divisions to its nursing facilities, and reductions to costs claimed for therapy services for alleged failures to comply with prudent buyer requirements. 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." Some of the fiscal intermediaries have alleged that the Company was not prudent in its purchasing of occupational therapy and speech pathology services prior to HCFA's establishing salary equivalency guidelines for these services effective in April 1998. Adjustments have been made in settling cost reports that reduced the cost from the amounts that were paid to contract therapy providers to the amount that the intermediary calculated would have been paid if the facility had employed therapists to provide services. Appeals were filed with the Provider Reimbursement Review Board ("PRRB") and resulted in a favorable outcome. However, on review the Social Security Administrator reversed the PRRB and allowed the intermediary's adjustments. The Company believes that it has substantial arguments to support its position that the contested costs are allowable and the issue is being pursued through the appropriate legal processes. There can be no assurance that the Company will prevail or that it will not be required to expend significant amounts to complete the appeal process. In addition contracts for therapy services 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 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 its pharmacy and rehabilitation companies. 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. The Company believes that it has substantial arguments to support its position that the facilities should have an exception to the related organization principle. However, there can be no assurance that the Company will prevail or that it will not be required to expend significant amounts to complete the appeal process. Other Factors Affecting 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. The Company's estimated principal payments, cash interest payments, and rent obligations (including those of Mariner Health) for fiscal year 1999 are approximately $295 million. The Company's operations require capital expenditures for renovations of existing facilities in order to continue to meet regulatory requirements, to upgrade facilities for the treatment of subacute patients and to accommodate the addition of specialty medical services, and to improve the physical appearance of its facilities for marketing purposes. The Company estimates that total capital expenditures for the year ending September 30, 1999 will be approximately $79.3 million of which $38 million is estimated to be maintenance capital expenditures. In addition to the Senior Credit Facility, the Company has a lease arrangement providing for up to $100.0 million to be used as a funding mechanism for future skilled nursing facility construction, lease conversions, and other facility acquisitions (the "Synthetic Lease"). This leasing program allows the Company to complete these projects without committing significant financing 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 43 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, 1998, approximately $48.6 million of this leasing arrangement was utilized. The leasing program is accounted for as an operating lease. The Company also received the consent of the requisite lenders under the Synthetic Lease transaction to permit the Mariner Merger, and certain covenants in the Synthetic Lease documents were modified to accommodate the Mariner Merger. In addition, the Synthetic Lease was further amended on December 23, 1998 to mirror certain changes made to the Senior Credit Facility. The Company has experienced an increasing trend in the past year 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 several large judgments against long-term care providers other than the Company in the last year 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 "Business- Regulation" and "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. 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 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 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. In the judgment of the Company's senior management, these restriction have not had, and are not expected to have, a material effect on the ability of the Company to meet its obligations. The Company believes that the cash flow generated from its operations, the Company's cash and cash equivalents, together with amounts available under the Senior Credit Facility and the Mariner Health Senior Credit Facility, should be sufficient to fund its debt service requirements, working capital needs, anticipated capital expenditures and other operating expenses. The Revolving Credit Facility provides the Company with revolving loans in an aggregate principal amount at any time not to exceed $175 million, of which $147.3 million was available at September 30, 1998 after considering $6.7 million in outstanding letters of credit and the $21.0 million borrowed. Also as of such date, $92.0 million was available under the Mariner Health Senior Credit Facility out of the maximum revolving credit commitment of $460 million, after taking into account $356.0 million in outstanding revolving loans and $12.0 million in outstanding letters of credit made or issued pursuant to the Mariner Health Senior Credit Facility. The Company's future operating performance and ability to service or refinance the Notes, the Mariner Health Senior Credit Facility, the Mariner Term Loan and the Mariner Notes and to extend or refinance the Senior Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. The Company is currently evaluating strategic alternatives with respect to certain of its facilities and product groups. The proceeds from any divestiture generally would be used to pay down the Company's indebtedness. 44 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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. As of September 30, 1998, the Company had Swap Agreements in effect totaling $60.0 million notional amount of which $40.0 million will mature in July 2005 and $20.0 million will mature in November 2005. Under the Swap Agreements, the Company pays interest at an average fixed rate of 6.79% and receives interest at a rate of three-month LIBOR. At September 30, 1998, the fair market value of the Swap Agreements would represent a loss of approximately $6.2 million for the Company. Additionally, in September 1998 the Company entered into a total return swap agreement relating to approximately $40.7 million face amount of Mariner Notes (the "Total Return Swap Agreement"). The Total Return Swap Agreement provides for the Company to receive 9.5% interest on approximately $40.7 million of Mariner Notes and to pay interest at one-month LIBOR plus 2.25%. Upon expiration of the Total Return Swap, if not extended, the Company has the right, but not the obligation, to purchase the Mariner Notes. If the Company chooses not to purchase the Mariner Notes, it is responsible for any decrease in the market value and receives the benefit of any increase in market value realized by the third party purchasee. At September 30, 1998, the fair market value of the Total Return Swap Agreement would represent a gain to the Company of approximately $0.1 million. Although the market value of the Mariner Notes has not been directly related to interest rate movements in recent months, to the extent interest rate movements impact the market value of the Mariner Notes, such fluctuations would affect the Company's obligations at expiration of the Total Return Swap Agreement. Based on average floating rate borrowings outstanding throughout fiscal year 1998, a 100-basis point change in LIBOR would have caused the Company's annual interest expense to change by approximately $7.8 million. Accordingly, a significant increase in LIBOR would have a material adverse effect on the Company's earnings. 45 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, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1998. 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 based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mariner Post-Acute Network, Inc., and subsidiaries at September 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Ernst & Young LLP Atlanta, Georgia December 21, 1998 46 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, -------------------- 1998 1997 ---------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 3,314 $ 14,355 Receivables (less allowances of $68,581 and $33,138)... 617,380 211,989 Notes receivable, net.................................. 9,656 2,223 Supplies............................................... 31,516 21,237 Prepaid expenses....................................... 11,943 5,276 Income tax refund receivable........................... 57,323 -- Deferred income taxes.................................. 58,875 24,294 Other (including patient trust funds of $5,399 and $3,799)............................................... 17,916 7,855 ---------- -------- TOTAL CURRENT ASSETS................................. 807,923 287,229 PROPERTY AND EQUIPMENT: Land, buildings and improvements....................... 863,451 378,251 Furniture, fixtures and equipment...................... 231,682 121,698 Leased property under capital leases................... 89,718 12,551 ---------- -------- 1,184,851 512,500 Less accumulated depreciation.......................... 257,698 210,117 ---------- -------- 927,153 302,383 GOODWILL, NET............................................ 1,084,473 196,120 RESTRICTED INVESTMENTS................................... 88,467 51,976 NOTES RECEIVABLE, NET.................................... 20,861 11,200 OTHER ASSETS............................................. 107,774 25,459 ---------- -------- $3,036,651 $874,367 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt. $ 46,250 $ 43,196 Accounts payable....................................... 160,240 46,872 Accrued payroll and related expenses................... 127,774 66,866 Accrued property taxes................................. 12,277 5,342 Patient trust funds.................................... 5,399 3,799 Accrued income taxes payable........................... -- 6,231 Accrued interest....................................... 35,057 2,355 Other accrued expenses................................. 70,710 10,464 ---------- -------- TOTAL CURRENT LIABILITIES............................ 457,707 185,125 LONG-TERM DEBT, NET OF CURRENT MATURITIES................ 1,977,865 252,763 LONG-TERM INSURANCE RESERVES............................. 61,310 27,555 MINORITY INTEREST........................................ 9,618 733 DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES... 133,137 32,908 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $.01; 5,000,000 and 4,650,000 shares authorized; none issued.............. -- -- Series A--Junior participating preferred stock, par value $.01; none and 350,000 shares authorized and re- served; none issued................................... -- -- Common stock, par value $.01; 500,000,000 and 75,000,000 shares authorized; 73,276,866 and 60,803,760 shares issued.............................. 733 608 Capital surplus........................................ 980,142 226,972 Retained earnings (deficit)............................ (583,111) 164,650 Unrealized gain (loss) on securities available-for- sale.................................................. (750) 244 Treasury stock at cost--none and 2,004,444 shares...... -- (17,191) ---------- -------- TOTAL STOCKHOLDERS' EQUITY........................... 397,014 375,283 ---------- -------- $3,036,651 $874,367 ========== ========
The accompanying notes are an integral part of these financial statements. 47 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED SEPTEMBER 30, -------------------------------- 1998 1997 1996 ---------- --------- --------- NET REVENUES Nursing home revenue: Net patient services..................... $1,513,420 $ 742,046 $ 767,747 Other.................................... 14,645 6,004 8,799 Non-nursing home revenue: Pharmacy services........................ 230,313 196,748 127,439 Therapy services......................... 194,125 179,506 205,785 Home health, hospital services, and oth- er...................................... 83,026 15,984 4,721 ---------- --------- --------- 2,035,529 1,140,288 1,114,491 COSTS AND EXPENSES: Salaries and wages......................... 782,520 438,693 455,702 Employee benefits.......................... 158,883 85,712 88,065 Nursing, dietary and other supplies........ 96,462 53,531 60,427 Ancillary services......................... 430,715 224,912 188,937 General and administrative................. 187,701 105,522 110,353 Insurance expense.......................... 58,988 26,142 22,446 Rent....................................... 86,625 42,489 44,185 Depreciation and amortization.............. 75,044 39,309 39,214 Provision for bad debts.................... 29,544 26,282 16,666 Recapitalization, indirect merger and other expenses.................................. 87,336 2,588 2,917 Impairment of long-lived assets............ 135,783 -- 20,489 Life insurance proceeds.................... -- -- (2,015) Gain on sale............................... -- -- (22,451) ---------- --------- --------- 2,129,601 1,045,180 1,024,935 ---------- --------- --------- INCOME (LOSS) FROM OPERATIONS.............. (94,072) 95,108 89,556 OTHER INCOME AND EXPENSE: Interest expense........................... 125,384 21,492 16,750 Interest and dividend income............... (11,082) (4,640) (4,289) ---------- --------- --------- 114,302 16,852 12,461 ---------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES, MINORITY INTEREST, AND EXTRAORDINARY LOSS.......... (208,374) 78,256 77,095 PROVISION (BENEFIT) FOR INCOME TAXES......... (10,559) 33,604 33,759 ---------- --------- --------- INCOME (LOSS) BEFORE MINORITY INTEREST AND EXTRAORDINARY LOSS........................ (197,815) 44,652 43,336 MINORITY INTEREST............................ (562) (735) (156) ---------- --------- --------- INCOME (LOSS) BEFORE EXTRAORDINARY LOSS.... (198,377) 43,917 43,180 EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF $6,034 INCOME TAX BENEFIT...... (11,275) -- -- ---------- --------- --------- NET INCOME (LOSS)............................ $ (209,652) $ 43,917 $ 43,180 ========== ========= ========= EARNINGS (LOSS) PER SHARE: Basic...................................... $ (4.31) $ 0.75 $ 0.72 ========== ========= ========= Diluted.................................... $ (4.31) $ 0.73 $ 0.71 ========== ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic...................................... 48,601 58,613 60,372 ========== ========= ========= Diluted.................................... 48,601 59,808 60,946 ========== ========= =========
The accompanying notes are an integral part of these financial statements. 48 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
UNREALIZED COMMON STOCK RETAINED GAIN TREASURY STOCK --------------- CAPITAL EARNINGS (LOSS) ON ------------------ SHARES AMOUNT SURPLUS (DEFICIT) SECURITIES SHARES AMOUNT TOTAL ------- ------ --------- --------- ---------- ------- --------- --------- BALANCE, SEPTEMBER 30, 1995................... 60,804 $608 $ 226,694 $ 77,553 -- 231 $ (1,259) $ 303,596 Net income.............. 43,180 43,180 Funding of employee ben- efit plans............. 736 (138) 846 1,582 Funding of options exer- cised under 1992 Em- ployee Stock Option Plan, net of tax....... 336 (120) 639 975 Purchase of treasury stock.................. 2,328 (20,000) (20,000) Unrealized loss on securities available- for-sale............... (18) (18) ------- ---- --------- --------- ----- ------- --------- --------- BALANCE, SEPTEMBER 30, 1996................... 60,804 608 227,766 120,733 (18) 2,301 (19,774) 329,315 Net income.............. 43,917 43,917 Funding of employee ben- efit plans............. 92 (177) 1,521 1,613 Funding of options exer- cised under 1992 Em- ployee Stock Option Plan, net of tax....... (15) (21) 191 176 Issuance of treasury stock in exchange for warrants............... (871) (99) 871 -- Unrealized gain on securities available- for-sale............... 262 262 ------- ---- --------- --------- ----- ------- --------- --------- BALANCE, SEPTEMBER 30, 1997................... 60,804 608 226,972 164,650 244 2,004 (17,191) 375,283 Net (loss).............. (209,652) (209,652) 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 Re- capitalization 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 Hold- ings, 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 exer- cised or canceled under 1992 Employee Stock Op- tion Plan, net of tax.. (5,918) (1,350) 11,410 5,492 Funding of employee ben- efit 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 Unrealized loss on securities available- for-sale............... (994) (994) ------- ---- --------- --------- ----- ------- --------- --------- BALANCE, SEPTEMBER 30, 1998................... 73,277 $733 $ 980,142 $(583,111) $(750) -- -- $ 397,014 ======= ==== ========= ========= ===== ======= ========= =========
The accompanying notes are an integral part of these financial statements. 49 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED SEPTEMBER 30, ------------------------------ 1998 1997 1996 --------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................ $(209,652) $ 43,917 $ 43,180 Adjustments to reconcile net income to net cash provided by (used in) operating activi- ties: Depreciation and amortization.............. 75,044 39,309 39,214 Interest expense on discounted debt........ 16,995 -- -- Income taxes deferred...................... 478 (753) (9,141) Equity earnings/minority interest.......... 562 735 156 Provision for bad debts.................... 29,544 26,282 16,666 Gain on sale............................... -- -- (22,451) Impairment of long-lived assets............ 135,783 -- 20,489 Changes in noncash working capital: Receivables................................ (71,582) (44,362) (69,634) Receivable from affiliates................. -- -- 2,698 Supplies................................... (11,670) (3,984) (519) Prepayments and other current assets....... (3,207) 195 3,832 Accounts payable........................... (21,538) (2,073) (13,774) Accrued expenses and other current liabili- ties...................................... 23,749 (5,673) 17,465 Changes in long-term insurance reserves...... 16,308 1,462 3,107 Other........................................ 3,654 (215) 520 --------- -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIV- ITIES......................................... (15,532) 54,840 31,808 CASH FLOWS USED IN INVESTING ACTIVITIES: Acquisitions and investments................. (171,894) (30,548) (68,710) Purchases of property and equipment.......... (65,168) (36,961) (53,366) Proceeds from sale of DevCon................. -- -- 47,500 Disposals of property, equipment and other assets...................................... 3,289 8,365 2,690 Restricted investments....................... 7,474 (20,543) 5,564 Net collections on notes receivable.......... 21,844 2,580 (538) Other........................................ (7,340) (211) 209 --------- -------- --------- NET CASH USED IN INVESTING ACTIVITIES.......... (211,795) (77,318) (66,651) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of shares to Apollo Management, L.P......................................... 232,750 -- -- Proceeds from Senior Credit Facility......... 815,000 -- -- Proceeds from Senior Notes................... 448,871 -- -- Proceeds from long-term debt................. -- 1,875 1,469 Net draws under credit line.................. 114,000 22,685 194,615 Repayment of long-term debt.................. (641,924) (9,297) (138,708) Purchase of treasury stock................... -- -- (20,000) Repurchase of shares in recapitalization..... (735,223) -- -- Deferred financing fees...................... (30,178) -- -- Other........................................ 12,990 176 975 --------- -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES...... 216,286 15,439 38,351 --------- -------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS......................................... (11,041) (7,039) 3,508 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR... 14,355 21,394 17,886 --------- -------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR......... $ 3,314 $ 14,355 $ 21,394 ========= ======== =========
The accompanying notes are an integral part of these financial statements. 50 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 4. 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 2 and 3. 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. 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. CASH MANAGEMENT The Company maintains a centralized cash management system in which cash receipts are transferred daily from facility and ancillary company depository accounts to cash concentration accounts. 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 the Senior Credit Facility and/or the Mariner Senior Secured Facility. See Note 10. Cash equivalents consist of temporary investments with original maturities of three months or less. NOTES RECEIVABLE, NET Notes receivable, net, aggregating $30.5 and $13.4 million at September 30, 1998 and 1997, respectively, consist primarily of notes which arose from divestitures of certain operating facilities. These notes, which are generally collateralized by long-term care facilities, have interest rates ranging generally from 5% to 12% and maturities through 2012, including approximately $9.8 million due after 2000. Notes receivable, net, at September 30, 1998 and 1997, include reserves for potential uncollectible amounts of $4.0 million and $1.2 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 51 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 related to property and equipment for the years ended September 30, 1998, 1997, and 1996 was $49.1 million, $32.0 million, and $33.6 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, 1998 and 1997 was $43.3 million and $20.3 million, respectively. Amortization of goodwill charged to expense was $23.0 million, $7.3 million and $5.6 million for the three years ended September 30, 1998, 1997 and 1996, respectively. IMPAIRMENT OF LONG-LIVED ASSETS In September 1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of these assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of carrying value over fair value written off. Fair value is based on market prices where available, an estimate of market value, or determined by various valuation techniques including discounted cash flow. See Note 13. 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 and (ii) serve as partial collateral for the Company's lease agreements with Health and Retirement Properties Trust ("HRPT") (See Note 10). 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 three years ended September 30, 1998, 1997 and 1996 were $1.0 million, $40.0 million and $31.5 million, respectively. The Company received $8.7 million in tax refunds during fiscal 1998 in addition to the $1.0 million in tax payments made by the Company. 52 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) TREASURY STOCK During fiscal year 1996, the Company acquired 2,327,220 shares of treasury stock (775,740 shares prior to the three-for-one stock split) on the open market for a total cost of $20.0 million. The shares repurchased were primarily intended to be used as part of a plan to fund the employer's contributions to the Company's 401(k) Plan and Deferred Retirement Incentive Plan and to fund employee purchases made under the Company's Employee Stock Purchase Plan. See Note 23. 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 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 32%, 26% and 26% and Medicaid revenues represented 39%, 41% and 43% of net revenue for the three years ending September 30, 1998, 1997 and 1996, 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. The Company believes it will be successful in collecting these receivables, however, the failure to recover these costs in the future could materially and adversely affect the Company. On July 1, 1998, the Company began phasing in its facilities to a Prospective Payment System ("PPS") for services to Medicare patients. By June 30, 1999, all facilities will be 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. After July 1, 1998, as its customers transition to PPS, the Company is amending the relationships with its customers to provide services at a fixed price based on the acuity of its patient. The Company will generate delivery of the appropriated level of therapy services to each patient based on the appropriate determination of need. The Company's rehabilitation management contracts typically have a term of one year but frequently include automatic renewals and in general are terminable on notice of 30 to 90 days by either party. Under certain contracts, the Company bills Medicare or another third-party payor directly. Under other contracts, the Company is compensated on a fee for service basis and in general directly bills the skilled nursing facility, which in turn receives reimbursement from Medicare, Medicaid, private insurance or the patient. The Company recognizes 53 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) payments under these latter contracts as payments from private payors. Under these latter contracts, the Company also generally indemnifies its customers against reimbursement denials by third-party payors for services determined not to be medically necessary. The Company has established internal documentation standards and systems to minimize denials and typically has the right to appeal denials at its expense. Historically, reimbursement denials under these contracts have been insignificant; however, an increase in denials could materially and adversely affect the Company. Under arrangements in which the Company bills a skilled nursing facility for its rehabilitation services on a fee for service basis, Medicare reimburses the facility based on a reasonable cost standard. Specific guidelines exist for evaluating the reasonable cost of physical, occupational and speech therapy services. Medicare applies salary-equivalency guidelines in determining the reasonable cost of physical therapy services, which is the cost that would be incurred if the therapist were employed by a nursing facility, plus an amount designed to compensate the provider for certain general and administrative overhead costs. Medicare pays for occupational and speech therapy services on a reasonable cost basis, subject to the so-called "prudent buyer" rule for evaluating the reasonableness of the costs. The Company's gross margins for its physical therapy services under the salary equivalency guidelines are significantly less than for its speech and occupational therapy services under the "prudent buyer" rule. In addition, the Company provides certain services between subsidiary companies, some of which are charged at cost and others of which are charged at market rates. The Company believes that the services which are 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. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company is aware of one current investigation and an additional possible investigation involving allegations of potential wrongdoing. See Note 17. While the Company believes that it is in compliance with all applicable laws and regulations, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion 25 "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for the stock option grants. In October 1995 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies the option to retain the current accounting approach for recognizing stock-based expense in the financial statements or to adopt a new accounting method based on the estimated fair value of the employee stock options. Companies that do not follow the new fair-value based method are required to provide pro forma disclosures of net income and earnings per share as if the fair-value method of accounting had been applied. See Note 23 for the pro forma effects on the Company's reported net income (loss) and earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS 123. 54 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 June 1997 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements and is effective for fiscal years beginning after December 15, 1997. In June 1997 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public business enterprises to report information about operating segments and related disclosures about products and services, geographic areas, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997 and is applicable to interim periods in the second year of application. Comparative information for earlier years is required to be restated in the initial year of application. 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. SFAS 132 is effective for fiscal years beginning after December 15, 1997. SFAS Nos. 130, 131, and 132 become effective in the Company's fiscal year ending September 30, 1999. The adoption of these statements is not expected to have a material impact on the Company's 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. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 will become effective in the Company's fiscal year ending September 30, 2000. The adoption of this statement is not expected to have a material impact on the Company's financial statements. 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 55 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 this SOP to have a material impact on its 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. 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 this SOP to have a material impact on its financial statements. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1998 financial statement presentation. NOTE 2. 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 14) of newly issued common stock of LCA. Concurrent with the Recapitalization Merger, LCA changed its name to Paragon Health Network, Inc. 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 10. 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 14), (ii) to repay substantially all amounts outstanding under the Company's and under GranCare's (see Note 3 for description of the GranCare Merger) previous credit facilities and (iii) pay for certain costs associated with the Apollo/LCA/GranCare Mergers. NOTE 3. 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 14) 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 14) 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 56 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 10) 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 $4.0 million for the fiscal year ended September 30, 1998, was recorded as a reduction to interest expense. NOTE 4. 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 $535.7 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 a preliminary purchase price allocation. The total purchase price has been allocated as follows (in thousands): Current assets................................................... $213,862 Property and equipment........................................... 420,047 Goodwill......................................................... 564,566 Restricted investments........................................... 3,227 Other long-term assets........................................... 36,378 Current liabilities.............................................. (55,853) Long-term debt................................................... (600,202) Other non-current liabilities.................................... (46,344) -------- Total purchase price............................................. $535,681 ========
57 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5. RECAPITALIZATION, INDIRECT MERGER AND OTHER EXPENSES 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 $69.3 million of these costs were paid during the fiscal year ended September 30, 1998. NOTE 6. 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 58 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 7) 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 7. ACQUISITIONS FISCAL YEAR 1998 ACQUISITIONS In addition to the Mariner Merger and Apollo/LCA/GranCare Mergers discussed in Notes 1 through 4, 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. 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. FISCAL YEAR 1996 ACQUISITIONS In June 1996, the Company acquired certain assets of Lahr Pharmacy, Inc. and related companies for $13.4 million in cash. 59 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective September 1, 1996, the Company acquired the stock of Allied Pharmacy Management, Inc., which operated five institutional pharmacies and a home health care business in Florida, for $29.6 million in cash. All such acquisitions were recorded using the purchase method of accounting. NOTE 8. DIVESTITURES In September 1998, the Company divested of its Hospice operations, which provided care for terminal patients, for a cash sales price of $6.0 million. In September 1996, the Company completed the divestiture of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million in cash. The Company retained a small ownership interest in the recapitalized company. Proceeds from the divestiture were utilized to reduce debt related to various acquisitions. NOTE 9. RESTRICTED INVESTMENTS Restricted investments at September 30, 1998 and 1997 included the following (in thousands):
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 ======= ====== ====== =======
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 1997 COST GAINS LOSSES VALUE - ------------------ --------- ---------- ---------- --------- Restricted by self insurance pro- grams: U.S. Treasury Notes............... $36,234 $234 $ (9) $36,459 Asset-backed securities........... 2,604 32 (2) 2,634 Corporate debt securities......... 5,073 68 -- 5,141 Mortgage-backed securities........ 4,273 54 (2) 4,325 Repurchase Pooling Arrangement.... 539 -- -- 539 Cash.............................. 2,878 -- -- 2,878 ------- ---- ---- ------- TOTAL............................ $51,601 $388 $(13) $51,976 ======= ==== ==== =======
Proceeds from the sale and maturities of investments were $95.4 million, $19.1 million, and $14.5 million for the three years ended September 30, 1998, 1997 and 1996, respectively. Gross gains (losses) were not significant for all periods presented. 60 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, 1998 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- Due in one year or less................................ $ 5,485 $ 6,168 Due after one year through five years.................. 33,303 33,331 Due after five years through ten years................. 14,270 15,122 Due after ten years.................................... 2,254 2,400 ------- ------- 55,312 57,021 Asset-backed securities................................ 2,402 4,309 Mortgage-backed securities............................. 3,455 2,487 Repurchase Pooling Arrangement......................... 587 587 HRPT Common Stock...................................... 18,813 16,813 Cash................................................... 7,250 7,250 ------- ------- TOTAL.................................................. $87,819 $88,467 ======= =======
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 10. DEBT Long-term debt at September 30, 1998 and 1997 is summarized in the following table (in thousands):
SEPTEMBER 30, -------------------- 1998 1997 ---------- -------- Senior Debt: Senior Credit Facilities: Revolving Credit Facility....................... $ 21,000 $ -- Bank Credit Facility............................ -- 255,000 Term Loans...................................... 815,000 -- Mariner Health Senior Credit Facility........... 356,000 -- SouthTrust Bank of Alabama, N.A................... -- 20,000 Variable Annuity Life Insurance Company........... -- 10,000 NationsBank of Texas, N.A......................... -- 3,000 Mortgage notes (6% to 11% due through 2014)....... 55,918 609 Other notes payable (8% to 10% due through 2008).. 91,346 3,547 Subordinated Debt: Senior Subordinated Notes (due 2007).............. 274,287 -- Senior Subordinated Discount Notes (due 2007)..... 183,968 -- Mariner Health Senior Subordinated Notes (due 2006)............................................ 149,749 -- ---------- -------- 1,947,268 292,156 Obligations under capital leases.................... 76,847 3,803 ---------- -------- 2,024,115 295,959 Less short-term notes payable and current portion... (46,250) (43,196) ---------- -------- TOTAL LONG-TERM DEBT................................ $1,977,865 $252,763 ========== ========
61 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest paid on the above debt was $74.5 million, $21.8 million, and $19.3 million during the three years ended September 30, 1998, 1997, and 1996, 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. The Term Loans will be amortized in quarterly installments totaling $8.4 million, $15.8 million, $16.6 million, $18.2 million, $48.5 million, $59.8 million, and $20.0 million in the fiscal years 1999, 2000, 2001, 2002, 2003, 2004, 2005 and 2006, respectively. Principal amounts outstanding under the Revolving Credit Facility will be due and payable in April 2005. As of September 30, 1998, there was $21.0 million borrowed under the Revolving Credit Facility in addition to approximately $6.7 million letter of credit issuances. Interest on outstanding borrowings accrue, at the option of the Company, at the customary Alternate Base Rate (the "ABR") of The Chase Manhattan Bank ("Chase") or at a reserve adjusted Eurodollar Rate (the "Eurodollar Rate") plus, in each case, an Applicable Margin. The term "Applicable Margin" means a percentage that will vary in accordance with a pricing matrix based upon the respective term loan tenor and the Company's leverage ratio. Through July 1998, the Applicable Margin for Revolving Loans and Tranche A Term Loans will equal 1.25% for loans based on ABR ("ABR Loans") and 2.25% for loans based on the Eurodollar Rate ("Eurodollar Loans"); for Tranche B Term Loans, 1.50% in the case of ABR Loans and 2.50% in the case of Eurodollar Loans; and for Tranche C Term Loans, 1.75% in the case of ABR Loans and 2.75% in the case of Eurodollar Loans. The covenants contained in the Senior Credit Facility restrict, among other things, the ability of the Company to dispose of assets, repay other indebtedness or amend other debt instruments, pay dividends, and make acquisitions. Subject in each case to certain exceptions, the following amounts are required to be applied, as mandatory prepayments, to prepay the Term Loans: (i) 75% of the net cash proceeds of the sale or issuance of equity by the Company; (ii) 100% of the net cash proceeds of the incurrence of certain indebtedness; (iii) 75% of the net cash proceeds of any sale or other disposition by the Company or any of its subsidiaries of any assets (excluding the sale of inventory and obsolete or worn-out property, and subject to a limited exception for reinvestment of such proceeds within 12 months); and (iv) 75% of excess cash flow for each fiscal year, which percentage will be reduced to 50% in the event the Company's leverage ratio as of the last day of such fiscal year is not greater than 4.50 to 1.00. Mandatory prepayments will be applied pro rata to the unmatured installments of the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term Loans; provided, however, that as long as any Tranche A Term Loan remains outstanding, each holder of a Tranche B Term Loan or a Tranche C Term Loan will have the right to refuse any such mandatory prepayment otherwise allocable to it, in which case the amount so refused will be applied as an additional prepayment of the Tranche A Term Loans. The Company will also have the right to prepay the Senior Credit Facility, in whole or in part, at its option. Partial prepayments must be in minimum amounts of $1 million and in increments of $100,000 in excess thereof. 62 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Amounts applied as prepayments of the Revolving Credit Facility may be reborrowed; amounts prepaid under the Term Loans may not be reborrowed. The $255.0 million Bank Credit Facility was repaid in full on November 4, 1997. 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 will be cash pay at a rate of 10.5% per annum thereafter. The Notes will mature on November 1, 2007. The net proceeds from this offering, along with proceeds from the Senior Credit Facility, were used to fund a portion of the Recapitalization Merger, refinance a significant portion of LCA's and GranCare's pre-merger indebtedness, and to pay costs and expenses associated with the Apollo/LCA/GranCare Mergers. MARINER HEALTH SENIOR CREDIT 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"). As of September 30, 1998, approximately $356.0 million of loans, and $12.0 million of letters of credit, were outstanding under the Mariner Health Senior Credit Facility. The Mariner Health Senior Credit Facility terminates on January 3, 2000, and provides for prime rate and Eurodollar-based interest rate options. The borrowing availability and rate of interest vary 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. The Mariner Senior Credit Facility also contains covenants which, among other things, require Mariner Health 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 acquisition 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. Mariner Health's obligations under the Mariner Health Senior Credit Facility are collateralized by a pledge of the stock of substantially all of its subsidiaries and are guaranteed by substantially all of its subsidiaries. In addition, the Mariner Health Senior Credit Facility is collateralized by mortgages on certain 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 certain 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 (See Note 17). 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 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 63 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 SENIOR SUBORDINATED NOTES. Mariner Health is also the issuer of certain 9 1/2% Senior Subordinated Notes due 2006 (the "Mariner Health Notes") which were issued pursuant to that certain Indenture dated as of April 4, 1996 (the "Mariner Indenture") with Mariner Health as issuer and State Street Bank and Trust Company as trustee, and are outstanding in the aggregate principal amount of $150.0 million. The Mariner Health Notes are unsecured senior subordinated obligations of Mariner Health and, as such, are subordinated in right of payment to all existing and future senior indebtedness of Mariner Health, including indebtedness under the Credit Facility. The Mariner Health Notes contain certain covenants, including, among other things, covenants with respect to the following matters: (i) limitation on indebtedness; (ii) limitation on restricted payments; (iii) limitation on the incurrence of liens; (iv) restriction on the issuance of preferred stock of subsidiaries; (v) limitation on transactions with affiliates; (vi) limitation on the sale of assets; (vii) limitation on other senior subordinated indebtedness; (viii) limitation on guarantees by subsidiaries; (ix) limitation on the creation of any restriction on the ability of Mariner Health's subsidiaries to make distributions; and (x) restriction on mergers, consolidations and the transfer of all or substantially all of the assets of Mariner Health to another person. OTHER SIGNIFICANT INDEBTEDNESS. In connection with the GranCare Merger, the Company became a party 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, 1998. 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 15.0% per annum which is paid monthly. Additional interest accrues on the outstanding principal of the Omega Note at the rate of 1% per annum. Such interest is compounded annually and is due and payable on a pro rata basis at the time of each principal payment or prepayment. Beginning October 1, 2002, quarterly amortizing installments of principal in the amount of $1.5 million will also become due and payable on the first day of each calendar quarter. The entire outstanding principal amount of the Omega 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. Payment of the Omega Note after acceleration upon the occurrence of an event of default will result in a prepayment penalty in the nature of a "make whole" premium. 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. PHCMI has satisfied this test in the past without the contribution of additional equity, and management believes that it will continue to do so in the future. 64 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In October 1993 the Company borrowed $20 million from SouthTrust Bank of Alabama, NA which was unsecured and bore interest at the rate of 6.95%, which was payable semi-annually. The $20 million principal balance of the note was repaid in full in November 1997. In January 1994, the Company issued, in a private placement, a $10 million note to American General Insurance Company that was later sold to The Variable Annuity Life Insurance Company at a fixed rate of interest of 7.79%. The note was unsecured and was repaid in full in November 1997. Long-term debt, including capital lease obligations, maturing in the next five fiscal years is presented below (in thousands):
SEPTEMBER 30, 1998 ------------------ 1999.................................................... $ 46,250 2000.................................................... 96,406 2001.................................................... 80,559 2002.................................................... 74,309 2003 and thereafter..................................... 1,726,591
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. As of September 30, 1998, the Company had Swap Agreements in effect totaling $60.0 million notional amount of which $40.0 million will mature in July 2005 and $20.0 million will mature in November 2005. Under the Swap Agreements, the Company pays interest at an average fixed rate of 6.79% and receives interest at a rate of three-month LIBOR. At September 30, 1998, the fair market value of the Swap Agreements would represent a loss of approximately $6.2 million for the Company. Additionally, in September 1998 the Company entered into a total return swap agreement relating to approximately $40.7 million face amount of Mariner Notes (the "Total Return Swap Agreement"). The Total Return Swap Agreement provides for the Company to receive 9.5% interest on approximately $40.7 million of Mariner Notes and to pay interest at one-month LIBOR plus 2.25%. Upon expiration of the Total Return Swap, if not extended, the Company has the right, but not the obligation, to purchase the Mariner Notes. If the Company chooses not to purchase the Mariner Notes, it is responsible for any decrease in the market value and receives the benefit of any increase in market value realized by the third party purchase. Also during 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 11. 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 $3.8 million, $3.5 million, and $2.2 million for the three years ended September 30, 1998, 1997, and 1996, respectively. 65 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 12. LIFE INSURANCE PROCEEDS In the third quarter of fiscal year 1996 the Company recorded a non-taxable gain of $2.0 million from the receipt of life insurance proceeds following the death of Don W. Wortley, former President of TMI. 65--1 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13. IMPAIRMENT OF LONG-LIVED ASSETS In the fourth quarter of fiscal year 1998 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 SFAS 121. The non-cash accounting charge was determined 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 as a result of reduced Medicare reimbursement due to PPS. Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.7 million during fiscal 1998, was completed during the fourth quarter of fiscal 1998. Nursing facilities and home health agencies to be disposed of had a carrying value of $54.8 million at September 30, 1998. In the fourth quarter of fiscal year 1996 the Company recorded an impairment loss of $20.5 million related to nursing facilities with a history of cash flow losses, certain other nursing facilities where management believed an impairment existed as a result of the competitive environment, goodwill, and other assets to be disposed. Management estimated the undiscounted cash flows to be generated by each of these assets and compared them to their carrying value. If the undiscounted future cash flow estimates were less than the carrying value of the asset then the carrying value was written down to estimated fair value. Goodwill associated with an impaired asset was included with the carrying value of that asset in performing both the impairment test and in measuring the amount of impairment loss related to the asset. Fair value was estimated based on either management's estimate of fair value, present value of future cash flows, or market value less estimated cost to sell for certain facilities to be disposed. The facilities with a history of cash flow losses operated at a loss for periods ranging from one to four years. The undiscounted cash flows for TMI were estimated based on the operating results of TMI subsequent to the death of the President of the rehabilitation services group (founder of TMI) and adjusted for the loss of contracts and impending business changes as a result of his death. The decision regarding the disposition of certain nursing facilities, which had operating losses of $0.4 million during fiscal 1996, was completed in the fourth quarter of 1996. Facilities to be disposed of had a carrying value of $1.5 million at September 30, 1996, and were sold in fiscal year 1997. NOTE 14. 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 15. RESTRUCTURING PLAN On June 14, 1996, the Company finalized and approved a plan originating in June 1995 to restructure the operations and exit certain activities of ARS. This plan included centralization of billing and collection, closing or downsizing unprofitable clinics and offsite contracts, and staff reductions of approximately 300 employees in 66 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) both corporate overhead and field management. This plan resulted in an increase to the original purchase price of the acquisition by $10.1 million, which was recorded in June 1996 and included an accrual for estimated exit costs of $4.4 million related to termination/severance for displaced employees and $4.2 million related to future lease costs for abandoned real property. During the fourth quarter of fiscal year 1997 the Company lowered its original estimate of the accrual for exit costs which resulted in a reduction to the original purchase price of $1.9 million. The revised increase in purchase price as a result of the restructuring plan includes the following: Termination/severance for displaced employees...................... $3,760 Future lease costs for abandoned real property..................... 2,561 Write off of abandoned tangible and intangible assets at closed lo- cations........................................................... 1,920 ------ Total............................................................ $8,241 ======
The restructuring plan was fully completed during the 1998 fiscal year and all amounts provided under this charge had been paid. NOTE 16. INCOME TAXES The provision (benefit) for income taxes is presented in the table below (in thousands):
YEARS ENDED SEPTEMBER 30, ----------------------------- 1998 1997 1996 --------- -------- -------- Current: Federal................................... $ (10,266) $ 34,214 $ 38,326 State & Local............................. (772) 5,370 5,141 --------- -------- -------- (11,038) 39,584 43,467 Deferred: Federal................................... 440 (4,922) (8,276) State & Local............................. 39 (1,058) (1,432) --------- -------- -------- 479 (5,980) (9,708) --------- -------- -------- Total................................... $ (10,559) $ 33,604 $ 33,759 ========= ======== ========
The provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax income as a result of the following:
YEARS ENDED SEPTEMBER 30, ------------------------------ 1998 1997 1996 --------- -------- -------- 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.............................. (0.2%) 3.6% 3.4% Permanent book/tax differences, primar- ily resulting from goodwill........... 2.9% 2.4% 7.0% Impairment of long-lived assets ....... 10.1% -- -- Non-deductible merger and acquisition costs................................. 2.2% 1.0% -- Other, net............................... 0.1% 1.3% (1.6%) Change in valuation allowance............ 14.8% -- -- --------- -------- -------- Effective tax rate....................... (5.1%) 43.3% 43.8% ========= ======== ========
67 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the net deferred tax asset (liability) are as follows (in thousands):
SEPTEMBER 30, ------------------ 1998 1997 -------- -------- Deferred tax liabilities: Amounts relating to property and equipment.......... $(25,457) $(32,967) Insurance........................................... (3,752) -- Other............................................... -- (5,107) -------- -------- Total deferred tax liabilities ................... (29,209) (38,074) -------- -------- Deferred tax assets: Asset valuation................................... 35,993 16,981 Insurance......................................... -- 7,261 Payroll and benefits.............................. 12,142 4,362 Restructuring reserve............................. 558 863 Purchase accounting............................... 15,716 -- NOL carryforwards................................. 35,282 1,844 Other miscellaneous............................... 4,226 6,183 Accrued expenses.................................. 14,135 -- Tax credits ...................................... 730 -- Timing differences in Medicare.................... 1,628 1,716 -------- -------- Total deferred tax assets......................... 120,410 39,210 Less valuation allowance.............................. (70,252) (1,844) -------- -------- Net deferred tax asset (liability).................... $ 20,949 $ (708) ======== ========
The net change in the valuation allowance for deferred tax assets was an increase of $68.4 million and $0.1 million at September 30, 1998 and 1997, respectively. The GranCare Merger and Mariner Merger resulted in the addition of deferred taxes and corresponding valuation allowance in the amount of $37.4 million. The Company has net operating loss carryforwards of $92.0 million expiring at various dates through 2018. The net operating losses are subject to various limitations due to changes in ownership of the Company's subsidiary corporations during the year. 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, ---------------- 1998 1997 ------- ------- Facilities operating under capital leases.................. $89,718 $12,551 Less accumulated amortization.............................. (6,838) (5,799) ------- ------- $82,880 $ 6,752 ======= =======
In October 1996 the Company entered into a leasing program, initially totaling $70.0 million and subsequently increased to $100.0 million, to be used as a funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions. The lease is an unconditional 68 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) "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, 1998 approximately $48.6 million of this leasing arrangement was utilized. The leasing program is accounted for as an operating lease. Rental expense, net of sublease rent income and amortization of unfavorable lease obligation, for all operating leases was $86.6 million, $42.5 million and $44.2 million for the three years ended September 30, 1998, 1997 and 1996, respectively. Certain leases also contain increases based on the Consumer Price Index, Medicaid reimbursement rates, or at amounts specified in the lease agreement. Sublease rent income was $7.1 million, $6.5 million and $6.9 million for the three years ended September 30, 1998, 1997 and 1996, respectively. Contingent rent based primarily on revenues was $2.3 million, $1.8 million and $1.6 million for the three years ended September 30, 1998, 1997 and 1996, respectively. The table below presents a schedule of the future minimum rental commitments and sublease income under all noncancellable leases as of September 30, 1998 (in thousands):
SUBLEASE OPERATING INCOME CAPITAL ---------- -------- -------- 1999........................................ $ 93,421 $ (7,522) $ 10,729 2000........................................ 79,565 (6,459) 9,283 2001........................................ 75,432 (6,459) 8,291 2002........................................ 68,999 (6,105) 8,261 2003........................................ 69,395 (5,699) 15,687 Subsequent years............................ 648,478 (59,526) 52,117 ---------- -------- -------- Total minimum rental obligations............ $1,035,290 $(91,770) 104,368 ========== ======== Less amount representing interest............................... (27,521) -------- Present value of capital leases................................. 76,847 Less current portion............................................ (5,544) -------- Long-term obligations under capital leases...................... $ 71,303 ========
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 past year 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 several large judgments against long-term care providers, other than the Company, in the last year 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 investigations of long- term care providers, particularly in the area of 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, 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. 69 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 or in the aggregate, if determined adversely to the Company and after taking into account the insurance coverage maintained by the Company, would have a material adverse effect on the Company's financial position or results of operations. 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 Health Care Center, Inc. Case No. 96 CV 4449, asserting five claims for relief, including third-party beneficiary, tortious interference and negligence per se causes of action arising out of quality of care issues at a healthcare facility formerly owned by GranCare. Pursuant to the Third Amended Complaint, the class claims were finally identified as third-party beneficiary of contract; breach of contract; tortious interference with contract; fraud; and negligence per se. In addition to the class claims, the named plaintiffs each asserted claims for promissory estoppel and violation of the Colorado Consumer Protection Act. On March 15, 1998, the court entered an order in which it certified a class action in the matter. The court has only certified the class with respect to the issue of liability and the various class rights to restitution. The court determined that emotional distress damages are of such an individualized and personal nature that the class-wide request for emotional distress damages was not appropriate for class treatment. On May 7, 1998, plaintiff's counsel orally dismissed her promissory estoppel claims on behalf of the named plaintiffs. In response to the Company's Motion to Dismiss All Claims and Motion for Summary Judgment Precluding Recovery of Medicaid Funds, on October 30, 1998, the court partially granted the Company's motions, dismissing the claims of all plaintiffs who were at all times during the class period Medicare/Medicaid patients, for lack of jurisdiction. The court further dismissed all restitution claims for the remaining plaintiffs, except those relating to emotional distress for the period beginning with their stay at defendants' facility and ending at the moment that they first received any Medicare/Medicaid benefits. No restitution claims of any sort were allowed on the claims for tortuous interference, fraud and negligence per se. In its order, the court requested a conference relative to whether the class was large enough to justify continuing the case as a class action. After this order, at the request of plaintiffs' counsel, the court stayed all activity and allowed plaintiffs to file a Motion for Reconsideration. Plaintiffs' Motion for Reconsideration was filed, as ordered, on November 16, 1998, and the court denied plaintiffs' motion on November 19, 1998. On December 10, 1998, the court certified as a final judgment that portion of its order of October 30, 1998 dismissing for lack of jurisdiction all the claims of plaintiffs who were at all relevant times Medicare or Medicaid patients. The court further stayed all remaining proceedings pending resolution of any appeal of the certified final judgment, and vacated the trial which had been scheduled for March 15, 1999. The Company intends to vigorously contest the remaining alleged claims and the certification of the various classes. The Company received a letter dated September 5, 1997 from an Assistant United States Attorney ("AUSA") in the United States Attorney's Office for the Eastern District of Texas (Beaumont) advising that the office is involved in an investigation of allegations that services provided at some of the Company's facilities may violate the Civil False Claims Act. The AUSA informed the Company that the investigation is the result of a qui tam complaint (which involves a private citizen requesting the federal government to intervene in an action because of an alleged violation of a federal statute) filed under seal against the Company, and the AUSA is investigating the allegations in order to determine if the United States will intervene in the proceedings. The AUSA has requested that the Company voluntarily produce a substantial amount of documents, including medical records of former residents. In November 1997, counsel for the Company met with the AUSA and the parties engaged in discussions on whether the voluntary production of former residents' medical records can be accomplished without violating the residents' rights to privacy and confidentiality. Based upon the information currently known about the complaint, the Company believes that given an opportunity to address the allegations, 70 the AUSA will find intervention by the United States is without merit. In December 1997, the Company advised the AUSA that absent the United States agreeing to protect the confidentiality of the residents' medical records, and to prevent unauthorized disclosure of the information requested to non- government personnel, the Company would not agree to a voluntary production. The Company has reopened discussions with the Department of Justice regarding the Company's position on the alleged claims. The Company will vigorously contest the alleged claims if the complaint is pursued. In 1997, the Department of Justice ("DOJ") advised the Company that the United States had declined to intervene in the qui tam complaint filed against The Brian Center Corporation ("BCC") and one of its subsidiaries, Med-Therapy Rehabilitation Services, Inc. ("Med-Therapy"), both wholly-owned subsidiaries of the Company (and of LCA before the Apollo/LCA/GranCare Mergers) in the federal district court for the Western District of North Carolina. The individual plaintiff has continued to pursue the alleged claims that BCC and Med-Therapy caused certain therapists to make improper therapy record entries with respect to screening services, and that any claims filed with Medicare for payments based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. The Company continues to vigorously contest these claims. Although the plaintiff's original complaint was dismissed for failure to state a claim, in September 1998, the court denied the Company's motion to dismiss an amended complaint. The parties have recently engaged in settlement negotiations, and if the case does not settle, discovery will commence. In connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless the Company from and against any and all loss, expense, damage, penalty and liability which could result from this claim, subject to further adjustment. Mr. Beaver's indemnity requires any payment to the Company to be in the form of shares of the Company's common stock. 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 is currently pending in the United States District Court for the Middle District of Florida, Tampa division, case no. 98-1205-CIV-T23B. The plaintiffs filed a motion to remand on June 22, 1998 and the Company filed a motion to dismiss on June 30, 1998. The Company is currently awaiting the outcome of these motions. The complaint has only been recently filed and no discovery has been conducted. Accordingly, the information available to the Company is very limited and the Company is unable to assess at this point the magnitude of the allegations. The Company intends to vigorously contest the request for class certification as well as all alleged claims made by the plaintiffs. 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 interest in Valley X-Ray was acquired by a predecessor corporation as an incidental part of a large acquisition. International X-Ray was not involved in the operation of 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 71 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) dismiss on behalf of its subsidiaries on November 23, 1998. The United States has agreed to the dismissal of GranCare as a party, and the briefing on the second motion regarding International X-Ray has been completed and awaits scheduling. On September 18, 1998, the Company was served with an administrative subpoena issued by the OIG. The subpoena was addressed to "Paragon Health Network, Inc." The subpoena seeks, among other things, certain records of twenty specified current or former LCA nursing facilities. The Company has been advised that the investigation is civil in nature and focuses on nursing facilities and nurse aide services. The government has not disclosed the origin of this civil administrative investigation or its intended scope. 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 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 asserts 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. The Company removed this case to Federal Court on November 2, 1998, and the matter is currently pending in the United States District Court for the Middle District of Florida, Tampa Division, case no 98-2240-CIV-T-17C. The plaintiffs filed a Motion to Remand on November 13, 1998, and the Company will be presenting a brief in opposition. The complaint has only been recently filed and no discovery has been conducted. Thus, the information available to the Company is very limited. At this point, the Company is unable to access the magnitude of the allegations. The Company intends to vigorously contest all claims, including all issues relating to the attempted certification of any alleged class. In October, 1998, the Custodian of Records of Cambridge Bedford, Inc., also known as Bedford Villa Nursing Center ("Bedford"), a wholly-owned subsidiary of the Company, was served an administrative subpoena issued by the OIG. The subpoena seeks, among other things, general information on corporate ownership and organizational structure, therapy and physician service arrangements, and medical records of eleven former residents of Bedford. Bedford has been advised that the investigation is civil in nature, and the OIG has assured the facility that the OIG will follow all applicable federal laws, including the Privacy Act, that pertain to the confidentiality of medical records, and that Bedford will face no violation of confidentiality or privacy laws in producing the patient medical records requested. The Company is cooperating with the investigation and has transmitted documents responsive to the subpoena on November 17, 1998. In November, 1998, Bedford also received a subpoena duces tecum from the DOJ, through the U.S. Attorney's Office in Detroit, Michigan, requesting certain patient medical records as the result of a criminal investigation of a named physician. The Company has been advised that the facility is not a subject or target of the investigation. The Company is cooperating with the U.S. Attorney's Office. 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 72 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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, 1998 and 1997 designated to pay such claims were $71.7 million and $52.0 million, respectively. In 1998, the Company purchased a traditional indemnity insurance policy for its 1998 workers' compensation liabilities. This transaction resulted in a reduction in the Company's self-insured liabilities for workers' compensation during the year ended September 30, 1998 as compared to the same period in 1997. 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. In 1992, the Company elected under Texas law to decline to participate in the Texas workers' compensation insurance program. As part of the election, the Company implemented an employee benefit plan providing for employer-paid benefits comparable to those provided under the Texas workers' compensation program and obtained insurance that limits the Company's exposure for any individual injury. During 1994, the Company established a trust in which to fund the amount applicable to actuarially determined claims to be incurred for fiscal year 1994 and subsequent years. Mariner Health is insured for current and past workers' compensation claims under various types of insurance and financial plans, certain of which are loss-sensitive in nature and design, which subject Mariner Health to additional future premiums for losses incurred in a prior year but paid in a subsequent fiscal period, as losses develop. In addition, Mariner Health insured some of their professional and general liability through insurance contracts with third parties under which Mariner Health's liability is capped at $0.1 million per claim. 73 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, 1998 and 1997. 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 The Company believes that the fair value of the long-term debt is properly reflected at current carrying amounts except for certain fixed rate debt instruments. Fair values for each significant fixed rate debt instrument 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 10. 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, 1998 and 1997 are as follows (in thousands):
SEPTEMBER 30, ---------------------------------------- 1998 1997 --------------------- ----------------- CARRYING CARRYING FAIR AMOUNT FAIR VALUE AMOUNT VALUE ---------- ---------- -------- -------- Cash and cash equivalents........ $ 3,314 $ 3,314 $ 14,355 $ 14,355 Notes receivable................. 30,517 32,160 13,423 14,172 Restricted investments........... 88,467 88,467 51,976 51,976 Long-term debt................... 2,024,115 1,981,561 295,959 298,843 Interest rate swap agreements.... -- (6,196) -- (1,622)
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. Should the related government agencies suspend or significantly reduce contributions to the Medicare or Medicaid programs, the Company's ability to 74 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) collect on its receivables would be adversely affected. Management believes that the remaining receivable balances from various payors, including individuals involved in diverse activities, subject to differing economic conditions, do not represent a concentration of credit risk to the Company. Management continually monitors and adjusts its allowance for doubtful accounts and contractual allowances associated with its receivables. Federal law limits the degree to which states are permitted to alter Medicaid programs. 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. Capital leases obligations include approximately $94.3 million of minimum lease payments due over the remaining lease terms. 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 per share (in thousands, except per share data):
YEARS ENDED SEPTEMBER 30, -------------------------- 1998 1997 1996 --------- ------- ------- Numerator for Basic and Diluted Earnings Per Share: Net income (loss) before extraordinary item.. $(198,377) $43,917 $43,180 Extraordinary item........................... (11,275) -- -- --------- ------- ------- Net income (loss)............................ $(209,652) $43,917 $43,180 ========= ======= ======= Denominator: Denominator for basic earnings per share- weighted average shares..................... $ 48,601 $58,613 $60,372 Effect of dilutive securities--Stock options. -- 1,195 574 --------- ------- ------- Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversions................................. $ 48,601 $59,808 $60,946 ========= ======= ======= Basic Earnings (Loss) Per Share: Net income (loss) before extraordinary item.. $ (4.08) $ 0.75 $ 0.72 Extraordinary item........................... (0.23) -- -- --------- ------- ------- Net income (loss) per common share........... $ (4.31) $ 0.75 $ 0.72 ========= ======= ======= Diluted Earnings (Loss) Per Share: Net income (loss) before extraordinary item.. $ (4.08) $ 0.73 $ 0.71 Extraordinary item........................... (0.23) -- -- --------- ------- ------- Net income (loss) per common share........... $ (4.31) $ 0.73 $ 0.71 ========= ======= =======
75 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The effect of dilutive securities for the year ended September 30, 1998 has been excluded because the effect is antidilutive as a result of the net loss for the period. 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 4. 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 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, 1998 and 1997, there were 7,091,957 and 3,901,404, 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:
YEARS ENDED SEPTEMBER 30, -------------------------------------------------------------------------- 1998 1997 1996 ------------------------ ------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE -------------- -------- -------------- -------- -------------- -------- Outstanding at beginning of year................ 3,901,404 $ 8.95 3,778,644 $9.18 2,338,875 $ 8.27 Granted................. 7,877,856 13.74 645,972 8.30 2,074,620 10.23 Exercised............... (4,423,153) 9.05 (21,831) 6.86 (118,302) 6.28 Forfeited............... (264,150) 16.15 (501,381) 9.95 (516,549) 9.87 -------------- ------ -------------- ----- -------------- ------ Outstanding at end of year................... 7,091,957 $13.97 3,901,404 $8.95 3,778,644 $ 9.18 ============== ====== ============== ===== ============== ====== Exercisable at end of year................... 974,457 $ 9.63 1,567,092 $7.71 951,033 $ 6.99 ============== ====== ============== ===== ============== ====== Price range............. $0.84 - $46.45 $4.42 - $12.92 $4.42 - $12.92 ============== ============== ============== Weighted average fair value of options granted during the year................... $ 7.84 $5.00 $ 5.59 ====== ===== ======
76 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996 risk-free interest rates ranging from 5.50% 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 0.508; and a weighted-average expected life of the option of eight years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
AVERAGE REMAINING EXERCISE CONTRACTUAL RANGE OPTIONS PRICE LIFE (YEARS) ----- --------- -------- ----------- $.84-$5.40................................. 125,685 $ 3.85 9.19 $7.05-$9.91................................ 519,395 $ 7.80 9.18 $11.00-$12.75.............................. 2,748,940 $12.09 9.17 $16.25-$16.75.............................. 3,299,500 $16.35 9.19 $17.88-$46.45.............................. 398,437 $18.51 9.17 --------- 7,091,957 =========
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):
YEARS ENDED SEPTEMBER 30, -------------------------- 1998 1997 1996 --------- ------- ------- Pro forma net income (loss)......................... $(212,251) $42,489 $42,405 Pro forma earnings per share........................ $ (4.37) $ 0.72 $ 0.70
The Company established an Employee Stock Purchase Plan in 1993 (the "LCA- ESPP"). The LCA-ESPP was terminated effective September 17, 1997. The plan had previously authorized the purchase of up to 360,000 shares (120,000 shares prior to the three-for-one stock split) of the Company's common stock by eligible employees. The provisions of the plan included eligibility for all full time employees who have completed one year of service, employee contributions equal to the lesser of 10% of base salary or $10,000, the purchase price being equal to the lesser of the fair market value of the stock on the first or the last day of the plan year, and an option to purchase shares of stock or withdraw all payroll deductions plus interest at the end of the plan year. As of September 30, 1997 and 1996, a total of 177,789 and 129,480 shares, respectively, (59,263 and 43,160 prior to the three-for-one stock split) had been issued under the plan. 77 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The table below sets forth summarized quarterly financial data for the years ended September 30, 1998 and 1997 (in thousands, except per share amounts) and has been adjusted to reflect the three-for-one stock split:
FOURTH THIRD SECOND FIRST 1998 QUARTER QUARTER QUARTER QUARTER ---- --------- -------- -------- -------- Net revenues............... $ 632,697 $494,065 $487,161 $421,606 Income (loss) from opera- tions..................... (132,570)(a) 29,728(b) 22,591 (b) (13,821)(b) Income (loss) before income taxes and equity earnings/minority interest.................. (171,455) 1,601 (5,371) (33,149) Equity earnings/minority interest.................. (16) (247) (127) (172) Income (loss) before ex- traordinary loss.......... (164,144) (242) (4,473) (29,518) Extraordinary loss on early extinguishment of debt.... -- -- -- (11,275) Net income (loss).......... $(164,144) $ (242) $ (4,473) $(40,793) ========= ======== ======== ======== Earnings (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. (b) Includes adjustments from previously reported results to reflect recapitalization, indirect merger and other expenses as follows: First Quarter, $41.0 million; Second Quarter, $13.6 million; and Third Quarter, $11.2 million. FOURTH THIRD SECOND FIRST 1997 QUARTER QUARTER QUARTER QUARTER ---- --------- -------- -------- -------- Net revenues............... $ 286,335 $288,433 $285,318 $280,202 Income from operations..... 19,126(c) 28,456 25,844 21,682 Income before income taxes and equity earnings/minority interest.................. 15,198 23,968 21,462 17,628 Equity earnings/minority interest.................. (330) (223) (119) (63) Net income................. $ 7,709 $ 13,669 $ 12,214 $ 10,325 ========= ======== ======== ======== Earnings per share: Basic.................... $ 0.13 $ 0.23 $ 0.21 $ 0.18 ========= ======== ======== ======== Diluted.................. $ 0.13 $ 0.23 $ 0.21 $ 0.18 ========= ======== ======== ======== Weighted average common and common equivalent shares outstanding: Basic.................... 58,613 58,643 58,616 58,507 ========= ======== ======== ======== Diluted.................. 59,808 59,870 59,478 58,957 ========= ======== ======== ========
- -------- (c) Includes $2.6 million recapitalization, indirect merger and other expenses. 78 MARINER POST-ACUTE NETWORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 25. TERMINATION OF STOCKHOLDER RIGHTS PLAN On November 17, 1994, the Company's Board of Directors declared a dividend of one right for each outstanding share of the Company's Common Stock. Each right entitled the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, for an exercise price of $160, subject to adjustment. On May 7, 1997, LCA's Board of Directors amended the Rights Agreement under which the rights were granted such that the Rights Agreement terminated immediately prior to the Apollo/LCA/GranCare Mergers. See Note 1 and 3. Such rights were not exercisable nor transferable apart from the Common Stock until such time as a person or group acquired 15% of the Company's Common Stock or initiated a tender offer or exchange offer that would result in ownership of 15% of the Company's Common Stock. 79 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on directors of the registrant will appear in the Company's Proxy Statement for the February 18, 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. Information required by this item for the Company's executive officers is contained in Item 4a of this report. ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation will appear in the Company's Proxy Statement for the February 18, 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information on security ownership of certain beneficial owners will appear in the Company's Proxy Statement for the February 18, 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information on certain relationships and related transactions will appear in the Company's Proxy Statement for the February 18, 1999 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission, and is incorporated herein by reference. 80 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following reports, financial statements and schedule are filed herewith on the pages indicated:
PAGE ---- Report of Independent Auditors......................................... 46 Consolidated Balance Sheets at September 30, 1997 and 1998............. 47 Consolidated Statements of Income for Fiscal Years 1996, 1997 and 1998. 48 Consolidated Statements of Stockholders' Equity for Fiscal Years 1996, 1997 and 1998......................................................... 49 Consolidated Statements of Cash Flows for Fiscal Years 1996, 1997 and 1998.................................................................. 50 Notes to Consolidated Financial Statements............................. 51 FINANCIAL STATEMENT SCHEDULE Schedule II--Valuation and Qualifying Accounts and Reserves............ 90
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and, therefore, have been omitted.
EXHIBITS -------- *2.1 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. 4.2 Amended and Restated Stockholders' Agreement dated as of November 25, 1998 by and among the Registrant, Apollo and certain other investors. *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. 4.5 Registration Rights Agreement dated as of July 13, 1998 by and among the Registrant, Rembert T. Cribb and Michael E. Fitzgerald.
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EXHIBITS -------- *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 1/2% Senior Subordinated Note due 2006, Series A and (ii) the form of 9 1/2% Senior Subordinated Note due 2006, Series B (Incorporated by reference to Exhibits 4.1, 4.2, and 10.1 to Mariner Health's Current Report on Form 8-K dated April 4, 1996). 4.10 Amendment No. 1 to Mariner Health Indenture, dated September 11, 1998. *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. 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. 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. *10.5 +Employment Agreement between the Registrant and Keith B. Pitts (filed as Exhibit 10.1 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 +First Amendment to Employment Agreement between the Registrant and Keith B. Pitts. *10.7 +Employment Agreement between the Registrant and Arthur W. Stratton, Jr. M.D. (filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-4, Registration No. 333-57339, and incorporated herein by reference). *10.8 +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). *10.9 +Employment Agreement between the Registrant and William R. Korslin (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). *10.10 +Employment Agreement between the Registrant and David L. Ward (filed as Exhibit 10.7 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 +Employment Agreement between the Registrant and Thomas P. Dixon. *10.12 +Employment Agreement between the Registrant and Charles B. Carden (filed as Exhibit 10.8 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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EXHIBITS -------- *10.13 +Employment Agreement between the Registrant and R. Jeffrey Taylor (filed as Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 and incorporated herein by reference). 10.14 +Form of Employment Agreement entered into between the Registrant and its Senior Vice Presidents. *10.15 +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). *10.16 +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). 10.17 +First Amendment to Paragon Health Network, Inc. 1997 Long-Term Incentive Plan. *10.18 +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). *10.19 +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). 10.20 First Amendment to the New GranCare, Inc. 1996 Stock Incentive Plan. *10.21 +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). 10.22 +First Amendment to the New GranCare, Inc. 1996 Replacement Stock Option Plan. *10.23 +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). 10.24 +First Amendment to the New GranCare, Inc. Outside Directors Stock Incentive Plan. 10.25 +Second Amendment to the New GranCare, Inc. Outside Directors Stock Incentive Plan. *10.26 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). *10.27 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). *10.28 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). *10.29 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). *10.30 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).
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EXHIBITS -------- *10.31 Amendment to AMS Properties, Inc. Facility Leases dated as of October 31, 1997 between Health and Retirement Properties Trust ("HRPT") and AMS Properties, Inc. ("AMS") (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). *10.32 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). *10.33 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). *10.34 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). *10.35 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). *10.36 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). *10.37 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). *10.38 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of December 29, 1993 among HRPT, GranCare, AMS and GCI Health Care (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.39 Master Lease Document dated December 28, 1990, between HRPT and AMS (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.40 Form of Guaranty dated December 28, 1990, by American Medical Services, Inc. and each of its subsidiaries in favor of HRPT (filed with GranCare's Registration Statement on Form S-1, Registration No. 33-42595, and incorporated herein by reference). *10.41 Amendment to Master Lease between HRPT and AMS dated as of December 29, 1993 (filed with GranCare's Current Report on Form 8-K filed January 13, 1994, and incorporated herein by reference). *10.42 Amendment to Master Lease Document and Facility Lease between GCI Health Care 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). *10.43 Amendment to Master Lease Document and Facility Lease between AMS and HRPT dated as of October 31, 1994 (filed with GranCare's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference). *10.44 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). *10.45 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).
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EXHIBITS -------- *10.46 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). *10.47 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). 10.48 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. 10.49 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. *10.50 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). *10.51 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). 10.52 First Amendment to FBTC Participation Agreement dated July 8, 1998. 10.53 Second Amendment to FBTC Participation Agreement dated December 22, 1998. *10.54 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). 10.55 First Amendment to FBTC Guarantee dated July 8, 1998. 10.56 Second Amendment to FBTC Guarantee dated December 22, 1998. *10.57 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). *10.58 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). *10.59 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). *10.60 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).
85
EXHIBITS -------- *10.61 +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). *10.62 +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). 10.63 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". 10.64 +Mariner Savings Plan. 10.65 +First Amendment to Mariner Savings Plan. 10.66 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. 10.67 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. 10.68 $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". 10.69 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. 10.70 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. 10.71 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. 10.72 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. 10.73 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. 10.74 Security Agreement dated as of December 23, 1998 from Mariner Health and its subsidiary guarantors in favor of PNC Bank, as Collateral Agent. 10.75 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.
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EXHIBITS -------- 10.76 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. 10.77 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. 10.78 +Paragon Health Network, Inc. Employee Stock Purchase Plan. 10.79 +First Amendment to Mariner Post-Acute Network, Inc. Employee Stock Purchase Plan (formerly the Paragon Health Network, Inc. Employee Stock Purchase Plan). *10.80 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). *10.81 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). 10.82 +GranCare, Inc. Executive Deferred Compensation Plan. 10.83 +First Amendment to the GranCare, Inc. Executive Deferred Compensation Plan. 10.84 +Second Amendment to the GranCare, Inc. Executive Deferred Compensation Plan. 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 request sets forth a good faith representation that as of December 30, 1998, the date of record for its 1999 annual stockholders' meeting to be held on February 18, 1999, such beneficial owner is entitled to vote at such meeting, and provided further 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 On August 11, 1998, the Company filed a report on Form 8-K reporting the acquisition by merger of Mariner Health on July 31, 1998. (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. 87 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) By: /s/ Susan Thomas Whittle ------------------------------------ Susan Thomas Whittle Senior Vice President, General Counsel and Secretary Date: December 29, 1998 88 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE /s/ Keith B. Pitts Chairman of the Board, Chief December 29, - -------------------------------- Executive Officer and 1998 Keith B. Pitts Director (Principal Executive Officer) /s/ Arthur W. Stratton Vice Chairman of the Board, December 29, - -------------------------------- President, Chief Operating 1998 Arthur W. Stratton Officer and Director /s/ Charles B. Carden Executive Vice President and December 29, - -------------------------------- Chief Financial Officer 1998 Charles B. Carden (Principal Financial Officer) /s/ Laurence M. Berg Director December 29, - -------------------------------- 1998 Laurence M. Berg /s/ Gene E. Burleson Director December 29, - -------------------------------- 1998 Gene E. Burleson /s/ Peter P. Copses Director December 29, - -------------------------------- 1998 Peter P. Copses /s/ Jay M. Gellert Director December 29, - -------------------------------- 1998 Jay M. Gellert /s/ Samuel B. Kellett Director December 29, - -------------------------------- 1998 Samuel B. Kellett /s/ Joel S. Kanter Director December 29, - -------------------------------- 1998 Joel S. Kanter /s/ John H. Kissick Director December 29, - -------------------------------- 1998 John H. Kissick /s/ William G. Petty, Jr. Director December 29, - -------------------------------- 1998 William G. Petty, Jr. /s/ Robert L. Rosen Director December 29, - -------------------------------- 1998 Robert L. Rosen /s/ Ronald W. Fleming Vice President, Controller and December 29, - -------------------------------- Chief Accounting Officer 1998 Ronald W. Fleming (Principal Accounting Officer) 89 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 1998: Allowance for doubtful ac- counts................... $33,138 29,544 (24,990) 30,889 $68,581 ======= ====== ======= ====== ======= Notes receivable reserves. $ 1,188 -- (300) 3,129 $ 4,017 ======= ====== ======= ====== ======= Valuation allowance....... $ 1,844 31,028 -- 37,380 $70,252 ======= ====== ======= ====== ======= Fiscal Year 1997: Allowance for doubtful ac- counts................... $17,405 27,760 (12,027) -- $33,138 ======= ====== ======= ====== ======= Notes receivable reserves. $ 3,516 (1,478)(a) (850) -- $ 1,188 ======= ====== ======= ====== ======= Valuation allowance....... $ 1,785 59 -- -- $ 1,844 ======= ====== ======= ====== ======= Fiscal Year 1996: Allowance for doubtful ac- counts................... $13,332 16,666 (14,702) 2,109 $17,405 ======= ====== ======= ====== ======= Notes receivable reserves. $ 3,550 -- (34) -- $ 3,516 ======= ====== ======= ====== ======= Valuation allowance....... $ 808 977 -- -- $ 1,785 ======= ====== ======= ====== =======
- -------- (a) Includes reversal of reserves based on collections of notes previously considered doubtful. 90 EX-4.1 2 FORM OF COMMON STOCK CERTIFICATE OF THE REGISTRANT EXHIBIT 4.1 ==================================================================================================================================== ____________ ____________ | NUMBER | COMMON STOCK COMMON STOCK | SHARES | |MPN | PAR VALUE PAR VALUE | | ____________ $.01 PER SHARE $.01 PER SHARE ____________ [LOGO OF MARINER APPEARS HERE] MARINER Post-Acute Network INCORPORATED UNDER THE CUSIP 568459 10 1 LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS MARINER POST-ACUTE NETWORK, INC. ______________________________________________________________________________________________________ | This is to Certify that | | | | | | | | is the owner of | ______________________________________________________________________________________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF Mariner Post-Acute Network, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. [SEAL OF MARINER In Witness Whereof the Corporation has caused this certificate to be signed in facsimile by its POST-ACUTE duly authorized officers and sealed with a facsimile of its corporate seal. APPEARS HERE] Dated Countersigned and Registered: AMERICAN STOCK TRANSFER & TRUST COMPANY (New York, N.Y.) Transfer Agent and Registrar By: /s/ Susan Thomas Whittle /s/ ^illegible signature^ Senior Vice President Chairman of the Board Authorized Signature General Counsel and Secretary and Chief Executive Officer ====================================================================================================================================
Mariner Post-Acute Network, Inc. will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation, and the qualifications, limitations or restrictions of such preferences and/or rights. Such request may be made to the Corporation or the transfer agent. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - _________Custodian___________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as tenants Act_________________ in common (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ | | ______________________________________ ____________________________________________________________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ____________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ___________________________________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________________________ X ________________________________________________________________________ X ________________________________________________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS NOTICE: WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: By ____________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EX-4.2 3 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT EXHIBIT 4.2 AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of November 4, 1997, amended as of April 13, 1998 and amended and restated as of November __, 1998 (the "Amended and Restated Agreement") by and among (i) each of the stockholders listed on the signature pages attached hereto (together with each other Person (defined below) who becomes a party to this Agreement in accordance with the terms hereof, the "Stockholders"), and (ii) Mariner Post- Acute Network, Inc. a Delaware corporation and the successor to Paragon Health Network, Inc. (the "Company"). W I T N E S S E T H: WHEREAS, the Company and the Stockholders entered into that certain Stockholders Agreement, dated as of November 4, 1997 (the "Original Stockholders Agreement" and as amended as of April 13, 1998, the "Original Amended Stockholders Agreement"); WHEREAS, the transactions contemplated by the Original Stockholders Agreement became effective (the "Effective Date") on the date of, and simultaneously with, the closing under the Amended and Restated Agreement and Plan of Merger, dated as of September 17, 1997 among the Company, Apollo Management, L.P., on behalf of one or more managed investment funds, and Apollo LCA Acquisition Corp. (the "Merger Agreement"); WHEREAS, subsequent to the date of the Original Amended Stockholders Agreement, the Board of Directors of the Company and the Stockholders have each determined that it is in the best interests of each of the foregoing entities to amend and restate the Original Amended Stockholders Agreement to give effect to the terms and conditions set forth in this Agreement, it being understood and agreed (i) with respect to any date or time period occurring and ending prior to the date of this Agreement, the rights and obligations of the parties thereto shall be governed by the Original Stockholders Agreement and the Original Amended Stockholders Agreement, as applicable, which for such purposes shall remain in full force and effect, and (ii) with respect to any date or time period occurring or ending on or after the date of this Agreement, the rights and obligations of the parties hereto shall be governed by this Agreement. WHEREAS, the Original Amended Stockholders Agreement may be amended only in accordance with Section 7.1 thereof which requires a written instrument executed by the Company (in accordance with the approval of two-thirds of the entire Board of Directors of the Company, including a majority of the directors who are not an Affiliate or an Associate (each as defined below) of any Stockholder) and the holders of a majority of the Shares (as defined below) held by the Stockholders including, so long as Apollo (as defined below) beneficially owns at least 25% of the Shares held by Apollo on November 4, 1997, the consent of Apollo, and if any amendment or modification would have a disproportionately material adverse effect on the rights or obligations of any Other Stockholder (as defined below) or would otherwise unfairly discriminate against any Other Stockholder, the consent of such Other Stockholder; WHEREAS, after giving effect to the transactions contemplated by the Merger Agreement and the three-for-one stock split effective on December 30, 1997, on the date of this Amended and Restated Agreement, each Stockholder beneficially owns the number of shares of common stock of the Company, par value $.01 per share ("Common Stock") set forth under its name on the signature pages attached hereto, and the Stockholders party to this Amended and Restated Agreement collectively beneficially own all of the 17,627,798 shares of Common Stock issued to the Stockholders (collectively, the "Shares"); and WHEREAS, the parties hereto desire to provide for certain rights and obligations in respect to the Shares and the Company as hereinafter provided. NOW THEREFORE, the parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION I.1 Definitions. Capitalized terms used herein and not otherwise defined herein have the meaning ascribed to them in the Merger Agreement. In addition, the following terms shall have the meaning ascribed to them below: "Affiliate" of a Person shall have the meaning set forth in Rule 12b-2 of the Exchange Act as in effect on the date of this Agreement, but shall not include (i) any investment fund in which a Person has invested if the Person does not otherwise control the investment fund or have, directly or indirectly, voting or dispositive power over any securities owned by such fund, (ii) any investor or limited partner of any Person who does not otherwise have voting or dispositive power over securities owned by that Person and not controlled by that Person, (iii) in the case of Apollo, any Person other than (A) Apollo Advisors II, L.P., the sole general partner of each of the Apollo entities party hereto, (B) Apollo Advisors IV, L.P., (C) Apollo Management, L.P., and (D) the other investment partnerships or other entities of which Apollo Advisors II, L.P., Apollo Advisors IV, L.P. or Apollo Management, L.P. is a general or managing partner or member, (iv) in the case of Chase Equity Associates, L.P., any Person other than (A) Chase Capital Partners, its sole general partner, and (B) the other investment partnerships or other entities of which Chase Capital Partners is a general or managing partner or member, (v) in the case of Healthcare Equity Partners, L.P. or Healthcare Equity QP Partners, any Person other than (A) Beecken, Petty & Company, L.L.C., the sole general partner of each of them, and (B) the other investment partnerships of which Beecken, Petty & Company, L.L.C. is a general or managing partner or member, (vi) in the case of Key Capital Corporation or Key Equity Partners 97, any Person other than (A) any general partner - 2 - of Key Equity Partners 97 and (B) any of the investment partnerships of which any general partner of Key Equity Partners is a general or managing partner or member, (vii) in the case of Drax Holdings L.P., any Person other than (A) any general partner of Drax Holdings L.P. and (B) the other investment partnerships or other entities of which any general partner of Drax Holdings L.P. is a general or managing partner or member, or (viii) in the case of Walnut Growth Partners Limited Partnership, any Person other than (A) any general partner of Walnut Growth Partners Limited Partnership and (B) the other investment partnerships or other entities of which any general partner of Walnut Growth Partners Limited Partnership is a general or managing partner or member. It is expressly intended that any Person who now or hereafter controls, directly or indirectly, any Stockholder shall be subject to the terms of this Agreement as if it were a Stockholder. "Apollo" means collectively Apollo Management, L.P., its legal successors and assigns, and each Person who controls, or is controlled by, Apollo Management, L.P. including, without limitation, the Stockholders indicated as such on the Apollo signature page attached hereto. "Associate" shall mean an officer, director, partner (other than a limited partner) or executive employee of, or exclusive consultant to, any Person, but shall not include in the case of Apollo, Keith B. Pitts. "Beneficial ownership" by a Person of any Voting Securities shall be determined in accordance with the terms "beneficial ownership" as defined in Rule 13d-3 under the Exchange Act as in effect on the date of this Agreement, and in addition, "beneficial ownership" shall include securities which such Person has the right to acquire (irrespective of whether such right is exercisable immediately or only after the passage of time, including the passage of time in excess of sixty (60) days), or exclusive right to vote, pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. For purposes of this Agreement, a Stockholder shall be deemed to beneficially own any Voting Securities beneficially owned by its Affiliates or any Group of which such Stockholder or any such Affiliate is a member. "Board of Directors" shall mean the Board of Directors of the Company. "Charter Documents" shall mean the Certificate of Incorporation and Bylaws of the Company. "Commission" shall mean the Securities and Exchange Commission. "Effective Time" shall mean the effective time of the merger of Paragon Acquisition Sub, Inc., a wholly owned subsidiary of the Company ("Sub"), and Mariner Health Group, Inc. ("Mariner") pursuant to that certain Agreement and Plan of Merger, dated as of April 13, 1998, by and among the Company, Sub and Mariner. - 3 - "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Group" shall mean a "group" as such term is used in Section 13(d)(3) of the Exchange Act as in effect on the date of this Agreement. "Laws" shall mean all applicable foreign, federal, state and local laws, statutes, rules, regulations, codes and ordinances. "Other Stockholders" shall mean the Stockholders other than Apollo. "Person" shall mean any individual, Group, corporation, general or limited partnership, limited liability company, governmental entity, joint venture, estate, trust, association, organization or other entity of any kind or nature. "Recapitalization Merger" shall mean the merger of Apollo LCA Acquisition Corp. with and into Living Centers of America, Inc. (the predecessor of the Company). "Securities Act" shall mean the Securities Act of 1933, as amended. "Stockholder Designee" shall mean a person designated for election to the Board of Directors by Apollo as provided in Section 4.1. "Voting Securities" shall mean (x) any securities entitled, or which may be entitled, to vote generally in the election of directors of the Company, (y) any securities convertible or exercisable into or exchangeable for such securities (whether or not the right to convert, exercise or exchange is subject to the passage of time or contingencies or both), or (z) any direct or indirect rights or options to acquire any such securities; provided that unexercised options granted pursuant to any employment benefit or similar plan and rights issued pursuant to any shareholder rights plan shall be deemed not to be "Voting Securities" (or to have Voting Power). In addition, the following terms have the definitions specified in the Sections noted: TERM SECTION ---- ------- Agreement recitals Allocation Percentage 6.2 Apollo Directors 4.1(a) Beneficial Ownership Threshold 4.1(a) Common Stock recitals Company recitals Co-Sale 6.2 Drag Transaction 6.3(a) - 4 - Drag Transaction Closing Date 6.2(a) Exempted Transfer 6.1 Merger Agreement recitals Nominating Committee 4.1(d) Notices 6.4 Proxy Statement 4.2 Purchaser 6.3(a) Related Price 6.3(a) Related Person 6.3(a) Regulated Holder 6.4 Regulated Problem 6.4 Sale Notice 6.3(a) Shares recitals Standstill Period 5.1 Stockholders recitals Stockholder Designee Period 4.1(a) Third Party Sale 6.2 Third Party Sale Notice 6.1 Total Shares Outstanding 4.1(a) Unaffiliated Directors 4.1(b) Unauthorized Transfer 6.2 ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each of the Stockholders as follows: SECTION II.1 Authority for this Agreement. The Company has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Company and, assuming this Agreement constitutes a valid and binding obligation of the Stockholders, constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding in equity or at law). - 5 - SECTION II.2 Consents and Approvals; No Violation. Except as set forth on Schedule 2.2, neither the execution and delivery of this Agreement by the Company nor the consummation of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the respective Restated Certificate of Incorporation or Bylaws (or other similar governing documents) of the Company or any of its subsidiaries, (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental or regulatory authority, except where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a Material Adverse Effect or have a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby, (iii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which the Company is a party or by which the Company or any of its assets or subsidiaries may be bound, except for such defaults (or rights of termination, cancellation or acceleration) which would not in the aggregate have a Material Adverse Effect or have a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby, (iv) result in the creation or imposition of any mortgage, lien, pledge, charge, security interest or encumbrance of any kind on any asset of the Company or any of its subsidiaries which, in the aggregate, would have a Material Adverse Effect or have a material adverse effect on the ability of the Company to consummate the transactions contemplated hereby, or (v) violate any order, writ, injunction, agreement, contract, decree, statute, rule or regulation applicable to the Company, any of its subsidiaries or by which any of their respective assets are bound, except for violations which would not in the aggregate have a Material Adverse Effect or have a material adverse effect on the ability of the Company to consummate the transactions contemplated by this Agreement. SECTION II.3 No Inconsistent Agreements. As of the Effective Date, there is no (and from and after the Effective Date the Company will not, and will cause its subsidiaries not to enter into any) agreement with respect to any securities of the Company or any of its subsidiaries (and from and after the Effective Date the Company shall not take, or permit any of its subsidiaries to take, any action) that is inconsistent in any material respect with the rights granted to the Stockholders in this Agreement. Without limiting the foregoing, except for this Agreement and the Registration Rights Agreement, there are no other existing agreements relating to the voting or, except as set forth on schedule 2.3, registration of any equity securities of the Company or any of its subsidiaries, - 6 - ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS Each Stockholder severally as to itself, but not jointly or as to any other Stockholder, represents and warrants to the Company as follows: SECTION III.1 Authority for this Agreement. The execution and delivery of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby have been duly and validly authorized by all necessary action on its part. This Agreement has been duly and validly executed and delivered by such Stockholder and, assuming this Agreement constitutes a valid and binding obligation of the Company, constitutes a valid and binding agreement of such Stockholder enforceable against such Stockholder in accordance with the terms, except as such enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditor's rights generally and to general principals of equity (whether considered in a proceeding in equity or at law). SECTION III.2 No Violation. Neither the execution and delivery of this Agreement by such Stockholder nor the consummation of the transactions contemplated hereby will conflict with or result in any breach of any provision under such Stockholder's partnership agreement or similar governing documents of such Stockholder. ARTICLE IV. BOARD REPRESENTATION AND VOTING SECTION VI.1 Board Representation. (a) On the Effective Date the size of the Board of Directors will be fixed at eleven members and the Company will cause the persons named on Schedule 4.1 (or subject to Section 4.1(i), such other substitute persons as may be designated by Apollo as Stockholder Designees) to be initially elected to the Board of Directors by virtue of the Recapitalization Merger contemplated by the Merger Agreement. Until the earlier of (i) the date on which the Stockholders beneficially own, collectively, less than 25% of the Shares or (ii) the date the Standstill Period ends by virtue of Section 5.2(g) hereof (the "Stockholder Designee Period"), the Company agrees, subject to Section 4.1(i), to support the nomination of, and the Company's Nominating Committee shall recommend to the Board of Directors the inclusion in the slate of nominees recommended by the Board of Directors to stockholders for election as directors at each annual meeting of stockholders of the Company (A) five Stockholder Designees if the Stockholders beneficially own a number of shares of Common Stock equal to 66 2/3% or more of the Shares, (B) four Stockholder Designees if the Stockholders beneficially own a number of shares of Common Stock equal to 50% or more but less than 66 2/3% of the - 7 - Shares, or (C) two Stockholder Designees if the Stockholders beneficially own 25% or more but less than 50% of the Shares (each a "Beneficial Ownership Threshold"); provided, that in no event will more than four of such Stockholder Designees be Associates of Apollo (each Stockholder Designee who is an Associate of Apollo is hereafter referred to as an "Apollo Director"). Notwithstanding the foregoing, if at any time after the fifth anniversary of the Effective Time, the number of shares of Company Common Stock beneficially owned by the Stockholders aggregate less than forty percent (40%) of the total number of shares of the Company's Common Stock of all classes entitled to vote in the election of directors as are then outstanding ("Total Shares Outstanding"), the maximum number of Stockholder Designees shall be the lowest whole number which when compared to the total number of directors of the Company (including all vacancies) is equal to or greater than the percentage which the aggregate number of shares of Company Common Stock beneficially owned by the Stockholders bears to the Total Shares Outstanding. (b) If any vacancy on the Company's Board of Directors occurs (by virtue of the death, retirement, disqualification, removal from office or other cause of a Stockholder Designee), prior to a meeting of the Company's stockholders, the Nominating Committee shall appoint, subject to Section 4.1(i), a person designated by Apollo to fill such vacancy (except if such vacancy occurs as a result of the reduction of the number of Stockholder Designees entitled to be included on the Board of Directors by reason of a decrease in the Stockholders' beneficial ownership of Common Stock pursuant to Section 4.1(a)) and each such person shall be a Stockholder Designee for purposes of this Agreement. (c) In the event the size of the Company's Board of Directors is increased, Apollo will have the right, subject to Section 4.1(i) hereof, to nominate such additional number of persons to serve as Stockholder Designees such that the total number of Stockholder Designees is equal to the lowest whole number which when compared to the total number of directors (including all vacancies) of the Company, is equal to or greater than the percentage which the aggregate number of shares of Company Common Stock then beneficially owned by the Stockholders bears to the Total Shares Outstanding. (d) On the Effective Date, the Company will cause the persons indicated on Schedule 4.1 to be initially named to a nominating committee (the "Nominating Committee") of the Board of Directors and at all times during the Stockholder Designee Period, (i) the size of the Nominating Committee will be fixed at five members, two of whom will be Stockholder Designees who are Apollo Directors and one of whom will be the Chief Executive Officer (if he or she is a director), and (ii) nominees for director that are not Stockholder Designees shall be designated exclusively by vote of not less than a majority of the members of the Nominating Committee. (e) Notwithstanding the foregoing, the Company shall have no obligation to support the nomination, recommendation or election of any Stockholder Designee pursuant to this Section 4.1 or any other obligation under this Section 4.1 if the Stockholders are in breach of any material provision of this Agreement. - 8 - (f) Other than any committee formed for the purpose of considering matters relating to the Stockholders or as set forth above with respect to the Nominating Committee, (i) if the Stockholders are entitled to include at least four Stockholder Designees for election to the Board of Directors under this Agreement, the Stockholders shall be entitled to have such number of Stockholder Designees serve on each committee of the Board of Directors that provides the Stockholders with representation (as a percentage) equal to no less than the percentage which the number of shares of Common Stock beneficially owned by the Stockholders bears to the Total Shares Outstanding, provided that under no circumstances shall Apollo Directors serve as a majority of any committee other than a committee formed for the purpose of considering matters relating to the cash or other compensation of officers and employees of the Company; or (ii) if the Stockholders are entitled to include two Stockholder Designees for election to the Board of Directors under this agreement, the Stockholders shall be entitled to have one Stockholder Designee serve on each committee of the Board of Directors. (g) Upon any decrease in the Stockholders' beneficial ownership of Common Stock below any Beneficial Ownership Threshold, Apollo shall use its best efforts to cause a number of Stockholder Designees to offer to immediately resign from the Company's Board of Directors (subject to acceptance by the Board of Directors) such that the number of Stockholder Designees serving on the Board of Directors immediately thereafter will be equal to the number of Stockholder Designees which Apollo would then be entitled to designate under Section 4.1(a). Upon termination of the Stockholder Designee Period, Apollo shall promptly offer to cause all of the Stockholder Designees to resign from the Board of Directors (subject to acceptance by the Board of Directors) thereof and the Company's obligations under this Section 4.1 shall terminate. (h) The Company and each Stockholder shall use commercially reasonable efforts to call, or cause the appropriate officers and directors of the Company to call, a special meeting of stockholders of the Company and to vote all of the shares of Common Stock owned or held of record by them for, or to cause to be taken actions by written consent in lieu of any such meeting necessary to cause, the removal (with or without cause) of any Stockholder Designee if Apollo requests such director's removal in writing for any reason. Except as provided in this Section 4.1(h), each Stockholder agrees that, at any time that it is then entitled to vote for the election or removal of directors, it will not vote in favor of the removal of any Stockholder Designee unless (i) such removal shall be at the request of Apollo pursuant to the provisions of Section 4.1(h), (ii) the right of the party who nominated such director to do so has terminated in accordance with Section 4.1(a) above, or (iii) such removal is in accordance with the requirements of Section 4.1(i) below. (i) Notwithstanding the provisions of this Section 4.1, Apollo shall not be entitled to designate any person to the Company's Board of Directors (or any committee thereof) in the event that (x) the Company receives a written opinion of its outside counsel that such Stockholder Designee would not be qualified under applicable law, rule or regulation to serve - 9 - as a director of the Company or (y) if the Nominating Committee objects to such Stockholder Designee because such Stockholder Designee has been involved in any of the events enumerated in Item 2(d) or (e) of Schedule 13D or such person is currently the target of an investigation by any governmental authority or agency relating to felonious criminal activity or is subject to any order, decree, or judgment of any court or agency prohibiting service as a director of any public company or providing investment or financial advisory services and, in any such event, Apollo shall withdraw the designation of such proposed Stockholder Designee and designate a replacement therefor (which replacement Stockholder Designee shall also be subject to the requirements of this Section). The Company shall use its reasonable best efforts to notify Apollo of any objection to a Stockholder Designee sufficiently in advance of the date on which proxy materials are mailed by the Company in connection with such election of directors to enable Apollo to propose a replacement Stockholder Designee in accordance with the terms of this Agreement. Apollo agrees to remove any Stockholder Designee objected to by the Nominating Committee on the grounds specified in clause (y) above. (j) The Company shall not, and shall not permit any of its subsidiaries to, without the consent of two-thirds of the entire Board of Directors of the Company, take any action that under the Charter Documents or this Agreement requires the approval of two-thirds of the entire Board of Directors of the Company if any of the Stockholder Designees approving (and whose vote is necessary to approve) such action are Persons whose removal from the Board of Directors has been requested at or prior to the time of such action by Apollo pursuant to Section 4.1(a), unless such action has been ratified by the reconstituted Board of Directors following such removal and election of successors. (k) Each Stockholder Designee serving on the Board of Directors shall be entitled to all compensation and stock incentives granted to directors who are not employees of the Company on the same terms provided to such directors. (l) Notwithstanding anything in this Agreement to the contrary, in connection with a Transfer of at least 66 2/3% of the Shares to a single transferee, whether by a single transaction or a series of transactions, Apollo may, by written notice to the Company, and with the affirmative approval of not less than two-thirds of the entire Board of Directors of the Company (including a vote that complies with Section 3.09(d)(2) of the Company's By-laws) assign all rights granted to Apollo under this Section 4.1 to such transferee (to the exclusion of other Stockholders) and, without limiting the foregoing, such transferee's rights to designate directors under this Section 4.1 shall not be reduced until such transferee ceases to beneficially own at least 66 2/3%, 50% or 25%, as the case may be, of the number of Shares or as such number of directors is otherwise reduced in accordance with Section 4.1. Any approval to such Transfer by the requisite vote of the Company's Board of Directors shall constitute the approval referred to in Section 203(a)(1) of the Delaware General Corporation Law, as amended. SECTION IV.2 Voting. Each Stockholder agrees that during the Standstill Period such Stockholder shall, and shall cause its Affiliates to, use commercially reasonable efforts to - 10 - be present, in person or represented by proxy, at all meetings of stockholders of the Company so that all Voting Securities beneficially owned by such Stockholder shall be counted for the purpose of determining the presence of a quorum at such meetings. Each Stockholder agrees that during the Standstill Period in connection with the election of directors of the Company, such Stockholder shall vote or cause to be voted all Voting Securities beneficially owned by such Stockholder to elect all individuals nominated by the Nominating Committee, unless to do so would violate the provisions of Section 4.1. Notwithstanding the foregoing, during the effectiveness of the Proxy and Voting Agreement (the "Proxy Agreement"), dated the date hereof, between Apollo Management, L.P. and the Other Stockholders, the Other Stockholders may rely (in accordance with the terms thereof) on the proxy designated therein to take any action required by this Section 4.2 on their behalf. ARTICLE V. STANDSTILL SECTION V.1 Standstill. During the period beginning on the date hereof and ending on the earliest to occur of (A) the tenth anniversary of the Effective Date, (B) the date on which the Stockholders own, collectively, Voting Securities which would represent less than 10% of the voting power in the general election of directors of the Company, on a fully diluted basis, of all Voting Securities then outstanding or (C) a Termination Event under any subdivision of Section 5.2 (such period, the "Standstill Period"), each Stockholder will not, and will cause each of its Affiliates not to, directly or indirectly: (i) except with the prior approval of two-thirds of the entire Board of Directors (which approval is requested in a manner which does not require disclosure publicly or to any third parties) acquire, offer to acquire (by tender or exchange offer or otherwise), or agree to acquire, by purchase or otherwise, beneficial ownership of any Voting Securities or voting rights or direct or indirect rights or options to acquire any Voting Securities of the Company or any of its Affiliates other than (A) the exercise of convertible securities acquired in compliance with the terms of this Agreement, or an acquisition as a result of a stock split, stock dividend or similar recapitalization, (B) the acquisition of shares of Common Stock pursuant to the Merger Agreement or the GranCare Merger Agreement, (C) acquisitions of Voting Securities provided that the aggregate number of Voting Securities beneficially owned by all Stockholders and their Affiliates (including the Shares) after giving effect to such acquisitions does not exceed 49% of the Total Shares Outstanding; (D) stock options or similar rights granted by the Company to an Affiliate of such Stockholder as compensation for performance as a director or officer of the Company or its subsidiaries (and any shares issuable upon exercise thereof), (E) transfers among Stockholders or (F) any rights which are granted to all stockholders of the Company (and any share issuable upon exercise thereof); provided, however, that if the Stockholders or any of their Affiliates in good faith inadvertently acquire not more than 100,000 shares of Common Stock in violation of these provisions and within 15 days after the first date on which the Stockholders have actual - 11 - knowledge (including by way of written notice given by the Company) that a violation has occurred, the Stockholders or any of their Affiliates shall have transferred any shares of Common Stock held in violation of these provisions to unrelated third parties so that the Stockholders and their Affiliates no longer beneficially own any such shares or have any agreement or understanding relating to such shares, this Section 5.1 shall be deemed not to have been violated; and provided further, that no violation of this provision shall be deemed to have occurred by reason of the indirect acquisition of beneficial ownership of securities resulting from (aa) investments in investment funds as to which no Stockholder or Affiliate thereof has control or power to control with respect to voting or investment decisions or (bb) acquisitions of securities by a limited partner in any Stockholder or Affiliates thereof as to which limited partner no Stockholder or its Affiliates has control or power to control; (ii) except pursuant to this Agreement or the Proxy Agreement, form, join or in any way participate in a Group with respect to any securities of the Company or its Affiliates, other than with other Stockholders or Affiliates or Associates of any Stockholder or Ares Leveraged Investment Fund, L.P., provided, however, that in the case of securities other than Voting Securities, Stockholders may participate in a Group with respect thereto with the prior approval of two-thirds of the entire Board of Directors (which approval is requested in a manner which does not require disclosure publicly or to any third party); (iii) grant a proxy to any Person other than (I) an Affiliate or Associate of a Stockholder; provided that any such Person shall not, pursuant to the grant of such proxy or otherwise, have the right or ability to vote shares of Common Stock representing 50% or more of the Total Shares Outstanding, (II) the proxy granted to Apollo pursuant to the Proxy Agreement or (III) proxies designated by the Board of Directors of the Company in connection with any contested election, or otherwise make, or in any way cause or participate in, any "solicitation" of "proxies" to vote (as those terms are defined in Regulation 14A under the Exchange Act) with respect to the Company or its Affiliates, or communicate with, seek to advise, encourage or influence any Person, in any manner, with respect to the voting of, securities of the Company or its Affiliates, or become a "participant" in any "election contest" (as those terms are defined or used in Rule 14a-11 under the Exchange Act) with respect to the Company or its Affiliates (other than (A) nonpublic communications with other Stockholders or Affiliates or Associates of any Stockholder which would not require public disclosure by any Person or (B) with the prior approval of a two thirds majority of the entire Board of Directors (which approval is requested in a manner which does not require disclosure publicly or to any third party)); (iv) initiate, propose or, except with the prior approval of two- thirds of the entire Board of Directors (which approval is requested in a manner which does not require disclosure publicly or to any third parties) otherwise solicit stockholders for the approval of one or more stockholder proposals with respect to the Company or its Affiliates or induce or attempt to induce any other Person to initiate any stockholder proposal or seek election to or seek to place a representative on the Board of Directors of the Company (except pursuant to Section 4.1 of this Agreement) or its Affiliates or seek the removal of any member of the - 12 - Board of Directors of the Company or its Affiliates (for this purpose, the actions of the Stockholder Designees in communicating (without public disclosure or disclosure to third parties) with the Board of Directors in their capacity as directors of the Company, and non-public communication by a Stockholder with other Stockholders or Affiliates of any Stockholder which would not require public disclosure by any Person, shall not be deemed to be in contravention of this paragraph (iv)); or (v) make any public announcement with respect to, or submit any proposal for, any transaction involving the Company, on the one hand, and Apollo or any Affiliates of Apollo, on the other hand, which would be deemed a "business combination" under the provisions of Section 203(c)(3)(i)-(iv) of the DGCL, whether or not such proposal might require public disclosure by the Company, unless such proposal is directed and disclosed solely to the Board. provided, that this Section 5.1 shall not restrict or inhibit the rights of a Stockholder to exercise its voting rights as a stockholder of the Company (subject to Section 4.2). SECTION V.2 Early Termination of Standstill. The obligations of the Stockholders under Section 5.1 shall terminate at the election of the Stockholders (representing a majority of the Shares then held by the Stockholders) upon the occurrence of any of the following events (each a "Termination Event"): (a) At least $10 million in indebtedness for monies borrowed by the Company or its subsidiaries shall have been accelerated; (b) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $10 million or more and any such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; (c) The Company or any material subsidiary shall file a petition in bankruptcy or for reorganization or for an arrangement or any composition, readjustment, liquidation, dissolution or similar relief pursuant to Title 11 of the United States Code or under any similar present or future federal law or the law of any other jurisdiction or shall be adjudicated a bankrupt or insolvent, or consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or for all or any substantial part of its property, or shall make a general assignment for the benefit of its creditors; (d) A petition or answer shall be filed proposing the adjudication of the Company or any material subsidiary as bankrupt or its reorganization or arrangement, or any composition, readjustment, liquidation, dissolution or similar relief with respect to it pursuant to Title 11 of the United States Code or under any similar present or future law or the law - 13 - or any other jurisdiction, and the Company shall consent to or acquiesce in the filing thereof, or such petition or answer shall not be discharged or denied within 60 days after the filing thereof; (e) The Company shall be in material breach of its obligations to the Stockholders under their Registration Rights Agreement and such breach shall not have been cured within 20 days after receipt by the Company from the Stockholders of a written notice specifying such breach and requiring it to be remedied, and the Company shall not in good faith be contesting whether such breach has occurred; (f) If the Company shall, in breach of its obligations under this Agreement, fail to nominate for election to the Board of Directions any Stockholder Designee who satisfies the requirements for designation to the Board of Directors set forth in Section 4.1 (i) or if the stockholders of the Company shall fail to elect to the Board of Directors all Stockholder Designees nominated in accordance with Section 4.1; (g) At any time after the expiration of six (6) years from the Effective Date; or (h) Without the prior approval of the Board of Directors, any Person or Group (other than any Stockholder or its Affiliates or any Group including any Stockholder or its Affiliates, or any person acting in concert with any of the foregoing) acquires (by tender or exchange offer or otherwise), offers to acquire (other than pursuant to a proposal which is not publicly disclosed or required to be publicly disclosed) or publicly announces the intention to acquire (other than an offer or announcement of the intention to acquire from any Stockholder the Voting Securities beneficially owned by such Stockholder) directly or indirectly, Voting Securities or voting rights or direct or indirect rights or options to acquire any Voting Securities of the Company representing 30% or more of the Voting Securities of the Company then outstanding. SECTION V.3 Notice of Proposed Acquisitions. In order to enable the Stockholders to comply with the provisions of Section 5.1, prior to the end of the Standstill Period, without the prior written consent of Apollo (other than as contemplated by Sections 5.1(i)(A), (B), (D), (E) or (F) hereof) none of the Other Stockholders or their Affiliates shall acquire, offer to acquire (by tender or exchange offer or otherwise), or agree to acquire, by purchase or otherwise, (a) Voting Securities or voting rights or direct or indirect rights or options to acquire any Voting Securities of the Company or any of its Affiliates that together with all other such securities so acquired by any Stockholder and its Affiliates since last obtaining consent pursuant to this Section 5.3 represent an additional 1% of the Total Shares Outstanding on the date of such purchase, offer or acquisition, or (b) if the Stockholders collectively own or have the right to acquire 40% or more of the Total Shares Outstanding and Apollo shall have provided written notice to the Other Stockholders thereof, any Voting Securities or voting rights or direct or indirect rights or options to acquire any Voting Securities of the Company or any of its Affiliates. - 14 - ARTICLE VI. TRANSFER SECTION VI.1 Transfer. Subject to the provisions of the Proxy Agreement, the Other Stockholders may sell, transfer, assign or otherwise dispose of any of the Shares; provided, however, that no Other Stockholder shall sell, transfer, assign or otherwise dispose of any of the Shares unless (i) such Other Stockholder delivers written notice to Apollo of its intent to transfer Shares not less than five (5) business days prior to such transfer, and (ii) if such transfer occurs other than pursuant to an Exempted Transfer (as defined below), such transferee becomes a party to this Agreement (whereupon such transferee shall become an "Other Stockholder" hereunder). Any purported transfer in violation of the provisions of this Agreement (an "Unauthorized Transfer") shall be null and void. The Company will not register, recognize or give effect to an Unauthorized Transfer and the purported transferee of any Shares pursuant to an Unauthorized Transfer will not thereby acquire any rights in such Shares. The Company will, immediately upon becoming aware of an actual or attempted Unauthorized Transfer, instruct the transfer agent for the Shares to issue an appropriate stop transfer order with regard to such transaction or attempted transaction. An "Exempted Transfer" hereunder (which shall not be subject to the transfer conditions set forth in clause (ii) of the first sentence of the preceding paragraph) shall mean: (a) any transfer by any Other Stockholder to its respective equity owners, whether by way of a distribution, return of capital, dividend or otherwise, or (b) any sale of Shares by any Other Stockholder either (1) pursuant to a registered public offering under the Securities Act, (2) pursuant to Rule 144 or Rule 145 promulgated under the Securities Act or (3) pursuant to a broker to broker sale executed on any national securities exchange or traded on the National Market System of NASDAQ. SECTION VI.2 Tag-Along Rights. If Apollo or any of their respective Affiliates proposes to enter into an agreement with respect to or otherwise enter into a bona fide sale transaction (a "Third-Party Sale") of Shares to a third party other than an Affiliate of Apollo, Apollo shall first provide the Company and each Other Stockholder a written notice (the "Third Party Sale Notice") specifying (i) the nature and amount of consideration to be paid to the Stockholders upon consummation of the Third Party Sale, (ii) the identity of the third party purchaser, and (iii) all other material terms of such proposed Third Party Sale, including the proposed closing date. If an Other Stockholder delivers a written notice (a "Co-Sale Notice") to Apollo on or prior to the fifth business day after the giving of the Third Party Sale Notice, such Other Stockholder shall be permitted to sell, on the same terms as Apollo, a portion of the total number of Shares sold in such Third Party Sale equal to the lesser of (i) the amount specified by such Other Stockholder in its Co-Sale Notice and (ii) the product of (A) such Other Stockholder's Allocation Percentage and (B) the total number of Shares to be sold in such Third Party Sale. The "Allocation Percentage" of each Other Stockholder at any time will be a fraction, the numerator of which is the number of Shares owned by such Other Stockholder and the denominator of which is the number of Shares owned by all Stockholders - 15 - desiring to include Shares in such Third Party Sale. The provisions of this Section 6.2 shall not apply to any transfer to an Affiliate of Apollo or pursuant to a public offering. SECTION VI.3 Drag-Along Rights. (a) Each Stockholder shall transfer all, but not less than all Shares then owned by such Stockholder, in connection and together with the sale of all, but not less than all of the Shares then owned by Apollo and its Affiliates and the Other Stockholders in a bona fide transaction (a "Drag Transaction") to any person who is not an Affiliate of Apollo (a "Purchaser"). Prior to consummating any Drag Transaction, Apollo will deliver to each Other Stockholder a written notice (a "Sale Notice") specifying (i) the nature and aggregate amount of consideration (the "Sale Price") to be paid to the Stockholders upon the consummation of the Drag Transaction, (ii) the identity of the Purchaser, and (iii) all other material terms of such proposed Drag Transaction, including the proposed date of the closing of the Drag Transaction (the "Drag Transaction Closing Date"). On the Drag Transaction Closing Date, each Stockholder shall sell to the Purchaser 100% of the Shares then held by such Stockholder on the terms and subject to the conditions set forth in the Sale Notice. If any Stockholder fails to deliver certificates representing its Shares as required by this Section 6.3, such Stockholder (i) shall not be entitled to the consideration it is to receive in the Drag Transaction until it cures such failure (provided, that after curing such failure it shall be so entitled to such consideration without interest), (ii) shall for all purposes be deemed no longer to be a stockholder of the Company and have no voting rights, (iii) shall not be entitled to any dividends or other distributions declared after the Drag Transaction Closing Date with respect to the Shares held by it, (iv) shall have no other rights or privileges granted to Stockholders under this or any future agreement and (v) in the event of liquidation of the Company, its rights with respect to any consideration it would have received if it had complied with this Section 6.3, if any, shall be subordinate to the rights of any equity holder. This Section 6.3 shall inure to the benefit of, and be enforceable by, Apollo and its Related Persons. "Related Person" means, with respect to any person, (i) any Affiliate of such person, (ii) any investment manager, investment advisor or general partner of such person, and (iii) any investment fund, investment account or investment entity whose investment manager, investment advisor or general partner is such person or a Related Person of such person. (b) The obligations of the Other Stockholders pursuant to this Section 6.3 are subject to the satisfaction of the following conditions: (i) if any Stockholder is given an option as to the form and amount of consideration to be received, all Stockholders will be given the same option (except that no Stockholder shall be required in any circumstance to accept consideration for its Shares in a form other than cash, cash equivalents or securities listed for trading on any national securities exchange or traded on the National Market System of NASDAQ); (ii no Other Stockholder shall be obligated to make any out-of-pocket expenditure prior to the consummation of the Drag Transaction (excluding modest expenditures for its own postage, copies, etc., and the fees and expenses of its own counsel retained by it), and no Other Stockholder shall be obligated to pay more - 16 - than its or his pro rata share (based upon the amount of consideration received for or with respect to its or his Shares) of reasonable expenses incurred in connection with such Drag Transaction to the extent such costs are incurred for the benefit of all Stockholders and are not otherwise paid by the Company or the acquiring party (including the costs of one counsel chosen by Apollo on behalf of the Stockholders and one counsel chosen by the holders of a majority of the Shares held by the Other Stockholders) (costs incurred by or on behalf of an Other Stockholder for its or his sole benefit will not be considered costs of the transaction hereunder); provided, however, that any Other Stockholder's liability for its or his pro rata share of such allocated expenses shall be capped at the total purchase price received by such Other Stockholder for its or his Shares; and (ii) (A) in the event that the Stockholders are required to provide any representations or warranties in connection with the Drag Transaction, each Other Stockholder shall only be required to represent and warrant as to its or his title to its or his Shares, and such Other Stockholder's authority, power, and right to enter into and consummate such other purchase agreement without violating any other agreement or legal requirement, and (B) in the event that the Other Stockholders are required to provide any indemnities in connection with the Drag Transaction, then each Other Stockholder shall not be liable for more than his pro rata share (based upon the amount of consideration received for or with respect to its or his Shares) of any liability for indemnity and such liability shall not exceed the total purchase price received by such Other Stockholder for its or his Shares. SECTION VI.4 Regulatory Compliance Cooperation. (a) If a Regulated Holder (as defined below) determines that it has a Regulatory Problem, the Company and the other Stockholders will (i) take all such actions to avoid or cure such Regulatory Problem as are reasonably requested by such Regulated Holder in order (A) to effectuate and facilitate a Transfer by such Regulated Holder of any securities of the Company then held by such Regulated Holder to any Person designated by such Regulated Holder, (B) to permit such Regulated Holder (or any Affiliate of such Regulated Holder) to exchange all or any portion of the Voting Securities of the Company then held by such Person on a share-for-share basis for shares of a class of nonvoting Securities of the Company, which nonvoting Securities shall be identical in all respects to such Voting Securities, except that such nonvoting Securities shall be nonvoting and shall be convertible into Voting Securities of the Company on such terms as are requested by such Regulated Holder in light of regulatory considerations then prevailing, and (C) to preserve and continue the respective allocation of the voting interests and powers with respect to the Company arising out of such Regulated Holder's ownership of Voting Securities of the Company and as provided in this Agreement before the transfers and amendments referred to above (including entering into such additional agreements as are reasonably requested by such Regulated Holder to permit a Person designated by such Regulated Holder to exercise voting power relinquished by such Regulated Holder upon any exchange of Voting Securities of the Company for nonvoting securities of the Company), and - 17 - (ii) enter into such additional agreements, adopt such amendments to this Agreement, the Charter Documents of the Company and other relevant agreements and take such additional actions, in each case as are reasonably requested by such Regulated Holder, in order to effectuate the purpose and intent of the foregoing. (b) If a Regulated Holder elects to transfer securities of the Company to another Regulated Holder in order to avoid or cure a Regulatory Problem, the Company and the other Stockholders shall enter into such agreements with such other Regulated Holder and its Affiliates as it may reasonably request in order to assist such other Regulated Holder and its Affiliates in complying with all Applicable Laws. Such agreements may include restrictions on the conversion, redemption, repurchase or retirement of securities of the Company that would result or be reasonably expected to result in such Regulated Holder or its Affiliates holding more Voting Securities or total equity interests in the Company than it is permitted to hold under such Applicable Laws. (c) If a Regulated Holder has the right or opportunity to acquire any of the Company's or its Subsidiaries' securities (as the result of a preemptive offer, pro-rata offer or otherwise), at such Regulated Holder's request the Company will offer to sell (or if the Company is not the seller, to cooperate with the seller and such Regulated Holder to permit such seller to sell) such non-voting Securities on the same terms as would have existed had such Regulated Holder acquired the securities so offered and immediately requested their exchange for non-voting securities pursuant to Section 6.4(a). (d) Each Stockholder agrees to cooperate with the Company in complying with this Section 6.4, including voting to approve amending the Charter Documents or this Agreement in a manner reasonably requested by the Regulated Holder requesting such amendment. (e) The Company and each Stockholder agree not to amend or waive the voting or other provisions of the Company's certificate or articles of incorporation or by-laws, or other constitutive and governing instruments and documents, or this Agreement if in any such case such amendment or waiver would cause any Regulated Holder to have a Regulatory Problem and such Regulated Holder has so notified the Company that it would have a Regulatory Problem promptly after it has notice of such proposed amendment or wavier. (f) In this Agreement, the following capitalized terms have the meanings given to them below: "Regulated Holder" means any holder of the Company's securities that is (or that is a subsidiary of a bank holding company that is) subject to the various provisions of Regulation Y of the Board of Governors of the Federal Reserve Systems. 12 C.F.R., Part 225 (or any successor to Regulation Y). "Regulatory Problem" means (i) any set of facts or circumstances wherein it has been asserted by any governmental regulatory agency (or a Regulated Holder believes that there is a - 18 - significant risk of such assertion) that such Person (or any bank holding company that controls such Person) is not entitled to hold, or exercise any material right with respect to, all or any portion of the securities of the Company which such Person holds or (ii) when such Person and its Affiliates would own, control or have power (including voting rights) over a greater quantity of securities of the Company than is permitted under any law or regulation or any requirement of any governmental authority applicable to such Person or to which such Person is subject. SECTION VI.5 Legend. Each certificate issued to represent any Shares shall bear the following (or a substantially equivalent) legend. The transfer of these securities is subject to restrictions set forth in a Stockholders Agreement, dated as of November 4, 1997, a copy of which is available for inspection at the office of the Corporation. Any certificate issued at any time in exchange or substitution for any certificate bearing such legend (except a new certificate issued upon the completion of a public distribution of securities of the Company represented thereby) shall also bear such legend, unless the restrictions contained in this Agreement are no longer in effect ARTICLE VII MISCELLANEOUS SECTION VII.1 Amendment and Modification. Any provision of this Agreement may be waived, provided that such waiver is set forth in a writing executed by the party against whom the enforcement of such waiver is sought. This Agreement may not be amended, modified or supplemented other than by a written instrument signed by (a) the Company (in accordance with the approval of two-thirds of the entire Board of Directors, including a majority of the directors who are not an Affiliate or an Associate of any Stockholder), and (b) the holders of a majority of the Shares held by the Stockholders; provided, however, that so long as Apollo beneficially owns at least 25% of the Shares held by Apollo on the Effective Date, without the consent of Apollo, no amendment or modification which adversely affects the rights or duties of Apollo hereunder may be effected, and provided, further, that no amendment or modification that would have a material adverse effect on the rights or obligations of any Other Stockholder without similarly and proportionately (based on the respective number of Shares then owned by the Other Stockholders hereunder) affecting the rights and obligations of all Other Stockholders hereunder, or that would otherwise unfairly discriminate against any Other Stockholder shall be effective as to such Other Stockholder unless such Other Stockholder shall have consented in writing thereto. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement. - 19 - SECTION VII.2 Successors and Assigns: Entire Agreement. (a) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and executors, administrators and heirs; provided, that except as otherwise specifically permitted pursuant to this Agreement, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Company without the prior written consent of each of the Stockholders. (b) This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. SECTION VII.3 Separability. In the event that any provision of this Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. SECTION VII.4 Notices. All notices, demands, requests, consents or approvals (collectively, "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally delivered or delivered by a reputable overnight courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or such other address as such party shall have specified most recently by written notice. Notice shall be deemed given or delivered on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given or delivered on the next business day following delivery of such notice to a reputable overnight courier service. To the Company: Mariner Post-Acute Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Attention: Chief Executive Officer Fax: (770) 698-8199 - 20 - with a copy (which shall not constitute notice) to: To Apollo: c/o Apollo Advisors II, L.P. 2 Manhattanville Road Purchase, New York 10577 Attention: Tony Tortorelli Fax: (914) 694-8032 - 21 - with a copy (which shall not constitute notice) to: Sidley & Austin 555 West Fifth Street Suite 4000 Los Angeles, California 90013 Attention: Robert W. Kadlec, Esq. Fax: (213) 896-6600 To the Other Stockholders: To the address specified on the signature page executed by such Other Stockholder. SECTION VII.5 Governing Law. This Agreement shall be governed by and construed in accordance with the internal law of the State of Delaware without giving effect to principles of conflicts of law. SECTION VII.6 Headings. The headings in this Agreement are for convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. SECTION VII.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument SECTION VII.8 Further Assurances. Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. SECTION VII.9 Termination. Unless sooner terminated in accordance with its terms or as otherwise herein provided, this Agreement shall terminate upon the earlier to occur of (i) the mutual agreement by the parties hereto, (ii) with respect to any Stockholder, such Stockholder ceasing to own any Shares or (iii) the tenth anniversary of the Effective Date. SECTION VII.10 Remedies. In the event of a breach or a threatened breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief that a remedy at law would be adequate is waived. - 22 - SECTION VII.11 Pronouns. Whenever the context may require, any pronouns used herein shall be deemed also to include the corresponding neuter, masculine or feminine forms. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MARINER POST-ACUTE NETWORK, INC. By: /s/ Keith B. Pitts ---------------------------------- Name: Keith B. Pitts Title: President and Chief Executive Officer - 23 - APOLLO 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/ Peter P. Copses --------------------------------------- Name: Peter P. Copses Title: Vice President 13,100,370 Shares of Common Stock 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/ Peter P. Copses ---------------------------------------- Name: Peter P. Copses Title: Vice President 484,188 Shares of Common Stock - 24 - 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/ Peter P. Copses ------------------------------------------ Name: Peter P. Copses Title: Vice President 783,033 Shares of Common Stock - 25 - OTHER STOCKHOLDERS CHASE EQUITY ASSOCIATES, L.P. By: Chase Capital Partners Its General Partner By: /s/ Brian J. Richmand ------------------------------------- Name: Brian J. Richmand Title: General Partner 2,000,001 Shares of Common Stock Address for Notice: 380 Madison Avenue 12th Floor New York, New York 10017 Attention: Christopher C. Behrens Telecopy No.: (212) 622-3101 with a copy to: O'Sullivan Graev & Karabell, LLP 30 Rockefeller Plaza New York, New York 10112 Attention: Michael F. Killea, Esq. Telecopy No.: (212) 408-2420 - 26 - HEALTHCARE EQUITY PARTNERS, L.P. By: Beecken, Petty & Company, L.L.C. Its General Partner By: /s/ Gregory A. Moerschel --------------------------------------- Name: Gregory A. Moerschel Title: Managing Director 182,592 Shares of Common Stock Address for Notice: c/o Beecken, Petty & Company, L.L.C. 901 Warrenville Road, Suite 205 Lisle, Illinois 60532 Attention: David K. Beecken Telecopy No.: (630) 435-0370 HEALTHCARE EQUITY QP PARTNERS, L.P. By: Beecken, Petty & Company, L.L.C. Its General Partner By: /s/ Gregory S. Moerschel ---------------------------------------------- Name: Gregory S. Moerschel Title: Managing Director 558,150 Shares of Common Stock Address for Notice: c/o Beecken, Petty & Company, L.L.C. 901 Warrenville Road, Suite 205 Lisle, Illinois 60532 Attention: David K. Beecken Telecopy No.: (630) 435-0370 - 27 - KEY CAPITAL CORPORATION By: /s/ Stephen R. Haynes ----------------------------------- Stephen R. Haynes Vice President 277,779 Shares of Common Stock Address for Notice: 127 Public Square, 6th Floor Cleveland, OH 44114 Attention: Stephen R. Haynes Telecopy No.: (216) 689-3204 KEY EQUITY PARTNERS 97 By: /s/ Stephen R. Haynes ---------------------------------- Stephen R. Haynes Its: General Partner 92,592 Shares of Common Stock Address for Notice: 127 Public Square, 6th Floor Cleveland, OH 44114 Attention: Stephen R. Haynes Telecopy No.: (216) 689-3204 - 28 - DRAX HOLDINGS L.P. By: Inman Corporation Its General Partner By: /s/ Linda Hamilton ---------------------------------------- Name: Linda Ann Hamilton Title: 75,000 Shares of Common Stock Address for Notice: c/o The Drax Group 8889 Pelican Bay Blvd., Suite 403 Naples, FL 34108 Attention: Linda Hamilton Telecopy No.: (941) 262-0467 WALNUT GROWTH PARTNERS LIMITED PARTNERSHIP By: Walnut GP, L.L.C Its General Partner By: Walnut Funds, Inc. A Member By: /s/ Joel Kanter ------------------------------------------ Name: Joel Kanter Title: 74,073 Shares of Common Stock Address for Notice: Suite 700 1227 25th Street, N.W. Washington, D.C. 20037 Attention: Michael Faber Telecopy No.: (202) 296-2882 - 29 - SCHEDULE 4.1 Stockholder Designees - --------------------- Laurence M. Berg*+ Peter P. Copses*+ John H. Kissick* Robert L. Rosen GranCare Nominees - ----------------- Gene E. Burleson Joel S. Kanter William G. Petty, Jr. LCA Nominees - ------------ Donald C. Beaver Chief Executive Officer - ----------------------- Keith B. Pitts+ ____________________________ * Apollo Director + Nominating Committee - 30 - EX-4.4 4 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.4 REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of May 1, 1998 by and among Paragon Health Network, Inc., a Delaware corporation (the "Company") and Daniel G. Schmidt III (the "Investor"). NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. The following terms shall have the meanings ----------- ascribed to them below: "Closing Date" means the date of the closing under the Agreement of Purchase and Plan of Reorganization (the "Exchange Agreement"), dated as of March 24, 1998, among the Company, Acquisition Sub, Inc., a Delaware corporation, Professional Rehabilitation, Inc., a South Carolina corporation, and the Investor. "Commission" means the Securities and Exchange Commission. "Demand Registration" means a registration of Registrable Securities under the Securities Act pursuant to a request made under Section 2.1. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Permitted Transferee" means any member of Investor's "immediate family" as such term currently is used in Instruction to Item 4.4(a) of Regulation S-K under the Securities Act, and any trust established for the benefit of such persons or Investor. "Person" means any individual or a corporation, partnership, joint venture, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other -1- amendments and supplements to the Prospectus, including post-effective amendments, and all materials incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Security" means each Share issued to the Investor in the transactions described in the Exchange Agreement (the "Transaction") until (i) it has been effectively registered under the Securities Act and disposed of pursuant to an effective registration statement, (ii) it is sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met, including a sale pursuant to the provisions of Rule 144(k) or (iii) it is otherwise transferred in accordance with the terms of this Agreement to any person other than a Permitted Transferee; it being understood that Shares transferred to any Permitted Transferee shall be "Registrable Securities". "Registration Statement" means any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Selling Holder" means any person who sells or proposes to sell Shares pursuant to a registration statement under the Securities Act. "Shares" means the shares of common stock, par value $.01 per share of the Company. "Underwriter" means a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer's market-making activities. ARTICLE II REGISTRATION RIGHTS Section 2.1 Demand Registration. ------------------- (a) Request for Registration. During the period commencing on the day ------------------------ immediately following the Closing Date and ending 18 months thereafter (the "Demand Period"), the Investor may make one written request for a Demand Registration of not less than 50% of the Registrable Securities received by the Investor in the transaction. The Investor will specify the number of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. -2- If the Investor requests that such Demand Registration be a "shelf" registration pursuant to Rule 415 under the Securities Act, the Company shall file such Demand Registration under Rule 415 and shall keep the Registration Statement filed in respect thereof effective for a period which shall terminate on the earlier of (i) six months from the date on which the Commission declares such Registration Statement effective, (ii) the date on which all Registrable Securities covered by such Registration Statement have been sold pursuant to such Registration Statement or (iii) the expiration of the Demand Period. (b) Effective Registration. A registration will not be deemed to have ---------------------- been effected as a Demand Registration unless it has been declared effective by the Commission and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; provided that if after -------- such Demand Registration has become effective, the offering of Registrable Securities pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the Commission or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of Registrable Securities pursuant to the registration (for any reason other than the acts or omissions of the Holders), such registration will be deemed not to have been effected. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected or (ii) the registration requested pursuant to this Section 2.1 does not remain effective for a period of at least 120 days, or six months with respect to a "shelf" registration, beyond the effective date thereof (or earlier upon the consummation of the distribution by the Investor of the Registrable Securities included in such registration statement), then such registration statement shall not count as the Demand Registration that may be requested by the Investor and the Company shall continue to be obligated to effect a registration pursuant to this Section 2. 1. The Investor may withdraw all of the Registrable Securities from a Demand Registration at any time (whether before or after the filing or effective date of such Demand Registration), provided that if the Investor bears the -------- expenses associated with such withdrawn Registration Statement, such Registration Statement will not count as a Demand Registration and the Company shall continue to be obligated to effect a registration pursuant to this Section 2.1. The Investor may, with the consent of the Company (and the Underwriter in the case of a Demand Registration pursuant to Section 2.1(c)), withdraw part of the Registrable Securities from a Demand Registration provided that such Demand Registration shall continue to count as the Demand Registration that the Company is required to effect pursuant to this Section 2.1. (c) Selection of Underwriter. If the Investor so elects, the offering ------------------------ of Registrable Securities pursuant to a Demand Registration shall be in the form of an underwritten offering. The Company shall select one or more nationally recognized firms of investment bankers to act as the book-running managing Underwriter or Underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering. -3- Section 2.2 Piggy-Back Registration. If at any time during the five ----------------------- (5) year period commencing the day immediately following the Closing Date, the Company proposes to file a Registration Statement under the Securities Act with respect to an offering of equity securities by the Company for its own account or for the account of any security holders of any class of its equity securities (other than (i) a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission) or (ii) a registration statement filed in connection with an exchange offer or offering of securities solely to the Company's existing security holders), then the Company shall give written notice of such proposed filing to the Investor as soon as practicable (but in no event less than 20 days before the anticipated filing date), and such notice shall offer the Investor and the Permitted Transferees, the opportunity to register such number of shares of Registrable Securities as the Investor may request, (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof) (a "Piggy-Back Registration") . The Company shall use its reasonable efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested by the Investor to be included in a Piggy-Back Registration (the "Piggy-Back Holders") to be included on the same terms and conditions as any similar securities of the Company or any other security holder included therein and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method of distribution thereof. The Investor shall have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw. Subject to the provisions of Section 2.1, the Company may withdraw a Registration Statement for its own account at any time prior to the time it becomes effective, provided that the Company shall reimburse the Investor for all -------- reasonable out-of-pocket expenses (including counsel fees and expenses) incurred by Investor prior to such withdrawal. No registration effected under this Section 2.2, and no failure to effect a registration under this Section 2.2, shall relieve the Company of its obligations pursuant to Section 2.1, and no failure to effect a registration under this Section 2.2 and to complete the sale of Shares in connection therewith shall relieve the Company of any other obligation under this Agreement (including, without limitation, the Company's obligations under Sections 3.2 and 5.1). Section 2.3 Reduction of Offering. --------------------- (a) Demand Registration. The Company may include in a Demand ------------------- Registration, Shares for the account of the Company, Registrable Securities for the account of the Investor (which for purposes of this Agreement "account of the Investor" includes all Permitted Transferees) and Shares for the account of other holders thereof exercising contractual piggyback rights, on the same terms and conditions as the Registrable Securities to be included therein for the account of the Investor and the Permitted Transferees; provided, however, that -------- (i) if the managing Underwriter or Underwriters of any underwritten offering described in Section 2.1 have informed the Company in writing that it is their opinion that the total number of Shares which the Investor, the Company, and -4- any such other holders intend to include in such offering is such as to materially and adversely affect the success of such offering, then (x) the number of Shares to be offered for the account of such other holders shall be reduced (to zero, if necessary), in the case of this clause (x) pro rata in --- ---- proportion to the respective number of Shares requested to be registered and (y) thereafter, if necessary, the number of Shares to be offered for the account of the Company (if any) shall be reduced (to zero, if necessary), to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters (and if the number of Shares to be offered for the account of each such Person has been reduced to zero, and the number of Shares requested to be registered by the Investor exceeds the number of Shares recommended by such managing Underwriters, then the number of Shares to be offered for the account of the Investor and the Permitted Transferees shall be reduced) and (ii) if the offering is not underwritten, no other party (other than other holders exercising contractual piggyback rights), including the Company, shall be permitted to offer securities under any such Demand Registration unless the Investor consents to the inclusion of such shares therein. (b) Piggy-Back Registration. ----------------------- (i) Notwithstanding anything contained herein, if the managing Underwriter or Underwriters of any underwritten offering described in Section 2.2 have informed, in writing, the Company that it is their opinion that the total number of Shares that the Company and any other Persons desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, then the number of Shares to be offered for the account of the Investor and all such other Persons (other than the Company) participating in such registration shall be reduced (to zero, if necessary) or limited pro rata in proportion to the --- ---- respective number of Shares requested to be registered to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters; provided, however, that if such offering is effected for the account of any an - ----------------- Apollo Holder (as defined in the Registration Rights Agreement dated November 4, 1997 between Paragon and the signatories thereto (the "Apollo Registration Rights Agreement")) or transferee of an Apollo Holder pursuant thereto, then (x) the number of Shares to be offered for the account of the Investor and any other holders that have requested to include Shares in such registration (other than parties to the Apollo Registration Rights Agreement) shall be reduced (to zero, if necessary), in the case of this clause (x) pro rata in proportion to the --- ---- respective number of Shares requested to be registered and (y) thereafter, if necessary, the number of Shares to be offered for the account of the Company (if any) shall be reduced (to zero, if necessary), to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters and (z) thereafter, if necessary, the Shares to be offered for the accounts of the parties to the Apollo Registration Rights Agreement shall be reduced as provided therein. (ii) If the managing Underwriter or Underwriters of any underwritten offering described in Section 2.2 notify the Company that the kind of securities that the Investor, the Company or any other Persons desiring to participate in such registration intend to include in -5- such offering is such as to materially and adversely affect the success of such offering, then the Shares to be included in such offering by the Investor shall be reduced as described in clause (i) above or if such reduction would, in the judgment of the managing Underwriter or Underwriters, be insufficient to substantially eliminate the adverse effect that inclusion of the Shares requested to be included would have on such offering, such Shares will be excluded from such offering. ARTICLE III REGISTRATION PROCEDURES Section 3.1 Filings; Information. Whenever the Company is required -------------------- to effect or cause the registration of Registrable Securities pursuant to Section 2.1, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) The Company will as expeditiously as possible prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed Registration Statement to become and remain effective for a period of not less than 120 days, or six months with respect to a "shelf" registration (or such shorter period as is required to complete the distribution of the shares); provided that the Company -------- may postpone, not more than three (3) times during the Demand Right period, the filing of a Registration Statement for a period of not more than 90 days from the date of receipt of the request in accordance with Section 2.1 if the Company reasonably determines that such a filing would adversely affect any proposed financing or acquisition by the Company which is material to the Company, and furnishes to the Investor a certificate signed by an executive officer of the Company to such effect. If the Company postpones the filing of a Registration Statement, it shall promptly notify the Investor in writing when the events or circumstances permitting such postponement have ended. (b) The Company will as expeditiously as possible prepare and file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective (subject to the second to last paragraph of this Section 3.1) for a period of not less than 120 days, or six months with respect to a "shelf" registration, or such shorter period which will terminate when all securities covered by such Registration Statement have been sold or the Demand Period has expired (but not before the expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by each Selling Holder thereof set forth in such Registration Statement. -6- (c) The Company will, prior to filing a Registration Statement or prospectus or any amendment or supplement thereto (including documents that would be incorporated or deemed to be incorporated therein by reference), furnish to the Investor, counsel representing the Investor, and each Underwriter, if any, of the Registrable Securities covered by such Registration Statement copies of such Registration Statement as proposed to be filed, together with exhibits thereto, which documents will be subject to review and comment by the foregoing within five days after delivery, and thereafter furnish to the Investor, counsel and Underwriter, if any, for their review and comment such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the Prospectus included in such Registration Statement and such other documents or information as the Investor, counsel or Underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by the Investor. (d) After the filing of the Registration Statement, the Company will promptly notify the Investor, (i) when a Prospectus or any supplement thereto or post-effective amendment has been filed and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the Commission or any other Federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if at any time when a prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Securities, the representations and warranties of the Company contained in any agreement contemplated by Section 3.1(h) (including any underwriting agreement) cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (vi) of the happening of any event which makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or which requires the making of any changes in a Registration Statement, Prospectus or documents incorporated therein by reference so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be necessary. (e) The Company will use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Investor reasonably (in light of the Investor's intended plan of distribution) requests, and (ii) -7- cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable the Investor to consummate the disposition of the Registrable Securities then owned by the Investor and the Permitted Transferee; provided that the -------- Company will not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (e), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (f) The Company will take all reasonable actions required to prevent the entry, or obtain the withdrawal, of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any Registrable Securities for sale in any jurisdiction, at the earliest moment. (g) Upon the occurrence of any event contemplated by paragraph 3.1(d)(vi) or 3.1(d)(vii) above, the Company will (i) prepare a supplement or post-effective amendment to such Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) promptly make available to the Investor any such supplement or amendment. (h) The Company will enter into customary agreements (including, if applicable, an underwriting agreement in customary form and which is reasonably satisfactory to the Company) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities (the Investor may, at his option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of such Underwriters also be made to and for the benefit of the Investor). (i) The Company will make available to the Investor (and will deliver to his counsel) and each Underwriter, if any, subject to restrictions imposed by the United States federal government or any agency or instrumentality thereof, copies of all correspondence between the Commission and the Company, its counsel or auditors and will also make available for inspection by the Investor, any Underwriter participating in any disposition pursuant to such Registration Statement and any attorney, accountant or other professional retained by the Investor or Underwriter, all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers and employees to supply all information reasonably requested by any inspectors in connection with such Registration Statement. The Investor agrees that information obtained by it solely as a result of such inspections (not including any information obtained from a third party who, insofar as is known to the Investor after reasonable inquiry, is not prohibited from providing such information by a contractual, legal or -8- fiduciary obligation to the Company) shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company or its affiliates unless and until such information is made generally available to the public. The Investor further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (j) The Company will furnish to the Investor and to each Underwriter, (i) an opinion or opinions of counsel to the Company, and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Investor or the managing Underwriter therefor reasonably requests. (k) In connection with an underwritten offering, the Company will participate, to the extent reasonably requested by the managing Underwriter for the offering or the Investor, in customary efforts to sell the securities under the offering, including, without limitation, participating in "road shows." The Company may require the Investor and each Permitted Transferee to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities by the Investor and each Permitted Transferee as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration including, without limitation, all such information as may be requested by the Commission or the NASD. The Company may exclude from such registration any Holder who fails to provide such information. The Investor and each Permitted Transferee agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 3.1(d)(iii), (v), (vi) and (vii) hereof, the Investor will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3.1(g) hereof, and, if so directed by the Company, the Investor will deliver to the Company all copies, other than permanent file copies, then in such Selling Holder's possession of the most recent Prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective (including the period referred to in Section 3.1(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 3.1(d)(iii), (v), (vi) or (vii) hereof to the date when the Company shall make available to the Investor a Prospectus supplemented or amended to conform with the requirements of Section 3.1(g) hereof. -9- In connection with any registration of Registrable Securities pursuant to Section 2.2, the Company will take the actions contemplated by paragraphs (c), (d), (e), (g), (h), (i) and (j) above. Section 3.2 Registration Expenses. In connection with the Demand --------------------- Registrations pursuant to Section 2.1 hereof, and any Registration Statement filed pursuant to Section 2.2 hereof, the Company shall pay the following registration expenses incurred in connection with the registration hereunder (the "Registration Expenses"): (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties) and all fees and expenses incident to the performance of or compliance with this Agreement by the Company, (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters), (vii) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, and (viii) reasonable fees and expenses of one firm of counsel for the Investor (together with necessary local counsel fees and expenses), which counsel shall be chosen by the Investor. The Company shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities. Section 3.3 Financial Statements. Anything in this Article III to -------------------- the contrary notwithstanding, the Company shall not be obligated to effect any registration pursuant to Section 2.1 or 2.2 if such registration would require the Company (i) to furnish any financial statements other than as of the end of a fiscal quarter or (ii) to furnish any certified financial statements other than as of the end of a fiscal year unless the Investor agrees to bear the expenses of furnishing such financial statements. ARTICLE IV TRANSFER Section 4.1 Transfer of Registrable Securities and Legend. --------------------------------------------- (a) The Investor acknowledges that the Registrable Securities will not be, except as otherwise provided herein, registered under the Securities Act, and the Investor agrees, until such Registrable Securities are registered, not to offer, sell, pledge or otherwise dispose of any Registrable Securities or any interest therein, unless done pursuant to the terms contained in this Article IV. (b) The Investor acknowledges that each certificate representing Registrable -10- Securities shall bear the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE BLUE SKY LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREUNDER. TRANSFER OF THIS SECURITY IS ALSO SUBJECT TO RESTRICTIONS CONTAINED IN THAT CERTAIN REGISTRATION RIGHTS AGREEMENT DATED AS OF ____________, 1998, AMONG THE ISSUER HEREOF AND A SHAREHOLDER OF THE ISSUER." In the event any of the Registrable Securities are registered under the Securities Act, the legends set forth in this subsection (b) shall be removed from the certificates representing such Registrable Securities, and the Company shall promptly, after presentation by the Investor of any certificates held by it, cause its transfer agent to issue new certificates without such legends; provided, however, that if such Registrable Securities are not sold or otherwise - -------- ------- transferred by the Investor holding such certificates substantially in accordance with the plan of distribution set forth in the registration statement and during the time period that the registration statement with respect thereto is effective under the Securities Act, the Investor shall surrender the certificates without such legend to the Company and shall receive in exchange therefor replacement certificates containing the legend set forth above. In addition, if any Registrable Securities shall be saleable at any time without restriction under the Securities Act, and the Company receives an opinion of the Investor's counsel, if requested by the Company and at the Company's cost and expense, to such effect, with which the Company's counsel reasonably agrees, the Company shall promptly, after presentation of certificates for such Registrable Securities by the Investor, issue new certificates without the legend required by this Section 4.1; provided, however, that no such opinion shall be required -------- ------- with respect to Registrable Securities that are eligible for sale under paragraph (k) of Rule 144 or any similar or successor rule. (c) The Company is hereby authorized to, and shall, issue to its transfer agent, and shall note upon its books, "stop transfer" instructions with respect to all of the Registrable Securities. Section 4.2 Transfer Procedure. The Investor will not sell, pledge, ------------------ transfer or otherwise dispose of any Registrable Securities, other than a transfer pursuant to Rule 144, or to a Permitted Transferee until the same shall have been registered under the Securities Act pursuant to Article II or the Company shall have received the following: (i) written notice describing in reasonable detail the proposed sale, pledge, -11- transfer or other disposition, (ii) a legal opinion in form and substance reasonably satisfactory to the Company, to the effect that the proposed sale, pledge, transfer or other disposition may be legally effected without registration under the Securities Act; and (iii) such supporting documents and supplementary assurances, if any, as the Company reasonably and promptly may request in order to assure compliance with the Securities Act. Upon receipt by the Company of any such notice and opinion, and any information reasonably requested in connection therewith, the Investor and each Permitted Transferee shall thereupon be entitled to transfer such Registrable Securities in accordance with the terms of the notice delivered by the Investor and each Permitted transferee to the Company, subject to the requirements of Section 4.3. Each certificate evidencing the Registrable Securities issued upon the transfer of any such Registrable Securities (and each certificate evidencing any untransferred balance of such Registrable Securities) shall bear the legend set forth in Section 4.1(b) unless in the opinion of the Company's counsel such legend is not necessary. ARTICLE V INDEMNIFICATION AND CONTRIBUTION Section 5.1 Indemnification by the Company. The Company agrees to ------------------------------ indemnify and hold harmless the Investor and each Permitted Transferee and each person who contracts such Permitted Transferee within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any loss, claim, damage, liability, reasonable attorneys' fee, cost or expense and costs and expenses of investigating and defending any such claim (collectively, the "Damages"), joint or several, and any action in respect thereof to which the Investor and each Permitted Transferee may become subject under the Securities Act or otherwise, insofar as such Damages (or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus relating to the Registrable Securities or any preliminary Prospectus, or arises out of, or are based upon, any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are based upon information furnished in writing to the Company by the Investor and each Permitted Transferee or Underwriter expressly for use therein, and shall reimburse the Investor and each Permitted Transferee for any legal and other expenses reasonably incurred by the Investor and each Permitted Transferee in investigating or defending or preparing to defend against any such Damages or proceedings; provided, however, that the Company shall not be liable to the -------- ------- Investor and each Permitted Transferee to the extent that (a) any such Damages arise out of or are based upon an untrue statement or omission made in any preliminary prospectus if (i) the Investor failed to send or deliver a copy of the final Prospectus with or prior to the delivery of written confirmation of the sale by the Investor and each Permitted Transferee to the Person asserting the claim from which such Damages arise, and (ii) the final Prospectus would have corrected such untrue statement or such omission; or (b) any such Damages arise out of or are based upon an untrue statement or omission in any Prospectus if (x) such untrue statement or omission is corrected in an amendment or supplement to such Prospectus, and (y) having previously been furnished by or on behalf of the Company with copies of such Prospectus as so amended or supplemented, the Investor and each Permitted Transferee thereafter fails to deliver such Prospectus as so amended or supplemented prior -12- to or concurrently with the sale of a Registrable Security to the Person asserting the claim from which such Damages arise. Section 5.2 Indemnification by Investor and each Permitted ---------------------------------------------- Transferee. The Investor and each Permitted Transferee agrees, jointly and - ---------- severally, to indemnify and hold harmless the Company, its officers, directors, employees and agents and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, together with the partners, officers, directors, employees and agents of such controlling Person, to the same extent as the foregoing indemnity from the Company to the Investor, but only with reference to information related to the Investor and each Permitted Transferee, or its plan of distribution, furnished in writing by the Investor and each Permitted Transferee or on the Investor's and each Permitted Transferee's behalf expressly for use in any Registration Statement or Prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary Prospectus. In case any action or proceeding shall be brought against the Company or its officers, directors, employees or agents or any such controlling Person or its partners, officers, directors, employees or agents, in respect of which indemnity may be sought against the Investor and each Permitted Transferee, the Investor and each Permitted Transferee shall have the rights and duties given to the Company, and the Company or its officers, directors, employees or agents, controlling Person, or its partners, officers, directors, employees or agents, shall have the rights and duties given to the Investor, under Section 5.1. The Investor and each Permitted Transferee also agrees to indemnify and hold harmless each other Selling Holder and any Underwriters of the Registrable Securities, and their respective officers and directors and each Person who controls each such other Selling Holder or Underwriter on substantially the same basis as that of the indemnification of the Company provided in this Section 5.2. The Company shall be entitled to receive indemnities from Underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. In no event shall the liability of the Investor and each Permitted Transferee be greater in amount than the dollar amount of the proceeds (net of payment of all expenses) received by the Investor upon the sale of the Registrable Securities giving rise to such indemnification obligation. Section 5.3 Conduct of Indemnification Proceedings. Promptly after -------------------------------------- receipt by any Person in respect of which indemnity may be sought pursuant to Section 5.1 or 5.2 (an "Indemnified Party") of notice of any claim or the commencement of any action, the Indemnified Party shall, if a claim in respect thereof is to be made against the Person against whom such indemnity may be sought (an "Indemnifying Party") notify the Indemnifying Party in writing of the claim or the commencement of such action, provided that the failure to notify -------- the Indemnifying Party shall not relieve it from any liability except to the extent of any material prejudice resulting therefrom. If any such claim or action shall be brought against an Indemnified Party, and it shall notify the Indemnifying Party thereof, the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified Indemnifying Party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party; provided, that the -------- Indemnifying Party acknowledges, in a writing in form and substance reasonably satisfactory to such -13- Indemnified Party, such Indemnifying Party's liability for all Damages of such Indemnified Party to the extent specified in, and in accordance with, this Article V. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided that the -------- Indemnified Party shall have the right to employ separate counsel to represent the Indemnified Party and its controlling Persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, but the fees and expenses of such counsel shall be for the account of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest between them, it being understood, however, that the Indemnifying Party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or claims, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all Indemnified Parties, or for fees and expenses that are not reasonable. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding. Whether or not the defense of any claim or action is assumed by the Indemnifying Party, such Indemnifying Party will not be subject to any liability for any settlement made without its consent, which consent will not be unreasonably withheld. Section 5.4 Contribution. If the indemnification provided for in ------------ this Article V is unavailable to the Indemnified Parties in respect of any Damages referred to herein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages (i) as between the Company and the Investor and/or each Permitted Transferee on the one hand and the Underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and the Investor and/or each Permitted Transferee on the one hand and the Underwriters on the other from the offering of the Registrable Securities, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company and the Investor on the one band and of the Underwriters on the other in connection with the statements or omissions which resulted in such Damages, as well as any other relevant equitable considerations, and (ii) as between the Company on the one hand and the Investor and/or each Permitted Transferee on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of the Investor and/or each Permitted Transferee in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Investor on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from -14- the offering (net of underwriting discounts and Commissions but before deducting expenses) received by the Company and the Investor bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page or underwriting section of the prospectus. The relative fault of the Company and the Investor and/or each Permitted Transferee on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Investor and/or each Permitted Transferee or by the Underwriters. The relative fault of the Company on the one hand and of each Selling Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Investor agree that it would not be just and equitable if contribution pursuant to this Section 5.4 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and the Investor and each Permitted Investor shall be required to contribute, jointly and severally, any amount in excess of the amount by which the total price at which the Registrable Securities of the Investor and each Permitted Investor and each Permitted Investor were offered to the public (less underwriting discounts and commissions) exceeds the amount of any damages which the Investor and each Permitted Investor has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity, contribution and expense reimbursement obligations contained in this Article V are in addition to any liability any Indemnifying Party may otherwise have to an Indemnified Party or otherwise. The provisions of this Article V shall survive, notwithstanding any termination of this Agreement. -15- ARTICLE VI REPRESENTATIONS AND WARRANTIES Section 6.1 Representations and Warranties of Investor. The Investor ------------------------------------------ for himself and on behalf of any Permitted Transferee hereby represents and warrants to the Company as follows: (a) The Investor understands that the Registrable Securities will not be registered under the Securities Act and will be, until registered, "restricted securities" as defined in Rule 144 promulgated under the Securities Act ("Rule 144"). (b) This Agreement is made with the Investor in reliance upon the Investor's representations and warranties to the Company that the Registrable Securities received by the Investor will be acquired for investment for the Investor's own account, and not with a view to the resale or distribution of any part thereof, and that the Investor has no present intention of selling, granting participations in, or otherwise distributing the same. By executing this Agreement, the Investor further represents and warrants that the Investor does not have presently any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to any such person, or to any third person, with respect to any Registrable Securities. (c) The Investor understands that the Registrable Securities will not be registered as of the date hereof under the Securities Act and will be exempt from registration pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated in part on each of the Investor's representations and warranties set forth herein. (d) The Investor is experienced in evaluating and investing in securities issued by companies such as the Company, is able to fend for itself in the transactions contemplated by this Agreement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the Investor's investment, and has the ability to bear the economic risks of the Investor's investment. The Investor further represents and warrants that the Investor has had, during the course of this transaction and prior to the issuance of the Registrable Securities, the opportunity to ask questions of, and receive answers from, the Company and its management and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to the Investor or to which the Investor had access. Without limiting the generality of the foregoing, the Investor acknowledges that it has received a copy of all of the SEC Reports (as defined below). Section 6.2 Representations and Warranties of the Company. The --------------------------------------------- Company hereby represents and warrants to the Investor as follows: (a) The Registrable Securities have been duly authorized and are validly issued, fully paid, nonassessable and free of preemptive rights. -16- (b) Exhibit A hereto sets forth a list of each registration --------- statement, report, proxy statement or other filings filed by the Company with the Commission within the previous three fiscal years ended September 30, 1997 and from such date through the date hereof, accurate and complete copies of which have been delivered to the Investor, other than registration statements on Form S-8. The Company has filed all registration statements, proxy statements, reports and other filings and all amendments thereto which it was required to file with the Commission. As of its date, none of said filings contained any untrue statement of a material fact or omitted any material fact necessary to make the statements therein not misleading, except to the extent any such statement or omission has been modified or superseded in a document subsequently filed with the appropriate authority. ARTICLE VII MISCELLANEOUS Section 7.1 Participation in Underwritten Registrations. The ------------------------------------------- Investor and the Permitted Transferees may not participate in any underwritten registration hereunder unless the Investor and the Permitted Transferees (a) agrees to sell the Registrable Securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements, and (b) completes and executes all questionnaires, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights; provided that (i) the Investor and each Permitted Transferee shall not be - -------- required to make any representations or warranties except those which relate solely to the Investor and each Permitted Transferee and its intended method of distribution, and (ii) the liability of the Investor and each Permitted Transferee to any Underwriter under such underwriting agreement will be limited to liability arising from misstatements or omissions regarding the Investor and its intended method of distribution and any such liability shall not exceed an amount equal to the amount of net proceeds the Investor and each Permitted Transferee derives from such registration; provided, however, that in an -------- offering by the Company in which the Investor and each Permitted Transferee requests to be included in a Piggy-Back Registration, the Company shall use its best efforts to arrange the terms of the offering such that the provisions set forth in clauses (i) and (ii) of this Section 7.1 are true; provided further, ---------------- that if the Company fails in its best efforts to so arrange the terms, the Investor and each Permitted Transferee may withdraw all or any part of its Registrable Securities from the Piggy-Back Registration and the Company shall reimburse the Investor and each Permitted Transferee for all reasonable out-of- pocket expenses (including counsel fees and expenses) incurred prior to such withdrawal. Section 7.2 Rules 144 and 144A. The Company covenants that it will ------------------ file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as the Investor may reasonably request, all to the extent required from time to time to enable the Investor to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter -17- adopted by the Commission. Upon the request of the Investor, the Company will deliver to the Investor a written statement as to whether it has complied with such requirements. Section 7.3 Holdback Agreements. ------------------- (a) Restrictions on Public Sale by Holder of Registrable Securities. The --------------------------------------------------------------- Investor agrees not to effect any public sale or distribution of the issue being registered or of a similar security of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 or Rule 144A under the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement filed by the Company (except as part of such registration), in the case of an underwritten public offering, if, and to the extent, requested by the managing Underwriter or Underwriters. (b) Restrictions on Sale by the Company and Others. The Company agrees and ---------------------------------------------- shall use its commercially reasonable best efforts to cause its Affiliates to agree (i) not to effect any public sale or distribution of any securities similar to those being registered in accordance with Section 2.1 hereof, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any Registration Statement (except as part of such Registration Statement), in the case of an underwritten offering, if, and to the extent, reasonably requested by the managing Underwriter or Underwriters, and (ii) to use its best efforts to ensure that any agreement entered into after the date hereof pursuant to which the Company issues or agrees to issue any privately placed securities (other than to officers or employees) shall contain a provision under which holders of such securities agree not to effect any sale or distribution of any such securities during the periods described in (i) above, in each case including a sale pursuant to Rule 144 or Rule 144A under the Securities Act (except as part of any such registration, if permitted); provided, however, that the provisions of this paragraph (b) shall not prevent - -------- ------- (x) the conversion or exchange of any securities pursuant to their terms into or for other securities or (y) the issuance of any securities to employees of the Company or pursuant to any employee plan. Section 7.4 Amendment and Modification. Any provision of this -------------------------- Agreement may be waived, provided that such waiver is set forth in a writing -------- executed by the party against whom the enforcement of such waiver is sought. This Agreement may not be amended, modified or supplemented other than by a written instrument signed by the parties hereto. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement. Section 7.5 Successors and Assigns: Entire Agreement. ---------------------------------------- (a) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and executors, -18- administrators and heirs; provided, that except as otherwise specifically permitted pursuant to this Agreement, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Company without the prior written consent of the Investor, provided, however, that this -------- ------- provision shall not be construed so as to prohibit the Company from engaging in any merger, other corporate reorganization or change in control without first obtaining the consent of the Investor. (b) This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. Section 7.6 Separability. In the event that any provision of this ------------ Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. Section 7.7 Notices. All notices, demands, requests, consents or ------- approvals (collectively, "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally delivered or delivered by a reputable overnight courier service with charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile, addressed as set forth below, or such other address as such party shall have specified most recently by written notice. Notice shall be deemed given or delivered on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given or delivered on the next business day following delivery of such notice to a reputable overnight courier service. (a) if to Paragon or Acquisition Sub, to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Attention: Office of the Chief Executive Officer Facsimile: (770) 698-8199 with a copy to: Paragon Health Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Attention: Sydney K. Boone, Jr. Vice President and Associate General Counsel -19- (b) if to the JDBK or the Stockholder, to: Daniel G. Schmidt, III P.O. Box 1715 Easley, SC 29641 Delivery Address: 6 Keynan Court Simpsonville, South Carolina 29680 with a copy to: John R. Thomas, Esq. Mailing Address: Merline & Thomas, P.A. P.O. Box 10796 Greenville, SC 29603 Overnight Delivery Address: Merline & Thomas, P.A. 665 N. Academy Street Greenville, SC 29601 Facsimile: (864) 242-5758 David Schulman, Esq. Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Facsimile: (215) 994-2222 Courtesy Notices to: Kenneth Holcomb, CPA Brigman, Holcomb, Weeks & Co., P.A. 703 East North Street Greenville, SC 29601 Facsimile: (864) 235-8107 -20- Section 7.8 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the internal law of the State of Georgia, without giving effect to principles of conflicts of law. Section 7.9 Headings. The headings in this Agreement are for -------- convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. Section 7.10 Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument. Section 7.11 Further Assurances. Each party shall cooperate and take ------------------ such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. Section 7.12 Termination. Unless sooner terminated in accordance ----------- with its terms or as otherwise herein provided, this Agreement shall terminate upon the earlier to occur of (i) the mutual agreement by the parties hereto, (ii) the date on which the Investor ceases to own any Registrable Securities or (iii) the fifth anniversary of the date hereof, provided, however, that the -------- ------- indemnification provisions of Article V and the expense provisions of Section 3.2 shall survive any such termination without limitation, and the provisions of Article IV shall terminate 24 months from the date of this Agreement without regard to any earlier termination of this Agreement. Section 7.13 Remedies. In the event of a breach or a threatened -------- breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief that a remedy at law would be adequate is waived. Section 7.14 Pronouns. Whenever the context may require, any -------- pronouns used herein shall be deemed also to include the corresponding neuter, masculine or feminine forms. -21- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. By: /s/ R. Jeffrey Taylor ------------------------------------ Name: R. Jeffrey Taylor Title: Senior Vice President - Development Investor /s/ Daniel Schmidt ----------------------------------- By: Daniel Schmidt -22- EX-4.5 5 REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.5 REGISTRATION RIGHTS AGREEMENT ----------------------------- REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of July 13, 1998 by and among Paragon Health Network, Inc., a Delaware corporation (the "Company") and Rembert T. Cribb and Michael E. Fitzgerald (collectively, the "Holders" and individually, a "Holder"). NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. The following terms shall have the meanings ----------- ascribed to them below: "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "Commission" means the Securities and Exchange Commission. "Demand Registration" means a registration of Registrable Securities under the Securities Act pursuant to a request made under Section 2.1. "Demanding Holder" means any Holder who has initiated a registration request in compliance with Section 2.1(a). "Effective Date" means the date of the closing under the Merger Agreement, dated as of June 4, 1998, among the Company, SMH Acquisition, Inc., the Holders and Summit Medical Holdings, Ltd. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. "Person" means any individual or a corporation, partnership, joint venture, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a -1- prospectus filed as part of an effective registration statement in reliance on Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement and all other amendments and supplements to the Prospectus, including post-effective amendments, and all materials incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Security" means each Share held by a Holder received in consideration of the Merger until (i) it has been effectively registered under the Securities Act and disposed of pursuant to an effective registration statement, (ii) it is sold under circumstances in which all of the applicable conditions of Rule 144 (or any similar provisions then in force) under the Securities Act are met, including a sale pursuant to the provisions of Rule 144(k) or (iii) it has been otherwise transferred in accordance with the terms of this Agreement and it may be resold by the Person receiving such Shares without registration under the Securities Act. "Registration Statement" means any registration statement of the Company that covers any of the Registrable Securities pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Selling Holder" means a Holder who sells or proposes to sell Shares pursuant to a registration statement under the Securities Act. "Shares" means the shares of common stock, par value $.01 per share of the Company. "Underwriter" means a securities dealer who purchases any Registrable Securities as principal in an underwritten offering and not as part of such dealer's market-making activities. ARTICLE II REGISTRATION RIGHTS Section 2.1 Demand Registration. ------------------- (a) Request for Registration. During the period commencing on the ------------------------ Closing Date and ending on the later of (a) 24 months thereafter or (b) such longer period as a Holder(s) remains an Affiliate(s) of the Company or would be deemed an underwriter(s) (under Section 2(11) of the Securities Act) with respect to the Registrable Securities (the "Demand Period"), -2- each Holder may make one written request for a Demand Registration of not less than (i) 25% of the Registrable Securities held by the Holders collectively or (ii) all of the Registrable Securities then held by the Holder making such request; provided that the Company shall not be obligated to effect a second Demand Registration until 90 days following the effectiveness of an earlier requested Demand Registration. Each such request will specify the number of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Holder making a demand may, with the written consent of the other Holder, include in his written request to the Company that shares of such other Holder be included as part of the Demand Registration and such other Holder shall not be deemed to have exercised his right to make one written request for Demand Registration but shall otherwise be deemed a "Demanding Holder." If a Holder requests that such Demand Registration be a "shelf" registration pursuant to Rule 415 under the Securities Act, the Company shall file such Demand Registration under Rule 415 and shall keep the Registration Statement filed in respect thereof effective for a period which shall terminate on the earlier of (i) six months from the date on which the Commission declares such Registration Statement effective, (ii) the date on which all Registrable Securities covered by such Registration Statement have been sold pursuant to such Registration Statement or (iii) the expiration of the Demand Period. (b) Effective Registration. A registration will not be deemed to have ---------------------- been effected as a Demand Registration unless it has been declared effective by the Commission and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; provided that if after -------- such Demand Registration has become effective, the offering of Registrable Securities pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the Commission or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of Registrable Securities pursuant to the registration (for any reason other than the acts or omissions of the Holders), such registration will be deemed not to have been effected. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected or (ii) the registration requested pursuant to this Section 2.1 does not remain effective for a period of at least 120 days, or six months with respect to a "shelf" registration, beyond the effective date thereof, then such registration statement shall not count as the Demand Registration(s) that may be requested by the Holder(s). The Demanding Holder(s) may withdraw all or any part of the Registrable Securities from a Demand Registration at any time (whether before or after the filing or effective date of such Demand Registration), and if all such Registrable Securities are withdrawn, to withdraw the demand related thereto. If at any time a Registration Statement is filed pursuant to a Demand Registration, and subsequently a sufficient number of Registrable Securities are withdrawn from the Demand Registration so that such Registration Statement does not cover at least the required amounts specified by Section 2.1(a), and an additional number of Registrable Securities is not so included, the Company may (or shall, if requested by the Demanding -3- Holder(s)) withdraw the Registration Statement, provided that if the Demanding Holder(s) bear the expenses associated with such withdrawn Registration Statement, such Registration Statement will not count as a Demand Registration(s) and the Company shall continue to be obligated to effect a registration(s) pursuant to this Section 2.1. If the Demanding Holder(s) determine to bear such expenses, such expenses shall be borne by the Demanding Holder whose withdrawal of Registrable Securities resulted in such Registration Statement not covering the specified required amounts. (c) Selection of Underwriter. During the period commencing on the ------------------------ Closing Date and ending 24 months thereafter, if a Holder so elects, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of an underwritten offering. The Company shall select one or more nationally recognized investment banking firms to act as the book-running managing Underwriter or Underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering, subject to the approval of the Demanding Holder. Section 2.2 Piggy-Back Registration. If at any time the Company ----------------------- proposes to file a Registration Statement under the Securities Act with respect to an offering of equity securities by the Company for its own account or for the account of any security holders of any class of its equity securities (other than (i) a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the Commission) or (ii) a registration statement filed in connection with an exchange offer or offering of securities solely to the Company's existing securityholders), including a Registration Statement relating to a Demand Registration, then the Company shall give written notice of such proposed filing to the Holder(s) as soon as practicable (but in no event less than 20 days before the anticipated filing date), and such notice shall offer the Holder(s) the opportunity to register such number of shares of Registrable Securities as the Holder(s) may request (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof) (a "Piggy-Back Registration"). The Company shall use its best efforts to cause the managing Underwriter or Underwriters of a proposed underwritten offering to permit the Registrable Securities requested by the Holder(s) thereof to be included in a Piggy-Back Registration (the "Piggy-Back Holders") to be included on the same terms and conditions as any similar securities of the Company or any other securityholder included therein and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method of distribution thereof. Any Holder shall have the right to withdraw its request for inclusion of its Registrable Securities in any registration statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw. Subject to the provisions of Section 2.1, the Company may withdraw a Registration Statement for its own account at any time prior to the time it becomes effective, provided that the Company shall reimburse the Piggy -------- Back Holders for all reasonable out-of-pocket expenses (including counsel fees and expenses) incurred prior to such withdrawal. -4- No registration effected under this Section 2.2, and no failure to effect a registration under this Section 2.2, shall relieve the Company of its obligations pursuant to Section 2.1, and no failure to effect a registration under this Section 2.2 and to complete the sale of Shares in connection therewith shall relieve the Company of any other obligation under this Agreement (including, without limitation, the Company's obligations under Sections 3.2 and 5.1). Section 2.3 Reduction of Offering. --------------------- (a) Demand Registration. The Company may include in a Demand ------------------- Registration Shares for the account of the Company and Shares for the account of other holders thereof exercising contractual piggyback rights, on the same terms and conditions as the Registrable Securities to be included therein for the account of the Demanding Holder(s); provided, however, that (i) if the managing -------- Underwriter or Underwriters of any underwritten offering described in Section 2.1 have informed the Company in writing that it is their opinion that the total number of Shares which the Demanding Holder(s), the Company, and any such other holders intend to include in such offering is such as to materially and adversely affect the success of such offering, then (x) the number of Shares to be offered for the account of such other holders shall be reduced (to zero, if necessary), in the case of this clause (x) pro rata in proportion to the --- ---- respective number of Shares requested to be registered and (y) thereafter, if necessary, the number of Shares to be offered for the account of the Company (if any) shall be reduced (to zero, if necessary), to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters (and if the number of Shares to be offered for the account of each such Person has been reduced to zero, and the number of Shares requested to be registered by the Demanding Holder(s) exceeds the number of Shares recommended by such managing Underwriters, then the number of Shares to be offered for the account of the Demanding Holder(s) shall be reduced to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters, and in the case of a reduction where both Demand Registrations have been exercised, such reduction shall be pro rata in proportion to the respective number of Shares requested to be registered by the Demanding Holders), and (ii) if the offering is not underwritten, no other party (other than Piggy-Back Holders and any other holders exercising contractual piggyback rights), including the Company, shall be permitted to offer securities under any such Demand Registration unless a majority of the Shares held by the Demanding Holder(s) consent to the inclusion of such shares therein. (b) Piggy-Back Registration. ----------------------- (i) Notwithstanding anything contained herein, if the managing Underwriter or Underwriters of any underwritten offering described in Section 2.2 have informed, in writing, the Piggy-Back Holders that it is their opinion that the total number of Shares that the Company and any other Persons desiring to participate in such registration intend -5- to include in such offering is such as to materially and adversely affect the success of such offering, then the number of Shares to be offered for the account of the Piggy-Back Holders and all such other Persons (other than the Company) participating in such registration shall be reduced (to zero, if necessary) or limited pro rata in proportion to the respective number of Shares --- ---- requested to be registered to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters; provided, however, that (A) if -------- ------- such offering is effected for the account of an Apollo Holder (as defined in the Registration Rights Agreement dated November 4, 1997 between Paragon and the signatories thereto (the "Apollo Registration Rights Agreement")) or transferee of an Apollo Holder, then (x) the number of Shares to be offered for the account of all holders other than parties to the Apollo Registration Rights Agreement shall be reduced (to zero, if necessary), in the case of this clause (x) pro --- rata in proportion to the respective number of Shares requested to be - ---- registered, (y) thereafter, if necessary, the number of Shares to be offered for the account of the Company (if any) shall be reduced (to zero, if necessary), to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters and (z) thereafter, if necessary, the shares to be offered for the accounts of the parties to the Apollo Registration Rights Agreement shall be cut back as provided in such agreement; (B) if such offering is effected for the account of any other security holder of the Company, pursuant to the demand registration rights of such securityholder, then (x) the number of Shares to be offered for the account of a Holder and any other holders that have requested to include Shares in such registration (but not such securityholders who have exercised their demand registration rights) shall be reduced (to zero, if necessary), in the case of this clause (x) pro rata in proportion to the --- ---- respective number of Shares requested to be registered and (y) thereafter, if necessary, the number of Shares to be offered for the account of the Company (if any) shall be reduced (to zero, if necessary), to the extent necessary to reduce the total number of Shares requested to be included in such offering to the number of Shares, if any, recommended by such managing Underwriters. (ii) If the managing Underwriter or Underwriters of any underwritten offering described in Section 2.2 notify the Piggy-Back Holders or other Persons requesting inclusion in such offering that the kind of securities that the Piggy-Back Holders, the Company or any other Persons desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, then the Shares to be included in such offering by the Piggy-Back Holders shall be reduced as described in clause (i) above or if such reduction would, in the judgment of the managing Underwriter or Underwriters, be insufficient to substantially eliminate the adverse effect that inclusion of the Shares requested to be included would have on such offering, such Shares will be excluded from such offering. -6- ARTICLE III REGISTRATION PROCEDURES Section 3.1 Filings; Information. Whenever the Company is required -------------------- to effect or cause the registration of Registrable Securities pursuant to Section 2.1, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable, and in connection with any such request: (a) The Company will as expeditiously as possible prepare and file with the Commission a Registration Statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its best efforts to cause such filed Registration Statement to become and remain effective for a period of not less than 120 days, or six months with respect to a "shelf" registration (or such shorter period as is required to complete the distribution of the shares); provided that the Company -------- may postpone the filing of a Registration Statement for a period of not more than 90 days from the date of receipt of the request in accordance with Section 2.1 if the Company reasonably determines that such a filing would adversely affect any proposed financing or acquisition by the Company and furnishes to the Demanding Holder a certificate signed by an executive officer of the Company to such effect; provided that the Company shall only be entitled to postpone any such filing one time in any twelve-month period. If the Company postpones the filing of a Registration Statement, it shall promptly notify the Demanding Holder in writing when the events or circumstances permitting such postponement have ended. (b) The Company will as expeditiously as possible prepare and file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective (subject to the second to last paragraph of this Section 3.1) for a period of not less than 120 days, or six months with respect to a "shelf" registration, or such shorter period which will terminate when all securities covered by such Registration Statement have been sold (but not before the expiration of the 90-day period referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by each Selling Holder thereof set forth in such Registration Statement. (c) The Company will, prior to filing a Registration Statement or Prospectus or any amendment or supplement thereto (including documents that would be incorporated or deemed to be incorporated therein by reference), furnish to each Selling Holder, counsel representing such Selling Holder, and each Underwriter, if any, of the Registrable -7- Securities covered by such Registration Statement copies of such Registration Statement as proposed to be filed, together with exhibits thereto, which documents will be subject to review and comment by the foregoing within five days after delivery, and thereafter furnish to such Selling Holder, counsel and Underwriter, if any, for their review and comment such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the Prospectus included in such Registration Statement and such other documents or information as such Selling Holder, counsel or Underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Holder. (d) After the filing of the Registration Statement, the Company will promptly notify each Selling Holder, (i) when a Prospectus or any supplement thereto or post-effective amendment has been filed and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the Commission or any other federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) if at any time when a Prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Securities, the representations and warranties of the Company contained in any agreement contemplated by Section 3.1(h) (including any underwriting agreement) cease to be true and correct in all material respects, (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, (vi) of the happening of any event which makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or which requires the making of any changes in a Registration Statement, Prospectus or documents incorporated therein by reference so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be necessary. (e) The Company will use its best efforts to (i) register or qualify the Registrable Securities under such other securities or blue sky laws of such jurisdictions in the United States as the Selling Holders reasonably (in light of the Selling Holder's intended plan of distribution) request, and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities in the United States as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things -8- that may be reasonably necessary or advisable to enable the Selling Holders to consummate the disposition of the Registrable Securities owned by such Selling Holders; provided that the Company will not be required to (A) qualify generally -------- to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (e), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction. (f) The Company will take all reasonable actions required to prevent the entry, or obtain the withdrawal, of any order suspending the effectiveness of a Registration Statement, or the lifting of any suspension of the qualification (or exemption from qualification) of any Registrable Securities for sale in any jurisdiction, at the earliest moment. (g) Upon the occurrence of any event contemplated by paragraph 3.1(d)(vi) or 3.1(d)(vii) above, the Company will (i) prepare a supplement or post-effective amendment to such Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (ii) promptly make available to each Selling Holder any such supplement or amendment. (h) The Company will enter into customary agreements (including, if applicable, an underwriting agreement in customary form and which is reasonably satisfactory to the Company) and take such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities (the Selling Holders may, at their option, require that any or all of the representations, warranties and covenants of the Company to or for the benefit of such Underwriters also be made to and for the benefit of such Selling Holders). (i) The Company will make available to each Selling Holder (and will deliver to his counsel) and each Underwriter, if any, subject to restrictions imposed by the United States federal government or any agency or instrumentality thereof, copies of all correspondence between the Commission and the Company, its counsel or auditors and will also make available for inspection by any Selling Holder, any Underwriter participating in any disposition pursuant to such Registration Statement and any attorney, accountant or other professional retained by any such Selling Holder or Underwriter, all financial and other records, pertinent corporate documents and properties of the Company (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers and employees to supply all information reasonably requested by any inspectors in connection with such Registration Statement. Each Selling Holder agrees that information obtained by it solely as a result of such inspections (not including any information obtained from a third party who, insofar as is known to the Investor after reasonable inquiry, is not prohibited from providing such information by a contractual, legal or fiduciary obligation to the Company) shall be deemed confidential and shall not be used by it as the basis for any market transactions in -9- the securities of the Company or its Affiliates unless and until such information is made generally available to the public. Each Selling Holder further agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, to the extent permitted by such court, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (j) The Company will furnish to each Selling Holder and to each Underwriter, (i) an opinion or opinions of counsel to the Company, and (ii) a comfort letter or comfort letters from the Company's independent public accountants, each in customary form and covering such matters of the type customarily covered by opinions or comfort letters, as the case may be, as the Selling Holders or the managing Underwriter therefor reasonably requests. (k) In connection with an underwritten offering, the Company will participate, to the extent reasonably requested by the managing Underwriter for the offering or the Selling Holders, in customary efforts to sell the securities under the offering, including, without limitation, participating in "road shows." The Company may require each Selling Holder to promptly furnish in writing to the Company such information regarding the distribution of the Registrable Securities by the Selling Holder as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration including, without limitation, all such information as may be requested by the Commission or the NASD. The Company may exclude from such registration any Holder who fails, after twenty (20) days' written notice of this requirement, to provide such information. Each Selling Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Sections 3.1(d)(iii), (v), (vi) and (vii) hereof, such Selling Holder will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Selling Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3.1(g) hereof, and, if so directed by the Company, such Selling Holder will deliver to the Company all copies, other than permanent file copies, then in such Selling Holder's possession of the most recent Prospectus covering such Registrable Securities at the time of receipt of such notice. In the event the Company shall give such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective (including the period referred to in Section 3.1(a) hereof) by the number of days during the period from and including the date of the giving of notice pursuant to Section 3.1(d)(iii), (v), (vi) or (vii) hereof to the date when the Company shall make available to the Selling Holders a Prospectus supplemented or amended to conform with the requirements of Section 3.1(g) hereof. -10- In connection with any registration of Registrable Securities pursuant to Section 2.2, the Company will take the actions contemplated by paragraphs (c), (d), (e), (i) and (j) above. Section 3.2 Registration Expenses. In connection with the Demand --------------------- Registrations pursuant to Section 2.1 hereof, and any Registration Statement filed pursuant to Section 2.2 hereof, the Company shall pay the following registration expenses incurred in connection with the registration hereunder (the "Registration Expenses"): (i) all registration and filing fees, (ii) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities), (iii) printing expenses, (iv) the Company's internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties) and all fees and expenses incident to the performance of or compliance with this Agreement by the Company, (v) the fees and expenses incurred in connection with the listing of the Registrable Securities, (vi) reasonable fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters), (vii) the reasonable fees and expenses of any special experts retained by the Company in connection with such registration, and (viii) reasonable fees and expenses of one firm of counsel for the Holder(s), (together with necessary local counsel fees and expenses), which counsel shall be chosen by the Holder(s). The Company shall have no obligation to pay any underwriting fees, discounts or commissions attributable to the sale of Registrable Securities. Section 3.3 Financial Statements. Anything in this Article III to the -------------------- contrary notwithstanding, the Company shall not be obligated to effect any registration pursuant to Section 2.1 if such registration would require the Company (i) to furnish any financial statements other than as of the end of a fiscal quarter or (ii) to furnish any certified financial statements other than as of the end of a fiscal year unless the Demanding Holder agrees to bear the expenses of furnishing such financial statements. ARTICLE IV TRANSFER Section 4.1 Transfer of Registrable Securities and Legend. --------------------------------------------- (a) Each Holder acknowledges that the Registrable Securities will not be, except as otherwise provided herein, registered under the Securities Act, and each Holder agrees, until such Registrable Securities are registered, not to offer, sell, pledge or otherwise dispose of any Registrable Securities or any interest therein, unless done pursuant to the terms contained in this Article IV. -11- (b) Each Holder acknowledges that each certificate representing Registrable Securities shall bear the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE BLUE SKY LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO A REGISTRATION STATEMENT UNDER SAID ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION THEREUNDER. TRANSFER OF THIS SECURITY IS ALSO SUBJECT TO RESTRICTIONS CONTAINED IN THAT CERTAIN REGISTRATION RIGHTS AGREEMENT DATED AS OF ____________, 1998, AMONG THE ISSUER HEREOF AND A SHAREHOLDER OF THE ISSUER." In the event any of the Registrable Securities are registered under the Securities Act, the legends set forth in this subsection (b) shall be removed from the certificates representing such Registrable Securities, and the Company shall promptly, after presentation by the Holder of any certificates held by it, cause its transfer agent to issue new certificates without such legends; provided, however, that if such Registrable Securities are not sold or otherwise - -------- ------- transferred by the Holder holding such certificates substantially in accordance with the plan of distribution set forth in the registration statement and during the time period that the registration statement with respect thereto is effective under the Securities Act, the Holder shall surrender the certificates without such legend to the Company and shall receive in exchange therefor replacement certificates containing the legend set forth above. In addition, if any Registrable Securities shall be saleable at any time without restriction under the Securities Act, and the Company receives an opinion of the Holder's counsel to such effect, with which the Company's counsel reasonably agrees, the Company shall promptly, after presentation of certificates for such Registrable Securities by the Holder, issue new certificates without the legend required by this Section 4.1; provided, however, that no such opinion shall be required with -------- ------- respect to Registrable Securities that are eligible for sale under paragraph (k) of Rule 144 or any similar or successor rule. Section 4.2 Transfer Procedure. Each of the Holders will not sell, ------------------ pledge, transfer or otherwise dispose of any Registrable Securities, other than a transfer pursuant to Rule 144, until the same shall have been registered under the Securities Act pursuant to Article II or the Company shall have received the following: (i) written notice describing in reasonable detail the proposed sale, pledge, transfer or other disposition, (ii) a legal opinion in form and substance reasonably satisfactory to the Company, to the effect that the proposed sale, pledge, transfer or other disposition may be legally effected without registration under the Securities Act; and (iii) such supporting documents and supplementary assurances, if any, as the Company reasonably and promptly may request in order to assure compliance with the Securities Act. Upon receipt by the Company of any such notice and opinion, and any information reasonably requested in connection therewith, the Holder shall -12- thereupon be entitled to transfer such Registrable Securities in accordance with the terms of the notice delivered by the Holder to the Company, subject to the requirements of Section 4.3. Each certificate evidencing the Registrable Securities issued upon the transfer of any such Registrable Securities (and each certificate evidencing any untransferred balance of such Registrable Securities) shall bear the legend set forth in Section 4.1(b) unless in the opinion of the Company's counsel such legend is not necessary. Section 4.3 Standstill Provisions. For a period of two (2) years --------------------- from the date hereof, without the prior written consent of the Company, each Holder, singly or as part of a "partnership, limited partnership, syndicate or other group" (within the meaning of Section 13(d)(3) of the Exchange Act), directly or indirectly, through one or more intermediaries or otherwise, will not, and will cause each of its Affiliates and Associates (as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act) not to: (a) purchase, acquire or own (of record or beneficially), or offer or agree to purchase, acquire or own (of record or beneficially), any Shares if, after giving effect to such purchase or acquisition, the Holder, together with its Affiliates and Associates, would own (of record or beneficially) more than 5% of the outstanding Shares. (b) (i) make, or in any way participate in, encourage, or support directly or indirectly, any "solicitation" of "proxies" (as such terms are defined or used in Regulation 14A promulgated pursuant to the Exchange Act) or become a "participant" or "participant in a solicitation" (as such terms are defined or used in Rule 14a-11 promulgated pursuant to the Exchange Act) with respect to the Company, (ii) seek to advise or influence any third person (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to the voting of any Shares, (iii) call or seek to call, directly or indirectly, any special meeting of stockholders of the Company for any reason whatsoever, (iv) seek, request, or take any action to obtain or retain, directly or indirectly, any list of holders of any Shares, or (v) assist or encourage any attempt by any other person to do or seek any of the foregoing; provided, however, that nothing -------- ------- herein shall restrict the ability of the Holder to vote the Registrable Securities in its discretion, subject at all time to compliance with the provisions of this Agreement. (c) initiate, propose or otherwise solicit holders of Shares for the approval of one or more stockholder proposals with respect to the Company as described in Rule 14a-8 promulgated pursuant to the Exchange Act; or (d) directly or indirectly participate in or encourage the formation of any "group" (within the meaning of Section 13(d)(3) of the Exchange Act) which owns or seeks to acquire beneficial ownership of Shares. -13- ARTICLE V INDEMNIFICATION AND CONTRIBUTION Section 5.1 Indemnification by the Company. The Company agrees to ------------------------------ indemnify and hold harmless each Selling Holder, any Underwriter and each Person, if any, who controls such Selling Holder or Underwriter within the meaning of the Securities Act or the Exchange Act, from and against any loss, claim, damage, liability, reasonable attorneys' fee, cost or expense and costs and expenses of investigating and defending any such claim (collectively, the "Damages"), joint or several, and any action in respect thereof to which any such Selling Holder, Underwriter or control person may become subject under the Securities Act, Exchange Act or otherwise, insofar as such Damages (or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus relating to the Registrable Securities or any preliminary Prospectus, or arises out of, or are based upon, any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are based upon information furnished in writing to the Company by a Selling Holder or Underwriter expressly for use therein, and shall reimburse each Selling Holder for any legal and other expenses reasonably incurred by the Selling Holder in investigating or defending or preparing to defend against any such Damages or proceedings; provided, however, that the Company shall not be -------- ------- liable to a Selling Holder to the extent that any such Damages arise out of or are based upon an untrue statement or omission in any Prospectus if (x) such untrue statement or omission is corrected in an amendment or supplement to such Prospectus, and (y) having previously been furnished by or on behalf of the Company with copies of such Prospectus as so amended or supplemented, the Selling Holder thereafter fails to deliver such Prospectus as so amended or supplemented prior to or concurrently with the sale of a Registrable Security to the Person asserting the claim from which such Damages arise. The Company also agrees to indemnify any Underwriters of the Registrable Securities, their officers and directors and each Person who controls such Underwriters on substantially the same basis as that of the indemnification provided to the Selling Holder under Section 5.1. Section 5.2 Indemnification by Selling Holder. Each Selling Holder --------------------------------- agrees to indemnify and hold harmless the Company, its officers, directors, employees and agents and each Person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, together with the partners, officers, directors, employees and agents of such controlling Person, from and against Damages, joint or several, in so far as such Damages (or proceedings in respect thereof) arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus relating to the Registrable Securities or any preliminary Prospectus, or arises out of, or are based upon, any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if and only to the extent that the same are based solely upon information furnished in writing to the Company by the Selling Holder expressly for use therein. Each Selling Holder also agrees to indemnify and hold harmless -14- each other Selling Holder and any Underwriters of the Registrable Securities, and their respective officers and directors and each Person who controls each such other Selling Holder or Underwriter on substantially the same basis as that of the indemnification provided to the Company under this Section 5.2. The Company shall be entitled to receive indemnities from Underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above, with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Registration Statement. In no event shall the liability of each Selling Holder be greater in amount than the dollar amount of the proceeds (net of payment of all expenses) received by each Selling Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. Section 5.3 Conduct of Indemnification Proceedings. Promptly after -------------------------------------- receipt by any Person in respect of which indemnity may be sought pursuant to Section 5.1 or 5.2 (an "Indemnified Party") of notice of any claim or the commencement of any action, the Indemnified Party shall, if a claim in respect thereof is to be made against the Person against whom such indemnity may be sought (an "Indemnifying Party") notify the Indemnifying Party in writing of the claim or the commencement of such action, provided that the failure to notify -------- the Indemnifying Party shall not relieve it from any liability except to the extent of any material prejudice resulting therefrom. If any such claim or action shall be brought against an Indemnified Party, and it shall notify the Indemnifying Party thereof, the Indemnifying Party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified Indemnifying Party, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party; provided, that the -------- Indemnifying Party acknowledges, in a writing in form and substance reasonably satisfactory to such Indemnified Party, such Indemnifying Party's liability for all Damages of such Indemnified Party to the extent specified in, and in accordance with, this Article V. After notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such claim or action, the Indemnifying Party shall not be liable to the Indemnified Party for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof other than reasonable costs of investigation; provided that the Indemnified Party shall have the right to -------- employ separate counsel to represent the Indemnified Party and its controlling Persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Indemnified Party against the Indemnifying Party, but the fees and expenses of such counsel shall be for the account of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential conflicts of interest between them, it being understood, however, that the Indemnifying Party shall not, in connection with any one such claim or action or separate but substantially similar or related claims or actions in the same jurisdiction arising out of the same general allegations or claims, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for all Indemnified Parties, or for fees and expenses that are not reasonable. No Indemnifying Party shall, without the prior written -15- consent of the Indemnified Party, effect any settlement of any claim or pending or threatened proceeding in respect of which the Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such claim or proceeding. Whether or not the defense of any claim or action is assumed by the Indemnifying Party, such Indemnifying Party will not be subject to any liability for any settlement made without its consent, which consent will not be unreasonably withheld. Section 5.4 Contribution. If the indemnification provided for in ------------ this Article V is unavailable to the Indemnified Parties in respect of any Damages referred to herein, then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages (i) as between the Company on the one hand and the Underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Registrable Securities, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Company on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such Damages, as well as any other relevant equitable considerations, (ii) as between the Company on the one hand and the Selling Holders on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of the Selling Holders in connection with such statements or omissions, as well as any other relevant equitable considerations, and (iii) as between the Underwriters on the one hand and the Selling Holders on the other, in such proportion as is appropriate to reflect the relative fault of the Underwriters on the one hand and the Selling Holders on the other in connection with the statements or omissions which resulted in such Damages, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and Commissions but before deducting expenses) received by the Company or the Underwriters. The relative fault of the Company, the Selling Holders and of the Underwriters shall be respectively determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each and by the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Selling Holders shall be at fault with respect to an untrue or alleged untrue statement of material fact or the omission or alleged omission to state a material fact only to the extent the same are based solely upon information furnished in writing to the Company expressly for use in the Registration Statement. The Company and the Selling Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.4 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a -16- result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.4, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities of such Selling Holder were offered to the public (less underwriting discounts and commissions) exceeds the amount of any damages which the Selling Holders have otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity, contribution and expense reimbursement obligations contained in this Article V are in addition to any liability any Indemnifying Party may otherwise have to an Indemnified Party or otherwise. The provisions of this Article V shall survive, notwithstanding any termination of this Agreement. ARTICLE VI REPRESENTATIONS AND WARRANTIES Section 6.1 Representations and Warranties of Investor. Each Holder ------------------------------------------ hereby represents and warrants to the Company as follows: (a) The Holder understands that the Registrable Securities will be, until registered, "restricted securities" as defined in Rule 144 promulgated under the Securities Act ("Rule 144"). (b) This Agreement is made with the Holder in reliance upon the Holder's representations and warranties to the Company that the Registrable Securities received by the Holder will be acquired for investment for the Holder's own account, and not with a view to the resale or distribution of any part thereof, and that the Holder has no present intention of selling, granting participations in, or otherwise distributing the same. By executing this Agreement, the Investor further represents and warrants that the Holder does not have presently any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to any such person, or to any third person, with respect to any Registrable Securities. (c) The Holder understands that the Registrable Securities will not be registered under the Securities Act and will be exempt from registration pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated in part on each of the Holder's -17- representations and warranties set forth herein. (d) The Holder is experienced in evaluating and investing in securities issued by companies such as the Company, is able to fend for itself in the transactions contemplated by this Agreement, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the Holder's investment, and has the ability to bear the economic risks of the Holder's investment. The Holder further represents and warrants that the Holder has had, during the course of this transaction and prior to the issuance of the Registrable Securities, the opportunity to ask questions of, and receive answers from, the Company and its management and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to the Holder or to which the Holder had access. Without limiting the generality of the foregoing, the Holder acknowledges that it has received a copy of all of the SEC Reports (as defined below). Section 6.2 Representations and Warranties of the Company. The --------------------------------------------- Company hereby represents and warrants to each Holder as follows: (a) The Registrable Securities have been duly authorized and are validly issued, fully paid, nonassessable and free of preemptive rights. (b) Exhibit A hereto sets forth a list of each registration --------- statement, report, proxy statement or other filings filed by the Company with the Commission, accurate and complete copies of which have been delivered to the Holders, other than registration statements on Form S-8. The Company has filed all registration statements, proxy statements, reports and other filings and all amendments thereto which it was required to file with the Commission. As of its date, none of said filings contained any untrue statement of a material fact or omitted any material fact necessary to make the statements therein not misleading, except to the extent any such statement or omission has been modified or superseded in a document subsequently filed with the appropriate authority. ARTICLE VII MISCELLANEOUS Section 7.1 Participation in Underwritten Registrations. No Person ------------------------------------------- may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements in form consistent with the rights granted to Holders, and (b) completes and executes all questionnaires, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and these registration rights; provided that (i) no Selling Holder -------- shall be required to make any representations or warranties except those which relate solely to such Holder and its intended method of distribution, and (ii) the liability of each such Holder to any Underwriter -18- under such underwriting agreement will be limited to liability arising from misstatements or omissions regarding such Holder and its intended method of distribution and any such liability shall not exceed an amount equal to the amount of net proceeds any Holder derives from such registration. Section 7.2 Rules 144 and 144A. The Company covenants that it will ------------------ file any reports required to be filed by it under the Securities Act and the Exchange Act and that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable Holders to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder, the Company will deliver to such Holder a written statement as to whether it has complied with such requirements. Section 7.3 Holdback Agreements. ------------------- (a) Restrictions on Public Sale by Holder of Registrable Securities. --------------------------------------------------------------- Provided each Holder has received adequate prior written notice thereof, each such Holder agrees not to effect any public sale or distribution of the issue being registered or of a similar security of the Company, or any securities convertible into or exchangeable or exercisable for such securities, including a sale pursuant to Rule 144 or Rule 144A under the Securities Act, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any registration statement (other than on Form S-4 or S-8) filed by the Company (except as part of such registration), in the case of an underwritten public offering, if, and to the extent, requested in writing by the managing Underwriter or Underwriters. (b) Restrictions on Sale by the Company and Others. The Company ---------------------------------------------- agrees and shall use its commercially reasonable best efforts to cause its Affiliates to agree (i) not to effect any public sale or distribution of any securities similar to those being registered in accordance with Section 2.1 hereof, or any securities convertible into or exchangeable or exercisable for such securities, during the 14 days prior to, and during the 90-day period beginning on, the effective date of any Registration Statement (except as part of such Registration Statement), in the case of an underwritten offering, if, and to the extent, reasonably requested by the managing Underwriter or Underwriters, and (ii) to use its best efforts to ensure that any agreement entered into after the date hereof pursuant to which the Company issues or agrees to issue any privately placed securities (other than to officers or employees) shall contain a provision under which holders of such securities agree not to effect any sale or distribution of any such securities during the periods described in (i) above, in each case including a sale pursuant to Rule 144 or Rule 144A under the Securities Act (except as part of any such registration, if permitted); provided, however, that the provisions of this -------- ------- paragraph (b) shall not prevent (x) the conversion or exchange of any securities pursuant to their terms into or for other securities or (y) the issuance of any securities to employees of the Company or pursuant to any employee plan. -19- Section 7.4 Amendment and Modification. Any provision of this -------------------------- Agreement may be waived, provided that such waiver is set forth in a writing -------- executed by the party against whom the enforcement of such waiver is sought. This Agreement may not be amended, modified or supplemented other than by a written instrument signed by the parties hereto. No course of dealing between or among any Persons having any interest in this Agreement will be deemed effective to modify, amend or discharge any part of this Agreement or any rights or obligations of any Person under or by reason of this Agreement. Section 7.5 Successors and Assigns: Entire Agreement. ---------------------------------------- (a) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and executors, administrators and heirs; provided, that except as otherwise specifically permitted pursuant to this Agreement, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by the Company without the prior written consent of each Holder. In the event that the Company engages in a merger or consolidation pursuant to which the outstanding capital stock of the Company, including the Registrable Securities, is converted into shares of another corporation, then in connection with such merger or consolidation, the Company shall cause the issuer of such shares to be bound by the terms of, and give substantive effect to the intent of, this Agreement; thereafter, the terms "Registrable Securities" "Company" and "Registration Statement" shall refer, respectively, to such shares received by Holders in connection with such merger or consolidation, the issuer of such shares, and a registration statement filed by such issuer (other provisions of this Agreement and defined terms shall be given a meaning consistent with the foregoing). The Holders shall be deemed to have consented to the assignment of this Agreement upon assumption by the aforementioned issuer of this Agreement. (b) This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. Section 7.6 Separability. In the event that any provision of this ------------ Agreement or the application of any provision hereof is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall not be affected except to the extent necessary to delete such illegal, invalid or unenforceable provision unless that provision held invalid shall substantially impair the benefits of the remaining portions of this Agreement. Section 7.7 Notices. All notices, demands, requests, consents or ------- approvals (collectively, "Notices") required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and shall be personally delivered or delivered by a reputable overnight courier service with charges prepaid, or transmitted by hand delivery, -20- telegram, telex or facsimile, addressed as set forth below, or such other address as such party shall have specified most recently by written notice. Notice shall be deemed given or delivered on the date of service or transmission if personally served or transmitted by telegram, telex or facsimile. Notice otherwise sent as provided herein shall be deemed given or delivered on the next business day following delivery of such notice to a reputable overnight courier service. To the Company: Paragon Health Network, Inc. One Ravinia Drive Suite 1500 Atlanta, Georgia 30346 Attn: General Counsel Fax: (770) 698.8199 To the Holders: Rembert T. Cribb 474 South Beach Road Hobe Sound, Florida 33455 Michael E. Fitzgerald 5675 Glen Errol Road Atlanta, Georgia 30327 Section 7.8 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the internal law of the State of Georgia, without giving effect to principles of conflicts of law. Section 7.9 Headings. The headings in this Agreement are for -------- convenience of reference only and shall not constitute a part of this Agreement, nor shall they affect their meaning, construction or effect. Section 7.10 Counterparts. This Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall constitute one and the same instrument. Section 7.11 Further Assurances. Each party shall cooperate and take ------------------ such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. Section 7.12 Termination. Unless sooner terminated in accordance ----------- with its terms or as otherwise herein provided, this Agreement shall terminate upon the earlier to occur -21- of (i) the mutual agreement by the parties hereto, (ii) the date on which the Investor ceases to own any Registrable Securities or (iii) the termination of the Demand Period, provided, however, that the indemnification provisions of -------- ------- Article V and the expense provisions of Section 3.2 shall survive any such termination and the provisions of Article IV shall terminate 24 months from the date of this Agreement without regard to any earlier termination of this Agreement. Section 7.13 Remedies. In the event of a breach or a threatened -------- breach by any party to this Agreement of its obligations under this Agreement, any party injured or to be injured by such breach will be entitled to specific performance of its rights under this Agreement or to injunctive relief, in addition to being entitled to exercise all rights provided in this Agreement and granted by law. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense or objection in any action for specific performance or injunctive relief that a remedy at law would be adequate is waived. Section 7.14 Pronouns. Whenever the context may require, any -------- pronouns used herein shall be deemed also to include the corresponding neuter, masculine or feminine forms. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. By: /s/ Jeff Taylor --------------------------------- Name: R. Jeffrey Taylor Title: Senior Vice President Holders /s/ Rembert T. Cribb --------------------------------- Rembert T. Cribb /s/ Michael E. Fitzgerald --------------------------------- Michael E. Fitzgerald -22- EX-4.10 6 AMENDMENT NO. 1 TO MARINER HEALTH INDENTURE EXHIBIT 4.10 SUPPLEMENTAL INDENTURE, dated as of September 11, 1998, by and between MARINER HEALTH GROUP, INC., a Delaware corporation (the "Company"), and STATE STREET BANK AND TRUST COMPANY, as trustee (the "Trustee"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and Trustee have heretofore executed and delivered an Indenture, dated as of April 4, 1996 (the "Indenture"), providing for the issuance of $150,000,000 in aggregate principal amount of 9-1/2% Senior Subordinated Notes due 2006 (the "Securities") of the Company; WHEREAS, Section 901 of the Indenture provides that the Company and the Trustee may, without the consent of the Holders, the Guarantors (if any) or any other obligor upon the securities, when authorized by a resolution of its Board of Directors and when the interests of the Holders shall not be adversely affected, enter into a supplemental indenture, in form and substance satisfactory to the Trustee, for the purpose of amending the Indenture to supplement any provisions with respect to matters arising under the Indenture; WHEREAS, Section 1015 of the Indenture requires the Company, upon any Change of Control, to offer to purchase the Securities from any Holder for cash at the Change of Control Purchase Price and to purchase any Securities tendered according to the terms of such offer; WHEREAS, the Company wishes to amend Section 1015 of the Indenture to permit the Company, upon a Change of Control, to either (1) purchase tendered Securities for cash at the Change of Control Purchase Price or (2) cause a person or entity other than the Company to purchase such Securities for cash at the Change of Control Purchase Price at the option of the Company; WHEREAS, the Company and the Trustee have determined that the interests of the Holders will not be adversely affected by this Supplemental Indenture; WHEREAS, the Company has been authorized by a resolution of its Board of Directors to enter into this Supplemental Indenture; WHEREAS, all other acts and proceedings required by law, by the Indenture and by the certificate of incorporation (as amended to this date) and by-laws (as amended to this date) of the Company to make this Supplemental Indenture a valid and binding agreement for the purposes expressed herein, in accordance with its terms, have been duly done and performed; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and for the equal and proportionate benefit of the Holders of the Securities, the Company and the Trustee hereby agree as follows: ARTICLE I. Definitions. ----------- Capitalized terms used in this Supplemental Indenture and not otherwise defined herein shall have the meanings assigned to such terms in the Indenture. ARTICLE II. Section 1. Amendment of Section 101 (Definitions). --------------------------------------- Section 101 of the Indenture is hereby amended by inserting the following new definitions in their appropriate alphabetical order: "`Alternate Transaction' shall have the meaning ascribed thereto in --------------------- Section 1015 of this Indenture." "`Company Transaction' shall have the meaning ascribed thereto in ------------------- Section 1015 of this Indenture." "`Designated Purchaser' shall have the meaning ascribed thereto in -------------------- Section 1015 of this Indenture." Section 2. Amendment of Section 1015 (Purchase of Securities Upon Change of ---------------------------------------------------------------- Control). -------- The provisions of Section 1015 of the Indenture are hereby amended by deleting the text of such Section 1015 in its entirety and inserting in lieu thereof the following: "Section 1015. Purchase of Securities upon a Change of Control. ----------------------------------------------- (a) If a Change of Control shall occur at any time, then each Holder shall have the right to require that the Company either (1) purchase (the "Company Transaction") or (2) cause another person or entity designated by the Company (the "Designated Purchaser") to purchase (the "Alternate Transaction") such Holder's Securities in whole or in part in integral multiples of $1,000, at a purchase price (the "Change of Control Purchase Price") in cash in an amount equal to 101% of the principal amount of such Securities, plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Purchase Date"), pursuant to the offer described below in this Section 1015 (the "Change of Control Offer") and in accordance with the other procedures set forth in Subsections (b), (c), (d) and (e) of this Section 1015. -2- (b) Within 30 days following any Change of Control, the Company shall notify the Trustee thereof and give written notice (a "Change of Control Purchase Notice") of such Change of Control to each Holder, by first-class mail, postage prepaid, at his address appearing in the Security Register, stating, among other things: (1) that a Change of Control has occurred, the date of such event, and that such Holder has the right to require the Company to repurchase such Holder's Securities at the Change of Control Purchase Price; (2) the circumstances and relevant facts regarding such Change of Control (including but not limited to information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (3) (i) the most recently filed Annual Report on Form 10-K (including audited consolidated financial statements) of the Company, the most recent subsequently filed Quarterly Report on Form 10-Q, as applicable, and any Current Report on Form 8-K of the Company filed subsequent to such Quarterly Report (or in the event the Company is not required to prepare any of the foregoing Forms, the comparable information required to be prepared by the Company and any Guarantor pursuant to Section 1018), (ii) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such reports and (iii) such other information, if any, concerning the business of the Company ,which the Company in good faith believes will enable such Holders to make an informed investment decision regarding the Change of Control Offer; (4) that the Change of Control Offer is being made pursuant to this Section 1015 and that all Securities properly tendered pursuant to the Change of Control Offer will be accepted for payment at the Change of Control Purchase Price; (5) the Change of Control Purchase Date, which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed, or such later date as is necessary to comply with requirements under the Exchange Act; (6) the Change of Control Purchase Price; (7) the names and addresses of the Paying Agent and the offices or agencies referred to in Section 1002; -3- (8) that Securities must be surrendered on or prior to the Change of Control Purchase Date to the Paying Agent at the office of the Paying Agent or to an office or agency referred to in Section 1002 to collect payment; (9) that the Change of Control Purchase Price for any Security which has been properly tendered and not withdrawn will be paid promptly following the Change of Control Offer Purchase Date; (10) the procedures that a Holder must follow to accept a Change of Control Offer or to withdraw such acceptance; (11) that any Security not tendered will continue to accrue interest; and (12) that, unless the Company defaults in the payment of the Change of Control Purchase Price, any Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date. (c) Upon receipt by the Company of the proper tender of Securities, the Holder of the Security in respect of which such proper tender was made shall (unless the tender of such Security is properly withdrawn) thereafter be entitled to receive solely the Change of Control Purchase Price with respect to such Security. Upon surrender of any such Security for purchase in accordance with the foregoing provisions, such Security shall be purchased by, (a) with respect to each Company Transaction, the Company and, (b) with respect to each Alternate Transaction, the Designated Purchaser, in each case, at the Change of Control Purchase Price, provided, however, that installments of interest whose Stated Maturity is on the Change of Control Purchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 309; provided, further, that notwithstanding anything herein to the contrary, any Security which is purchased by a Designated Purchaser shall continue to bear interest at the rate born by the Security until paid in full in accordance with the terms herein. If any Security tendered for purchase in accordance with the provisions of this Section 1015 shall not be so paid or purchased upon surrender thereof, the principal thereof (and premium, if any, thereon) shall, until paid, bear interest from the Change of Control Purchase Date at the rate borne by such Security. Holders electing to have Securities purchased will be required to surrender such Securities to the Paying Agent at the address specified in the Change of Control Purchase Notice at least one Business Day prior to the Change of Control Purchase Date. Any Security that is to be purchased only in part shall be surrendered to a Paying Agent at the office of such Paying Agent (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written -4- instrument of transfer in form satisfactory to the Company and the Security Registrar or the Trustee, as the case may be, duly executed by the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Security, without service charge, one or more new Securities of any authorized denomination as requested by such Holder in an aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered that is not purchased. (d) The Company shall (i) not later than the Change of Control Purchase Date, either (A) cause a Designated Purchaser to accept for purchase Securities or portions thereof tendered pursuant to the Change of Control Offer or (B) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) not later than 10:00 a.m. (New York time) on the Change of Control Purchase Date, deposit with the Trustee or with a Paying Agent (or, in the case of an Alternate Transaction, cause the Designated Purchaser to deposit with the Trustee or with a Paying Agent) an amount of money in same day funds (or New York Clearing House funds if such deposit is made prior to the Change of Control Purchase Date) sufficient to pay the aggregate Change of Control Purchase Price of all the Securities or portions thereof which are to be purchased (whether by the Company or a Designated Purchaser) as of the Change of Control Purchase Date, and (iii) not later than 10:00 a.m. (New York time) on the Change of Control Purchase Date deliver to the Paying Agent an Officers' Certificate stating the Securities or portions thereof accepted for payment by, (1) with respect to each Company Transaction, the Company and, (2) with respect to each Alternate Transaction, the Designated Purchaser. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Change of Control Purchase Price of the Securities purchased from each such Holder, and the Company shall execute and the Trustee shall promptly authenticate and mail or deliver to (x) such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered and (y) any Designated Purchaser a new Security equal in principal amount to the Securities purchased by such Designated Purchaser. Any Securities not so accepted shall be promptly mailed or delivered by the Paying Agent at the Company's expense to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer on the Change of Control Purchase Date. For purposes of this Section 1015 the Company shall choose a Paying Agent which shall not be the Company. In the event that any Designated Purchaser fails to provide funds with respect to any Securities tendered hereunder, the Company shall remain liable with respect thereto for the payment of the Change of Control Purchase Price and the interest on such Securities until the Change of Control Purchase Price is paid to such Holder. Notwithstanding anything herein to the contrary, the Indebtedness evidenced by the Securities purchased by a Designated Purchaser shall not be deemed to have been accepted for payment by the Company, not be extinguished by virtue of such purchase and such Securities continue to bear interest at the rate borne by such Security. -5- (e) A tender made in response to a Change of Control Purchase Notice may be withdrawn if the Company receives, not later than one Business Day prior to the Change of Control Purchase Date, a telegram, telex, facsimile transmission or letter, specifying, as applicable: (1) the name of the Holder: (2) the certificate number of the Security in respect of which such notice of withdrawal is being submitted, (3) the principal amount of the Security (which shall be $1,000 or an integral multiple thereof) delivered for purchase by the Holder as to which such notice of withdrawal is being submitted; (4) a statement that such Holder is withdrawing his election to have such principal amount of such Security purchased; and (5) the principal amount, if any, of such Security (which shall be $1,000 or an integral multiple thereof) that remains subject to the original Change of Control Purchase Notice and that has been or will be delivered for purchase by the Company. (f) Subject to applicable escheat laws, the Trustee and the Paying Agent shall return to the Company any cash that remains unclaimed, together with interest or dividends, if any, thereon, held by them for the payment of the Change of Control Purchase Price; provided, however, that, (x) to the extent that the aggregate amount of cash deposited by the Company, pursuant to clause (ii) of paragraph (d) above exceeds the aggregate Change of Control Purchase Price of the Securities or portions thereof to be purchased, then the Trustee shall hold such excess for the Company and (y) unless otherwise directed by the Company in writing, promptly after the Business Day following the Change of Control Purchase Date the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon. (g) The Company and the Designated Purchaser, if any, shall comply, to the extent applicable, with the applicable tender offer rules, including Rule 14e- I under the Exchange Act and any other applicable securities laws or regulations in connection with a Change of Control Offer." -6- ARTICLE III Section 1. Continuing Effect of Indenture. ------------------------------ Except as expressly provided herein, all of the terms, provisions and conditions of the Indenture and the Securities outstanding thereunder shall remain in full force and effect. Section 2. Construction of Supplemental Indenture. -------------------------------------- This Supplemental Indenture is executed as, and shall constitute, an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. Section 3. Trust Indenture Act Controls. ---------------------------- If any provision of this Supplemental Indenture limits, qualifies or conflicts with another provision of this Supplemental Indenture or the Indenture that is required to be included by the Trust Indenture Act of 1939 as in force at the date as of which this Supplemental Indenture is executed, the provision required by said Act shall control. Section 4. Trustee Disclaimer. ------------------ The recitals contained in this Supplemental Indenture shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture. Section 5. Counterparts. ------------ This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. [Remainder of Page Intentionally Left Blank] -7- IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. MARINER HEALTH GROUP, INC. By: /s/ Boyd P. Gentry ----------------------------- Name: Boyd P. Gentry ----------------------- Title: Vice President and Treasurer ----------------------- [SEAL] Attest: /s/ Stefano M. Miele ------------------------- Name: Stefano M. Miele -------------------- Title: Vice President and Associate General Counsel -------------------- STATE STREET BANK AND TRUST COMPANY, as Trustee By: /s/ M.L. Stores ----------------------------- Name: M.L. Stores ----------------------- Title: Vice President ----------------------- [SEAL] -8- EX-10.2 7 2ND AMD. OF AMENDED AND RESTATED OPERATING LEASE EXHIBIT 10.2 SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE STATE OF FLORIDA COUNTY OF PINELLAS THIS SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "Second Amendment") entered into this 19th day of June, 1998, but made effective as of the Effective Time as defined in that certain Agreement and Plan of Merger dated as of April 13, 1998, among Paragon Health Network, Inc., Paragon Acquisition Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time"), by and between BELLEAIR EAST MEDICAL INVESTORS, LTD. (L.P.). a Georgia limited partnership (hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a Delaware corporation, successor by merger to Convalescent Services, Inc., a Georgia corporation (hereinafter called "Tenant"). W I T N E S S E T H : WHEREAS, Landlord owns a nursing center located in Clearwater, Florida, formerly known as Belleair East Health Care Center, but now known as Mariner Health of Clearwater (the "Facility"); and WHEREAS, Landlord and Tenant entered into that certain Amended and Restated Operating Lease dated May 24, 1995, but made effective the 2nd day of January, 1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties amended and restated the original lease between the parties dated July 1, 1994, wherein the Landlord leased the Facility to the Tenant; and WHEREAS, Landlord and Tenant entered into a First Amendment of the Amended and Restated Operating Lease, made effective May 30,1997, making certain amendments thereto; and WHEREAS, Landlord and Tenant desire to further amend the Amended and Restated Operating Lease as set forth hereinafter, with such amendment to become effective at the Effective Time. THEREFORE, for and in consideration of the mutual benefits to be gained by the performance hereof, Landlord and Tenant do hereby amend the Amended and Restated Operating Lease as follows: 1. The first sentence of Section 2 of the Amended and Restated Operating Lease is hereby amended to read as follows: "The Term of this Lease shall begin at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of thirteen (13) years and four (4) months from January 2, 1996, unless sooner terminated as provided hereinafter." 4 2. The first sentence of Subsection 37b.(1) of the Amended and Restated Operating Lease is hereby amended to read as follows: "Tenant may exercise its Option granted in this Section 37(b)(1) at any time during the 365-day period commencing on the anniversary of the Lease Date in the year 2006 (the "Purchase Option Date"). 3. Subject to the amendments set forth herein, the remaining terms and conditions of the Amended and Restated Operating Lease (as previously amended) shall remain in full force and effect and are hereby reaffirmed and ratified. 4. This Second Amendment shall become effective at, and shall only be effective from and after, the Effective Time. Prior to the Effective Time, this Second Amendment shall be of no force or effect. In the event the Effective Time (as defined above) has not occurred by June 30, 1999, this Second Amendment shall be null and void. IN WITNESS WHEREOF, the parties have duly executed this First Amendment as of the date hereinabove set forth. LANDLORD: BELLEAIR EAST MEDICAL INVESTORS, LTD. (L.P.) By:___________________________________ General Partner TENANT: MARINER HEALTH CARE OF NASHVILLE, INC. By:___________________________________ Title:_____________________________ 5 EX-10.3 8 2ND AMD. OF AMENDED AND RESTATED OPERATING LEASE EXHIBIT 10.3 SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE STATE OF FLORIDA COUNTY OF CHARLOTTE THIS SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "Second Amendment") entered into this 19th day of June, 1998, but made effective as of the Effective Time as defined in that certain Agreement and Plan of Merger dated as of April 13, 1998, among Paragon Health Network, Inc., Paragon Acquisition Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time"), by and between PORT CHARLOTTE HEALTHCARE ASSOCIATES, LTD. (L.P.), a Georgia limited partnership (hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a Delaware corporation, successor by merger to Convalescent Services, Inc., a Georgia corporation (hereinafter called "Tenant"). W I T N E S S E T H : WHEREAS, Landlord owns a nursing center located in Port Charlotte, Florida, formerly known as Palmview but now known as Mariner Health of Port Charlotte (the "Facility"); and WHEREAS, Landlord and Tenant entered into that certain Amended and Restated Operating Lease dated May 24, 1995, but made effective the 2nd day of January, 1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties amended and restated the original lease between the parties dated July 1, 1994, wherein the Landlord leased the Facility to the Tenant; and WHEREAS, Landlord and Tenant entered into a First Amendment of the Amended and Restated Operating Lease, made effective January 2, 1996, making certain amendments thereto; and WHEREAS, Landlord and Tenant desire to further amend the Amended and Restated Operating Lease as set forth hereinafter, with such amendment to become effective at the Effective Time. THEREFORE, for and in consideration of the mutual benefits to be gained by the performance hereof, Landlord and Tenant do hereby amend the Amended and Restated Operating Lease as follows: 1. The first sentence of Section 2 of the Amended and Restated Operating Lease is hereby amended to read as follows: "The Term of this Lease shall begin at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of thirteen (13) years and four (4) months from January 2, 1996, unless sooner terminated as provided hereinafter." 2. The first sentence of Subsection 37b.(1) of the Amended and Restated Operating Lease is hereby amended to read as follows: "Tenant may exercise its Option granted in this Section 37(b)(1) at any time during the 365-day period commencing on the anniversary of the Lease Date in the year 2006 (the "Purchase Option Date"). 3. Subject to the amendments set forth herein, the remaining terms and conditions of the Amended and Restated Operating Lease (as previously amended) shall remain in full force and effect and are hereby reaffirmed and ratified. 4. This Second Amendment shall become effective at, and shall only be effective from and after, the Effective Time. Prior to the Effective Time, this Second Amendment shall be of no force or effect. In the event the Effective Time (as defined above) has not occurred by June 30, 1999, this Second Amendment shall be null and void. IN WITNESS WHEREOF, the parties have duly executed this First Amendment as of the date hereinabove set forth. LANDLORD: PORT CHARLOTTE HEALTHCARE ASSOCIATES, LTD. (L.P.) By:___________________________________ General Partner TENANT: MARINER HEALTH CARE OF NASHVILLE, INC. By:___________________________________ Title:_____________________________ 2 ACKNOWLEDGMENTS STATE OF GEORGIA COUNTY OF __________________ On this the _____ day of ____________, 1998, before me, the undersigned officer, personally appeared ______________________________, known to me to be the general partner of the aforesaid limited partnership and the person whose name is subscribed to the within instrument and acknowledged that he executed the same as general partner of said partnership for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _______________________________________ Notary Public [NOTARIAL SEAL] My Commission expires:_______________ STATE/COMMONWEALTH OF _____________________ COUNTY OF _____________________ On this the _____ day of ___________, 1998, before me, the undersigned officer, personally appeared _______________________________________________, known to me to be the _________________________________________ of the aforesaid corporation and the person whose name is subscribed to the within instrument as such officer of the aforesaid corporation, and acknowledged that he executed the same in such capacity on behalf of the corporation for the purposes therein contained. _______________________________________ Notary Public [NOTARIAL SEAL] My Commission expires:_______________ 3 EX-10.4 9 FIRST AMENDMENT OF AMENDED AND RESTATED OPERATING EXHIBIT 10.4 FIRST AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE STATE OF COLORADO COUNTY OF DENVER THIS FIRST AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "First Amendment") is entered into this 19th day of June, 1998, but made effective as of the Effective Time as defined in that certain Agreement and Plan of Merger dated as of April 13, 1998, among Paragon Health Network, Inc., Paragon Acquisition Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time") by and between DENVER MEDICAL INVESTORS, LTD. (L.P.). a Georgia limited partnership (hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a Delaware corporation, successor by merger to Convalescent Services, Inc., a Georgia corporation (hereinafter called "Tenant"). W I T N E S S E T H : WHEREAS, Landlord owns a nursing center located in Denver, Colorado, formerly known as South Monoco Care Center, but now known as Mariner Health of Denver (the "Facility"); and WHEREAS, Landlord and Tenant entered into that certain Amended and Restated Operating Lease dated May 24, 1995, but made effective the 2nd day of January, 1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties amended and restated the original lease between the parties dated April 1, 1994 (and amended on January 1, 1995), wherein the Landlord leased the Facility to the Tenant; and WHEREAS, Landlord and Tenant desire to amend the Amended and Restated Operating Lease as set forth hereinafter, with such amendment to become effective at the Effective Time. THEREFORE, for and in consideration of the mutual benefits to be gained by the performance hereof, Landlord and Tenant do hereby amend the Amended and Restated Operating Lease as follows: 1. The first sentence of Section 2 of the Amended and Restated Operating Lease is hereby amended to read as follows: "The Term of this Lease shall begin at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of eighteen (18) years and four (4) months from January 2, 1996, unless sooner terminated as provided hereinafter." 2. The first sentence of Subsection 37b.(1) of the Amended and Restated Operating Lease is hereby amended to read as follows: "Tenant may exercise its Option granted in this Section 37(b)(1) at any time during the 365-day period commencing on December 1, 2008 (the "Purchase Option Date"). 3. Subject to the amendments set forth herein, the remaining terms and conditions of the Amended and Restated Operating Lease (as previously amended) shall remain in full force and effect and are hereby reaffirmed and ratified. 4. This First Amendment shall become effective at, and shall only be effective from and after, the Effective Time. Prior to the Effective Time, this First Amendment shall be of no force or effect. In the event the Effective Time (as defined above) has not occurred by June 30, 1999, this First Amendment shall be null and void. IN WITNESS WHEREOF, the parties have duly executed this First Amendment as of the date hereinabove set forth. LANDLORD: DENVER MEDICAL INVESTORS, LTD. (L.P.) By:___________________________________ General Partner TENANT: MARINER HEALTH CARE OF NASHVILLE, INC. By:___________________________________ Title:_____________________________ 2 ACKNOWLEDGMENTS STATE OF GEORGIA COUNTY OF ___________________ On this the _____ day of _________, 1998, before me, the undersigned officer, personally appeared ______________________________, known to me to be the general partner of the aforesaid limited partnership and the person whose name is subscribed to the within instrument and acknowledged that he executed the same as general partner of said partnership for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand and official seal. _______________________________________ Notary Public [NOTARIAL SEAL] My Commission expires:_______________ STATE/COMMONWEALTH OF _______________________ COUNTY OF ______________________ On this the _____ day of __________, 1998, before me, the undersigned officer, personally appeared _______________________________________________, known to me to be the _________________________________________ of the aforesaid corporation and the person whose name is subscribed to the within instrument as such officer of the aforesaid corporation, and acknowledged that he executed the same in such capacity on behalf of the corporation for the purposes therein contained. _______________________________________ Notary Public [NOTARIAL SEAL] My Commission expires:_______________ 3 EX-10.6 10 1ST AMENDMENT TO EMPLOYMENT AGREEMENT-KEITH PITTS EXHIBIT 10.6 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of July 31, 1998, between KEITH B. PITTS (the "Executive") and PARAGON HEALTH NETWORK, INC., a Delaware corporation (the "Company"). W I T N E S S E T H ------------------- WHEREAS, the Executive and the Company desire to amend certain provisions of that certain Employment Agreement dated as of November 4, 1997 between the Executive and the Company (the "Original Employment Agreement") in order to provide for revised terms governing base salary, term of the agreement, the vesting of options in the event of termination of the Executive's employment and certain healthcare benefits to be extended to the Executive and his dependents; NOW, THEREFORE, the parties agree, as follows: 1. Paragraph 2 of the Original Employment Agreement shall be deleted in its entirety and replaced by the following: 2. Term. This Agreement became effective on November 4, 1997 (the ---- "Effective Date"). This Agreement is for the period (the "Term") commencing on the Effective Date and terminating on the fourth anniversary of the date of the consummation of the transactions contemplated by the Agreement and Plan of Merger dated as of April 13, 1998 (the "Mariner Merger Agreement"), among the Company, Mariner Health Group, Inc. and Paragon Acquisition Sub, Inc. (the date of the consummation of the transactions contemplated by the Mariner Merger Agreement is referred to herein as the "Mariner Merger Date"), or upon the Executive's earlier death, disability or termination of employment pursuant to Section 11; provided, however, that commencing on the -------- ------- fourth anniversary of the Mariner Merger Date and on each anniversary thereafter, the term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 2. Section 6(b) of the Original Employment Agreement shall be deleted in its entirety and replaced by the following: (b) Base Salary. The Executive's Base Salary hereunder shall be ----------- $850,000 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 $850,000 a year. 3. Subsequent to Section 6(b) in the Original Employment Agreement, each time the number "$700,000" appears, it shall be deleted and replaced with the number "$850,000." 4. Section 9 of the Original Employment Agreement shall be deleted in its entirety and replaced by the following: 9. Pension and Welfare Benefits. During the Term, the Executive ---------------------------- shall be eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to senior officers of the Company generally. In addition, the Company shall reimburse the Executive for all out-of-pocket costs incurred and paid by the Executive relating to the health care of the Executive and his dependents that are not covered by the health benefit plans or arrangements of the Company or its subsidiaries through the later of the Date of Termination or the seventh anniversary of the Effective Date. 5. Section 10 of the Original Employment Agreement shall be deleted in its entirety and replaced by the following: 10. Stock Options. The Company, pursuant to the terms of its Stock ------------- Option Plan (and as approved by the Compensation Committee of the Board of Directors), granted to the Executive as of the Effective Date, stock options to purchase 1,465,000 shares (as adjusted for the 3-for-1 stock split which took place on December 29, 1997) of common stock of the Company which, as of the Effective Date, represented approximately 3-3/10% (3.3%) of the fully diluted common shares of the Company. Such stock options shall, in accordance with the Company's Stock Option Plan, (i) expire ten years from the Effective Date or 90 days after the Executive's Date of Termination, if earlier; (ii) vest and become exercisable on each of the first four anniversaries of the Effective Date in an amount equal to one-fourth (1/4) of the stock options granted; (iii) be exercisable, in the event of the Executive's termination of employment, for a period of 90 days following his Date of Termination; and (iv) have an exercise price per share equal to the fair market value of a share of common stock of the Company as of the Effective Date, which equaled the closing price of a share of GranCare, Inc. on the Effective Date, divided by .23457, with the resulting quotient being further divided by three to reflect the aforementioned stock split. The Executive shall be eligible for additional stock option awards under the stock option plan of the Company and, in this regard, the 2 Compensation Committee of the Board of Directors may consider whether, but not be obligated, to award the Executive additional stock options under such plan. 6. The following subparagraph shall be added immediately following subparagraph (h) of Section 12 of the Original Employment Agreement: (i) Continuation of Health Care Reimbursement. Nothing in this ----------------------------------------- Section 12 or elsewhere in this Agreement shall reduce in any way the Company's obligations set forth in the second sentence of Section 9 hereof to reimburse the Executive for all out-of-pocket costs incurred and paid by the Executive relating to the health care of the Executive and his dependents that are not covered by the health benefit plans or arrangements of the Company or its subsidiaries throughout the later of the Date of Termination or the seventh anniversary of the Effective Date. 7. All capitalized terms used herein but not otherwise defined shall have the same meanings as set forth in the Original Employment Agreement. 8. Except for such amendments as are specifically provided for herein, the Original Employment Agreement remains in full force and effect in all respects. 9. 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. 3 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. PARAGON HEALTH NETWORK, INC. By: /s/ Susan Thomas Whittle -------------------------------- Susan Thomas Whittle Senior Vice President and General Counsel THE EXECUTIVE /s/ Keith B. Pitts ----------------------------------- Keith B. Pitts 4 EX-10.11 11 EMPLOYMENT AGREEMENT - THOMAS P. DIXON EXHIBIT 10.11 EMPLOYMENT AGREEMENT Employment Agreement dated as of July 31, 1998 between Thomas P. Dixon (the "Executive") and Mariner Post-Acute Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as President, Prism Rehab Systems, and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company (including GranCare, Inc.) under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment. The Company hereby employs the Executive, and the ---------- Executive hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term. This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the three-year period (the "Term") terminating on the third anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as President, -------- Prism Rehab Systems or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of President, Prism Rehab Systems) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at offices of the Company located in Framingham, MA or as may be determined by 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 ----------- $300,000.00 a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than $300,000.00 a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to sixty percent (60%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its executive vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 2 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's 3 request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below $300,000.00; (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; 4 (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to 5 provide a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or 6 nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo; or . (v) the approval of a sale, spin off, merger, liquidation or other transaction which results in a disposition of or transfer of substantially all of the assets of the Rehab Services Division (the "Division") or one or more subsidiaries which hold substantially all of the Division's assets. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the 7 Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was -------- bonus or bonuses paid to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be 8 utilized in the calculation pursuant to this clause (2), provided, -------- further, that for purposes of this Agreement, if the Date of ------- Termination occurs before the end of the first fiscal year that ends after the Effective Date, the amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two and one-half (2.5); (iii) 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, her bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through Date of Termination, payable at the same time and in the same manner as the Company customarily pays such other bonuses; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of thirty-six (36) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together 9 with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) twelve (12) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed twenty-four (24) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) 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, her bonus 10 prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through Date of Termination, payable at the same time and in the same manner as the Company customarily pays such other bonuses; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of 11 Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. (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, 12 encumbered, or hypothecated by him, except as otherwise expressly permitted by the provisions of this Agreement. This Agreement shall inure to the benefit of and be enforceable by the Executive and his personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amount would still be payable to him hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there is no such designee, to his estate. 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. 13 (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity of which either (A) (i) the principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or (B) (i) whose principal business is operating or managing long term, acute hospital care facilities or (ii) which operates a long term, acute hospital care facility that is material in relation to the Company's or its subsidiaries' comparable business and (iii) in either case, which derives at least 10% of its long term, acute care facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company or its subsidiaries. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly 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 14 contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion o the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) o the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not 15 being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 17. Entire Agreement. This Agreement contains all the understandings ---------------- between the parties hereto pertaining to the matters referred to herein, and on the Effective Date shall supersede all undertakings and agreements, whether oral or in writing, previously entered into by them with respect thereto. The Executive represents that, in executing this Agreement, he does not rely and has not relied upon any representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: Thomas P. Dixon 1881 Worcester Road Framingham, MA 01701 To the Company at: Mariner Post-Acute Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or 16 certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 17 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. MARINER POST-ACUTE NETWORK, INC. BY: /s/ Susan Thomas Whittle ------------------------------------------- NAME: Susan Thomas Whittle TITLE: Senior Vice President and General Counsel EXECUTIVE /s/ Thomas P. Dixon ------------------------------------------- THOMAS P. DIXON 18 EX-10.14 12 EMPLOYMENT AGREEMENT - SENIOR VICE PRESIDENTS EXHIBIT 10.14 [SENIOR VICE PRESIDENT FORM] EMPLOYMENT AGREEMENT Employment Agreement dated as of ____________, 19__ between __________ (the "Executive") and Mariner Post-Acute Network, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to employ the Executive as a [SENIOR VICE PRESIDENT], and the Executive desires to accept such employment, for the term and upon the other conditions hereinafter set forth; and WHEREAS, as a condition of entering into this Agreement, the Executive agrees to waive the Executive's rights, if any, against the Company and any predecessor company under (i) any employment agreement and (ii) any other plan, arrangement or agreement of any kind that provides any form of severance payments; and WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions of the employment relationship of the Executive with the Company; NOW, THEREFORE, the parties agree as follows: 1. Employment The Company hereby employs the Executive, and the Executive ---------- hereby accepts employment with the Company, upon the terms and subject to the conditions set forth herein. 2. Term This Agreement shall commence on the date hereof (the "Effective ---- Date") and continue for the two-year period (the "Term") terminating on the second anniversary of the Effective Date, or upon the Executive's earlier death, disability or other termination of employment pursuant to Section 11; provided, however, that commencing on the second anniversary of the Effective Date and on each anniversary thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to any such anniversary, either party hereto shall have notified the other party hereto in writing that such extension shall not take effect. 3. Position. During the Term, the Executive shall serve as [SENIOR VICE -------- PRESIDENT] of the Company or in such other executive position in the Company as the Executive shall approve. 4. Duties and Reporting Relationship. During the Term, the Executive --------------------------------- shall, on a full time basis, use his skills and render services to the best of his abilities in supervising and conducting the operations of the Company and shall not engage in any other business activities except with the prior written approval of the Board of Directors of the Company (the "Board") or its duly authorized designee. The Executive shall also perform such other executive and administrative duties (not inconsistent with the position of [SENIOR VICE PRESIDENT]) as the Executive may reasonably be expected to be capable of performing on behalf of the Company, as may from time to time be authorized or directed by the Board. The Executive agrees to be employed by the Company in all such capacities for the Term, subject to all the covenants and conditions hereinafter set forth. 5. Place of Performance. The Executive shall perform his duties and -------------------- conduct his business at [THE PRINCIPAL EXECUTIVE OFFICES OF THE COMPANY] OR [SPECIFY OTHER LOCATION], except for required travel on the Company's business. 6. Salary and Annual Bonus. ----------------------- (a) Base Salary. The Executive's base salary hereunder shall be ----------- [$_______] a year, payable monthly and prorated for any partial year of employment. The Board shall review such base salary at least annually and make such adjustment from time to time as it may deem advisable, but the base salary shall not at any time be less than [$__________] a year. (b) Annual Bonus. The Company shall provide the Executive with an ------------ opportunity to earn upon achievement of target performance, an annual bonus equal to fifty percent (50%) of his base salary (the "Target Bonus"), with a minimum bonus of between fifty percent (50%) of Target Bonus upon achievement of threshold performance and an opportunity to earn up to one hundred fifty percent (150%) of the Target Bonus for performance in excess of the targets. 7. Vacation, Holidays and Sick Leave. During the Term, the Executive --------------------------------- shall be entitled to paid vacation, paid holidays and sick leave in accordance with the Company's standard policies for its senior vice presidents. 8. Business Expenses. The Executive shall be reimbursed for all ordinary ----------------- and necessary business expenses incurred by him in connection with his employment upon timely submission by the Executive of receipts and other documentation as required by the Internal Revenue Code and in conformance with the Company's normal procedures. 9. Pension and Welfare Benefits. During the Term, the Executive shall be ---------------------------- eligible to participate fully in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements available to vice presidents of the Company generally. 2 10. Stock Options The Company, pursuant to the terms of its stock option ------------- plan, may grant to the Executive, stock options to purchase a number of shares of common stock. 11. Termination of Employment. ------------------------- (a) General. The Executive's employment hereunder may be terminated ------- without any breach of this Agreement only under the following circumstances. (b) Death or Disability. ------------------- (i) The Executive's employment hereunder shall automatically terminate upon the death of the Executive. (ii) If, as a result of the Executive's incapacity due to physical or mental illness, the Executive is unable to perform the essential functions of his job for any one hundred eighty (180) days (whether or not consecutive) during any eighteen (18) month period, and no reasonable accommodation can be made that will allow Executive to perform his essential functions, the Company may terminate the Executive's employment hereunder for any such incapacity (a "Disability"). (c) Termination by the Company. The Company may terminate the -------------------------- Executive's employment hereunder at any time, whether or not for Cause. For purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the Executive to perform his duties hereunder (other than any such failure resulting from the Executive's incapacity due to physical or mental illness), which has not ceased within ten (10) days after a written demand for substantial performance is delivered to the Executive by the Company, which demand identifies the manner in which the Company believes that the Executive has not performed such duties, (ii) the engaging by the Executive in willful misconduct or an act of moral turpitude which is materially injurious to the Company, monetarily or otherwise (including, but not limited to, conduct which violates Section 15 hereof) or (iii) the conviction of the Executive of, or the entering of a plea of nolo contendere by, the Executive with respect to, a felony. (d) Termination by the Executive. The Executive shall be entitled to ---------------------------- terminate his employment hereunder (A) for Good Reason, (B) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health, provided that the Executive shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, further, that, at the Company's 3 request, the Executive shall submit to an examination by a doctor selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor or (C) without the Executive's express written consent, any failure by the Company to comply with any material provision of this Agreement, which failure has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company. For purposes of this Agreement, "Good Reason" shall mean the occurrence following a Change in Control during the term of this Agreement, of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) any material diminution in the Executive's authorities or responsibilities (including reporting responsibilities) which were in effect immediately prior to the Change in Control or from his status, title, position or responsibilities (including reporting responsibilities) which were in effect following a Change in Control pursuant to the Executive's consent to accept any such change; the assignment to him of any duties or work responsibilities which are inconsistent with such status, title, position or work responsibilities; or any removal of the Executive from, or failure to reappoint or reelect him to any of such positions, except if any such changes are because of Disability, retirement, death or Cause; (ii) a reduction by the Company in the Executive's base salary or Target Bonus as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any Person (as defined in Section 11(h)(i) below) in control of the Company provided in no event shall any such reduction reduce the Executive's base salary below [$_________]; (iii) the relocation of the Executive's office at which he is to perform his duties, to a location more than fifty (50) miles from the location at which the Executive performed his duties prior to the Change in Control, except for required travel on the Company's business to an extent substantially consistent with his business travel obligations prior to the Change in Control; (iv) the failure by the Company, without the Executive's consent, to pay to the Executive any portion of the Executive's current compensation; 4 (v) the failure by the Company to continue to provide the Executive with benefits substantially similar in value to the Executive in the aggregate to those enjoyed by the Executive under any of the Company's pension, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, unless the Executive participates after the Change in Control in other comparable benefit plans generally available to senior executives of the Company and senior executives of any Person in control of the Company; (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 11(f) below; for purposes of this Agreement, no such purported termination shall be effective. The Executive's continued employment for 6 months following any act or failure to act constituting Good Reason hereunder without the delivery of a Notice of Termination shall constitute consent to, and a waiver of rights with respect to, such act or failure to act. (e) Voluntary Resignation. Should the Executive wish to resign from --------------------- his position with the Company or terminate his employment for other than Good Reason during the Term, the Executive shall give sixty (60) days written notice to the Company ("Notice Period"), setting forth the reasons and specifying the date as of which his resignation is to become effective. During the Notice Period, the Executive shall cooperate fully with the Company in achieving a smooth transition of the Executive's duties and responsibilities to such person(s) as may be designated by the Company. The Company reserves the right to accelerate the Date of Termination by giving the Executive notice and payment of amounts due to the Executive under Section 6(a) and, to the extent applicable, Section 6(b) for the balance of the Notice Period. The Company's obligation to continue to employ the Executive or to continue payment of the amounts described in the preceding sentence shall cease immediately if: (1) the Executive has not satisfied his obligations to cooperate fully with a smooth transition or (2) the Company has grounds to terminate the Executive's employment immediately for Cause. (f) Notice of Termination. Any purported termination of the --------------------- Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 19. "Notice of Termination" shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide 5 a basis for termination of the Executive's employment under the provision so indicated. (g) Date of Termination. "Date of Termination" shall mean (i) if the ------------------- Executive's employment is terminated because of death, the date of the Executive's death, (ii) if the Executive's employment is terminated for Disability, the date Notice of Termination is given, (iii) if the Executive's employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for any other reason (other than death or Disability), the date specified in the Notice of Termination which shall not be less than sixty (60) days from the date such Notice of Termination is given. (h) Change in Control. For purposes of this Agreement, a Change in ----------------- Control of the Company shall have occurred if (i) any "Person" (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections 13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of its subsidiaries, (2) any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, (4) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Company's common stock or (5) Apollo Management, LP, any of its affiliates and any investments funds managed by it (collectively, "Apollo"))), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the combined voting power of the Company's then outstanding voting securities; (ii) during any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person (other than Apollo) who has entered into an agreement with the Company to effect a transaction described in clause (i), (iii), or (iv) of this Section 1l(h)) whose election by the Board or nomination for election by the Company's stockholders was (A) made pursuant to the Stockholders Agreement affecting the Company dated November 4, 1997 or (B) approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or 6 nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than both (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 50% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation in which no person acquires 50% or more of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect) other than such a sale or disposition to Apollo. (i) Return of Property. When the Executive ceases to be employed by ------------------ the Company, the Executive will promptly surrender to the Company all Company property, including without limitation, all records and other documents obtained by him or entrusted to him during the course of his employment with the Company provided, however, that the Executive may retain copies of such documents as necessary for the Executive's personal records for federal income tax purposes. 12. Compensation During Disability; Death or Upon Termination. --------------------------------------------------------- (a) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), the Executive shall continue to receive his base salary at the rate then in effect for such period until his employment is terminated pursuant to Section 1l(b)(ii) hereof, provided that payments so made to the Executive during the Disability Period shall be reduced by the sum of the amounts, if any, payable to the Executive with respect to such period under disability benefit plans of the Company or under the Social Security disability insurance program, and which amounts were not previously applied to reduce any such payment. 7 (b) If the Executive's employment is terminated by his death or Disability, the Company shall pay (i) any base salary due to the Executive under Section 6(a) through the date of such termination and (ii) an amount equal to the Target Bonus he would have received for the fiscal year that ends on or immediately after the Date of Termination, assuming the Company achieved the lowest target level for which a bonus is paid under the plan described in Section 6(b), prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination. In addition, if the Executive's employment is terminated by his death, the Company shall continue to pay to his estate his salary for an additional six months at the rate then in effect. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (d) If following a Change in Control (A) the Company terminates the Executive's employment without Cause, or (B) the Executive terminates his employment for Good Reason, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an aggregate amount equal to the product of (A) the sum of (1) the Executive's base salary at the rate in effect of the Date of Termination and (2) the average of the annual bonuses actually paid to the Executive by the Company with respect to the two (2) fiscal years which immediately precede the year of the Term which the Date of Termination occurs provided if there was -------- bonus or bonuses paid to the Executive with respect only to one fiscal year that immediately precedes the year within the Term in which the Date of Termination occurs, then such single year's bonus or bonuses shall be utilized in the calculation pursuant to this clause (2), provided, further, that for purposes of this Agreement, if the Date of ----------------- Termination occurs before the end of the first fiscal year that ends after the Effective Date, the 8 amount of the bonus paid by the Company to the Executive shall be deemed to be the Target Bonus and (B) the number two (2); (iii) 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/her] bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through Date of Termination, payable at the same time and in the same manner as the Company customarily pays such other bonuses; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active Employee, under the Company's life insurance, medical, health and similar welfare benefit plans (other then group disability benefits) for a period of twenty-four (24) months. Benefits otherwise receivable by the Executive pursuant to this Section 12(d)(iv) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period during which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; and (v) the payments provided for in this Section 12(d) (other than Section 12(d)(iv)) shall be made not later than the thirtieth (30th) day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 16 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code (as defined in Section 16)) as soon as the amount thereof can be determined but in no event later than the sixtieth (60th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount determined by the Company within six (6) months after payment to have been due, such excess shall constitute a loan by the Company to the Executive, payable no later than the thirtieth (30th) business day after demand by the Company (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 12(d), the Company shall provide the Executive with a written statement setting forth the 9 manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). (vi) If the Executive continues to be employed by the Company for one (1) year after a Change of Control and has not by such time given Notice of Termination for Good Reason, the Executive will have waived his right to exercise his rights under Section 12(d) hereof with respect to any act or failure to act which constitutes Good Reason. (e) If the Executive terminates his employment under clause (C) of Section 11(d) hereof or, prior to any Change of Control, the Company terminates the Executive's employment without Cause, then (i) the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, at the time such payments are due; (ii) the Company shall pay to the Executive the greater of either (A) the remaining amount of base salary owed for the Term; or (B) an aggregate amount equal to the sum of (1) nine (9) months of the Executive's base salary at the rate in effect as of the Date of Termination plus (2) one (1) additional month of the Executive's base salary at such rate for each full year of service beyond the first anniversary of this Agreement, not to exceed eighteen (18) months of base salary payments; such amount to be paid in substantially equal monthly installments during the period commencing with the month immediately following the month in which the Date of Termination occurs or in a lump sum payment, as decided by the Company; (iii) the Company shall pay the Executive his Target Bonus prorated for the period beginning on the first day of the fiscal year in which occurs the Date of Termination through the Date of Termination; (iv) the Company shall continue coverage for the Executive, on the same terms and conditions as would be applicable if the Executive were an active employee, under the Company's life insurance, medical, health, and similar welfare benefit plans (other then group disability) for 10 a period not to exceed the number of months the Executive will be paid under Section 12(e)(ii) beginning on the Date of Termination; (v) benefits otherwise receivable by the Executive pursuant to clause (iv) of this Section 12(e) shall be reduced to the extent comparable benefits are actually received by the Executive from a subsequent employer during the period which the Company is required to provide such benefits, and the Executive shall report any such benefits actually received by him to the Company; (vi) the payments made to the Executive under Section 12(e) hereof will be reduced by the amount of payments provided for by any subsequent employer of the executive for a position obtained after the Date of Termination. (f) If the Executive experiences a termination under Section 12(d) or 12(e) hereof, until the Executive finds another full-time position or for 6 months, whichever is earlier, the Company shall provide the Executive with professional outplacement services of the Executive's choosing and shall reimburse the Executive documented incidental outplacement expenses directly related to the Executive's job search such as resume mailing, interview trips, and clerical support, subject to a maximum cost of $10,000 for such outplacement services and incidental expenses. The Executive's choice of professional outplacement services is subject to the Company's reasonable prior approval. If the Company has not approved or disapproved of the Executive's choice within ten (10) business days of receiving notice of such choice, the Company will be deemed to have given is approval. Any approval by the Company will be in writing and will state the basis for such disapproval. The Executive will not be entitled to receive cash or lieu of the professional outplacement services provided pursuant to this Section. (g) If the Executive shall terminate his employment under clause (B) of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and the Company shall have no further obligations to the Executive under this Agreement. (h) The Executive shall not be required to mitigate the amount of any payment provided for in this Section 12 by seeking other employment or otherwise, and, except as provided in Sections 12(e) hereof, the amount of any payment or benefit provided for in this Section 12 shall not be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement benefits. 11 (i) Release. Prior to making any payment pursuant to Sections ------- 12(d)(iii) and 12(d)(iv) or Sections 12(e)(ii) and 12(e)(iii), whichever is applicable, the Company shall have the right to require the Executive to sign, and the Executive hereby agrees to sign, an agreement to be bound by the terms of Section 15 of this Agreement and a waiver of all claims the Executive may have (including any claims under the Age Discrimination in Employment Act), and the Company may withhold payment of such amount until the period during which the Executive may revoke such waiver (normally seven days) has elapsed. 13. Representations and Covenants. ----------------------------- (a) The Company represents and warrants that this Agreement has been authorized by all necessary corporate action of the Company and is a valid and binding agreement of the Company enforceable against it in accordance with its terms. (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. 12 15. Confidentiality and Non-Competition Covenants. --------------------------------------------- (a) The Executive covenants and agrees that he will not at any time during or at any time after the end of the Term, directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, Confidential Information (as hereinafter defined) that is treated as trade secrets by the Company and will not at any time during or for a period equal to the number of payments which are being made under Section 12(e) hereof directly or indirectly, use for his own account, or disclose to any person, firm or corporation, other than authorized officers, directors and employees of the Company or its subsidiaries, any other Confidential Information. As used herein, "Confidential Information" of the Company means information of any kind, nature or description which is disclosed to or otherwise known to the Executive as a direct or indirect consequence of his association with the Company, which information is not generally known to the public or in the business in which the Company is engaged or which information relates to specific investment opportunities within the scope of the Company's business which were considered by the Executive or the Company during the term of this Agreement. Confidential Information that is treated as confidential trade secrets by the Company shall include, but not be limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, patient or resident lists and accounts, supplier information, accounting forms and procedures, personnel policies, information pertaining to the salaries, positions and performance reviews of the Company's employees, information on the methods of the Company's operations, research and data developed by or for the benefit of the Company and information relating to revenues, costs, profits and the financial condition of the Company. During the Term and for a period of two years following the termination of the Executive's employment, the Executive shall not induce any employee of the Company or its subsidiaries to terminate his or her employment by the Company or its subsidiaries in order to obtain employment by any person, firm or corporation affiliated with the Executive. (b) The Executive covenants and agrees that any information, materials, ideas, discoveries, techniques or programs developed or discovered by the Executive in connection with the performance of his duties hereunder shall remain the sole and exclusive property of the Company and, to the extent it constitutes Confidential Information, shall be subject to the covenants contained in the preceding paragraph. 13 (c) The Executive covenants and agrees that during the Term and, if the Executive's employment is terminated by the Executive for other than Good Reason, for a period of two (2) years following the termination of the Executive's employment, the Executive shall not, directly or indirectly, own an interest in, operate, join, control, or participate as a partner, director, principal, officer, or agent of, enter into the employment of, or act as a consultant to, in any case in which he has control or supervision over a significant portion of any entity (i) whose principal business is the operation of one or more skilled nursing facilities or (ii) which operates a skilled nursing business that is material in relation to the Company's comparable business and (iii) in either case, which derives at least 10% of its skilled nursing facility revenue from facilities which are located within 35 miles of centers or facilities operated by the Company. Notwithstanding anything herein to the contrary, the foregoing provisions of this Section 15(c) shall not prevent the Executive from acquiring securities representing not more than 5% of the outstanding voting securities of any publicly held corporation. (d) Without limiting the right of the Company to pursue all other legal and equitable remedies available for violation by the Executive of the covenants contained in this Section 15, it is expressly agreed by the Executive and the Company that such other remedies cannot fully compensate the Company for any such violation and that the Company shall be entitled to injunctive relief, without the necessity of proving actual monetary loss, to prevent any such violation or any continuing violation thereof. Each party intends and agrees that if in any action before any court or agency legally empowered to enforce the covenants contained in this Section 15, any term, restriction, covenant or promise contained herein is found to be unreasonable and accordingly unenforceable, then such term, restriction, covenant or promise shall be deemed modified to the extent necessary to make it enforceable by such court or agency. The covenants contained in Section 15 shall survive the conclusion of the Executive's employment by the Company. 16. Prohibition on Parachute Payments. --------------------------------- (a) Notwithstanding any other provisions of this Agreement, any payment or benefit received or to be received by the Executive in connection with a Change in Control of the Company or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including, without limitation, base salary and bonus payments, being hereinafter called "Total Payments") would not be deductible (in whole or in part), by the Company, an affiliate or any Person making such payment or providing such benefit as a result of section 14 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), (A) such cash payments shall first be reduced (if necessary, to zero), and (B) all other non-cash payments by the Company to the Executive shall next be reduced (if necessary, to zero). For purposes of this limitation (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (b) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 16, the aggregate "parachute payments" paid to or for the Executive's benefit are in an amount that would result in any portion of such "parachute payments" not being deductible by reason of section 280G of the Code, then the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the aggregate "parachute payments" paid to or for the Executive's benefit over the aggregate "parachute payments" that could have been paid to or for the Executive's benefit without any portion of such "parachute payments" not being deductible by reason of section 280G of the Code; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 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 15 representation or statement not set forth herein made by the Company with regard to the subject matter, bases or effect of this Agreement or otherwise. 18. Amendment or Modification. Waiver. No provision of this Agreement may --------------------------------- be amended or waived unless such amendment or waiver is agreed to in writing, signed by the Executive and by a duly authorized officer of the Company. No waiver by any party hereto of any breach by another party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, any prior time or any subsequent time. 19. Notices. Any notice to be given hereunder shall be in writing and ------- shall be deemed given when delivered personally, sent by courier or telecopy or registered or certified mail, postage prepaid, return receipt requested, addressed to the party concerned at the address indicated below or to such other address as such party may subsequently give notice of hereunder in writing: To Executive at: [FILL IN ADDRESS] To the Company at: Mariner Post-Acute Network, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 Any notice delivered personally or by courier under this Section 19 shall be deemed given on the date delivered and any notice sent by telecopy or registered or certified mail, postage prepaid, return receipt requested, shall be deemed given on the date telecopied or mailed. 20. Severability. If any provision of this Agreement or the application of ------------ any such provision to any party or circumstances shall be determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this Agreement or the application of such provision to such person or circumstances other than those to which it is so determined to be invalid and unenforceable, shall not be affected thereby, and each provision hereof shall be validated and shall be enforced to the fullest extent permitted by law. 21. Survivorship. The respective rights and obligations of the parties ------------ hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. 16 22. Governing Law: Attorney's Fees. ------------------------------ (a) This Agreement will be governed by and construed in accordance with the laws of the State of Georgia, without regard to its conflicts of laws principles. (b) The prevailing party in any dispute arising out of this Agreement shall be entitled to be paid its reasonable attorney's fees incurred in connection with such dispute from the other party to such dispute. 23. Dispute Resolution. The Executive and the Company shall not initiate ------------------ legal proceedings relating in any way to this Agreement or to the Executive's employment or termination from employment with the Company until thirty (30) days after the party against whom the claim is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claims and the amount of any purported damages attributable to each such claim. The Executive and the Company further agree that if respondent submits the claiming party's claim to the CPR Institute for Dispute Resolution, JAMS/Endispute, or other local dispute resolution service for nonbinding mediation prior to the expiration of such thirty (30) day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of: (a) the completion of good-faith mediation efforts or (b) 90 days after the date on which the respondent received written notice of the claimant's claim(s); provided, however, that nothing in this Section 23 shall prohibit the Company from pursuing injunctive or other equitable relief against the Executive prior to, contemporaneous with, or subsequent to invoking or participating in these dispute resolution processes. The Company shall pay the cost of the mediator. 24. Headings. All descriptive headings of sections and paragraphs in this -------- Agreement are intended solely for convenience, and no provision of this Agreement is to be construed by reference to the heading of any section or paragraph. 25. Withholdings. All payments to the Executive under this Agreement ------------ shall be reduced by all applicable withholding required by federal, state or local tax laws. 26. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 17 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:_________________________________ EXECUTIVE _______________________________________ 18 OPTIONAL PROVISIONS ------------------- (c) Execution Bonus. On the Effective Date, the Company shall pay to --------------- the Executive [$______] (subject to any applicable payroll or other taxes required to be withheld). Voluntary Resignation. If the Executive terminates his employment for ---------------------- other than Good Reason within twelve (12) months from the Effective Date, the Executive shall be obligated to refund the amount that was received under Section 6(c) of this Agreement. 19 EX-10.17 13 1ST AMD-1997 LONG-TERM INCENTIVE PLAN (PARAGON) EXHIBIT 10.17 FIRST AMENDMENT TO PARAGON HEALTH NETWORK, INC. 1997 LONG-TERM INCENTIVE PLAN THIS FIRST AMENDMENT is made on the day of , 1998, by Paragon --- -------- Health Network, Inc., a Delaware corporation (the "Corporation"). INTRODUCTION ------------ WHEREAS, the Corporation adopted the Paragon Health Network, Inc. 1997 Long-Term Incentive Plan (the "Plan"), effective November 4, 1997; WHEREAS, the stockholders of the Corporation approved the Plan at the Meeting of Stockholders held on , 199 ; - --------- -------------- -- WHEREAS, the Corporation has entered into an Agreement and Plan of Merger, dated April 13, 1998 with Mariner Health Group, Inc. ("Mariner") and Paragon Acquisition Sub, Inc. ("Sub"), pursuant to which Mariner will merge with and into Sub with Mariner surviving as a wholly-owned subsidiary of the Corporation (the "Merger"); WHEREAS, in connection with the Merger, the Corporation intends to issue options to certain of the directors and officers of Mariner, and after the issuance of such options, the Corporation will have insufficient shares of common stock, par value $.01 per share, of the Corporation ("Common Stock") available under the Plan to continue to utilize the Plan as a component of compensation for qualified officers, key employees and consultants; and WHEREAS, the Corporation desires to amend the Plan to increase the number of shares of Common Stock authorized for issuance under the Plan from 6,000,000 (adjusted to reflect a three-for-one stock split that occurred on December 30, 1997, whereby the number of shares of Common Stock available for issuance under the Plan was increased from 2,000,000 to 6,000,000 pursuant to Section 6.7 of the Plan) to 10,000,000 shares. AMENDMENT --------- NOW, THEREFORE, effective July 31, 1998 and subject to approval by the holders of Common Stock, the first sentence of Section 1.5 of the Plan is hereby amended and modified by as follows: "Subject to adjustment as provided in Section 6.7, 10,000,000 shares of Common Stock shall be available under this Plan, reduced by the sum of the aggregate number of shares of Common Stock which become subject to outstanding options, including Director Options, outstanding Free-Standing SARs, outstanding Stock Awards and outstanding Performance Shares." Except as specifically provided for herein, the Plan shall remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By: ------------------------- Title: ---------------------- ATTEST: By: ------------------------- Title: ---------------------- [CORPORATE SEAL] 2 EX-10.20 14 1ST AMD-1996 STOCK OPTION PLAN (NEW GRANCARE) EXHIBIT 10.20 FIRST AMENDMENT TO THE NEW GRANCARE, INC. 1996 STOCK INCENTIVE PLAN THIS FIRST AMENDMENT is made on the _______ day of ___________, 1997, by GRANCARE, INC., a Delaware corporation (the "Primary Sponsor"). INTRODUCTION: ------------ The Primary Sponsor maintains the New GranCare, Inc. 1996 Stock Incentive Plan (the "Plan"). The Primary Sponsor has changed its name from New GranCare, Inc. to GranCare, Inc. and now desires to amend the Plan to reflect the new name of the Primary Sponsor. NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan, effective as of February 12, 1997, so that the Plan will hereinafter be referred to as the GranCare, Inc. 1996 Stock Incentive Plan and each reference contained in the Plan to the New GranCare, Inc. 1996 Stock Incentive Plan shall be deemed to be a reference to the GranCare, Inc. 1996 Stock Incentive Plan. Except as specifically amended by this First Amendment, the Plan will remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as the day and year first above written. GRANCARE, INC. By: ------------------------------ Title: --------------------------- ATTEST: By: ----------------------------- Title: -------------------------- [CORPORATE SEAL] 9 EX-10.22 15 1ST AMD-REPLACEMENT STOCK OPT PLAN (NEW GRANCARE) EXHIBIT 10.22 FIRST AMENDMENT TO THE NEW GRANCARE, INC. 1996 REPLACEMENT STOCK OPTION PLAN THIS FIRST AMENDMENT is made on the _______ day of ___________, 1997, by GRANCARE, INC., a Delaware corporation (the "Primary Sponsor"). INTRODUCTION: ------------ The Primary Sponsor maintains the New GranCare, Inc. 1996 Replacement Stock Option Plan (the "Plan"). The Primary Sponsor has changed its name from New GranCare, Inc. to GranCare, Inc. and now desires to amend the Plan to reflect the new name of the Primary Sponsor. NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan, effective as of February 12, 1997, so that the Plan will hereinafter be referred to as the GranCare, Inc. 1996 Replacement Stock Option Plan and each reference contained in the Plan to the New GranCare, Inc. 1996 Replacement Stock Option Plan will be deemed to be a reference to the GranCare, Inc. 1996 Replacement Stock Option Plan. Except as specifically amended by this First Amendment, the Plan will remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as the day and year first above written. GRANCARE, INC. By: ---------------------------- Title: ------------------------- ATTEST: By: -------------------------- Title: ----------------------- [CORPORATE SEAL] 3 EX-10.24 16 1ST AMD-DIRECTORS STOCK INCENTIVE PLAN (NEW GRAN) EXHIBIT 10.24 FIRST AMENDMENT TO THE NEW GRANCARE, INC. OUTSIDE DIRECTORS STOCK INCENTIVE PLAN THIS FIRST AMENDMENT is made on the _______ day of ___________, 1997, by GRANCARE, INC., a Delaware corporation (the "Primary Sponsor"). INTRODUCTION: ------------ The Primary Sponsor maintains the New GranCare, Inc. Outside Directors Stock Incentive Plan (the "Plan"), effective February 12, 1997. The Primary Sponsor has changed its name from New GranCare, Inc. to GranCare, Inc. and now desires to amend the Plan to reflect the new name of the Primary Sponsor. NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan, effective as of February 12, 1997, so that the Plan will hereinafter be referred to as the GranCare, Inc. Outside Directors Stock Incentive Plan and each reference contained in the Plan to the New GranCare, Inc. Outside Directors Stock Incentive Plan will be deemed to be a reference to the GranCare, Inc. Outside Directors Stock Incentive Plan. Except as specifically amended by this First Amendment, the Plan will remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as the day and year first above written. GRANCARE, INC. By: ---------------------------- Title: ------------------------- ATTEST: By: -------------------------- Title: ----------------------- [CORPORATE SEAL] 4 EX-10.25 17 2ND AMD-DIRECTORS STOCK INCENTIVE PLAN (NEW GRAN) EXHIBIT 10.25 SECOND AMENDMENT TO THE NEW GRANCARE, INC. OUTSIDE DIRECTORS STOCK INCENTIVE PLAN THIS SECOND AMENDMENT is made on the ________ day of ___________, 1997, by GRANCARE, INC., a Delaware corporation ("Primary Sponsor"). INTRODUCTION ------------ The Primary Sponsor maintains the GranCare, Inc. Outside Directors Stock Incentive Plan (the "Plan"), effective February 12, 1997. The Plan currently states that, as of the date of initial election or appointment of an individual as an eligible director, such director will receive a stock option (the "Stock Option") to purchase 10,000 shares of common stock of the Primary Sponsor. The Primary Sponsor now desires to amend the Plan to increase the number of shares of common stock of the Primary Sponsor subject to the Stock Option that directors will receive as of the date of the initial election or appointment as an eligible director. AMENDMENT --------- 1. Effective February 12, 1997, the Plan is amended by deleting Section 6.1 in its entirety and substituting the following language: "6.1 As of the date of the initial election or appointment of an individual as an Eligible Director, such Director shall be granted a Stock Option to purchase 15,000 shares of Common Stock upon the terms and conditions of this Section 6." 2. Effective February 12, 1997, the Plan is amended by deleting Section 6.2 in its entirety and substituting the following language: "6.2 On the date of each annual meeting of the shareholders of the Company, beginning with the 1997 annual meeting, each individual who is at that time serving as an Eligible Director, whether or not such individual is standing for re-election as a member of the Board of Directors at that particular meeting, shall be granted a Stock Option to purchase 6,000 shares of Common Stock upon the terms and conditions of the this Section 6, provided such individual has served as a member of the Board of Directors for at least six (6) months (service as a member of the Board of Directors shall include service as a director of GranCare, Inc. prior to the Distribution of New GranCare, Inc.), until the Director has received grants of Stock Options under this Plan, covering a total of 27,000 shares of Common Stock." 1 Except as specifically amended by this Second Amendment, the Plan will remain in full force and effect as prior to this Second Amendment. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed as of the day and the year first above written. GRANCARE, INC. By: ------------------------------- Title: ---------------------------- ATTEST: By: ----------------------------- Title: -------------------------- 2 EX-10.48 18 1ST AMEND. DATED JULY 8, 1998 TO THE CREDIT AGMT EXHIBIT 10.48 FIRST AMENDMENT FIRST AMENDMENT, dated as of July 8, 1998 (this "Amendment"), to the Credit --------- Agreement, dated as of November 4, 1997 (the "Credit Agreement"), among 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"), NATIONSBANK, N.A., as documentation agent (in such capacity, ------- the "Documentation Agent"), and THE CHASE MANHATTAN BANK, 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; and WHEREAS, the Borrower has requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 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 Amendment shall have the meanings given to them in this Amendment. (b) Replacement of Definitions. Section 1.1 of the Credit Agreement is -------------------------- hereby amended by deleting therefrom the definitions of the following definitions in their entirety and substituting in lieu thereof the following definitions in the appropriate alphabetical order: 'Consolidated EBITDA': for any period, Consolidated Net Income for such ------------------- period plus, without duplication and to the extent reflected as a charge in ---- the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business) or, with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, writeoffs or changes to the income statements increasing the amount of reserves, in an aggregate amount not to 2 exceed $15,000,000, of accounts receivable of the Borrower and its Subsidiaries, (f) any other non-cash charges, (g) with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, fees and expenses related to the transactions contemplated by the Recapitalization Agreement (including conforming accounting adjustments) and the financing thereof in an aggregate amount equal to the lesser of the actual amount of such expenses and $122,000,000, (h) non-recurring cash charges taken within six months of the First Amendment Effective Date as a result of the Mariner Merger in an aggregate amount not to exceed $25,000,000 (such charges not in excess of such amount, the "Mariner Merger Charges"), (i) any lease ---------------------- payments by Summit Institute for Pulmonary Medicine and Rehabilitation, Inc. ("Summit") with respect to the Riverside Community Hospital, Bossier ------ City, Bossier Parish, Louisiana, to the extent and in the proportion of the guarantee by Summit of the then outstanding principal amount of the Summit IRB (the "Summit Guarantee") and (j) with respect to the computation of the ---------------- financial covenants contained in Section 7.1, for the Reference Period ending: (i) December 31, 1997, $12,000,000, (ii) March 31, 1998, $9,000,000 and (iii) June 30, 1998, $6,000,000, and minus, to the extent included in ----- the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other non-cash income, all as determined on a consolidated basis; provided, -------- that there shall be included in Consolidated EBITDA for such period the difference (but not below zero) between (a) the amount of Consolidated Net Income with respect to Mariner and its Subsidiaries for such period, to the extent of any cash distributions paid by Mariner to the Borrower during such period and (b) the amount of any investment by the Borrower in or for the account of Mariner during such period which is not utilized by Mariner during such period for the purposes set forth in Section 7.8(k). "Subsidiary": as to any Person, a corporation, partnership, limited ---------- liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. Unless otherwise specified, the term "Subsidiary" or "Subsidiaries" shall not include Mariner and its Subsidiaries and Mariner Merger Sub. 'Substitute Omega Property': any Health Care Facility and related ------------------------- personal property conveyed to PHCMI after the Closing Date (which Health Care Facility may be leased to a New PHCMI Subsidiary), or any Health Care Facility and related personal 3 property contributed or otherwise transferred by LC-Southeast to the Substitute Omega Property Subsidiary (which Health Care Facility may be leased to PHCMI), and which Health Care Facility in either case is or becomes encumbered by a mortgage, deed to secure debt or deed of trust in favor of Omega, for the purpose of serving as substitute collateral for the obligations of PHCMI to Omega, in exchange for the surrender by Omega of the Omega Letter of Credit; provided that the Substitute Omega Property -------- shall not, in the aggregate, (i) represent more than $3,500,000 of the Borrower's Consolidated EBITDA for the most recent Reference Period for which the relevant financial information is available or (ii) have a maximum aggregate capacity in excess of 600 beds." (c) Amendment of Definitions. (i) The definition of the term "Assumed ------------------------ Debt" is hereby amended by adding at the end thereof and prior to the period the following: "provided, that, notwithstanding the above, the -------- Summit Guarantee shall be deemed to constitute Assumed Debt, to the extent the principal amount of Indebtedness guaranteed thereby does not exceed $3,500,000". (ii) The definition of the term "Revolving Credit Commitment" is hereby amended by deleting the number "$150,000,000" in the last line and substituting in lieu thereof the number "$175,000,000". (iii) The definition of the term "Tranche A Term Loan Commitment" is hereby amended by deleting the number "$240,000,000" in the last line and substituting in lieu thereof the number "$315,000,000". (d) Addition of Definitions. The following defined terms are hereby ----------------------- added to Section 1.1 of the Credit Agreement in appropriate alphabetical order: 'First Amendment': the First Amendment, dated as of July 8, 1998, --------------- to this Agreement. 'First Amendment Effective Date': the date of effectiveness of ------------------------------ the First Amendment. 'LC-Southeast': Living Centers-Southeast, Inc., a North Carolina ------------ corporation and an indirect Wholly Owned Subsidiary of the Borrower. 'Mariner': Mariner Health Group, Inc., a Delaware corporation. ------- 'Mariner Credit Agreement': the Credit Agreement, dated as of ------------------------ May 18, 1994, among Mariner, the lenders party thereto and PNC Bank, N.A., as agent, as amended, supplemented, restated or otherwise modified from time to time. 4 'Mariner Merger': the merger of Mariner Merger Sub with and into -------------- Mariner, with Mariner as the continuing or surviving corporation, pursuant to the Mariner Merger Agreement. 'Mariner Merger Agreement': the Agreement and Plan of Merger, ------------------------ dated as of April 13, 1998, among the Borrower, Mariner Merger Sub and Mariner, as amended, supplemented, restated or otherwise modified from time to time in accordance with Section 7.9. 'Mariner Merger Sub': Paragon Acquisition Sub, Inc., a Delaware ------------------ corporation. 'Mariner Notes': the 9-1/2% Senior Subordinated Notes due 2006 ------------- of Mariner, as amended, supplemented or otherwise modified from time to time. 'Substitute Omega Property Subsidiary': Living Centers-PHCM, ------------------------------------ Inc., a North Carolina corporation and a Wholly Owned Subsidiary of LC-Southeast. 'Summit': as defined in the definition of "Consolidated EBITDA". ------ 'Summit Guarantee': as defined in the definition of "Consolidated ---------------- EBITDA". 'Summit IRB': the series 1987 revenue refunding bonds issued by ---------- the Louisiana Public Facilities Authority with respect to the Southwest Medical Center, Inc. Project." 2. Amendment to Section 2.1. Section 2.1 of the Credit Agreement is ------------------------ hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following new Section 2.1: "2.1 Term Loan Commitments. (a) Subject to the terms and --------------------- conditions hereof, (i) each Tranche A Term Loan Lender severally agrees to make a term loan (an "Initial Tranche A Term Loan") to the --------------------------- Borrower on the Closing Date in an amount equal to the amount of the Tranche A Term Loan Commitment of such Lender then in effect, (ii) each Tranche B Term Loan Lender severally agrees to make a term loan (a "Tranche B Term Loan") to the Borrower on the Closing Date in an ------------------- amount equal to the amount of the Tranche B Term Loan Commitment of such Lender and (iii) each Tranche C Term Loan Lender severally agrees to make a term loan (a "Tranche C Term Loan") to the Borrower on the ------------------- Closing Date in an amount equal to the amount of the Tranche C Term Loan Commitment of such Lender and (b) subject to the terms and conditions of the First Amendment, each Tranche A Term Loan Lender severally agrees to make a term loan (a "Subsequent Tranche A Term ------------------------- Loan", and together with such ---- 5 Tranche A Term Loan Lender's Initial Tranche A Term Loan, if any, a "Tranche A Term Loan") to the Borrower on the First Amendment ------------------- Effective Date in an amount equal to the difference between such Tranche A Term Loan Lender's Tranche A Term Loan Commitment on the First Amendment Effective Date and such Tranche A Term Loan Lender's Tranche A Term Loan Commitment on the Business Day immediately preceding the First Amendment Effective Date, if any. The Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.12." 3. Procedure for Borrowing of Subsequent Tranche A Term Loans. ---------------------------------------------------------- Subject to the terms and conditions of the Credit Agreement and this First Amendment, each Tranche A Term Loan Lender which has a portion of the Increased Tranche A Term Loan Commitment (as defined below) agrees to make a term loan to the Borrower on the Effective Date (as defined below). No later than 12:00 noon, New York City time, one Business Day prior to the Effective Date, the Borrower shall give the Administrative Agent irrevocable notice requesting that such Tranche A Term Loan Lenders make the Subsequent Tranche A Term Loans to be made on the Effective Date. The Subsequent Tranche A Term Loans made on the Effective Date shall initially be ABR Loans. Upon receipt of such notice the Administrative Agent shall promptly notify each such Tranche A Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the Effective Date each such Tranche A Term Loan Lender shall make available to the Administrative Agent at its office specified in Section 10.2 an amount in immediately available funds equal to the Subsequent Tranche A Term Loans to be made by such Tranche A Term Loan Lender on the Effective Date. The Administrative Agent shall credit the account of the Borrower on the books of such office of the Administrative Agent with the aggregate of the amounts made available to the Administrative Agent by such Tranche A Term Loan Lenders in immediately available funds. 4. Amendment to Section 2.3. Section 2.3(a) of the Credit Agreement ------------------------ is hereby amended by deleting such section in its entirety and substituting in lieu thereof the following new Section 2.3(a): "(a) The Tranche A Term Loan of each Tranche A Term Loan Lender shall be repayable in 22 consecutive quarterly installments on the last day of each December, March, June and September, commencing on December 31, 1998, each of which shall be in an amount equal to such Lender's Tranche A Term Loan Percentage multiplied by one-quarter of the amount set forth below opposite the period during which such installment is due or, in the case of the installments due from December 31, 2003 through March 31, 2004, one-half of the amount set forth below opposite the period during which such installment is due: Period Principal Amount ------ ---------------- December 31, 1998 through September 30, 1999 $29,531,250 6 December 31, 1999 through September 30, 2000 $59,062,500 December 31, 2000 through September 30, 2001 $62,343,750 December 31, 2001 through September 30, 2002 $62,343,750 December 31, 2002 through September 30, 2003 $68,906,250 December 31, 2003 through March 31, 2004 $32,812,500 5. Amendment to Section 4.16. Section 4.16 of the Credit Agreement ------------------------- is hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following new Section 4.16: "4.16 Use of Proceeds. The proceeds of the Term Loans (other than --------------- the Subsequent Tranche A Term Loans) shall be used to finance a portion of the Recapitalization and to pay related fees and expenses. The proceeds of the Subsequent Tranche A Term Loans, Revolving Credit Loans, the Swing Line Loans and the Letters of Credit shall be used for Permitted Acquisitions, working capital needs and general corporate purposes (including, without limitation, for the purposes set forth in Section 7.8(k)); provided, however, that up to -------- ------- $25,000,000 of the Revolving Credit Loans and Swing Line Loans may be used to finance a portion of the Recapitalization and to pay related fees and expenses." 6. Amendment to Section 6.10. Section 6.10 of the Credit Agreement ------------------------- is hereby amended by adding at the end thereof the following new paragraph (e): "(e) Notwithstanding anything to the contrary contained herein, the Substitute Omega Property Subsidiary shall not be required to comply with any provision of this Section 6.10, and neither the Property of the Substitute Omega Property Subsidiary nor any of the Substitute Omega Property Subsidiary's Capital Stock shall be pledged as Collateral, in any such case, for so long as the Substitute Omega Property Subsidiary is restricted by any Contractual Obligation from complying with this Section 6.10 or from having its Capital Stock pledged as Collateral.". 7. Amendment to Section 7.1. Section 7.1 of the Credit Agreement is ------------------------ hereby amended by deleting paragraph (d) and substituting in lieu thereof the following new paragraph (d): "(d) Maintenance of Consolidated Net Worth. Permit Consolidated ------------------------------------- Net Worth at the last day of any fiscal quarter of the Borrower ending after December 31, 1997 to be less than (i) all items which were included on the consolidated balance sheet under shareholders' equity at December 31, 1997 less $50,000,000, plus (ii) 50% of Consolidated ---- Net Income (if positive) for the period from January 1, 1998 to such date (not taking into account the Mariner Merger Charges), plus (iii) ---- without duplication, 100% of the amount which would in conformity with GAAP be included in shareholders' equity on a consolidated balance sheet of the 7 Borrower and its Subsidiaries as a result of the issuance of Capital Stock by, or capital contributions made to, the Borrower or any of its Subsidiaries after the Closing Date, minus (iv) the amount of the ----- Mariner Merger Charges on an after-tax basis." 8. Amendment to Section 7.2. Section 7.2 of the Credit Agreement is ------------------------ hereby amended by adding after the word "by" in the fourth line of paragraph (e) thereof the words "the Substitute Omega Property Subsidiary or". 9. Amendment to Section 7.3. Section 7.3 of the Credit Agreement is ------------------------ hereby amended by (a) inserting immediately after the words "by PHCMI" in the first line of paragraph (m) thereof the words ", the Substitute Omega Property Subsidiary", (b) relettering current paragraphs (o) and (p) as (p) and (q) and (c) inserting the following new paragraph (o) as follows: "(o) the pledge by Summit in favor of the trustee for the Summit IRB of its interest in the sinking fund reserve account for the Summit IRB;". 10. Amendment to Section 7.4. Section 7.4 of the Credit Agreement is ------------------------ hereby amended by deleting paragraphs (c) and (d) thereof in their entirety and substituting in lieu thereof the following new paragraphs (c) and (d): "(c) any Subsidiary of the Borrower may Dispose of one or more Substitute Omega Properties to PHCMI, the Substitute Omega Property Subsidiary or any of the New PHCMI Subsidiaries in connection with providing substitute collateral to Omega in exchange for the surrender by Omega of the Omega Letter of Credit, and PHCMI, the Substitute Omega Property Subsidiary or any New PHCMI Subsidiary may temporarily lease or sublease the Substitute Omega Properties to LC-Southeast, provided that any such lease or sublease to LC-Southeast shall be cancelled as soon as reasonably practicable after receipt of necessary Governmental Authority Health Care Permits and Medicare and Medicaid licenses for the Substitute Omega Properties reissued in the name of PHCMI, the Substitute Omega Property Subsidiary or any New PHCMI Subsidiary, as applicable; (d) any acquisition expressly permitted by Section 7.8 may be structured as a merger with or into the Borrower (provided that the -------- Borrower shall be the continuing or surviving corporation), with or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly Owned -------- Subsidiary Guarantor shall be the continuing or surviving corporation) or, in the case of the Mariner Merger, with or into Mariner (provided that -------- Mariner shall be the continuing or surviving corporation); and". 11. Amendment to Section 7.8. Section 7.8 of the Credit Agreement is ------------------------ hereby amended by (a) inserting at the end of paragraph (g) thereof and prior to the semi-colon the following: "and the capital contribution by LC-Southeast to the Substitute Omega Property 8 Subsidiary represented by the transfer of the Substitute Omega Properties to the Substitute Omega Property Subsidiary, as permitted in Section 7.4(c) hereof", (b) inserting immediately after the amount "$300,000,000" in the last line of paragraph (h) thereof the following: "provided, further, the Borrower and ----------------- Mariner Merger Sub shall be permitted to consummate the Mariner Merger pursuant to the Mariner Merger Agreement without regard to the foregoing dollar limitations, and shall be deemed not to be a utilization of such dollar limitations", (c) deleting the word "and" at the end of paragraph (j) thereof, (d) relettering current paragraph (k) as paragraph (l), and (e) adding thereto the following new paragraph (k): "(k) investments by the Borrower in or for the account of Mariner (i) to finance the redemption or repurchase by Mariner of the Mariner Notes, (ii) to make the required payments to holders of the Cash Payment Options (as such term is defined in the Mariner Merger Agreement) and (iii) to pay other costs and expenses incurred by Mariner directly associated with the Mariner Merger, in an aggregate amount for items (i), (ii) and (iii) not to exceed $100,000,000 during the term of this Agreement; and". 12. Amendment to Section 7.9. Section 7.9 of the Credit Agreement is ------------------------ hereby amended by (a) deleting the word "or" the first time it appears in the sixth line and substituting in lieu thereof a comma and (b) inserting immediately after the word "Notes" in the sixth line thereof the words "or the Mariner Merger Agreement, except for changes to the Mariner Merger Agreement that do not adversely affect the Lenders in any respect". 13. Amendment to Section 7.10. Section 7.10 of the Credit Agreement ------------------------- is hereby amended by inserting immediately at the end thereof and prior to the period the following: "provided, that the foregoing provisions of this Section -------- 7.10 shall not be deemed to prohibit (i) any transaction incidental to the Mariner Merger, as contemplated in the Mariner Merger Agreement, (ii) the provision of certain administrative services by the Borrower for Mariner or any of its Subsidiaries in the ordinary course of business and consistent with the Borrower's past practice with respect to its other Subsidiaries, (iii) the payment by the Borrower in the ordinary course of business of certain third party payment obligations on behalf of Mariner or any of its Subsidiaries to the extent Mariner or such Subsidiary, as the case may be, provides timely reimbursement to the Borrower for such payment, but in any event such reimbursement shall be in the same fiscal quarter in which the Borrower made such payment (it being understood that the payment of such obligations by the Borrower in accordance with this clause (iii) shall be deemed not to be a utilization of the dollar limitations set forth in Section 7.8(k)) or (iv) the investment permitted pursuant to section 7.8(k)". 14. Amendment to Section 7.14. Section 7.14 of the Credit Agreement ------------------------- is hereby amended by (a) deleting the word "and" in the fifth line and substituting in lieu thereof a comma and (b) adding at the end thereof and prior to the period the following: "and (c) so long as the Summit IRB is outstanding, any agreement binding on Summit and relating to the Health Care Facility in Bossier City, Bossier Parish, Louisiana, leased by Summit and financed by the Summit IRB". 9 15. Amendment to Section 7.15. Section 7.15 of the Credit Agreement ------------------------- is hereby amended by (a) deleting the word "and" in the eighth line and substituting in lieu thereof a comma and (b) adding at the end thereof and prior to the period the following: "and (iii) Section 6.11(b) of the Amended and Restated Agreement of Sale, dated as of April 1, 1993, as amended prior to the date hereof, by and among the Louisiana Public Facilities Authority, Southwest Medical Center, Inc. and Summit, as guarantor". 16. Amendment to Section 8. Section 8 of the Credit Agreement is ---------------------- hereby amended by (a) deleting paragraph (f) and substituting in lieu thereof the following new paragraph (f): "(f) (i) the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries or Mariner or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or", (b) deleting the word "or" in the last line of paragraph (l) thereof, (c) adding at the end of paragraph (l) and prior to the semi-colon the following: "or (iv) the Borrower shall cease to own 100% of the issued and outstanding Capital Stock of Mariner", (d) adding the word "or" at the end of paragraph (m) thereof and (e) adding thereto the following new paragraph (n): "(n) Mariner or any of its Subsidiaries shall default in the observance or performance of any agreement or condition with respect to the Mariner Credit Agreement 10 or the Mariner Notes (including, without limitation, any guarantee thereof), or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or event or condition, in each of the foregoing instances, is to cause, or to permit the holder or beneficiary of the Mariner Credit Agreement or the Mariner Notes or guarantee thereof (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, the Mariner Credit Agreement or the Mariner Notes (or any guarantee thereof) to become due prior to its stated maturity or (in the case of any such guarantee) to become payable, and such holder or beneficiary shall cause the Mariner Credit Agreement or the Mariner Notes (or any guarantee thereof) to become due prior to its stated maturity or (in the case of any such guarantee) to become payable;". 17. Amendment of Schedule 1.1(a). Schedule 1.1(a) to the Credit ---------------------------- Agreement is hereby amended by adding thereto the following information set forth on Schedule 1.1(a) attached hereto. 18. Supplement to Schedule 7.14. Schedule 7.14 to the Credit --------------------------- Agreement is hereby amended by adding thereto the information set forth on Annex A to this Amendment. 19. Pledge of Mariner Stock. The Borrower hereby assigns and ----------------------- transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Lenders, a security interest in, the shares of Capital Stock of Mariner listed on Annex B to this Amendment, together with any other shares, stock certificates, options or rights of any nature whatsoever in respect of the Capital Stock of Mariner that may be issued or granted to, or held by, the Borrower while the Credit Agreement is in effect, as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Borrower Obligations, which assignment, transfer and grant shall be governed by the terms of the Guarantee and Collateral Agreement. 20. Fees. (a) In consideration for the agreement of each Revolving ---- Credit Lender which has agreed to increase its Revolving Credit Commitment pursuant hereto or any Revolving Credit Lender becoming a Revolving Credit Lender on the date hereof pursuant hereto (the aggregate increase in the Revolving Credit Commitments being referred to herein as the "Increased --------- Revolving Credit Commitment"), the Borrower agrees to pay to each such Revolving - --------------------------- Credit Lender, a fee in an amount previously disclosed to such Revolving Credit Lender by the Administrative Agent in writing, payable on the date on which the Mariner Merger becomes effective, as provided in the Mariner Merger Agreement (the "Mariner Merger Effective Date") in immediately available funds. ----------------------------- (b) In consideration for the agreement of each Tranche A Term Loan Lender which has agreed to increase its Tranche A Term Loan Commitment pursuant hereto or any Tranche A Term Loan Lender becoming a Tranche A Term Loan Lender on the date hereof pursuant hereto (the aggregate increase in the Tranche A Term Loan Commitments being referred to herein as the "Increased Tranche A Term Loan ----------------------------- Commitment"), the Borrower agrees - ---------- 11 to pay to each such Tranche A Term Loan Lender, a fee in an amount previously disclosed to such Tranche A Term Loan Lender by the Administrative Agent in writing, payable on the Mariner Merger Effective Date in immediately available funds. 21. Conditions to Effectiveness. The amendments provided for herein --------------------------- shall become effective on the date (the "Effective Date") of satisfaction of the -------------- following conditions precedent: (a) The Administrative Agent shall have received counterparts of this Amendment duly executed and delivered by the Borrower and the Required Lenders (including each Lender which has committed to a portion of the Increased Revolving Credit Commitment or the Increased Tranche A Term Loan Commitment). (b) The Administrative Agent shall have received a copy of the resolutions of the Borrower, in form and substance satisfactory to the Administrative Agent, authorizing (i) the execution, delivery and performance of this Amendment and (ii) the borrowings contemplated by the Increased Revolving Credit Commitments and the Increased Tranche A Term Loan Commitments, which resolutions shall be certified by the Secretary or an Assistant Secretary of the Borrower as of the date hereof, and which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (c) The Administrative Agent shall have received a certificate of the Secretary of the Borrower, dated the date hereof, as to the incumbency and signature of the officers of the Borrower executing this Amendment satisfactory in form and substance to the Administrative Agent. (d) All governmental and third party approvals (including landlords' and other consents) necessary or advisable in connection with this Amendment, the making of the loans under the Increased Revolving Credit Commitment and the Increased Tranche A Term Loan Commitment and the consummation of the Mariner Merger shall have been obtained and be in full force and effect (other than certain Health Care Permits relating to Health Care Facilities owned or operated by Mariner or its Subsidiaries which may be required as a result of the Mariner Merger and which in any event have been applied for and are reasonably expected by the management of the Borrower to be issued in due course and the failure of which to obtain such Health Care Permits shall not have a Material Adverse Effect), and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose materially adverse conditions on the Credit Agreement as amended by this Amendment, the making of the loans under the Increased Revolving Credit Commitment and the Increased Tranche A Term Loan Commitment or the consummation of the Mariner Merger. (e) The Lenders shall have received the Mariner Merger Agreement. 12 (f) The Administrative Agent shall have received the executed legal opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel to the Borrower dated the date hereof and in form and substance satisfactory to the Administrative Agent with respect to this Amendment and the transactions contemplated hereby. (g) The Administrative Agent shall have received the certificates representing the shares of Capital Stock of Mariner pledged pursuant to paragraph 19 above, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the Borrower. (h) The Mariner Merger shall have been consummated pursuant to the terms of the Mariner Merger Agreement contemporaneously with the effectiveness of this Amendment. (i) The requisite lenders under the Mariner Credit Agreement shall have agreed to amend and waive certain provisions of the Mariner Credit Agreement on terms and conditions satisfactory to the Administrative Agent, so that after giving effect to such amendments and waivers and the consummation of the Mariner Merger, no default or event of default shall have occurred and be continuing under the Mariner Credit Agreement. ; provided, that, the effectiveness of the amendments set forth in paragraphs -------- ---- 1(c)(i), 9(b) and (c), 14 and 15 and the addition of the definitions "Summit", "Summit Guarantee" and "Summit IRB" contained in paragraph 1(d) shall be conditioned only upon the satisfaction of the condition contained in clause (a) of this paragraph 21. 22. Representations and Warranties. The Borrower as of the date ------------------------------ hereof and after giving effect to the amendment contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 4 of the Credit Agreement; 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 Amendment. 23. 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 the 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. 24. 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 21 of this 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 13 hereby. The execution, delivery and effectiveness of this 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 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. 25. Counterparts. This 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. 26. GOVERNING LAW. THIS 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 (WITHOUT REGARD FOR THE CONFLICT OF LAWS PRINCIPLES THEREOF). 14 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By: --------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Lender By: --------------------------------- Name: Title: 15 Schedule 1.1(a) --------------- Tranche A Term Revolving Loan Commitment Credit Commitment --------------- ----------------- The Chase Manhattan Bank $18,000,000 $ 6,000,000 Nationsbank, N.A. 16,875,000 5,625,000 General Electric Capital Corporation 7,500,000 2,500,000 The Bank of Nova Scotia 7,500,000 2,500,000 First Union National Bank 7,500,000 2,500,000 Wachovia Bank, N.A. 7,500,000 2,500,000 Societe Generale 3,750,000 1,250,000 Skandinaviska Enskilda Banken AB 3,750,000 1,250,000 Transamerica Business Credit Corporation 2,625,000 875,000 ----------- ----------- TOTAL $75,000,000 $25,000,000 =========== =========== 16 Annex A ------- NEGATIVE PLEDGES NONE 17 Annex B ------- MARINER PLEDGED STOCK
Certificate Number Stock Issuer Shareholder Class of Stock Number of Shares - -------------- ------------------ -------------- ----------- --------- Mariner Health Mariner Post-Acute Group, Inc. Network, Inc. Common 1 1,000
EX-10.49 19 2ND AMEND. DATED DEC. 22, 1998 TO THE CREDIT AGMT EXHIBIT 10.49 SECOND AMENDMENT SECOND AMENDMENT, dated as of December 22, 1998 (this "Amendment"), to --------- the Credit Agreement, dated as of November 4, 1997 (as amended by the First Amendment, dated as of July 8, 1998 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"), ------- NATIONSBANK, N.A., as documentation agent (in such capacity, the "Documentation ------------- Agent"), and THE CHASE MANHATTAN BANK, 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 requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Credit Agreement be amended in the manner provided for in this 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 Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 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 Amendment shall have the meanings given to them in this Amendment. (b) Amendment of Definitions. ------------------------ (i) The definition of the term "Applicable Margin" contained in Section 1.1 of the Credit Agreement is hereby amended by (A) deleting the percentages "1.50%" and "2.50%" set forth opposite "Tranche B Term Loans" and substituting in lieu thereof the percentages "2.25%" and "3.25%", respectively and (B) deleting the percentages "1.75%" and "2.75%" set forth opposite "Tranche C Term Loans" and substituting in lieu thereof the percentages "2.50%" and "3.50%", respectively. (ii) The definition of the term "Consolidated Leverage Ratio Stepdown Date" contained in Section 1.1 of the Credit Agreement is hereby amended by deleting the amount "$125,000,000" in the fourth line and substituting in lieu thereof the amount "$100,000,000". (c) Replacement of Definitions. Section 1.1 of the Credit Agreement -------------------------- is hereby amended by deleting therefrom the definition of "Consolidated EBITDA" in its entirety and substituting in lieu thereof the following new definition of "Consolidated EBITDA": "'Consolidated EBITDA': for any period, Consolidated Net Income for ------------------- such period plus, without duplication and, other than with respect to item ---- (j) below, to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business), (f) any other non-cash charges, (g) with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, fees and expenses related to the transactions contemplated by the Recapitalization Agreement (including conforming accounting adjustments) and the financing thereof in an aggregate amount equal to the lesser of the actual amount of such expenses and $122,000,000, (h) non-recurring cash charges taken on or prior to September 30, 1999 as a result of the Mariner Merger in an aggregate amount not to exceed $35,000,000 (such charges not in excess of such amount, the "Mariner Merger Charges"), (i) any lease ---------------------- payments by Summit Institute for Pulmonary Medicine and Rehabilitation, Inc. ("Summit") with respect to the Riverside Community Hospital, Bossier ------ City, Bossier Parish, Louisiana, to the extent and in the proportion of the guarantee by Summit of the then outstanding principal amount of the Summit IRB (the "Summit Guarantee") and (j) at any date of determination ending on ---------------- the dates set forth in this clause (j) below, the amount of cost synergies reasonably projected to be achieved by the Borrower as a result of the Mariner Merger and which as of such dates have not yet been achieved, up to a maximum for the determination date ending: (i) December 31, 1998, $18,000,000, (ii) March 31, 1999, $18,000,000, (iii) June 30, 1999, $16,000,000 and (iv) September 30, 1999, $14,000,000, and minus, to the ----- extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary or non- recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other non-cash income, all as determined on a consolidated basis; provided, that there shall be included in Consolidated -------- EBITDA for such period the difference (but not below zero) between (a) the amount of Consolidated Net Income with respect to Mariner and its Subsidiaries for such period, to the extent of any cash distributions paid by Mariner to the Borrower during such period and (b) the amount of any investment by the Borrower in or for the account of Mariner during such period which is not utilized by Mariner during such period for the purposes set forth in Section 7.8(k)." 2. Amendment to Section 4. Section 4 of the Credit Agreement is ---------------------- hereby amended by adding thereto the following new Section 4.23: "4.23 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 or any of its Subsidiaries interface), and the testing of all such systems and other equipment as so reprogrammed, will be completed in all material respects by June 30, 1999. The costs to the Borrower and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing and 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 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." 3. Amendment to Section 7.1(a). Section 7.1(a) of the Credit --------------------------- Agreement is hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: December 31, 1997 through September 30, 1999 6.75 to 1.00 December 31, 1999 through September 30, 2000 6.50 to 1.00 December 31, 2000 through September 30, 2001 6.00 to 1.00 December 31, 2001 through June 30, 2002 5.00 to 1.00 September 30, 2002 through June 30, 2003 4.75 to 1.00 September 30, 2003 (or, if earlier, the Consolidated Leverage Ratio Stepdown Date) and thereafter 4.50 to 1.00 4. Amendment to Section 7.1(b). Section 7.1(b) of the Credit --------------------------- Agreement is hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: December 31, 1997 through September 30, 1999 1.60 to 1.00 December 31, 1999 through September 30, 2000 1.75 to 1.00 December 31, 2000 through September 30, 2001 1.85 to 1.00 December 31, 2001 through September 30, 2002 2.50 to 1.00 December 31, 2002 and thereafter 2.75 to 1.00 5. Amendment to Section 7.1(c). Section 7.1(c) of the Credit --------------------------- Agreement is hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: December 31, 1997 through September 30, 2000 1.10 to 1.00 December 31, 2000 through September 30, 2001 1.15 to 1.00 December 31, 2001 and thereafter 1.25 to 1.00 6. Amendment to Section 7.5(f). Section 7.5(f) of the Credit --------------------------- Agreement is hereby amended by inserting immediately after the word "Borrower" and prior to the semi-colon in the second line thereof the following: "; provided, that during the fiscal years of the Borrower ending September 30, 1999 - -------- and September 30, 2000, in addition to the foregoing amount, the Borrower shall be permitted to make additional sales of assets with a fair market value not to exceed $150,000,000 in the aggregate for all such additional sales in both of such fiscal years". 7. Amendment to Section 7.7. Section 7.7 of the Credit Agreement is ------------------------ hereby amended by deleting the amount "$125,000,000" in the seventh line and substituting in lieu thereof the amount "$100,000,000". 8. Amendment to Section 7.8(h). Section 7.8(h) of the Credit --------------------------- Agreement is hereby amended by deleting the amount "$125,000,000" in the tenth line and substituting in lieu thereof the amount "$100,000,000". 9. Amendment to Section 7.8(l). Section 7.8(l) of the Credit --------------------------- Agreement is hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following new Section 7.8(l): "(l) in addition to investments otherwise expressly permitted by this Section 7.8, investments by the Borrower or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed $20,000,000 at any one time outstanding." 10. Amendment to Section 7.10. Section 7.10 of the Credit Agreement ------------------------- is hereby amended by deleting clause (iv) of the proviso thereto added pursuant to the First Amendment and substituting in lieu thereof the following new clause (iv): "(iv) the investments permitted pursuant to Sections 7.8(k) and (l)". 11. Replacement of Pricing Grid. Annex A to the Credit Agreement is --------------------------- hereby amended by deleting such Annex A in its entirety and substituting in lieu thereof the Pricing Grid attached as Annex A hereto. 12. Fees. In consideration of the agreement of the Lenders to ---- consent to the amendments contained herein, the Borrower agrees to pay to each Lender which so consents on or prior to December 22, 1998, an amendment fee in an amount equal to 0.25% of the amount of such Lender's Commitment, payable on the date hereof in immediately available funds. 13. Conditions to Effectiveness. The amendments provided for herein --------------------------- shall become effective on the date the Administrative Agent shall have received counterparts of this Amendment duly executed and delivered by the Borrower and the Required Lenders. 14. Representations and Warranties. The Borrower as of the date ------------------------------ hereof and after giving effect to the amendment contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 4 of the Credit Agreement; 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 Amendment. 15. 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 the 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. 16. 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 13 of this 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 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 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. 17. Counterparts. This 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. 18. GOVERNING LAW. THIS 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. IN WITNESS WHEREOF, the parties hereto have caused this 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:________________________________________ Name: Title: Annex A ------- PRICING GRID FOR REVOLVING CREDIT LOANS,SWING LINE LOANS TRANCHE A TERM LOANS AND COMMITMENT FEES
====================================================================================================== Consolidated Leverage Ratio Applicable Margin Applicable Margin Commitment Fee for ABR Loans for Eurodollar Loans Rate - ------------------------------------------------------------------------------------------------------ greater than or equal to 5.25 to 1.0 1.25% 2.75% .50% - ------------------------------------------------------------------------------------------------------ less than 5.25 to 1.0 and greater than or equal to 4.75 to 1.0 1.00% 2.50% .50% - ------------------------------------------------------------------------------------------------------ less than 4.75 to 1.0 and greater than or equal to 4.25 to 1.0 .75% 2.25% .40% - ------------------------------------------------------------------------------------------------------ less than 4.25 to 1.0 and greater than or equal to 3.75 to 1.0 .50% 2.00% .375% - ------------------------------------------------------------------------------------------------------ less than 3.75 to 1.0 .25% 1.75% .30% ======================================================================================================
Changes in the Applicable Margin with respect to Revolving Credit Loans, Tranche A Term Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "Adjustment ---------- Date") on which financial statements are delivered to the Lenders pursuant to - ---- Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the Consolidated Leverage Ratio shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. Each determination of the Consolidated Leverage Ratio hereunder shall be made with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements. EX-10.52 20 1ST AMEND TO FBTC PARTICIPATION EXHIBIT 10.52 FIRST AMENDMENT TO PARTICIPATION AGREEMENT FIRST AMENDMENT TO PARTICIPATION AGREEMENT, dated as of July 8, 1998 (this "Amendment"), to the Amended and Restated Participation Agreement, dated --------- as of November 4, 1997 (the "Participation Agreement"), among LIVING CENTERS ----------------------- HOLDING COMPANY, a Delaware corporation (the "Lessee"), FBTC LEASING CORP., a ------ New York corporation (the "Lessor"), THE CHASE MANHATTAN BANK, a New York ------ banking corporation, as agent (in such capacity, the "Agent") for each of the ----- financial institutions listed on the signature pages hereof and for the financial institutions from time to time parties hereto (each, a "Lender"; ------ collectively, the "Lenders") and THE FUJI BANK, LIMITED (HOUSTON AGENCY), as co- ------- agent (in such capacity, the "Co-Agent"). Capitalized terms used but not -------- otherwise defined in this Amendment shall have the meanings set forth in Annex A to the Participation Agreement. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Participation Agreement, the parties thereto agreed to participate in a transaction in which, among other things, (i) the Lenders agreed to make certain loans to the Lessor pursuant to the Amended and Restated Credit Agreement dated as of November 4, 1997 among the Lessor, the Agent and the Lenders; (ii) the Lessor agreed to use the proceeds of the Loans to acquire and construct certain properties; and (iii) the Lessor agreed to lease such properties to Lessee pursuant to the Lease. WHEREAS, the Lessee has requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Participation Agreement be amended in the manner provided for in this Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. (a) General. Terms defined in the Participation ------------- ------- Agreement and used herein shall, unless otherwise indicated, have the meanings given to them in the Participation Agreement. Terms defined and used in this Amendment shall have the meanings given to them in this Amendment. (b) Replacement of Definitions. The Participation Agreement is -------------------------- hereby amended by deleting from Annex A thereto the definitions of the following definitions in their entirety and substituting in lieu thereof the following definitions in the appropriate alphabetical order: "'Consolidated EBITDA': for any period, Consolidated Net Income for ------------------- such period plus, without duplication and to the extent reflected as a ---- charge in the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, 2 (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary or non- recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business) or, with respect to the computation of the financial covenants contained in Section 11.1 of the Guarantee for any Reference Period ending on or prior to September 30, 1998, writeoffs or changes to the income statements increasing the amount of reserves, in an aggregate amount not to exceed $15,000,000, of accounts receivable of Paragon and its Subsidiaries, (f) any other non-cash charges, (g) with respect to the computation of the financial covenants contained in Section 11.1 of the Guarantee for any Reference Period ending on or prior to September 30, 1998, fees and expenses related to the transactions contemplated by the Recapitalization Agreement (including conforming accounting adjustments) and the financing thereof in an aggregate amount equal to the lesser of the actual amount of such expenses and $122,000,000, (h) non-recurring cash charges taken within six months of the First Amendment Effective Date as a result of the Mariner Merger in an aggregate amount not to exceed $25,000,000 (such charges not in excess of such amount, the "Mariner Merger -------------- Charges"), (i) any lease payments by Summit Institute for Pulmonary -------- Medicine and Rehabilitation, Inc. ("Summit") with respect to the Riverside ------ Community Hospital, Bossier City, Bossier Parish, Louisiana, to the extent and in the proportion of the guarantee by Summit of the then outstanding principal amount of the Summit IRB (the "Summit Guarantee") and (j) with ---------------- respect to the computation of the financial covenants contained in Section 11.1 of the Guarantee, for the Reference Period ending: (i) December 31, 1997, $12,000,000, (ii) March 31, 1998, $9,000,000 and (iii) June 30, 1998, $6,000,000, and minus, to the extent included in the statement of such ----- Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other non-cash income, all as determined on a consolidated basis; provided, that there -------- shall be included in Consolidated EBITDA for such period the difference (but not below zero) between (a) the amount of Consolidated Net Income with respect to Mariner and its Subsidiaries for such period, to the extent of any cash dividends paid by Mariner to Paragon during such period and (b) the amount of any investment by Paragon in or for the account of Mariner which is not utilized by Mariner for the purposes set forth in subsection 11.8(k) of the Guarantee. 'Subsidiary': as to any Person, a corporation, partnership, limited ---------- liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board 3 of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of Paragon. Unless otherwise specified, the term "Subsidiary" or "Subsidiaries" shall not include Mariner and its Subsidiaries and Mariner Merger Sub." 'Substitute Omega Property': any Health Care Facility and related ------------------------- personal property conveyed to PHCMI after the Closing Date (which Health Care Facility may be leased to a New PHCMI Subsidiary), or any Health Care Facility and related personal property contributed or otherwise transferred by LC--Southeast to the Substitute Omega Property Subsidiary (which Health Care Facility may be leased to PHCMI), and which Health Care Facility in either case is or becomes encumbered by a mortgage, deed to secure debt or deed of trust in favor of Omega, for the purpose of serving as substitute collateral for the obligations of PHCMI to Omega, in exchange for the surrender by Omega of the Omega Letter of Credit; provided that the -------- Substitute Omega Property shall not, in the aggregate, (i) represent more than $3,500,000 of Paragon's Consolidated EBITDA for the most recent Reference Period for which the relevant financial information is available or (ii) have a maximum aggregate capacity in excess of 600 beds." (c) Amendment of Definitions. The definition of the term "Assumed ------------------------ Debt" is hereby amended by adding at the end thereof and prior to the period the following: "provided, that, notwithstanding the above, the -------- Summit Guarantee shall be deemed to constitute Assumed Debt, to the extent the principal amount of Indebtedness guaranteed thereby does not exceed $3,500,000". (d) Addition of Definitions. The following defined terms are hereby ----------------------- added to Annex A of the Participation Agreement in appropriate alphabetical order: "'First Amendment': the First Amendment, dated as of July 8, --------------- 1998, to this Agreement. 'First Amendment Effective Date': the date of effectiveness of ------------------------------ the First Amendment. 'LC--Southeast': Living Centers--Southeast, Inc., a North ------------ Carolina corporation and an indirect Wholly Owned Subsidiary of the Borrower. 'Mariner': Mariner Health Group, Inc., a Delaware corporation. ------- 4 'Mariner Credit Agreement': the Credit Agreement, dated as of ------------------------ May 18, 1994, among Mariner, the lenders party thereto and PNC Bank, N.A., as agent, as amended supplemented or otherwise modified from time to time. 'Mariner Merger': the merger of Mariner Merger Sub with and into -------------- Mariner, with Mariner as the continuing or surviving corporation, pursuant to the Mariner Merger Agreement. 'Mariner Merger Agreement': the Agreement and Plan of Merger, ------------------------ dated as of April 13, 1998, among Paragon, Mariner Merger Sub and Mariner, as amended, supplemented or otherwise modified from time to time in accordance with subsection 11.9 of the Guarantee. 'Mariner Merger Sub': Paragon Acquisition Sub, Inc., a Delaware ------------------ corporation. 'Mariner Notes': the 9-1/2% Senior Subordinated Notes due 2006 ------------- of Mariner, as amended, supplemented or otherwise modified from time to time. 'Substitute Omega Property Subsidiary': Living Centers - PHCM, ------------------------------------ Inc., a North Carolina corporation and a Wholly Owned Subsidiary of LCC--Southeast. 'Summit': as defined in the definition of "Consolidated EBITDA". ------ 'Summit Guarantee': as defined in the definition of ---------------- "Consolidated EBITDA". 'Summit IRB': the series 1987 revenue refunding bonds issued by ---------- the Louisiana Public Facilities Authority with respect to the Southwest Medical Center, Inc. Project." 2. Amendment to Section 6.2(q). Section 6.2(q) of the Participation --------------------------- Agreement is hereby amended by deleting the amount "25,000,000" in the third line and substituting in lieu thereof the amount "50,000,000". 3. Conditions to Effectiveness. The amendments provided for herein --------------------------- shall become effective on the date (the "Effective Date") of satisfaction of the -------------- following conditions precedent: (a) The Agent shall have received counterparts of this Amendment duly executed and delivered by the Lessee, the Lessor and the Lenders. 5 (b) The Agent shall have received a copy of the resolutions, in form and substance satisfactory to the and the Agent, of the Lessee authorizing the execution, delivery and performance of this Amendment, certified by the Secretary or an Assistant Secretary of the Lessee as of the date hereof, which certificate shall be in form and substance satisfactory to the Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (c) The Agent shall have received a certificate of the Secretary or an Assistant Secretary of the Lessee, dated the date hereof, as to the incumbency and signature of the officers of the Lessee executing this Amendment satisfactory in form and substance to the Agent. (d) The Agent shall have received the executed legal opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel to the Lessee dated the date hereof and in form and substance satisfactory to the Agent with respect to this Amendment and the transactions contemplated hereby. ;provided, that, the effectiveness of the amendments set forth in paragraphs -------- ---- 1(c) and the addition of the definitions "Summit", "Summit Guarantee" and "Summit IRB" contained in paragraph 1(d) shall be conditioned only upon the satisfaction of the condition contained in clause (a) of this paragraph 3. 4. Consent. Notwithstanding the provisions of Section 8.2 of the ------- Lease, the Agent and the Lenders hereby consent to the financing under the Credit Agreement of the acquisition and construction in the maximum aggregate amount of $17,000,000, of an approximately 90,000 square foot office facility located in Houston, Texas, to be used to for Paragon's shared services operation. 5. Payment of Expenses. The Lessee agrees to pay or reimburse the ------------------- Agent for all of its out-of-pocket costs and expenses incurred in connection with the 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 Agent. 6. 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 3 of this Amendment, each reference in the Participation Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Participation Agreement, and each reference in the other Loan Documents to "the Participation Agreement", "thereunder", "thereof" or words of like import referring to the Participation Agreement, shall mean and be a reference to the Participation Agreement as amended hereby. The execution, delivery and effectiveness of this 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 herein, all of the provisions and covenants of the Participation Agreement and the other Loan 6 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. 7. Counterparts. This 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. 8. GOVERNING LAW. THIS 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. 7 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. LIVING CENTERS HOLDING COMPANY, as Lessee By: -------------------------------- Name: Title: FBTC LEASING CORP., as Lessor By: -------------------------------- Name: Title: THE CHASE MANHATTAN BANK, as Agent and a Lender By: -------------------------------- Name: Title: THE FUJI BANK, LIMITED, as Co-Agent and a Lender By: -------------------------------- Name: Title: CITIBANK, N.A., as a Lender By: -------------------------------- Name: Title: 8 NATIONSBANK, N.A., as a Lender By: -------------------------------- Name: Title: THE BANK OF NOVA SCOTIA, as a Lender By: -------------------------------- Name: Title: BANQUE PARIBAS, as a Lender By: -------------------------------- Name: Title: By: -------------------------------- Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By: -------------------------------- Name: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: -------------------------------- Name: Title: By: -------------------------------- Name: Title: 9 FIRST UNION NATIONAL BANK, as a Lender By: -------------------------------- Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, as a Lender By: -------------------------------- Name: Title: TORONTO DOMINION BANK (TEXAS), INC., as a Lender By: -------------------------------- Name: Title: THE UNION BANK OF CALIFORNIA, N.A., as a Lender By: -------------------------------- Name: Title: MARINE MIDLAND BANK, as a Lender By: -------------------------------- Name: Title: EX-10.53 21 2ND AMD TO FBTC PARTICIPATION AGMT (12/22/98) EXHIBIT 10.53 SECOND AMENDMENT TO PARTICIPATION AGREEMENT SECOND AMENDMENT TO PARTICIPATION AGREEMENT, dated as of December 22, 1998 (this "Amendment"), to the Amended and Restated Participation Agreement, ----------- dated as of November 4, 1997 as amended by the First Amendment to the Amended and Restated Participation Agreement, dated as of July 8, 1998 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Participation Agreement"), among LIVING CENTERS HOLDING COMPANY, a Delaware - ------------------------- corporation (the Lessee"), FBTC LEASING CORP., a New York corporation (the "Lessor"), THE CHASE MANHATTAN BANK, a New York banking corporation, as agent - -------- (in such capacity, the "Agent") for each of the financial institutions listed on ------- the signature pages hereof and for the financial institutions from time to time parties hereto (each, a "Lender"; collectively, the "Lenders") and THE FUJI -------- --------- BANK, LIMITED (HOUSTON AGENCY), as co-agent (in such capacity, the "Co-Agent"). ---------- Capitalized terms used but not otherwise defined in this Amendment shall have the meanings set forth in Annex A to the Participation Agreement. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Participation Agreement, the parties thereto agreed to participate in a transaction in which, among other things, (i) the Lenders agreed to make certain loans to the Lessor pursuant to the Amended and Restated Credit Agreement dated as of November 4, 1997 among the Lessor, the Agent and the Lenders; (ii) the Lessor agreed to use the proceeds of the Loans to acquire and construct certain properties; and (iii) the Lessor agreed to lease such properties to Lessee pursuant to the Lease. WHEREAS, the Lessee has requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Participation Agreement be amended in the manner provided for in this 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 Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. (a) General. Terms defined in the Participation ------------- ------- Agreement and used herein shall, unless otherwise indicated, have the meanings given to them in the Participation Agreement. Terms defined and used in this Amendment shall have the meanings given to them in this Amendment. (b) Amendment of Definitions. ------------------------ 2 The definition of the term "Consolidated Leverage Ratio Stepdown Date" contained in Annex A of the Participation Agreement is hereby amended by deleting the amount "$125,000,000 in the fourth line and substituting in lieu thereof the amount "$100,000,000". (c) Replacement of Definitions. The Participation Agreement is hereby -------------------------- amended by deleting from Annex A thereto the definition "Consolidated EBITDA" in its entirety and substituting in lieu thereof the following new definition of "Consolidated EBITDA": "Consolidated EBITDA": for any period, Consolidated Net Income for ------------------- such period plus, without duplication and, other than with respect to item (j) below, to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary or non- recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business), (f) any other non-cash charges, (g) with respect to the computation of the financial covenants contained in Section 7.1 for any Reference Period ending on or prior to September 30, 1998, fees and expenses related to the transactions contemplated by the Recapitalization Agreement (including conforming accounting adjustments) and the financing thereof in an aggregate amount equal to the lesser of the actual amount of such expenses and $122,000,000, (h) non-recurring cash charges taken on or prior to September 30, 1999 as a result of the Mariner Merger in an aggregate amount not to exceed $35,000,000 (such charges not in excess of such amount, the "Mariner Merger Charges"), (i) any lease payments by Summit Institute for ---------------------- Pulmonary Medicine and Rehabilitation, Inc. ("Summit") with respect to the Riverside Community Hospital, Bossier City, Bossier Parish, Louisiana, to the extent and in the proportion of the guarantee by Summit of the then outstanding principal amount of the Summit IRB (the "Summit Guarantee") and ---------------- (j) at any date of determination ending on the dates set forth in this clause (j) below, the amount of cost synergies reasonably projected to be achieved by Mariner as a result of the Mariner Merger and which as of such dates have not yet been achieved, up to a maximum for the determination date ending: (i) December 31, 1998, $18,000,000, (ii) March 31, 1999, $18,000,000, (iii) June 30, 1999, $16,000,000 and (iv) September 30, 1999, $14,000,000, and minus, to ----- the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary or non- recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business) and (c) any other non-cash income, all as determined on a consolidated basis; provided, that there shall be included in Consolidated EBITDA for such period the difference (but not below zero) between (a) the amount of Consolidated Net Income with respect to Mariner and its Subsidiaries for such period, to the extent of any cash distributions paid by Mariner to Mariner during such period and (b) the amount of any investment by Mariner in or for the account of Mariner during such period which is not utilized by Mariner during such period for the purposes set forth in Section 7.8(k)." 3 (d) Addition of Definitions. The following defined terms are hereby ----------------------- added to Annex A of the Participation Agreement in appropriate alphabetical order: "Mariner": Mariner Post-Acute Network, Inc. (formerly known as ------- Paragon Health Network, Inc.), a Delaware corporation. References in the Operative Documents to "Paragon" shall be deemed to refer to Mariner. "Second Amendment": the Second Amendment, dated as of December ---------------- 22, 1998, to this Agreement. "Second Amendment Effective Date": the date of effectiveness of ------------------------------- the Second Amendment. 2. Replacement of Pricing Grid. Schedule 1 to Annex A of the --------------------------- Participation Agreement is hereby amended by deleting such Schedule 1 in its entirety and substituting in lieu thereof the Pricing Grid attached as Schedule 1 hereto. 3. Fees. In consideration of the agreement of the Lenders to consent ---- to the amendments contained herein, Mariner agrees to pay to (a) each Lender which so consents, on or prior to December 22, 1998, an amendment fee in an amount equal to 0.25% of the amount of such Lender's Commitment, payable on the date hereof in immediately available funds, and (b) the Lessor, if it should so consent, on or prior to December 22, 1998 an amendment fee in an amount equal to 0.25% of the amount of the Lessor's Commitment, payable on the date hereof in immediately available funds. 4. Conditions to Effectiveness. The amendments provided for herein --------------------------- shall become effective on the date the Agent shall have received counterparts of this Amendment duly executed and delivered by the Lessee, the Lessor and the Required Lenders. 5. Reference to and Effect on the Operative Documents; Limited Effect. ------------------------------------------------------------------ On and after the date hereof and the satisfaction of the conditions contained in paragraph 4 of this Amendment, each reference in the Participation Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Participation Agreement, and each reference in the other Operative Documents to "the Participation Agreement", "thereunder", "thereof" or words of like import referring to the Participation Agreement, shall mean and be a reference to the Participation Agreement as amended hereby. The execution, delivery and effectiveness of this 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 Operative Documents, nor constitute a waiver of any provisions of any of the Operative Documents. Except as expressly amended herein, all of the provisions and covenants of the Participation Agreement and the other 4 Operative 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. 6. Counterparts. This 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. 7. GOVERNING LAW. THIS 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 Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. LIVING CENTERS HOLDING COMPANY, as Lessee By: --------------------------------- Name: Title: 6 FBTC LEASING CORP., as Lessor By: --------------------------------- Name: Title: 7 THE CHASE MANHATTAN BANK, as Agent and a Lender By: --------------------------------- Name: Title: 8 THE FUJI BANK, LIMITED, as Co-Agent and a Lender By: --------------------------------- Name: Title: 9 CITIBANK, N.A., as a Lender By: --------------------------------- Name: Title: 10 NATIONSBANK, N.A., as a Lender By: --------------------------------- Name: Title: 11 THE BANK OF NOVA SCOTIA, as a Lender By: --------------------------------- Name: Title: 12 BANQUE PARIBAS, as a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: 13 CREDIT LYONNAIS NEW YORK BRANCH, as a Lender By: --------------------------------- Name: Title: 14 DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: --------------------------------- Name: Title: By: --------------------------------- Name: Title: 15 FIRST UNION NATIONAL BANK, as a Lender By: --------------------------------- Name: Title: 16 THE LONG-TERM CREDIT BANK OF JAPAN, LIMITED, as a Lender By: --------------------------------- Name: Title: 17 TORONTO DOMINION BANK (TEXAS), INC., as a Lender By: --------------------------------- Name: Title: 18 THE UNION BANK OF CALIFORNIA, N.A., as a Lender By: --------------------------------- Name: Title: 19 MARINE MIDLAND BANK, as a Lender By: --------------------------------- Name: Title: 20 Schedule 1 ---------- PRICING GRID FOR REVOLVING CREDIT LOANS, SWING LINE LOANS TRANCHE A TERM LOANS AND COMMITMENT FEES
======================================================================================================= Consolidated Leverage Ratio Applicable Margin Applicable Margin Commitment Fee for ABR Loans for Eurodollar Loans Rate - ------------------------------------------------------------------------------------------------------- greater than or equal to 5.25 to 1.0 1.25% 2.75% .50% - ------------------------------------------------------------------------------------------------------- less than 5.25 to 1.0 and greater than or equal to 4.75 to 1.0 1.00% 2.50% .50% - ------------------------------------------------------------------------------------------------------- less than 4.75 to 1.0 and greater than or equal to 4.25 to 1.0 .75% 2.25% .40% - ------------------------------------------------------------------------------------------------------- less than 4.25 to 1.0 and greater than or equal to 3.75 to 1.0 .50% 2.00% .375% - ------------------------------------------------------------------------------------------------------- less than 3.75 to 1.0 .25% 1.75% .30% =======================================================================================================
Changes in the Applicable Margin with respect to Revolving Credit Loans, Tranche A Term Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "Adjustment ---------- Date") on which financial statements are delivered to the Lenders pursuant to - ---- Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. In addition, at all times while an Event of Default shall have occurred and be continuing, the Consolidated Leverage Ratio shall for the purposes hereunder be deemed to be greater than or equal to 5.25 to 1.0. Each determination of the Consolidated Leverage Ratio hereunder shall be made with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements. EX-10.55 22 1ST AMD TO FBTC GUARANTEE (7/8/98) EXHIBIT 10.55 FIRST AMENDMENT TO GUARANTEE FIRST AMENDMENT TO GUARANTEE, dated as of July 8, 1998 (this "Amendment"), to the Amended and Restated Guarantee, dated as of November 4, - ---------- 1997 (the "Guarantee"), made by PARAGON HEALTH NETWORK, INC., a Delaware --------- corporation ("Paragon") and the other guarantors which are signatories thereto ------- (Paragon and each such other guarantor, individually, a "Guarantor"; --------- collectively, the "Guarantors"), in favor of THE CHASE MANHATTAN BANK, as ---------- administrative agent (in such capacity, the "Agent") for the lenders (the ----- "Lenders") parties to the Amended and Restated Credit Agreement, dated as of the - -------- date hereof (as further amended, supplemented, extended or otherwise modified from time to time, the "Credit Agreement"), among FBTC LEASING CORP. (the ---------------- "Borrower"), the Lenders and the Agent. - --------- W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Guarantee, dated as of November 4, 1997, made by Guarantor and certain of its subsidiaries in favor of the Agent, Paragon agreed to guarantee the prompt and complete performance of the Guaranteed Obligations (as defined in the Guarantee). WHEREAS, the Guarantor has requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Guarantee be amended in the manner provided for in this Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Terms defined in the Guarantee and used herein ------------- shall, unless otherwise indicated, have the meanings given to them in the Guarantee. Terms defined and used in this Amendment shall have the meanings given to them in this Amendment. 2. Amendment to Section 11.1. Section 11.1 of the Guarantee is ------------------------- hereby amended by deleting paragraph (d) and substituting in lieu thereof the following new paragraph (d): "(d) Maintenance of Consolidated Net Worth. Permit Consolidated ------------------------------------- Net Worth at the last day of any fiscal quarter of Paragon ending after December 31, 1997 to be less than (i) all items which were included on the consolidated balance sheet under shareholders' equity at December 31, 1997 less $50,000,000, plus (ii) 50% of Consolidated ---- Net Income (if positive) for the period from January 1, 1998 to such date (not taking into account the Mariner Merger Charges), plus (iii) ---- without duplication, 100% of the amount which would in conformity with GAAP be included in shareholders' equity on a consolidated balance sheet of Paragon and its Subsidiaries as a result of the issuance of Capital Stock by, or capital 2 contributions made to, Paragon or any of its Subsidiaries after the Closing Date, minus (iv) the amount of the Mariner Merger Charges on ----- an after-tax basis." 3. Amendment to Section 11.2. Section 11.2 of the Guarantee is ------------------------- hereby amended by adding after the word "by" in the fourth line of paragraph (e) thereof the words "the Substitute Omega Property Subsidiary or". 4. Amendment to Section 11.3. Section 11.3 of the Guarantee is ------------------------- hereby amended by (a) inserting immediately after the words "by PHCMI" in the first line of paragraph (m) thereof the words ", the Substitute Omega Property Subsidiary", (b) relettering current paragraphs (o) and (p) as (p) and (q) and (c) inserting the following new paragraph (o) as follows: "(o) the pledge by Summit in favor of the trustee for the Summit IRB of its interest in the sinking fund reserve account for the Summit IRB;". 5. Amendment to Section 11.4. Section 11.4 of the Guarantee is ------------------------- hereby amended by deleting paragraphs (c) and (d) thereof in their entirety and substituting in lieu thereof the following new paragraphs (c) and (d): "(c) any Subsidiary of Paragon may Dispose of one or more Substitute Omega Properties to PHCMI, the Substitute Omega Property Subsidiary or any of the New PHCMI Subsidiaries in connection with providing substitute collateral to Omega in exchange for the surrender by Omega of the Omega Letter of Credit, and PHCMI, the Substitute Omega Property Subsidiary or any New PHCMI Subsidiary may temporarily lease or sublease the Substitute Omega Properties to LC--Southeast, provided that any such lease or sublease to LC--Southeast shall be cancelled as soon as reasonably practicable after receipt of necessary Governmental Authority Health Care Permits and Medicare and Medicaid licenses for the Substitute Omega Properties reissued in the name of PHCMI, the Substitute Omega Property Subsidiary or any New PHCMI Subsidiary, as applicable; (d) any acquisition expressly permitted by Section 11.8 may be structured as a merger with or into Paragon (provided that Paragon shall be -------- the continuing or surviving corporation), with or into any Wholly Owned Subsidiary Guarantor (provided that the Wholly Owned Subsidiary Guarantor -------- shall be the continuing or surviving corporation) or, in the case of the Mariner Merger, with or into Mariner (provided that Mariner shall be the -------- continuing or surviving corporation); and". 6. Amendment to Section 11.8. Section 11.8 of the Guarantee is ------------------------- hereby amended by (a) inserting at the end of paragraph (g) thereof and prior to the semi-colon the following: "and the capital contribution by LC--Southeast to the Substitute Omega Property Subsidiary represented by the transfer of the Substitute Omega Properties to the Substitute Omega Property Subsidiary, as permitted in Section 11.4(c) hereof", (b) inserting immediately after the amount "$300,000,000" in the last line of paragraph (h) thereof the following: "provided, further, Paragon and Mariner Merger Sub shall be permitted to - ------------------ consummate the Mariner Merger pursuant to the Mariner Merger Agreement without regard to the foregoing 3 dollar limitations, and shall be deemed not to be a utilization of such dollar limitations", (c) relettering current paragraph (k) as paragraph (l), and (d) adding thereto the following new paragraph (k): "(k) investments by Paragon in or for the account of Mariner (i) to finance the redemption or repurchase by Mariner of the Mariner Notes, (ii) to make the required payments to holders of the Cash Payment Options (as such term is defined in the Mariner Merger Agreement) and (iii) to pay other costs and expenses incurred by Mariner directly associated with the Mariner Merger, in an aggregate amount for items (i), (ii) and (iii) not to exceed $100,000,000 during the term of this Agreement; and". 7. Amendment to Section 11.9. Section 11.9 of the Guarantee is ------------------------- hereby amended by (a) deleting the word "or" in the seventh line and substituting in lieu thereof a comma and (b) inserting immediately after the word "Notes" in the sixth line thereof the words "or the Mariner Merger Agreement, except for immaterial changes to the Mariner Merger Agreement that do not adversely affect the Lenders in any respect". 8. Amendment to Section 11.10. Section 11.10 of the Guarantee is -------------------------- hereby amended by inserting immediately at the end thereof and prior to the period the following: "provided, that the foregoing provisions of this Section -------- 11.10 shall not be deemed to prohibit (i) any transaction incidental to the Mariner Merger, as contemplated in the Mariner Merger Agreement, (ii) the provision of certain administrative services by Paragon for Mariner or any of its Subsidiaries in the ordinary course of business and consistent with Paragon's past practice with respect to its other Subsidiaries, (iii) the payment by Paragon in the ordinary course of business of certain third party payment obligations on behalf of Mariner or any of its Subsidiaries to the extent Mariner or such Subsidiary, as the case may be, provides timely reimbursement to Paragon for such payment, but in any event such reimbursement shall be in the same fiscal quarter in which Paragon made such payment (it being understood that the payment of such obligations by Paragon in accordance with this clause (iii) shall be deemed not to be a utilization of the dollar limitations set forth in Section 11.8(k)) or (iv) the investment permitted pursuant to Section 11.8(k)". 9. Amendment to Section 11.14. Section 11.14 of the Guarantee is -------------------------- hereby amended by (a) deleting the word "and" in the sixth line and substituting in lieu thereof a comma and (b) adding at the end thereof and prior to the period the following: "and (c) so long as the Summit IRB is outstanding, any agreement binding on Summit and relating to the Health Care Facility in Bossier City, Bossier Parish, Louisiana, leased by Summit and financed by the Summit IRB". 10. Supplement to Schedule 7.14. Schedule 7.14 to the Guarantee is --------------------------- hereby amended by adding thereto the information set forth on Annex A to this Amendment. 4 11. Amendment to Section 11.15. Section 11.15 of the Guarantee is -------------------------- hereby amended by (a) deleting the word "and" in the ninth line and substituting in lieu thereof a comma and (b) adding at the end thereof and prior to the period the following: "and (iii) Section 6.11(b) of the Amended and Restated Agreement of Sale, dated as of April 1, 1993, as amended prior to the date hereof, by and among the Louisiana Public Facilities Authority, Southwest Medical Center, Inc. and Summit, as guarantor". 12. Conditions to Effectiveness. The amendments provided for herein --------------------------- shall become effective on the date (the "Effective Date") of satisfaction of the -------------- following conditions precedent: (a) The Agent shall have received counterparts of this Amendment duly executed and delivered by the Guarantors. (b) The Agent shall have received a copy of the resolutions, in form and substance satisfactory to the and the Agent, of Paragon authorizing the execution, delivery and performance of this Amendment, certified by the Secretary or an Assistant Secretary of Paragon as of the date hereof, which certificate shall be in form and substance satisfactory to the Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (c) The Agent shall have received a certificate of the Secretary or an Assistant Secretary of Paragon, dated the date hereof, as to the incumbency and signature of the officers of Paragon executing this Amendment satisfactory in form and substance to the Agent. (d) The Agent shall have received the executed legal opinion of Powell, Goldstein, Frazer & Murphy LLP, counsel to Paragon dated the date hereof and in form and substance satisfactory to the Agent with respect to this Amendment and the transactions contemplated hereby. ;provided, that, the effectiveness of the amendments set forth in paragraphs -------- ---- 4(b) and (c), 9 and 11 shall be conditioned only upon the satisfaction of the condition contained in clause (a) of this paragraph 12. 13. Representations and Warranties. Paragon as of the date hereof ------------------------------ and after giving effect to the amendment contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 9 of the Guarantee; provided, that each reference to the Guarantee therein shall -------- be deemed to be a reference to the Guarantee after giving effect to this Amendment. 14. Payment of Expenses. Paragon agrees to pay or reimburse the ------------------- Agent for all of its out-of-pocket costs and expenses incurred in connection with the Amendment, any other 5 documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 15. 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 12 of this Amendment, each reference in the Guarantee to "this Guarantee", "hereunder", "hereof" or words of like import referring to the Guarantee, and each reference in the other Loan Documents to "the Guarantee", "thereunder", "thereof" or words of like import referring to the Guarantee, shall mean and be a reference to the Guarantee as amended hereby. The execution, delivery and effectiveness of this 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 herein, all of the provisions and covenants of the Guarantee 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. 16. Counterparts. This 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. 17. GOVERNING LAW. THIS 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. 6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written. PARAGON HEALTH NETWORK, INC. By: -------------------------------- Title: 7 AMERICAN-CAL MEDICAL SERVICES, INC. AMS GREEN TREE, INC. AMS PROPERTIES, INC. CONNERWOOD HEALTHCARE, INC. COORDINATED HOME HEALTH SERVICES, INC. CORNERSTONE HEALTH MANAGEMENT COMPANY EH ACQUISITION CORP. EH ACQUISITION CORP. II EH ACQUISITION CORP. III EVERGREEN HEALTHCARE, INC. EVERGREEN HEALTHCARE LTD., L.P. GC SERVICES, INC. GCI BELLA VITA, INC. GCI CAMELLIA CARE CENTER, INC. GCI COLTER VILLAGE, INC. GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC. GCI FAITH NURSING HOME, INC. GCI HEALTH CARE CENTERS, INC. GCI JOLLEY ACRES, INC. GCI PALM COURT, INC. GCI PRINCE GEORGE, INC. GCI REALTY, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VALLEY MANOR HEALTH CARE CENTER, INC. GCI VILLAGE GREEN, INC. GCI-CAL HEALTH CARE CENTERS, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE GPO SERVICES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE, INC. GRANCARE NURSING SERVICES AND HOSPICE, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE TRADING, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSTMASTERS, INC. NATIONAL HERITAGE REALTY, INC. OMEGA/INDIANA CARE CORPORATION RENAISSANCE MENTAL HEALTH CENTER, INC. STONECREEK MANAGEMENT COMPANY, INC. By: -------------------------------------- Title: 8 AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY MANAGEMENT, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN SENIOR HEALTH SERVICES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC. DEVCON HOLDING COMPANY EXTENDED ACUTE HOSPITALS OF AMERICA, INC. GULF COAST PHYSICAL THERAPY GROUP, INC. HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC. HOMECARE ASSOCIATES OF AMERICA, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSPICE CARE OF TENNESSEE, INC. HOSPICE MANAGEMENT PARTNERS, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS - EAST, INC. LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. MED-CARE SALES AND RENTALS, INC. MED-THERAPY REHABILITATION SERVICES, INC. PROFESSIONAL RX SYSTEMS, INC. PROGRESSIVE CARE CENTERS OF AMERICA, INC. REHABILITY HEALTH SERVICES, INC. REHABILITY HOSPITAL SERVICES, INC. THERACARE HOME HEALTH AGENCY, INC. THERAPY MANAGEMENT INNOVATIONS, INC. TOICA, INC. WORKHEALTH HEALTHCARE MANAGEMENT INC. By: ------------------------------------------- Title: 9 Annex A ------- NEGATIVE PLEDGES EX-10.56 23 2ND AMD TO FBTC GUARANTEE (12/22/98) EXHIBIT 10.56 SECOND AMENDMENT TO GUARANTEE SECOND AMENDMENT TO GUARANTEE, dated as of December 22, 1998 (this "Amendment"), to 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 (as the same may be further amended, supplemented or otherwise modified from time to time, the "Guarantee"), made by MARINER POST-ACUTE NETWORK, INC. --------- (formerly known as Paragon Health Network, Inc.), a Delaware corporation ("Mariner") and the other guarantors which are signatories thereto (Mariner and - --------- each such other guarantor, individually, a "Guarantor"; collectively, the --------- "Guarantors"), in favor of THE CHASE MANHATTAN BANK, as administrative agent (in - ----------- such capacity, the "Agent") for the lenders (the "Lenders") parties to the ----- ------- Amended and Restated Credit Agreement, dated as of November 4, 1997 (as further amended, supplemented, extended or otherwise modified from time to time, the "Credit Agreement"), among FBTC LEASING CORP. (the "Borrower"), the Lenders and - ----------------- -------- the Agent. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Amended and Restated Guarantee, dated as of November 4, 1997, made by Guarantor and certain of its subsidiaries in favor of the Agent, Paragon Health Network, Inc. agreed to guarantee the prompt and complete performance of the Guaranteed Obligations (as defined in the Guarantee). WHEREAS, the Guarantor has requested, and, upon this Amendment becoming effective, the Lenders have agreed, that certain provisions of the Guarantee be amended in the manner provided for in this 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 Amendment; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Defined Terms. Terms defined in the Guarantee and used herein ------------- shall, unless otherwise indicated, have the meanings given to them in the Guarantee. Terms defined and used in this Amendment shall have the meanings given to them in this Amendment. 2. Amendment to Section 9. Section 9 of the Guarantee is hereby ---------------------- amended by adding thereto the following new Section 4.23: "9.22 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 2 year 2000 of computer systems and other equipment containing embedded microchips, in either case owned or operated by Mariner 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 Mariner or any of its Subsidiaries interface), and the testing of all such systems and other equipment as so reprogrammed, will be completed in all material respects by June 30, 1999. The costs to Mariner and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing and 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 Mariner and its Subsidiaries are and, with 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." 3. Amendment to Section 11.1(a). Section 11.1(a) of the Guarantee ---------------------------- is hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: December 31, 1997 through September 30, 1999 6.75 to 1.00 December 31, 1999 through September 30, 2000 6.50 to 1.00 December 31, 2000 through September 30, 2001 6.00 to 1.00 December 31, 2001 through June 30, 2002 5.00 to 1.00 September 30, 2002 through June 30, 2003 4.75 to 1.00 September 30, 2003 (or, if earlier, the Consolidated Leverage Ratio Stepdown Date) and thereafter 4.50 to 1.00 4. Amendment to Section 11.1(b). Section 11.1(b) of the Guarantee is ---------------------------- hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: December 31, 1997 through September 30, 1999 1.60 to 1.00 December 31, 1999 through September 30, 2000 1.75 to 1.00 December 31, 2000 through September 30, 2001 1.85 to 1.00 December 31, 2001 through September 30, 2002 2.50 to 1.00 December 31, 2002 and thereafter 2.75 to 1.00 5. Amendment to Section 11.1(c). Section 11.1(c) of the Guarantee is hereby amended by deleting the table contained therein and substituting in lieu thereof the following new table: 3 December 31, 1997 through September 30, 2000 1.10 to 1.00 December 31, 2000 through September 30, 2001 1.15 to 1.00 December 31, 2001 and thereafter 1.25 to 1.00 6. Amendment to Section 11.5(f). Section 11.5(f) of the Guarantee is hereby amended by inserting immediately after the word "Paragon" and prior to the semi-colon in the second line thereof the following: "; provided, that during the fiscal years of Mariner ending September 30, 1999 and September 30, 2000, in addition to the foregoing amount, Mariner shall be permitted to make additional sales of assets with a fair market value not to exceed $150,000,000 in the aggregate for all such additional sales in both of such fiscal years". 7. Amendment to Section 11.7. Section 11.7 of the Guarantee is ------------------------- hereby amended by deleting the amount "$125,000,000" in the seventh line and substituting in lieu thereof the amount "$100,000,000". 8. Amendment to Section 11.8(h). Section 11.8(h) of the Guarantee ---------------------------- is hereby amended by deleting the amount "$125,000,000" in the tenth line and substituting in lieu thereof the amount "$100,000,000". 9. Amendment to Section 11.8(l). Section 11.8(l) of the Guarantee ---------------------------- is hereby amended by deleting such Section in its entirety and substituting in lieu thereof the following new Section 11.8(l): "(l) in addition to investments otherwise expressly permitted by this Section 11.8, investments by Mariner or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed $20,000,000 at any one time outstanding." [THIS PARAGRAPH WAS FORMERLY PARAGRAPH (k) IN GUARANTEE BUT WAS MOVED TO PARAGRAPH (l) PURSUANT TO FIRST AMENDMENT] 10. Amendment to Section 11.10. Section 11.10 of the Guarantee is -------------------------- hereby amended by deleting clause (iv) of the proviso thereto added pursuant to the First Amendment and substituting in lieu thereof the following new clause (iv): "(iv) the investments permitted pursuant to Sections 11.8(k) and (l)". 11. Conditions to Effectiveness. The amendments provided for --------------------------- herein shall become effective on the date the Agent shall have received counterparts of this Amendment duly executed and delivered by the Guarantor and the Required Lenders. 12. Representations and Warranties. Mariner as of the date hereof ------------------------------ and after giving effect to the amendment contained herein, hereby confirms, reaffirms and restates that representations and warranties made by it in Section 9 of the Guarantee; provided, that each reference to the Guarantee therein shall -------- be deemed to be a reference to the Guarantee after giving effect to this Amendment. 4 13. 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 Amendment and the Second Amendment to the Amended and Restated Participation Agreement, dated as of the date hereof and any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent. 14. Reference to and Effect on the Operative Documents; Limited ----------------------------------------------------------- Effect. On and after the date hereof and the satisfaction of the conditions - ------ contained in paragraph 8 of this Amendment, each reference in the Guarantee to "this Guarantee", "hereunder", "hereof" or words of like import referring to the Guarantee, and each reference in the other Operative Documents to "the Guarantee", "thereunder", "thereof" or words of like import referring to the Guarantee, shall mean and be a reference to the Guarantee as amended hereby. The execution, delivery and effectiveness of this 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 Operative Documents, nor constitute a waiver of any provisions of any of the Operative Documents. Except as expressly amended herein, all of the provisions and covenants of the Guarantee and the other Operative 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. 15. Counterparts. This 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. 16. GOVERNING LAW. THIS 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 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., formerly known as Paragon Health Network, Inc. By: ------------------------------------ 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 REALTY, INC. GCI REHAB, INC. GCI SPRINGDALE VILLAGE, INC. GCI THERAPIES, INC. GCI VALLEY MANOR HEALTH CARE CENTER, INC. GCI VILLAGE GREEN, INC. GCI-CAL HEALTH CARE CENTERS, INC. GCI-CAL THERAPIES COMPANY GCI-WISCONSIN PROPERTIES, INC. GRANCARE GPO SERVICES, INC. GRANCARE HOME HEALTH SERVICES, INC. GRANCARE, INC. GRANCARE NURSING SERVICES AND HOSPICE, INC. GRANCARE OF MICHIGAN, INC. GRANCARE OF NORTH CAROLINA, INC. GRANCARE OF NORTHERN CALIFORNIA, INC. GRANCARE SOUTH CAROLINA, INC. GRANCARE TRADING, INC. HERITAGE OF LOUISIANA, INC. HMI CONVALESCENT CARE, INC. HOSTMASTERS, INC. NATIONAL HERITAGE REALTY, INC. OMEGA/INDIANA CARE CORPORATION RENAISSANCE MENTAL HEALTH CENTER, INC. STONECREEK MANAGEMENT COMPANY, INC. By: ---------------------------------- Title: AMERICAN PHARMACEUTICAL SERVICES, INC. AMERICAN REHABILITY MANAGEMENT, INC. AMERICAN REHABILITY SERVICES, INC. AMERICAN SENIOR HEALTH SERVICES, INC. APS HOLDING COMPANY, INC. APS PHARMACY MANAGEMENT, INC. BRIAN CENTER HEALTH & REHABILITATION/TAMPA, INC. BRIAN CENTER HEALTH & RETIREMENT/ALLEGHANY, INC. BRIAN CENTER HEALTH & RETIREMENT/BASTIAN, INC. BRIAN CENTER HEALTH & RETIREMENT/WALLACE, INC. BRIAN CENTER MANAGEMENT CORPORATION BRIAN CENTER NURSING CARE/AUSTELL, INC. BRIAN CENTER NURSING CARE/FINCASTLE, INC. BRIAN CENTER NURSING CARE/HICKORY, INC. BRIAN CENTER NURSING CARE/POWDER SPRINGS, INC. BRIAN CENTER OF ASHEBORO, INC. BRIAN CENTER OF CENTRAL COLUMBIA, INC. BRIAN CENTERS HEALTH & RETIREMENT/WALLACE, INC. DEVCON HOLDING COMPANY EXTENDED ACUTE HOSPITALS OF AMERICA, INC. GULF COAST PHYSICAL THERAPY GROUP, INC. HOME HEALTH MANAGEMENT ASSOCIATES OF AMERICA, INC. HOMECARE ASSOCIATES OF AMERICA, INC. HOSPICE ASSOCIATES OF AMERICA, INC. HOSPICE CARE OF TENNESSEE, INC. HOSPICE MANAGEMENT PARTNERS, INC. LC MANAGEMENT COMPANY LCA OPERATIONAL HOLDING COMPANY LCR, INC. LIVING CENTERS DEVELOPMENT COMPANY LIVING CENTERS - EAST, INC. LIVING CENTERS HOLDING COMPANY LIVING CENTERS LTCP DEVELOPMENT COMPANY LIVING CENTERS OF TEXAS, INC. LIVING CENTERS - ROCKY MOUNTAIN, INC. LIVING CENTERS - SOUTHEAST DEVELOPMENT CORPORATION LIVING CENTERS - SOUTHEAST, INC. MED-CARE SALES AND RENTALS, INC. MED-THERAPY REHABILITATION SERVICES, INC. PROFESSIONAL RX SYSTEMS, INC. PROGRESSIVE CARE CENTERS OF AMERICA, INC. REHABILITY HEALTH SERVICES, INC. REHABILITY HOSPITAL SERVICES, INC. THERACARE HOME HEALTH AGENCY, INC. THERAPY MANAGEMENT INNOVATIONS, INC. TOICA, INC. WORKHEALTH HEALTHCARE MANAGEMENT INC. By: ------------------------------------- Title: EX-10.63 24 AMENDED AND RESTATED REVOLVING CREDIT AGMT EXHIBIT 10.63 Execution Draft $250,000,000 REVOLVING CREDIT FACILITY CREDIT AGREEMENT by and among MARINER HEALTH GROUP, INC. and THE BANKS PARTY HERETO and PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent and FIRST UNION NATIONAL BANK, as Syndication Agent Dated as of May 18, 1994, as amended TABLE OF CONTENTS (i) SCHEDULES SCHEDULE 1.01(C) COMMITMENTS OF BANKS SCHEDULE 1.01(P) PERMITTED LIENS SCHEDULE 2.09(a) EXISTING LETTERS OF CREDIT; LOANS, INTEREST AND OTHER OBLIGATIONS UNDER PRIOR CREDIT AGREEMENT SCHEDULES 6.01(a) QUALIFICATIONS TO DO BUSINESS, SUBSIDIARIES AND and 6.01(c) EXCLUDED ENTITIES SCHEDULE 6.01(u) MATERIAL CONTRACTS SCHEDULE 6.01(y) ENVIRONMENTAL DISCLOSURES SCHEDULE 6.01(z) CERTAIN DISCLOSURES REGARDING OTHER DEBT OF THE BORROWER SCHEDULE 6.01(aa) OWNED AND LEASED REAL PROPERTY OF THE LOAN PARTIES; MATTERS REGARDING CERTAIN LEASED FACILITIES AND INDEBTEDNESS OF CERTAIN SUBSIDIARIES SCHEDULE 6.01(cc) CERTAIN AFFILIATE TRANSACTIONS SCHEDULE 8.01(1) CERTAIN DISCLOSURES REGARDING SUBORDINATION OF INDEBTEDNESS SCHEDULE 8.02(a) PERMITTED INDEBTEDNESS SCHEDULE 8.02(c) CERTAIN GUARANTEES SCHEDULE 8.02(d) RESTRICTED INVESTMENTS SCHEDULE 8.02(x) EXISTING NEGATIVE PLEDGE COVENANTS (ii) EXHIBITS EXHIBIT 1.01(A) ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 1.01(C) CONDITIONS FOR INCURRENCE OF CERTAIN LIENS AND CERTAIN INDEBTEDNESS EXHIBIT 1.01(C)(1) COLLATERAL SHARING AGREEMENT EXHIBIT 1.01(F) FIRST MORTGAGE EXHIBIT 1.01(G) GUARANTY AND SURETYSHIP AGREEMENT EXHIBIT 1.01(I) INDEMNITY EXHIBIT 1.01(I)(1) INTERCREDITOR AGREEMENT - LEASED FACILITY (A) and (B) EXHIBIT 1.01(I)(2) INTERCREDITOR AGREEMENT - OWNED FACILITY (A) and (B) EXHIBIT 1.01(P) PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT EXHIBIT 1.01(P)(1) PLEDGE AGREEMENT (Borrower) EXHIBIT 1.01(P)(2) PLEDGE AGREEMENT (Subsidiaries Pledging Stock) EXHIBIT 1.01(P)(3) PLEDGE AGREEMENT (Subsidiaries Pledging Partnership Interests) EXHIBIT 1.01(R) REVOLVING CREDIT NOTE EXHIBIT 1.01(S)(1) SECURITY AGREEMENT EXHIBIT 1.01(S) SUBORDINATION AGREEMENT (Intercompany) EXHIBIT 1.01(T) TRUSTEE AGREEMENT EXHIBIT 2.05 LOAN REQUEST EXHIBIT 8.01(l) TERMS OF CERTAIN SUBORDINATED INDEBTEDNESS EXHIBIT 8.01(m)(i) ACQUISITION APPROVAL CERTIFICATE EXHIBIT 8.01(m)(ii) ACQUISITION NOTICE CERTIFICATE EXHIBIT 8.03(d) COMPLIANCE CERTIFICATE (iii) CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of May 18, 1994, as amended and is made by and among MARINER HEALTH GROUP, INC., a Delaware corporation (the "Borrower"), the BANKS (as hereinafter defined), FIRST UNION NATIONAL BANK, in its capacity as syndication agent (hereinafter referred to in such capacity as the "Syndication Agent"), and PNC BANK, NATIONAL ASSOCIATION, in its capacity as administrative agent for the Banks under this Agreement (hereinafter referred to in such capacity as the "Administrative Agent"). WITNESSETH: WHEREAS, the Borrower, the Administrative Agent and the Banks are party to that certain Credit Agreement dated as of May 18, 1994 (as amended prior to the date hereof, the "Existing Revolving Credit Agreement"), pursuant to which the Banks have heretofore provided the Borrower with a revolving credit facility (the "Revolving Credit Facility") in an aggregate principal amount not to exceed $460,000,000; and WHEREAS, the Borrower has requested that the Revolving Credit Facility be reduced to $250,000,000 (the "Reduced Revolving Credit Commitment"); and WHEREAS, on the Eighteenth Amendment Effective Date, the Borrower (the "Term Loan Borrower") has entered into the Term Loan Agreement pursuant to which the Term Loan Lenders have provided for a $210,000,000 term loan facility (the "Term Loan Facility"); and WHEREAS, in connection with the reduction of the Revolving Credit Commitments, the Borrower has requested the relaxation of certain financial and other covenants; and WHEREAS, the Banks are willing to agree to the foregoing subject to the terms and conditions hereafter set forth. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: ARTICLE I CERTAIN DEFINITIONS ------------------- 1.01 Certain Definitions. In addition to words and terms defined ------------------- elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise: Acquisition Approval Certificate shall have the meaning set -------------------------------- forth in Section 8.01(m)(i). Acquisition Income Reporting Period shall mean the period during ----------------------------------- which Borrower shall measure Consolidated Cash Flow from Operations pursuant to Section 8.01(m) for purposes of computing Borrower's leverage ratio and its other financial covenants on the date on which Borrower makes any Permitted Acquisition, which period shall be either: (1) the four fiscal quarters ending immediately before the date of such Permitted Acquisition (the "Immediately Preceding Four Quarters") if such Permitted Acquisition occurs after the Delivery Date for the financial statements of Borrower for such Immediately Preceding Four Quarters, or (2) the four fiscal quarters ending one quarter period prior to the end of the Immediately Preceding Four Quarters (the "Second Preceding Four Quarters") if such Permitted Acquisition occurs before the Delivery Date for the financial statements of Borrower for the Immediately Preceding Four Quarters. Acquisition Notice Certificate shall have the meaning given to ------------------------------ such term in Section 8.01(m)(ii). Acquisition Reporting Certification shall mean any Permitted ----------------------------------- Acquisition with respect to which Borrower delivers or is required to deliver either an Acquisition Notice Certificate or an Acquisition Approval Certificate pursuant to Section 8.01(m). Adjusted Net Income shall mean for any period of determination ------------------- an amount equal to the net income (loss) of the Borrower and its Subsidiaries for such period determined and consolidated in accordance with GAAP; provided, however, that there shall not be included in such Adjusted Net Income any non- recurring items related to costs and expenses incurred in connection with acquisitions and dispositions of assets, merger transactions or other business combinations, any extraordinary gain or loss, the cumulative effect of a change in accounting principles and costs related to the discharge of legal judgments or settlement costs related to the settlement of a bona fide dispute between the Borrower or any of its Subsidiaries and any other Person. Adjusted Total Indebtedness shall mean, as of any date of --------------------------- determination, Total Indebtedness, less, the aggregate amount of the sum without duplication, of the following items (a), (b) and (c): (a) the outstanding principal amount of the Subordinated Notes, (b) the outstanding principal amount of Permitted Subordinated Indebtedness which refinances or is used to purchase Subordinated Notes, and (c) the outstanding principal amount of Indebtedness permitted pursuant to Section 8.02(a)(iv). Notwithstanding the foregoing, it is expressly agreed that Total Indebtedness shall, in no event, be reduced by more than $150,000,000 with respect to the aggregate amount of items (a) and (b) described in the previous sentence. Administrative Agent shall mean PNC Bank, National Association, -------------------- in its capacity as administrative agent for the Banks under this Agreement and its successors in such capacity. 2 Administrative Agent's Fee shall have the meaning assigned to -------------------------- that term in Section 10.15 hereof. Affiliate as to any person shall mean any other person (i) which --------- directly or indirectly controls, is controlled by, or is under common control with such person, (ii) which beneficially owns or holds 50% or more of any class of the voting stock of the Borrower, or (iii) 50% or more of the voting stock (or in the case of a person which is not an individual or a corporation, 50% or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Borrower. Control, as used herein, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be. Agents shall mean collectively the Administrative Agent and the ------ Syndication Agent, and Agent shall mean any one of the Agents, individually. Agreement shall mean this Credit Agreement as the same may be --------- supplemented, amended, modified or restated from time to time including all schedules and exhibits hereto. Agreement No. 15 shall mean that certain Amendment No. 15 to ---------------- Credit Agreement dated October 3, 1997 among Borrower, the Banks and Administrative Agent, together with schedules and exhibits thereto. Agreement No. 17 to Credit Agreement dated July 14, 1998 among ------------------------------------ Borrower, the Banks and Administrative Agent, together with schedules and exhibits thereto. Amendment No. 16 shall mean that certain Amendment No. 16 to ---------------- Credit Agreement dated January 2, 1998 among Borrower, the Banks and Administrative Agent, together with schedules and exhibits thereto. Ansonia shall mean Mariner Health Care of Southern Connecticut, ------- a corporation organized and existing under the laws of the State of Connecticut. Applicable Percentage Over Euro-Rate shall have the meaning ------------------------------------ assigned to such term in Section 4.01(a)(ii). Approved Charges shall mean, for any period of determination, ---------------- the following charges, determined and consolidated in accordance with GAAP, to Consolidated Net Income: (i) charges for Medicare Recoupment (taken or to be taken with respect to fiscal years 1996, 1997, or 1998 and relating to Medicare's disallowance of costs under related party rules), not to exceed for the Borrower and its Subsidiaries on a consolidated basis, $50,000,000 in the aggregate for the period commencing on the Eighteenth Amendment Effective Date through and including the Expiration Date; 3 (ii) charges to increase accounts receivable reserves (solely for the purpose of achieving consistency of accounts receivable reserve levels of the Borrower and its Subsidiaries with the policies of MPN), not to exceed for the Borrower and its Subsidiaries on a consolidated basis, $25,000,000 in the aggregate for the period commencing on the Eighteenth Amendment Effective Date through and including the Expiration Date; (iii) non-recurring cash charges for employee related costs of the Borrower including, without limitation, relocation and recruitment costs, retention bonuses, severance payments to employees of the Borrower, reasonable and customary transaction fees, including without limitation, legal and other professional fees, paid or to be paid following the Seventeenth Amendment Effective Date, all as related to the Eighteenth Amendment or the Paragon Acquisition, not to exceed for the Borrower and its Subsidiaries on a consolidated basis $13,000,000 and other cash charges of a similar nature which shall have been approved in writing by the Agents prior to the taking of such charge; and (iv) subject to the prior written approval of the Required Banks, other cash charges (recurring or nonrecurring), extraordinary items, or non-recurring expenses incurred in connection with any Permitted Acquisition. Assignment and Assumption Agreement shall mean an Assignment and ----------------------------------- Assumption Agreement by and among a Purchasing Bank, the Transferor Bank and the Administrative Agent, as agent and on behalf of the remaining Banks, substantially in the form of Exhibit 1.01(A) hereto. --------------- Authorized Officer shall mean with respect to each Loan Party ------------------ those persons designated by written notice to the Administrative Agent from the Borrower, authorized to execute notices, reports and other documents required hereunder. The Borrower may amend such list of persons from time to time by giving written notice of such amendment to the Administrative Agent. Bank shall mean the financial institutions named on Schedule ---- -------- 1.01(R)(2) hereto and their respective successors and assigns as permitted - ---------- hereunder, each of which is referred to herein as a Bank. ---- Base Rate shall mean the greater of (i) the interest rate per --------- annum announced from time to time by the Administrative Agent at its Principal Office as its then prime rate, which rate may not necessarily be the lowest rate then being charged commercial borrowers by the Administrative Agent, or (ii) the Federal Funds Effective Rate plus one-half percent (0.5%) per annum. Base Rate Option shall mean the Revolving Credit Base Rate ---------------- Option. Benefit Arrangement shall mean at any time an "employee benefit ------------------- plan," within the meaning of Section 3(3) of ERISA, which is neither a Plan or a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to, by any member of the ERISA Group. 4 Borrower shall mean Mariner Health Group, Inc., a corporation -------- organized and existing under the laws of the State of Delaware. Borrowing Date shall mean, with respect to any Loan, the date -------------- for the making thereof or the renewal thereof or conversion thereof to the same or a different Interest Rate Option, which shall be a Business Day. Borrowing Tranche shall mean specified portions of Loans ----------------- outstanding as follows: (i) any loan to which a Euro-Rate Option applies which becomes subject to the same Interest Rate Option under the same Loan Request by the Borrower and which have the same Interest Period shall constitute one Borrowing Tranche, and (ii) all Loans to which a Base Rate Option applies shall constitute one Borrowing Tranche. Business Day shall mean (i) with respect to matters relating to ------------ the Euro-Rate Option, a day on which banks in the London interbank market are dealing in U.S. Dollar deposits and on which commercial banks are open for domestic and international business in Pittsburgh, Pennsylvania and New York, New York, and (ii) with respect to any other matter, a day on which commercial banks are open for business in Pittsburgh, Pennsylvania and New York, New York. 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. Change in Ownership shall mean the occurrence of any of the ------------------- following: (i) if, from and after the Seventeenth Amendment Effective Date, any person or group within the meaning of Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") excluding the Permitted Investors, shall at any time designate or obtain the right to designate a percentage (the "Third Party Board Percentage") equal to 25% or more of the members of the Board of Directors of MPN unless at such time the percentage of ------ the members of the Board of Directors of MPN designated by the Permitted Investors is greater than the Third Party Board Percentage; (ii) any "person" or "group" (as such terms are defined above), excluding the Permitted Investors, shall at any time become, or obtain rights (whether by means of warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rule 13(d)3 and 13(d)5 under the Exchange Act), directly or indirectly, of a percentage (the "Third Party Stock Percentage") equal to 33-1/3% or more of the Voting Stock of MPN unless at such time the percentage of outstanding Voting ------ Stock of MPN beneficially owned by the Permitted Investors (determined on a fully diluted basis) is equal to or greater than the Third Party Stock Percentage, provided, that for the purposes of this clause (ii), Voting Stock -------- that a Permitted Investor has the power to vote in its sole discretion pursuant to contract or proxy shall be deemed to be beneficially owned by such Permitted Investor and not by any other "person" or "group"; (iii) a Specified Change of Control shall occur; or (iv) MPN shall cease to own, directly or indirectly, one hundred percent (100%) of all Voting Stock of the Borrower. 5 Class A Excluded Entities shall mean collectively those Excluded ------------------------- Entities which have not incurred any Restricted Indebtedness nor are subject to or bound by the terms of any agreement with respect to Restricted Indebtedness, and Class A Excluded Entity shall mean separately any Class A Excluded Entity. ----------------------- Closing Date shall mean May 18, 1994, which is the Business Day ------------ on which the first Loan was made. Collateral Agent shall mean 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. Collateral shall mean the Pledge Collateral, the UCC Collateral, ---------- the Intellectual Property Collateral, all of the collateral (consisting of real or personal property) under the First Mortgages, the Mortgages and the Leasehold Mortgages and any other collateral security in which any of the Loan Parties may hereafter grant a security interest or other lien to the Administrative Agent or the Collateral Agent, as the case may be, for the benefit of the Banks as security for their obligations under the Loan Documents. Collateral Sharing Agreement shall mean the Collateral Sharing ---------------------------- Agreement among the Administrative Agent, the Loan Parties, the Term Loan Parties, the administrative agent under the Term Loan Agreement and the Collateral Agent, substantially in the form of Exhibit 1.01(C)(1). ------------------- Combined Commitment shall mean, as to any Bank, as of any date ------------------- of determination, the aggregate of its Revolving Credit Commitment and its Term Loan Commitment (if any). Commitment shall mean as to any Bank its Revolving Credit ---------- Commitment and Commitments shall mean the aggregate of the Revolving Credit ----------- Commitments of all of the Banks. Commitment Fee shall have the meaning assigned to that term in -------------- Section 2.03 hereof. Compliance Certificate shall have the meaning set forth in ---------------------- Section 8.03(d). Conditions for Incurrence of Certain Liens and Certain ------------------------------------------------------ Indebtedness shall mean those conditions set forth on Exhibit 1.01(C). - ------------ --------------- Consolidated Cash Flow from Operations for any period of -------------------------------------- determination shall mean the difference between the amounts determined under the following clauses (i) and (ii): (i) the sum, without duplication, of (X) the sum of Consolidated Net Income, depreciation, amortization, Approved Charges, other non-cash charges to Consolidated Net Income (including, without limitation, ordinary course reserves with respect to bad debts arising out of ordinary course accounts receivable), interest expense, and income tax expense of the Borrower and its 6 Restricted Subsidiaries for such period determined in accordance with GAAP, plus (Y) the sum of the Consolidated Cash Flow from Operations Adjustment Amount for all Class A Excluded Entities, minus (ii) non-cash credits to net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, subject to the adjustments described in this definition below. If the Loan Parties make a Permitted Acquisition and the Banks approve of the historical and pro forma financial statements of the business acquired in such Permitted Acquisition pursuant to Section 8.01(m) hereof, Consolidated Cash Flow from Operations shall be adjusted as set forth in paragraphs (A) and (B) below. The adjustments in Paragraphs (A) and (B) below shall apply to computations of the ratios in Sections 2.01, 2.03, 4.01(a), 8.02(f), 8.02(q), 8.02(r), 8.02(s) and 8.02(u) on the date of such Permitted Acquisition and at the end of each of the four fiscal quarters after such Permitted Acquisition. (The adjustments described in Paragraph (A) below shall not apply to computations of such ratios made as of the end of the fiscal quarter immediately preceding the date of such Permitted Acquisition.) (A) Consolidated Cash Flow from Operations for periods prior to such Permitted Acquisition shall include (i) the sum of net income, depreciation, amortization, other non-cash charges to net income, interest expense and income tax expense of the acquired business, plus the adjustment, if any pursuant to clause (B) below, minus (ii) non-cash credits to net income of such business, in each case as determined in accordance with GAAP; and (B) To the extent, in the determination of net income of the acquired business utilized in clause (A) above, deductions were taken in respect of rental expense pursuant to operating leases in accordance with GAAP and following the consummation of a Permitted Acquisition the Borrower appropriately amends such leases so that, in accordance with GAAP, such rental expense pursuant to operating leases may properly be treated as rental expense pursuant to capital leases (and the Borrower treats such leases as capital leases for periods following the consummation by the Borrower of such Permitted Acquisition) then, such net income for purposes of clause (A) above shall be increased by the deductions taken in respect of rental expense pursuant to such operating leases during the period of determination. Consolidated Cash Flow from Operations Adjustment Amount shall -------------------------------------------------------- mean, for each Class A Excluded Entity, for any period of determination, the amount equal to the product of (A) a percentage, as determined by the Administrative Agent in its reasonable discretion, multiplied by (B) the difference between (i) the sum of net income, depreciation, amortization, other non-cash charges to such net income, interest expense and income tax expense of such Class A Excluded Entity for such period, as determined in accordance with GAAP, minus (ii) non-cash credits to net income of such Class A Excluded Entity for such period, as determined in accordance with GAAP. In determining the applicable percentage under clause (A) above, the Administrative Agent shall review with the Borrower the constituent documents of each Excluded Entity, including without limitation, partnership agreements, shareholder agreements and other relevant documents which the Borrower agrees to provide as the Administrative Agent may reasonably request, and the Administrative Agent shall also review the equity ownership interests of the Loan Parties in each Excluded Entity and the actual 7 cash flow available to be distributed to the Loan Parties from the operations of each Excluded Entity. Consolidated Net Income shall mean for any period of ----------------------- determination an amount equal to the net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, but without regard to net income attributable to Excluded Entities. Consolidated Net Worth shall mean as of any date of ---------------------- determination total stockholders' equity of the Borrower and its Subsidiaries as of such date determined and consolidated in accordance with GAAP. Contamination shall mean the presence or release or threat of ------------- release of Regulated Substances in, on, under or emanating to or from the Property, which pursuant to Environmental Laws requires notification or reporting to an Official Body, or which pursuant to Environmental Laws requires the identification, investigation, cleanup, removal, remediation, containment, control, abatement of or other response action or which otherwise constitutes a violation of Environmental Laws. Control Investment Affiliate shall mean as to any Person, any ---------------------------- other Person which (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Corporate Shares shall have the meaning assigned to that term in ---------------- Section 6.01(c). Corporate Subsidiaries shall mean collectively the Subsidiaries ---------------------- of Borrower which are corporations, and Corporate Subsidiary shall mean -------------------- individually any of them. Delivery Date shall mean the date which is the earlier of (i) ------------- the date on which the Borrower delivers its consolidated financial statements to the Administrative Agent and the Banks pursuant to Sections 8.03(b) and (c), or (ii) one Business Day following the date on which such financial statements are due to be delivered pursuant to such Sections. Designated Portion of the Subordinated Notes shall mean, as of -------------------------------------------- any date of determination, that portion of the Subordinated Notes, held by NationsBank, N.A., pursuant to the LMS Swap Agreement. Dollar, Dollars, U.S. Dollars and the symbol $ shall mean lawful ----------------------------- - money of the United States of America. Drawing Date shall have the meaning assigned to that term in ------------ Section 2.09(d). 8 Eighteenth Amendment shall mean that certain Amendment No. 18 to -------------------- Credit Agreement, dated as of December 23, 1998 among Borrower, the Banks and the Agents. Eighteenth Amendment Effective Date shall mean December 23, ----------------------------------- 1998. Environmental Complaint shall mean any written complaint by any ----------------------- Person or Official Body setting forth a cause of action for personal injury or property damage, natural resource damage, contribution or indemnity for response costs, civil or administrative penalties, criminal fines or penalties, or declaratory or equitable relief arising under any Environmental Law or any order, notice of violation, citation, subpoena, request for information or other written notice or demand of any type issued by an Official Body pursuant to any Environmental Law. Environmental Law shall mean all federal, state, local and ----------------- foreign Laws and any consent decrees, settlement agreements, judgments, orders, directives, policies or programs issued by or entered into with an Official Body pertaining or relating to: (i) pollution or pollution control; (ii) protection of human health or the environment; (iii) employee safety in the workplace; (iv) the management, presence, use, generation, processing, extraction, treatment, recycling, refining, reclamation, labeling, transport, storage, collection, distribution, disposal or release or threat of release of Regulated Substances; (v) the presence of Contamination; (vi) the protection of endangered or threatened species; and (vii) the protection of Environmentally Sensitive Areas. Environmentally Sensitive Area shall mean (i) any wetland as ------------------------------ defined by applicable Environmental Law; (ii) any area designated as a coastal zone pursuant to applicable Laws, including Environmental Law; (iii) any area of historic or archeological significance or scenic area as defined or designated by applicable Laws, including Environmental Law; (iv) habitats of endangered species or threatened species as designated by applicable Laws, including Environmental Law; or (v) a floodplain or other flood hazard area as defined pursuant to any applicable Laws. ERISA shall mean the Employee Retirement Income Security Act of ----- 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. ERISA Group shall mean, at any time, the Borrower and all ----------- members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. Euro-Rate shall mean with respect to the Loans comprising any --------- Borrowing Tranche to which the Euro-Rate Option applies for any Interest Period, the interest rate per annum determined by the Administrative Agent by dividing (the resulting quotient rounded upward to the nearest 1/100 of 1% per annum) (i) the rate of interest determined by the Administrative Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or appropriate successor or, if Exco-Noonan or its successor ceases to provide such 9 quotes, a comparable replacement as determined by the Administrative Agent) as evidenced on Dow Jones Markets Service (formerly known as Telerate) display page 4756 (or such other display page on the Dow Jones Markets Service system as may replace Dow Jones Markets Service display page 4756), two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Borrowing Tranche and having a borrowing date and maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: Dow Jones Markets Service page 4756 as quoted by Exco-Noonan, Euro-Rate = (or appropriate successor) -------------------------- 1.00 - Euro-Rate Reserve Percentage The Euro-Rate shall be adjusted with respect to any Euro-Rate Option outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Administrative Agent shall give prompt notice to the Borrower of the Euro-Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. Euro-Rate Option shall mean the Revolving Credit Euro-Rate ---------------- Option. Euro-Rate Reserve Percentage shall mean the maximum percentage ---------------------------- (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Administrative Agent (which determination shall be conclusive absent manifest error) which is in effect during any relevant period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System. Event of Default shall mean any of the Events of Default ---------------- described in Section 9.01 of this Agreement. Excluded Entities shall mean (i) any partnership, corporation or ----------------- limited liability company which is neither MPN nor a MPN Subsidiary nor a Subsidiary of any Loan Party and with respect to which a Loan Party has made a Restricted Investment permitted by Section 8.02(d)(iv), and (ii) any Unrestricted Subsidiary of the Borrower which the Borrower has designated as one of the Excluded Entities and with respect to which a Loan Party has made a Restricted Investment permitted by Section 8.02(d)(iv), and Excluded Entity --------------- shall mean separately any Excluded Entity. Existing Letters of Credit shall have the meaning given to such -------------------------- term in Section 2.09. Expiration Date shall mean, with respect to the Commitments, --------------- January 3, 2000. 10 Facility Purchase Option shall mean an option provided by a ------------------------ Lessor Lender or Owned Facility Lender in an Intercreditor Agreement giving the Administrative Agent or the Banks the right to purchase the Lessor Indebtedness or Owned Facility Indebtedness from such Lessor Lender or Owned Facility Lender upon certain events of default relating to such Indebtedness. FAS 121 shall mean Financial Accounting Standard No. 121 ------- promulgated by the Financial Accounting Standards Board, as in effect from time to time. Federal Funds Effective Rate for any day shall mean the rate per ---------------------------- annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day of which such rate was announced. First Mortgages shall mean the First Mortgages in substantially --------------- the form of Exhibit 1.01(F) with respect to all owned real property of the Loan --------------- Parties (other than owned real property subject to a Mortgage as of the Eighteenth Amendment Effective Date), executed and delivered by the applicable Loan Party to the Collateral Agent for the benefit of the Banks. Fixed Charge Coverage Ratio shall have the meaning set forth in --------------------------- Section 8.02(q). GAAP shall mean generally accepted accounting principles as are ---- in effect on the Closing Date, subject to the provisions of Section 1.03 hereof, and applied on a consistent basis (except for changes in application in which the Borrower's independent certified public accountants concur) both as to classification of items and amounts. Guaranty of any person shall mean any obligation of such person -------- guaranteeing or in effect guaranteeing any liability or obligation of any other person in any manner, whether directly or indirectly, including, without limiting the generality of the foregoing, any agreement to indemnify or hold harmless any other person, any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business. Guaranty Agreements shall mean collectively the Guaranty and ------------------- Suretyship Agreements, in substantially the form attached hereto as Exhibit ------- 1.01(G) executed and delivered by the Subsidiaries of Borrower to the - ------- Administrative Agent for the benefit of the Banks, and Guaranty Agreement shall ------------------ mean separately any Guaranty Agreement. 11 Historical Statements shall have the meaning given to such term --------------------- in Section 6.01(i)(i). Indebtedness shall mean as to any person at any time, any and ------------ all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such person for or in respect of: (i) borrowed money, including, without limitation the Subordinated Notes, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) reimbursement obligations under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate protection agreement, (iv) any other transaction (including without limitation forward sale or purchase agreements, capitalized (not operating) leases required under GAAP to be disclosed as a liability on the Loan Party's balance sheet and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such person to finance its operations or capital requirements (but not including the deferred portion of any Restricted Investment in an Excluded Entity if such amount is to be paid from available cash flow from operations of the Borrower and its Subsidiaries and also not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note, instrument or other evidence of indebtedness and which are not more than ninety (90) days past due (unless such past due indebtedness is being disputed in good faith and an appropriate reserve has been established with respect to such indebtedness in accordance with GAAP)), provided that, for purposes of this clause (iv) the phrase "other evidence of indebtedness" shall not include any ordinary course evidence of trade accounts payable of the Borrower or any Subsidiary such as purchase orders or invoices, or (v) any Guaranty of Indebtedness for borrowed money. Indenture shall mean that certain Indenture dated April 4, 1996, --------- between the Borrower and State Street Bank and Trust Company, as trustee, in respect of the Subordinated Notes, as the same may be amended, modified, supplemented or restated from time to time in accordance with this Agreement. Indemnity shall mean the Indemnity Agreement substantially in --------- the form of Exhibit 1.01(I) among the Banks, the Collateral Agent, certain of --------------- the Loan Parties, certain of the Term Loan Parties and the Term Loan Banks relating to possible environmental liabilities associated with any of the Property. Insolvency Proceedings shall mean, with respect to any Person, ---------------------- (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other, similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of any Loan Party or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of such Person's creditors generally or any substantial portion of its creditors; undertaken under any Law. 12 Intellectual Property Collateral shall mean all of the property -------------------------------- described in the Patent, Trademark and Copyright Security Agreement. Intercreditor Agreements shall mean collectively, as of any date ------------------------ of determination, each Intercreditor Agreement entered into between the Administrative Agent and a Lessor Lender, each Intercreditor Agreement entered into between the Administrative Agent and an Owned Facility Lender, each Intercreditor Agreement entered into as required by Section 8.02(d)(iv), and each other Intercreditor Agreement entered into between the Administrative Agent or Collateral Agent, as the case may be, and any other Person, as required pursuant to this Agreement, and Intercreditor Agreement shall mean, ----------------------- individually, any of the Intercreditor Agreements. Interest Payment Date shall mean each date specified for the --------------------- payment of interest in Section 5.03. Interest Period shall have the meaning assigned to such term in --------------- Section 4.02. Interest Rate Option shall mean any Euro-Rate Option or Base -------------------- Rate Option. Internal Revenue Code shall mean the Internal Revenue Code of --------------------- 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. Labor Contractors shall have the meaning assigned to that term ----------------- in Section 6.01(u). Law shall mean any law (including common law), constitution, --- statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree or award of any Official Body. Leased Facilities shall mean collectively all health care ----------------- facilities leased by a Subsidiary of Borrower, as lessee, and Leased Facility --------------- shall mean any of the Leased Facilities, individually. Leasehold Mortgages shall mean collectively, as of any date of ------------------- determination, each Leasehold Mortgage granted by a Subsidiary Lessee in favor of the Administrative Agent (or Collateral Agent, as the case may be) for the benefit of the Banks with respect to the Leased Facility leased by such Subsidiary Lessee, and Leasehold Mortgage shall mean individually any of the ------------------ Leasehold Mortgages. To the extent that a Leasehold Mortgage is granted by a Loan Party, as grantor, on or after the Eighteenth Amendment Effective Date as required by this Agreement, such Leasehold Mortgage shall be in favor of the Collateral Agent for the benefit of the Banks and shall be in form and substance satisfactory to the Administrative Agent, notwithstanding any provisions of this Agreement to the contrary. 13 Lessor shall mean with respect to a Leased Facility, the person ------ which owns such facility and leases such facility to a Subsidiary Lessee. Lessor Indebtedness shall mean Indebtedness of a Lessor either ------------------- secured by the assets of or related to the Leased Facility owned by such Lessor or which includes restrictive covenants or other provisions related or applicable to such Leased Facility. Lessor Lender shall mean, with respect to any Lessor ------------- Indebtedness, the obligee thereof. Letter of Credit shall have the meaning assigned to that term in ---------------- Section 2.09. Letter of Credit Borrowing shall mean an extension of credit -------------------------- resulting from a drawing under any Letter of Credit which shall not have been reimbursed on the date when made and shall not have been converted into a Revolving Credit Loan under Section 2.09(d). Letter of Credit Fee shall have the meaning assigned to that -------------------- term in Section 2.09. Letters of Credit Outstanding shall mean at any time the sum of ----------------------------- (i) the aggregate undrawn face amount of outstanding Letters of Credit and (ii) the aggregate amount of all unpaid and outstanding Reimbursement Obligations. Lien shall mean any mortgage, deed of trust, pledge, lien, ---- security interest, charge or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or capitalized lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing). Loan Documents shall mean this Agreement, the Collateral Sharing -------------- Agreement, the First Mortgages, the Notes, the Guaranty Agreements, the Pledge Agreements, the Mortgages, the Leasehold Mortgages, the Intercreditor Agreements, the Trustee Agreement, the Subordination Agreement (Intercompany), the Indemnity, the Patent, Trademark and Copyright Security Agreement, the Security Agreement and any other instruments, certificates or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may have previously been or in the future be supplemented or amended from time to time in accordance herewith or therewith, and Loan Document shall mean any of the Loan Documents. ------------- Notwithstanding any provision of this Agreement to the contrary, it is expressly agreed that: (i) any First Mortgage, Pledge Agreement, Mortgage, Leasehold Mortgage, Intercreditor Agreement, Security Agreement or Patent, Trademark and Copyright Security Agreement required to be entered into by a Loan Party as debtor, pledgor, or mortgagor on or after the Eighteenth Amendment Effective Date shall, unless otherwise required by the 14 Administrative Agent, name the Collateral Agent, as secured party, mortgagee, grantee, pledgee or similar designation, as the case may be, for the ratable benefit of the Banks and (on a pari passu basis) the Term Loan Banks, and (ii) any Loan Party formed or acquired on or after the Eighteenth Amendment effective date shall execute and deliver a joinder to the Collateral Sharing Agreement in form and substance satisfactory to the Administrative Agent. Loan Parties shall mean the Borrower and its Subsidiaries, other ------------ than those Subsidiaries which are permitted Excluded Entities. Loan Request shall mean a request for Revolving Credit Loans ------------ made in accordance with Section 2.05 hereof or a request to select, convert to or renew a Euro-Rate Option in accordance with Section 4.02 hereof. Loans shall mean collectively and Loan shall mean separately all ----- ---- Revolving Credit Loans or any Revolving Credit Loan. Mariner Maryland shall mean Mariner Health Care of Baltimore, ---------------- Inc., a corporation organized and existing under the laws of the Commonwealth of Massachusetts. Mariner Nashville shall mean Mariner Health Care of Nashville, ----------------- Inc., a Delaware corporation, a Subsidiary of the Borrower and the successor by merger to Convalescent Services Inc., a Georgia corporation. Material Adverse Change shall mean any set of circumstances or ----------------------- events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of the Borrower and its Subsidiaries taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Borrower or any of its Subsidiaries to duly and punctually pay or perform its Indebtedness, or (d) impairs materially or could reasonably be expected to impair materially the ability of any Agent or any of the Banks, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document. Material Subsidiary shall mean any Subsidiary the revenue or net ------------------- income of which represented more than five percent (5%) of the Borrower's consolidated revenues or consolidated net income during the preceding four (4) fiscal quarters. Member Interests shall have the meaning assigned to that term in ---------------- Section 6.01(c). Month, with respect to an Interest Period under the Euro-Rate ----- Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any Interest Period with respect to Loans subject to a Euro-Rate Option begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final 15 month of such Interest Period shall be deemed to end on the last Business Day of such final month. Mortgages shall mean collectively, as of any date of --------- determination, the second lien Mortgages granted by a Subsidiary Owner in favor of the Administrative Agent (or Collateral Agent, as the case may be) for the benefit of the Banks with respect to the Owned Facility of such Subsidiary Owner, and Mortgage shall mean individually any of the Mortgages. To the extent -------- that a Mortgage is granted by a Loan Party, as mortgagor, on or after the Eighteenth Amendment Effective Date as required by this Agreement, such Mortgage shall be in favor of the Collateral Agent for the ratable benefit of the Banks and (on a pari passu basis) the Term Loan Banks, and shall be in form and substance satisfactory to the Administrative Agent, notwithstanding any provision of this Agreement to the contrary. MPN shall mean Mariner Post-Acute Network, Inc., a corporation --- organized and existing under the laws of the State of Delaware and formerly known as Paragon Health Network, Inc., together with its successors and assigns. MPN Credit Agreement shall mean that certain Credit Agreement -------------------- dated as of November 4, 1997, by and among MPN, as borrower, the lenders party thereto as lenders, The Chase Manhattan Bank, as administrative agent, swing line lender and letter of credit bank, and NationsBank, N.A., as documentation agent, as the same may be amended, supplemented, restated or replaced from time to time. MPN Subsidiary shall mean any Subsidiary of MPN other than the -------------- Borrower or any Subsidiary of the Borrower. Multiemployer Plan shall mean any employee benefit plan which is ------------------ a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions. Multiple Employer Plan shall mean a Plan which has two or more ---------------------- contributing sponsors (including the borrower or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA. NBG shall mean NationsBank of Georgia, N.A. --- NBT shall mean NationsBank of Tennessee, N.A. --- Net Sale Proceeds shall mean, with respect to any transaction, ----------------- an amount equal to the cash proceeds received by the Borrower or any of its Subsidiaries from or in respect of such transaction (including, when received, any cash proceeds received as income or other cash proceeds of any non-cash proceeds of such transaction), less (x) any expenses or charges (including commissions, fees and taxes paid or payable) reasonably incurred by such Person in 16 respect of such transaction, (y) any Indebtedness pertaining to the assets involved in such transaction which is required to be repaid or prepaid by the Borrower or any of its Subsidiaries from the proceeds of such transaction as a result of such transaction and (z) any amounts considered appropriate by the chief financial officer of the Borrower to provide reserves in accordance with GAAP for payment of indemnities or liabilities that may be incurred in connection with such sale or disposition. For purposes of this definition, if taxes or other expenses payable in connection with the sale or other disposition of any asset are not known as of the date of such sale or other disposition, then such fees, commissions, expenses or taxes shall be estimated in good faith by the chief financial officer of the Borrower and such estimated amounts shall be deducted. At such time as any reserved amount described in clause (y) above is no longer required to be held in reserve, the balance thereof, after payment of the related liabilities or indemnities, shall be used to make a mandatory prepayment of the Loans or the Term Loans (as applicable) in accordance with Section 5.05. Ninth Amendment Effective Date shall mean April 30, 1996, which ------------------------------ shall be the effective date of the Amendment No. 9 to this Agreement. Non-Disturbance Agreements shall mean collectively, as of any -------------------------- date of determination, the non-disturbance agreements executed by a Lessor Lender and the applicable Subsidiary Lessee, each providing in part that the Lessor Lender shall recognize the rights of the Subsidiary Lessee which is lessee of the Leased Facility so financed by such Lessor Lender should such Lessor Lender foreclose upon such Leased Facility. Notes shall mean the Revolving Credit Notes. ----- Obligations shall mean all obligations from time to time of any ----------- Loan Party to any Bank, Agent or the Administrative Agent from time to time arising under or in connection with or related to or evidenced by or secured by this Agreement or any other Loan Document, whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency reorganization or similar proceedings with respect to any Loan Party, or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not allowed in such proceeding under applicable Law). Without limitation of the foregoing, such obligations include (i) the principal amount of the Loans, interest, letter of credit reimbursement obligations, and fees, indemnities or expenses under or in connection with any Loan Document and all refinancings or refundings thereof; and (ii) all obligations arising from any extensions of credit under or in connection with the Loan Documents from time to time, regardless of whether any such extensions of credit are in excess of the amount committed under or contemplated by the Loan Documents or are made in circumstances in which any condition to extension of credit is not satisfied. Obligations shall remain such notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Obligations or any interest therein. 17 Official Body shall mean any national, federal, state, local or ------------- other government or political subdivision thereof or any agency, authority, board, bureau, central bank, commission, department or instrumentality of any government or political subdivision thereof, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. Owned Facilities shall mean all health care facilities acquired ---------------- by a Subsidiary of the Borrower (or the health care facilities which are owned by a person which is acquired by a Loan Party and such person thereby becomes a Subsidiary of the Borrower), which facilities (as of the date of acquisition by a Loan Party or the date the owner of such facility becomes a Subsidiary of the Borrower) have outstanding Indebtedness payable to a lender, other than Indebtedness payable to the Banks pursuant to the Loan Documents or payable to the lenders under the Term Loan Documents, and Owned Facility shall mean any -------------- Owned Facilities, individually. Owned Facility Indebtedness shall mean with respect to an Owned --------------------------- Facility, the Indebtedness of the Subsidiary Owner thereof payable to a lender other than the Banks under this Agreement or other than the lenders under the Term Loan Agreement, which Indebtedness is secured by the assets of such Owned Facility. Owned Facility Lender shall mean with respect to a Subsidiary --------------------- Owner, the obligee of the Owned Facility Indebtedness payable by such Subsidiary Owner. Paragon Acquisition shall mean the merger of Paragon Acquisition ------------------- Sub with and into the Borrower, with the Borrower being the surviving corporation, whereupon the shareholders of the Borrower received shares of MPN common stock in exchange for their outstanding shares of the Borrower's capital stock, and the Borrower became a wholly-owned subsidiary of MPN, all pursuant to the Paragon Merger Agreement. Paragon Acquisition Sub shall mean Paragon Acquisition Sub, ----------------------- Inc., a Delaware corporation and a wholly-owned Subsidiary of MPN. Paragon Merger Agreement shall mean the Agreement and Plan of ------------------------ Merger, dated as of April 13, 1998, among MPN, Paragon Acquisition Sub and the Borrower, as amended, supplemented, restated or otherwise modified from time to time. Paragon Senior Subordinated Note Indenture shall mean that ------------------------------------------ certain Indenture, dated November 4, 1997, with MPN as issuer and IBJ Schroder Bank & Trust Company as trustee, with respect to the issuance by MPN of its 9 1/2% Senior Subordinated Notes due 2007 and its 10 1/2% Senior Subordinated Discount Notes due 2007. Participation Advance shall mean, with respect to any Bank, such --------------------- Bank's payment in respect of its participation in a Letter of Credit Borrowing according to its Ratable Share pursuant to Section 2.09(g). Partnership Interest shall have the meaning given to such term -------------------- in Section 6.01(c). 18 Partnership Subsidiaries shall mean collectively the ------------------------ Subsidiaries of Borrower which are general or limited partnerships and Partnership Subsidiary shall mean individually any of them. - ---------------------- Patent, Trademark and Copyright Security Agreement shall mean -------------------------------------------------- the Patent, Trademark and Copyright Security Agreement in substantially the form of Exhibit 1.01(P) executed and delivered by each of the Loan Parties to the Collateral Agent for the benefit of the Banks. PBGC shall mean the Pension Benefit Guaranty Corporation ---- established pursuant to Subtitle A of Title IV of ERISA or any successor. Permitted Acquisition shall mean any merger, consolidation or --------------------- acquisition after the Closing Date described in and permitted under clause (iii) or (iv) of Section 8.02(f). Permitted Distribution Amount shall mean: ----------------------------- (A) for any Subsidiary (the "Payor Subsidiary"), other than those Subsidiaries listed in (B) below, the permitted amount of distributions to be made by the Payor Subsidiary which shall equal the applicable amount so that the ratio of the following (x) to (y) shall be at least equal to or greater than 2.0 to 1.0: (x) the sum of (i) net income, plus (ii) to the extent deducted in - determining net income for the applicable period of determination under the preceding clause (i), interest expense, income tax expense, depreciation, amortization, operating lease expense, and expense in respect of capital leases of the Payor Subsidiary, plus (iii) capital expenditures, all for the Payor Subsidiary, as determined in accordance with GAAP, for the four fiscal quarters of the Payor Subsidiary immediately preceding the date of the proposed distribution, to (y) the sum of (i) all payments of principal and other amounts -- - due in respect of Indebtedness (without limitation, prepayment fees, penalties or other amounts) of the Payor Subsidiary during the fiscal quarter when the proposed distribution shall be made and the following three fiscal quarters, plus (ii) the sum of the amounts in respect of income tax expense, operating lease expense, expense in respect of capital leases, and capital expenditures under clauses (x)(ii) and (iii) above for the Payor Subsidiary for the four fiscal quarters immediately preceding the date of the proposed distribution, plus (iii) the aggregate amount of the proposed distribution by the Payor Subsidiary; and (B) for each of Mariner Health of Forest Hills, LLC, Mariner Health of Bel Air, LLC, Tampa Health Properties, LTD (Bay-to-Bay), Westbury Associates, New Hanover/Mariner Health, LLC (Wilmington), and Global Healthcare Center -Bethesda, LLC, the permitted amount of distributions to be made by each of them shall equal the amount permitted to be made in accordance with the distribution provisions of their respective joint venture agreement, limited liability company agreement, partnership agreement or similar agreement in effect on the Sixteenth Amendment Effective Date (a copy of which has been delivered to the Administrative Agent), and no amendment shall be made to such provisions regarding distributions in such joint venture agreements, limited liability company agreements, partnership agreements or similar agreements following the Sixteenth Amendment Effective Date without the prior written approval of the Administrative Agent unless any distributions by 19 such Subsidiary are permitted by the provisions of clause (A) above and distributions by such Subsidiary are otherwise in compliance with Section 8.02(e). Permitted General Intangibles shall mean licenses, permits, ----------------------------- certificates or Medicare/Medicaid reimbursement contracts. Permitted Investments shall mean: --------------------- (i) direct obligations of the United States of America or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America maturing in twelve months or less from the date of acquisition; (ii) commercial paper maturing in 180 days or less rated not lower than A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service on the date of acquisition; (iii) demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poor's Corporation or Moody's Investors Service on the date of acquisition; (iv) publicly traded debt securities or preferred stocks rated at least A or better by either Standard & Poor's Corporation or by Moody's Investors Service which in the aggregate do not have, at any time, a cost basis under GAAP in excess of $1,000,000; (v) common stocks, or mutual funds which invest in common stocks provided that (A) such stocks are of corporations organized and existing under the laws of the United States of America, (B) such stocks are traded publicly on a national securities exchange or the "over the counter market", (C) the Borrower or its Subsidiaries do not have a cost basis in excess of $15,000,000 in the aggregate in such stocks and mutual funds, (D) the Borrower or its Subsidiaries invest in such stocks or mutual funds using funds obtained from sources other than, directly or indirectly, proceeds of Loans hereunder and (E) the cost basis of the Borrower or its Subsidiaries in such stocks and mutual funds does not exceed at any time the amount of cash invested in investments described in clauses (i) through (iv) and (vi) of this definition of Permitted Investments; and (vi) investments in money market funds rated AA or AAm-G or higher by Standard & Poor's Corporation (or equivalent rating) whose net asset value remains a constant $1.00 per share. Permitted Investors shall mean Apollo Management L.P., a ------------------- Delaware limited partnership and its Control Investment Affiliates. Permitted Leased Facility Liens shall mean, with respect to a ------------------------------- Subsidiary Lessee, Liens, meeting all of the criteria specified below, solely on certain of the Permitted General Intangibles of such Subsidiary Lessee, granted in favor of the Lessor Lender providing 20 financing to the Lessor which is the lessor of such Subsidiary Lessee's Leased Facility, and such Liens secure the Lessor Indebtedness provided by such Lessor Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Leased Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Lessor Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness which such Lien secures; (ii) Such Subsidiary Lessee shall have granted to Administrative Agent (or the Collateral Agent, as the case may be) perfected security interests in each of the assets of such Subsidiary Lessee encumbered by such Liens, and the Administrative Agent's (or Collateral Agent's, as the case may be) security interests shall have priority over all other Liens on such assets, except that they shall be subordinate to the Liens in favor of the Lessor Lender unless the Lessor Lender is listed on Schedule 6.01(aa) hereto and ----------------- such Schedule states that such Lessor Lender has refused to consent to the grant to Administrative Agent of such second Liens; (iii) The amount of Lessor Indebtedness secured by such Liens may not be increased after the date such Subsidiary Lessee becomes a Subsidiary of the Borrower, and any reductions in the amount of such Lessor Indebtedness after such date shall be permanent; and (iv) Any termination by such Lessor Lender of such Liens in an asset after the date such Subsidiary Lessee becomes a Subsidiary of the Borrower shall be permanent, and no Loan Party shall thereafter grant any new Lien on assets of any Loan Party in favor of such Lessor Lender. Permitted Liens shall mean: --------------- (i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable; (ii) Pledges or deposits made in the ordinary course of business to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, old-age pensions or other social security programs; (iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default; 21 (iv) Good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, progress or advance payments, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (v) Encumbrances consisting of zoning restrictions, easements, reservations, rights of way or other restrictions on the use of real property, none of which materially impairs the use of such property as currently used or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use; (vi) Liens in favor of the Administrative Agent for the benefit of the Banks, in favor of the Collateral Agent for the benefit of the Banks and Liens (which are on a pari passu basis with the Liens in favor of the Banks, or which are subject to the terms of the Collateral Sharing Agreement) in favor of the Collateral Agent for the benefit of the Term Loan Banks; (vii) Liens in respect of capital leases as and to the extent permitted in Section 8.02(p) and Liens in respect of operating leases; (viii) Any Lien existing on the Eighteenth Amendment Effective Date and described on Schedule 1.01(P) hereto (excluding Permitted Leased ---------------- Facility Liens and Permitted Owned Facility Liens which are addressed in clauses (xi) and (xiii) below) provided that the principal amount secured thereby is not hereafter increased and no additional assets become subject to such Lien (other than through after-acquired property clauses in effect on the date hereof); (ix) Purchase Money Security Interests or other Liens, provided that the aggregate amount of loans and deferred payments secured by such Purchase Money Security Interests or other Liens shall not exceed $15,000,000 (excluding for the purpose of this computation any loans or deferred payments secured by Liens described on Schedule 1.01(P) hereto); ---------------- (x) The following, (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry, and in either case they do not materially affect the Collateral or, in the aggregate, materially impair the ability of any Loan Party to perform its obligations hereunder or under the other Loan Documents: (1) Claims or Liens for taxes, assessments or charges due and payable and subject to interest or penalty, provided that such Loan Party maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien; 22 (2) Claims, Liens or encumbrances upon, and defects of title to, real or personal property other than a material portion of the Collateral, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; or (3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; (xi) Permitted Leased Facility Liens existing as of the Sixteenth Amendment Effective Date which are described on Schedule 6.01(aa) as ----------------- of such date, and, after the Sixteenth Amendment Effective Date, subject to the approval of the Required Banks (including without limitation satisfaction of all applicable conditions set forth on Exhibit 1.01(C)), additional Permitted Leased --------------- Facility Liens; (xii) Permitted Owned Facility Liens existing as of the Sixteenth Amendment Effective Date which are described on Schedule 6.01(aa) as ----------------- of such date, and, after the Sixteenth Amendment Effective Date, subject to the approval of the Required Banks (including without limitation, satisfaction of all applicable conditions set forth on Exhibit 1.01(C)), additional Permitted ---------------- Owned Facility Liens; (xiii) With respect to an Unrestricted Subsidiary which is an Excluded Entity, Liens securing Indebtedness incurred by such Unrestricted Subsidiary, provided that the sole assets subject to such Lien are assets of such Unrestricted Subsidiary or assets of a person other than any Loan Party or other Unrestricted Subsidiary; and (xiv) With respect to Facilities subject to First Mortgages, all matters of record other than any mortgages, deeds of trust, deeds to secure debt, financing statements, judgment liens or tax liens, in favor of Persons other than the Collateral Agent, and all matters that would be shown by current survey of such Facility. Permitted Owned Facility Liens shall mean, with respect to a ------------------------------ Subsidiary Owner, Liens, meeting all of the criteria specified below, on real and personal property of such Subsidiary Owner relating to the Owned Facility of such Subsidiary Owner, granted in favor of the Owned Facility Lender providing financing with respect to such Owned Facility, and such Liens secure the Owned Facility Indebtedness provided by such Owned Facility Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Owned Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Owned Facility Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of the Owned Facility Indebtedness which such Lien secures; 23 (ii) The Subsidiary Owner shall have granted to Administrative Agent (or Collateral Agent, as the case may be) second priority mortgage liens and security interests in each of the assets which is encumbered by such Liens; (iii) The amount of Owned Facility Indebtedness secured by such liens may not be increased after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower and any reductions in the amount of such Owned Facility Indebtedness after such date shall be permanent; and (iv) Any termination by an Owned Facility Lender of such Liens in an asset after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower shall be permanent and the Subsidiaries of Borrower may not thereafter grant any new Lien on assets of any Loan Party in favor of such Owned Facility Lender. Permitted Subordinated Indebtedness shall mean Indebtedness of ----------------------------------- the Borrower in an amount and on terms and conditions (including provisions subordinating such Indebtedness to the Indebtedness and all other obligations of the Loan Parties to the Agents and the Banks under the Loan Documents) satisfactory to the Agents (whose approval will not be unreasonably withheld), designated by the Agents as "Permitted Subordinated Indebtedness" and which refinances, in whole or in part, the Subordinated Notes; provided however that, in addition to the approval of the Agents, the prior written approval of the Required Banks (which shall not be unreasonably withheld) shall be required for the Borrower to incur Indebtedness which refinances, in whole or in part, the Subordinated Notes, if and only if the terms of such new Indebtedness include any of the following: (x) a provision that amortizes any principal of such new Indebtedness prior to the Expiration Date, (y) a principal amount of such Indebtedness in excess of $151.5 million, or (z) any financial covenant which is more restrictive than any financial covenant contained in this Agreement. Person shall mean any individual, corporation, partnership, ------ association, joint-stock company, trust, unincorporated organization, joint venture, government or political subdivision or agency thereof, or any other entity. Pinnacle shall mean Pinnacle Care Corporation, a corporation -------- organized and existing under the laws of the State of Delaware. Plan shall mean at any time an employee pension benefit plan ---- (including a Multiple Employer Plan but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group. 24 Pledge Agreements shall mean collectively the Pledge Agreements ----------------- in substantially the form attached hereto as: (i) Exhibit 1.01(P)(1) executed ------------------ and delivered by the Borrower to the Collateral Agent for the benefit of the Banks; (ii) Exhibit 1.01(P)(2) executed and delivered by any Subsidiary which ------------------ owns any equity ownership interest in another Corporate Subsidiary to the Collateral Agent for the benefit of the Banks; (iii) Exhibit 1.01(P)(3) executed ------------------ by any Subsidiary which owns any interest in a Partnership Subsidiary; and (iv) any other agreement pledging equity interests of a Subsidiary to the Collateral Agent, for the benefit of the Banks, in form and substance satisfactory to the Collateral Agent, as any such Pledge Agreement may hereinafter be modified, amended, restated or replaced from time to time in form and substance satisfactory to the Administrative Agent, and Pledge Agreement shall mean ---------------- separately any Pledge Agreement. Pledged Collateral shall have the meaning assigned to that term ------------------ in the respective Pledge Agreements. PNC Bank shall mean PNC Bank, National Association, a national -------- banking association, its successors and assigns. Potential Default shall mean any event or condition which with ----------------- notice, passage of time or a determination by the Administrative Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default. Principal Office shall mean the main banking office of the ---------------- Administrative Agent, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Prior Credit Agreement shall mean that certain Credit Agreement ---------------------- dated as of October 6, 1993 among Borrower, certain of the Banks and PNC Bank, as agent. Prior Security Interest shall mean a valid and enforceable ----------------------- perfected first priority security interest under the Uniform Commercial Code in the UCC Collateral and the Pledged Collateral, which in the case of the UCC Collateral is subject only to Liens for taxes not yet due and payable to the extent such prospective tax payments are given priority by statute or Purchase Money Security Interests as permitted hereunder. Prohibited Transaction shall mean any prohibited transaction as ---------------------- defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor. Property shall mean all real property, both owned and leased, of -------- any Loan Party. Purchase Money Security Interest shall mean Liens upon tangible -------------------------------- personal property securing loans to a Loan Party or deferred payments by a Loan Party in either case, for the purchase of such tangible personal property. 25 Purchase Price shall mean, with respect to any Permitted -------------- Acquisition by the Loan Parties, the sum of (i) cash paid at closing, (ii) the amount of any deferred payments, which are not contingent on the financial performance of the business being acquired, (iii) the projected amount of any deferred payments which are contingent on the financial performance of the business being acquired following the acquisition, provided that it shall be assumed for purposes of such projection that the cash flow and other financial performance of the acquired business in each year after the acquisition date shall be the same as the financial performance of such business during the twelve (12) months preceding such date, (iv) the amount of any debt assumed or guaranteed by any Loan Party, (v) if the Loan Parties are acquiring stock of another person (whether by purchase, merger or otherwise) the amount of debt of such person outstanding after the acquisition, plus (vi) the value of any stock, securities or other consideration given by any of the Loan Parties in connection therewith. If the consideration to be paid in connection with a Permitted Acquisition includes deferred payments which are contingent on the financial performance of the acquired business after the acquisition, the Loan Parties shall compare the amount of deferred payments which the Loan Parties actually pay (or which become ascertainable if the Loan Parties can ascertain the amount of any deferred payments before paying them) with the amount which the Loan Parties projected they would pay pursuant to clause (iii) in the preceding sentence. The Purchase Price in connection with such acquisition shall be deemed to increase by the amount of such excess for purposes of determining the aggregate Purchase Price paid by the Loan Parties in connection with Permitted Acquisitions pursuant to Sections 8.02(f)(iii)(v) and 8.02(f)(iv)(x). Purchasing Bank shall mean a Bank which becomes a party to this --------------- Agreement by executing an Assignment and Assumption Agreement. Qualifying Asset Sale shall have the meaning set forth in --------------------- Section 5.05(a). Ratable Share shall mean the proportion that a Bank's Commitment ------------- bears to the Commitments of all of the Banks. Regulated Substances shall mean, without limitation, any -------------------- substance, material or waste, regardless of its form or nature, defined under Environmental Law as a "hazardous substance," "pollutant," "pollution," "contaminant," "extremely hazardous substance," "toxic chemical," "toxic substance," "toxic waste," "hazardous waste," "special handling waste," "industrial waste," "residual waste," "solid waste," "municipal waste," "mixed waste," "infectious waste," "chemotherapeutic waste," "medical waste" or "regulated substance" or any other material, substance or waste, regardless of its form or nature, which otherwise is regulated by Environmental Law. Regulation U shall mean Regulation U, T or X as promulgated by ------------ the Board of Governors of the Federal Reserve System, as amended from time to time. Reimbursement Obligations shall have the meaning assigned to ------------------------- such term in Section 2.09(d). 26 Reportable Event means a reportable event described in Section ---------------- 4043 of ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan and for which the 30-day notice period has not been waived by regulation. Required Banks shall mean: (i) if there are no Loans, -------------- Reimbursement Obligations or Letter of Credit Borrowings outstanding, Banks whose Commitments aggregate at least 51% of the Commitments of all of the Banks, or (ii) if there are Loans, Reimbursement Obligations or Letter of Credit Borrowings outstanding, any Bank or group of Banks if the sum of the Loans, Reimbursement Obligations and Letter of Credit Borrowings then outstanding aggregates at least 51% of the total principal amount of all of the Loans, Reimbursement Obligations and Letter of Credit Borrowings then outstanding. Reimbursement Obligations and Letter of Credit Borrowings shall be deemed, for purpose of this definition, to be in favor of the Administrative Agent and not a participating Bank if such Bank has not made its Participation Advance in respect thereof and shall be deemed to be in favor of such Bank to the extent of its Participation Advance if it has made its Participation Advance in respect thereof. Required Environmental Permits shall mean all permits, licenses, ------------------------------ bonds, consents, programs, approvals or authorizations required under Environmental Law for the Borrower and/or each of its Subsidiaries to conduct its operations, maintain the Property or equipment thereon or construct, maintain, operate or occupy any improvements. Required Environmental Notices shall mean all notices, reports, ------------------------------ plans, forms or other filings which pursuant to Environmental Law, Required Environmental Permits or at the request or direction of an Official Body must be submitted to an Official Body or which otherwise must be maintained with respect to the Property, Contamination and the operations and activities of the Borrower and each of its Subsidiaries. Responsible Officer shall mean, with respect to any Loan Party, ------------------- the Chief Executive Officer, the Chief Financial Officer or the treasurer thereof. Restricted Indebtedness shall mean with respect to the Excluded ----------------------- Entities, Indebtedness secured by any Liens, other than Indebtedness not to exceed $250,000 in the aggregate for all Excluded Entities secured by Purchase Money Security Interests. Restricted Investments shall mean collectively the following ---------------------- with respect to the Excluded Entities: (i) investments or contributions by any of the Loan Parties directly or indirectly in or to the capital of or other payments to (except in connection with transactions for fair value in the ordinary course of business) an Excluded Entity, (ii) loans by any of the Loan Parties directly or indirectly to an Excluded Entity, (iii) guaranties by any of the Loan Parties directly or indirectly of the obligations of an Excluded Entity, or (iv) other obligations, contingent or otherwise, of any of the Loan Parties to or for the benefit of an Excluded Entity. If the nature of a Restricted Investment is tangible property then the amount of such Restricted Investment shall be determined by valuing such property at fair value in accordance with the past practice of the Loan Parties and such fair values shall be satisfactory to the Agents, in their sole discretion. 27 Restricted Subsidiaries shall mean all Subsidiaries of the ----------------------- Borrower other than the Unrestricted Subsidiaries of the Borrower which as of the date of determination are Excluded Entities. Revolving Credit Base Rate Option shall have the meaning --------------------------------- assigned to that term in Section 4.01(a)(i). Revolving Credit Commitment shall mean as to any Bank at any --------------------------- time, the amount initially set forth opposite its name on Schedule 1.01(C) ---------------- hereto in the column labeled "Amount of Commitment for Revolving Credit Loans," and thereafter to give effect to the most recent Assignment and Assumption Agreement, as such amount shall be reduced from time to time pursuant to Sections 2.01 and 2.10 hereof, and Revolving Credit Commitments shall mean the ---------------------------- aggregate Revolving Credit Commitments of all of the Banks. Revolving Credit Euro-Rate Option shall have the meaning --------------------------------- assigned to that term in Section 4.01(a)(ii). Revolving Credit Loans shall mean collectively and Revolving ---------------------- --------- Credit Loan shall mean separately all Revolving Credit Loans or any Revolving - ----------- Credit Loan made by the Banks or one of the Banks to the Borrower pursuant to Section 2.01 hereof. Revolving Credit Notes shall mean collectively all the Revolving ---------------------- Credit Notes of the Borrower in the form of Exhibit 1.01(R) hereto evidencing --------------- the Revolving Credit Loans together with all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part and Revolving Credit Note shall mean separately any Revolving Credit Note. - --------------------- Revolving Facility Usage shall mean at any time the sum of the ------------------------ Revolving Credit Loans outstanding and the Letters of Credit Outstanding. Security Agreement shall mean the Security Agreement in ------------------ substantially the form of Exhibit 1.01(s)(1) executed and delivered by each of ------------------ the Loan Parties to the Collateral Agent for the benefit of the Banks. Seventeenth Amendment Effective Date shall mean July 31, 1998. ------------------------------------ Sixteenth Amendment Effective Date shall mean January 2, 1998. ---------------------------------- Solvent shall mean, with respect to any person on a particular ------- date, that on such date (i) the fair value of the property of such person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such person, (ii) the present fair saleable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such person does not intend to, and does not believe that it will, incur debts or liabilities beyond such 28 person's ability to pay as such debts and liabilities mature, and (v) such person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Special Fee shall have the meaning set forth in Section 2.04. ----------- Specified Change of Control shall mean a "Change of Control" as --------------------------- defined in the Paragon Senior Subordinated Note Indenture, as in effect on the Seventeenth Amendment Effective Date, without regard to any amendments to such definition subsequent to such date. Subordinated Indebtedness Incurrence Date shall mean March 28, ----------------------------------------- 1996, the date of issuance by the Borrower of the Subordinated Notes pursuant to and in accordance with the Indenture. Subordinated Notes shall mean the $150 million in original ------------------ principal amount of Subordinated Notes due 2006 issued by the Borrower pursuant to the Indenture. It is acknowledged that prior to the Exchange Offer, the Subordinated Notes shall consist of the Series A Securities, and following the Exchange Offer, the Subordinated Notes shall consist of the Series B Securities and any Series A Securities which are not exchanged in the Exchange Offer, as such terms are defined in the Indenture. Subordination Agreement (Intercompany) shall mean that certain -------------------------------------- Subordination Agreement (Intercompany) in the form of Exhibit 1.01(S) hereto --------------- executed and delivered by each Loan Party to the Administrative Agent for the benefit of the Banks. Subsidiary of any person at any time shall mean (i) any ---------- corporation, limited liability company or trust of which more than 50% (by number of shares or number of votes) of the outstanding capital stock, member interests or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries, and (ii) any corporation, trust, limited liability company, partnership or other entity which is controlled or capable of being controlled by such Person or one or more of such Person's Subsidiaries. Subsidiary Lessee shall mean each Subsidiary of Borrower which ----------------- is the lessee of a Leased Facility. Subsidiary Owner shall mean, with respect to an Owned Facility, ---------------- the Subsidiary of Borrower which is the owner thereof. 29 Supermajority Required Banks shall mean: (i) if there are no ---------------------------- Loans, Reimbursement Obligations or Letter of Credit Borrowings outstanding, Banks whose Commitments aggregate at least 66 and 2/3% of the Commitments of all of the Banks, or (ii) if there are Loans, Reimbursements Obligations or Letter of Credit Borrowings outstanding, any Bank or group of Banks if the sum of the Loans, Reimbursements Obligations and Letter of Credit Borrowings then outstanding aggregates at least 66 and 2/3% of the total principal amount of all of the Loans, Reimbursements Obligations and Letter of Credit Borrowings then outstanding. Reimbursements Obligations and Letter of Credit Borrowings shall be deemed, for purpose of this definition, to be in favor of the Administrative Agent and not a participating Bank if such Bank has not made its Participation Advance in respect thereof and shall be deemed to be in favor of such Bank to the extent of its Participation Advance if it has made its Participation Advance in respect thereof. Term Loan Agreement shall mean that certain Loan Agreement, ------------------- dated the Eighteenth Amendment Effective Date, among the Term Loan Borrower, PNC Bank, National Association, as agent, First Union National Bank, as syndication agent and the Term Loan Banks, providing for a $210,000,000 term loan facility to the Term Loan Borrower, as such agreement may from time to time be amended, restated, modified, supplemented or replaced. Term Loan Banks shall mean the financial institutions signatory --------------- from time to time to the Term Loan Agreement as "banks" thereunder, together with their successors and permitted assigns. Term Loan Borrower shall mean Mariner Health Group, Inc., a ------------------ Delaware corporation, in its capacity as the borrower under the Term Loan Agreement, together with its successors and permitted assigns in such capacity. Term Loan Commitment shall have the meaning set forth in the -------------------- Term Loan Agreement. Term Loan Documents shall mean the Term Loan Agreement and all ------------------- ------------------- other documents, instruments and agreements now or hereafter executed and delivered in connection therewith (excluding the Loan Documents), as the same may be amended, restated, supplemented or replaced from time to time. Term Loan Parties shall mean, collectively, the Term Loan ----------------- Borrower and all guarantors, from time to time, of Indebtedness and other obligation under the Term Documents. Total Indebtedness shall mean as of any date of determination, ------------------ without duplication, the total Indebtedness of the Borrower and its Subsidiaries. Transferor Bank shall mean the selling Bank pursuant to an --------------- Assignment and Assumption Agreement. 30 Tri-State shall mean Tri-State Health Care, Inc., a West --------- Virginia corporation, which is a Subsidiary of Pinnacle and the sole general partner of Seventeenth Street Partnership. Trustee Agreement shall mean, as of any date of determination, ----------------- collectively (i) that certain Paying Agency Agreement executed by Mariner Nashville, PNC Bank and certain of the Lessors listed on Schedule 6.01(aa), in ----------------- the form of Exhibit 1.01(T) providing for the payment by Mariner Nashville to PNC Bank, as trustee for Mariner Nashville and such Lessors, of monies due to such Lessors under the leases between such Lessors and Mariner Nashville, and the subsequent payment of such monies by PNC Bank to the Lessors; and (ii) in accordance with the requirements of this Agreement, each other similar agreement, in form and substance satisfactory to the Administrative Agent relating to certain Subsidiaries of the Borrower and certain Lessors. UCC Collateral shall mean the Pledged Collateral, the property -------------- of the Loan Parties in which security interests are granted under the Security Agreement, and that portion of the Collateral under the Mortgages, First Mortgages, and the Leasehold Mortgages which consists of personal property in which a security interest was granted under the Uniform Commercial Code. Uniform Commercial Code shall have the meaning assigned to that ----------------------- term in Section 6.01(p). Unrestricted Subsidiary of any person at any time shall mean any ----------------------- corporation or limited liability company of which more than 50% but less than 80% (by number of shares or number of votes) of the outstanding capital stock or member interests normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% but less than 80% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries. Voting Stock shall mean, with respect to any Person, any class ------------ or series of Capital Stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of stockholders called for such purpose, without the occurrence of any additional event or contingency. 1.02 Construction. Unless the context of this Agreement otherwise ------------ clearly requires, references to the plural include the singular, the singular the plural and the part the whole, "or" has the inclusive meaning represented by the phrase "and/or," and "including" has the meaning represented by the phrase "including without limitation." References in this Agreement to "determination" of or by any Agent or the Banks shall be deemed to include good faith calculations by any Agent or the Banks (in the case of quantitative determinations) and good faith beliefs by any Agent or the Banks (in the case of qualitative determinations). Whenever any Agent or the Banks are granted the right herein to act in its or their sole discretion 31 or to grant or withhold consent such right shall be exercised in good faith. The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement and the Table of Contents preceding this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. 1.03 Accounting Principles. Except as otherwise provided in this --------------------- Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. In the event of: (i) any dissolution or liquidation of any Subsidiary pursuant to Section 8.02(f) of this Agreement, (ii) any consolidation or merger of any Subsidiary with or into any person (other than the Borrower or another Subsidiary)pursuant to Section 8.02(f) of this Agreement, or (iii) the sale, transfer, lease or disposition of assets of the Borrower or any Subsidiary permitted pursuant to Section 8.02(g)(v) of this Agreement, then, in the case of any of the foregoing clauses (i), (ii) or (iii), any financial covenant to be calculated thereunder (including, without limitation, those set forth in Section 2.01(c), 4.01, and 8.02(q) through 8.02(u), inclusive) shall be calculated for the period during which such sale, transfer, lease or other disposition occurs, excluding all financial items (for example and without limitation, all cash flow, revenues, expenses, and income) attributable to the assets sold, transferred, leased or otherwise disposed of. It is expressly agreed that for all periods ending after the consummation of the Paragon Acquisition, all cash expenses (other than expenses directly related to the Paragon Acquisition) paid by MPN on behalf of or for the benefit of the Borrower or any Subsidiary of the Borrower and reimbursed by the Borrower pursuant to Section 8.02(e)(v) shall be treated as an expense of the Borrower or such Subsidiary of the Borrower (whether or not GAAP would require such amount to be included as an expense of the Borrower or such Subsidiary) for the purpose of determining "net income of the Borrower and its Subsidiaries in accordance with GAAP" under this Agreement in connection with the calculation of the applicable financial covenants under this Agreement (including without limitation in the determination of Consolidated Cash Flow from Operations, Consolidated Net Income, the numerator of the Fixed Charge Coverage Ratio in Section 8.02 (q) and the calculations set forth in Section 8.02(e)), it being the express intent of the Borrower, the Agents and the Banks that notwithstanding payment of expenses by MPN on behalf of or for the benefit of the Borrower or Subsidiaries of the Borrower that consolidated net income of the Borrower and its Subsidiaries shall continue to be determined after the consummation of the Paragon Acquisition as if all expenses of the Borrower and its Subsidiaries are paid by them. 32 ARTICLE II REVOLVING CREDIT FACILITY ------------------------- 2.01 Revolving Credit Commitments; Limitation on Borrowings. ------------------------------------------------------ (a) Revolving Credit Commitments. Subject to the terms and ---------------------------- conditions hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make revolving credit loans (the "Revolving Credit Loans") to the Borrower at any time and from time to time on or after the date hereof to, but not including, the Expiration Date in an aggregate principal amount not to exceed at any one time such Bank's Revolving Credit Commitment minus such Bank's Ratable Share of the Letters of Credit Outstanding. Within such limits of time and amount and subject to the other provisions of this Agreement, the Borrower may borrow, repay and reborrow pursuant to this Section 2.01. In no event shall the aggregate of outstanding Revolving Credit Loans and Letters of Credit Outstanding as of any date exceed the Revolving Credit Commitments as of such date, and the entire outstanding principal amount of the Revolving Credit Loans shall be due and payable on the Expiration Date. (b) [Intentionally Omitted]. --------------------- (c) Limitation on Borrowings. Notwithstanding the provision of ------------------------ Sections 2.01(a) and 2.01(b) of this Agreement, the outstanding principal amount of Revolving Credit Loans to the Borrower and aggregate Letters of Credit Outstanding shall not exceed at any time an amount such that after giving effect to such borrowings, the ratio of (i) Total Indebtedness to (ii) Consolidated Cash Flow from Operations exceeds (A) 5.75 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. For purposes of such ratio, the amount determined under clause (i) shall be as of the date of determination and the amount determined under clause (ii) shall be for the twelve-month period ending on the last day of the month which precedes such date of determination. 2.02 Nature of Banks' Obligations With Respect to Revolving Credit ------------------------------------------------------------- Loans. Each Bank shall be obligated to participate in each request for - ----- Revolving Credit Loans pursuant to Section 2.05 hereof in accordance with its Ratable Share. The aggregate of each Bank's Revolving Credit Loans outstanding hereunder to the Borrower at any time shall never exceed its Revolving Credit Commitment minus its Ratable Share of Letters of Credit Outstanding. The obligations of each bank hereunder are several. The failure of any Bank to perform its obligations hereunder shall not affect the obligations of the Borrower to any other party nor shall any other party be liable for the failure of such Bank to perform its obligations hereunder. The Bank shall have no obligation to make Revolving Credit Loans hereunder on or after the Expiration Date. 2.03 Commitment Fees. Accruing from the Eighteenth Amendment --------------- Effective Date until the Expiration Date, the Borrower agrees to pay to the Administrative Agent for the account of each Bank, as consideration for such Bank's Revolving Credit Commitment 33 hereunder, a commitment fee (the "Commitment Fee") equal to the applicable percentage set forth below based on the ratio of Total Indebtedness to Consolidated Cash Flow from Operations.
Ratio of Total Indebtedness to Commitment Fee Consolidated Cash Flow from Operations (per annum) - ----------------------------------------- ------------------ Greater than 5.25 to 1.0 .50% Greater than 4.75 to 1.0 but less than or equal to 5.25 to 1.0 .45% Greater than 4.25 to 1.0 but less than or equal to 4.75 to 1.0 .40% Greater than 3.75 to 1.0 but .35% less than or equal to 4.25 to 1.0 Less than or equal to 3.75 to 1.0 .30%
Such ratio shall be computed on the date of each Acquisition Requiring Certification as more fully set forth in the third sentence of Section 8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any adjustment to the Commitment Fee attributable to such computation shall be effective on the date of such Acquisition Requiring Certification. If Borrower does not make any Acquisition Requiring Certification during any fiscal quarter, (1) such ratio shall also be computed as of the end of such fiscal quarter, with Consolidated Cash Flow from Operations computed for the four fiscal quarters then ended and Total Indebtedness computed as of the end of such fiscal quarter, and (2) any increase in the Commitment Fee attributable to a change in such ratio shall be effective as of the Delivery Date for the Borrower's consolidated financial statements for such quarter and (3) any decrease of the Commitment Fees attributable to a change in such ratio shall be effective as of the later of the Delivery Date for such financial statements and the date on which such financial statements are actually delivered to the Administrative Agent and the Banks. Commitment Fees shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed on the average daily unborrowed amount of such Bank's Revolving Credit Commitment (less its Ratable Share of the Letters of Credit Outstanding) as the same may be constituted from time to time. All Commitment Fees shall be payable in arrears on the first Business day of each April, July, October and January after the date hereof commencing on January 1, 1999 and on the Expiration Date or upon acceleration of maturity of the Notes. 2.04 Special Fee. Accruing from the Seventeenth Amendment Effective ----------- Date through and including the Expiration Date, the Borrower agrees to pay to the Administrative Agent for the account of each Bank in accordance with the Ratable Share of each Bank, a fee (the "Special Fee") equal to the product of (x) the per annum rate of 1.50%, multiplied by (y) the lesser of $25 million or the aggregate amount of any distributions or dividends made by the Borrower to MPN pursuant to Section 8.02(e)(vi) hereof. Each Special Fee shall be computed as of the end of each fiscal quarter of the Borrower and shall be payable in arrears on the first 34 Business Day of each April, July, October and January after the date hereof, commencing on January 1, 1999, and on the Expiration Date or upon acceleration of maturity of the Notes. 2.05 Loan Requests. Except as otherwise provided herein, the ------------- Borrower may from time to time prior to the Expiration Date request the Banks to make Revolving Credit Loans, or renew or convert the Interest Rate Option applicable to existing Loans, by the delivery to the Administrative Agent, not later than 10:00 A.M. Pittsburgh time (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the making of Loans to which the Euro- Rate Option applies or the conversion to or the renewal of the Euro-Rate Option for any Loans; and (ii) on the Business Day which is the proposed Borrowing Date with respect to the making of a Loan to which the Base Rate Option applies or the last day of the preceding Interest Period with respect to the conversion of the Base Rate Option for any Loan, of a duly completed request therefor substantially in the form of Exhibit 2.05 hereto or a request by telephone ------------ immediately confirmed in writing by letter, facsimile or telex in such form (each, a "Loan Request"), it being understood that the Administrative Agent may rely in good faith on the authority of any person making such telephonic request and purporting to be an Authorized officer. Each Loan Request shall be irrevocable and shall (i) specify the proposed Borrowing Date; (ii) specify the aggregate amount of the proposed Loans comprising the Borrowing Tranche, which shall be in integral multiples of $500,000 and not less than $5,000,000 for Loans to which the Euro-Rate Option applies and not less than the lesser of $500,000 or the maximum amount available for Loans to which the Base Rate Option applies; (iii) specify whether the Euro-Rate Option or Base Rate Option shall apply to the proposed Loans comprising the Borrowing Tranche; (iv) specify in the case of Loans to which the Euro-Rate Option applies, an appropriate Interest Period for the proposed Loans comprising the Borrowing Tranche; (v) specify the use by the Borrower of the loan proceeds; (vi) certify that no Event of Default or Potential Default has occurred and is continuing after giving effect to the proposed Revolving Credit Loan and without limiting the generality of this clause (vi), certify compliance with Section 2.01(c) of this Agreement; and (vii) in the event that the proceeds of the proposed Revolving Credit Loan will be used to acquire a new health care facility or other business, permitted to be acquired pursuant to this Agreement, certify, in detail satisfactory to the Administrative Agent, a calculation of the ratio specified in Section 2.01(c). 2.06 Making Revolving Credit Loans. The Administrative Agent shall, ----------------------------- promptly after receipt by it of a Loan Request pursuant to Section 2.05, notify the Banks of its receipt of such Loan Request specifying: (i) the proposed Borrowing Date and the time and method of disbursement of such Revolving Credit Loan; (ii) the amount and type of such Revolving Credit Loan and the applicable Interest Period; and (iii) the apportionment among the Banks of the Revolving Credit Loans as determined by the Administrative Agent in accordance with Section 2.02 hereof. Each Bank shall remit the principal amount of each Revolving Credit Loan to the Administrative Agent such that the Administrative Agent is able to, and the Administrative Agent shall, to the extent the Banks have made funds available to it for such purpose, fund such Revolving Credit Loan to the Borrower in U.S. Dollars and immediately available funds at the Principal Office prior to 2:00 P.M. Pittsburgh time on the Borrowing Date, provided that if any Bank fails to remit such funds to the Administrative Agent in a timely 35 manner the Administrative Agent may elect in its sole discretion to fund with its own funds the Revolving Credit Loan of such Bank on the Borrowing Date. 2.07 Revolving Credit Note. The obligation of the Borrower to repay --------------------- the aggregate unpaid principal amount of the Revolving Credit Loans made to it by each Bank, together with interest thereon, shall be evidenced by a promissory note of the Borrower dated the Closing Date in substantially the form attached hereto as Exhibit 1.01(R) payable to the order of each Bank in a face amount --------------- equal to the Revolving Credit Commitment of such Bank. 2.08 Use of Proceeds. The proceeds of the Revolving Credit Loans --------------- shall be used for (a) the acquisition and development of health care related businesses and facilities and (b) general corporate purposes, which, among other things, may include working capital (including but not limited to the reimbursement of MPN by the Borrower of ordinary course business expenses pursuant to Section 8.02(e)(v)) or intercompany loans to a Subsidiary of the Borrower provided the Borrower and such Subsidiary comply with Section 8.01(1) hereof. 2.09 Letter of Credit Subfacility. ---------------------------- (a) Borrower may request the issuance of, on the terms and conditions hereinafter set forth, standby letters of credit (each a "Letter of Credit" and collectively, "Letters of Credit") by delivering to the 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 a Letter of Credit provided that each Letter of Credit shall (A) have a maximum maturity of twelve (12) months from the date of issuance, and (B) in no event expire later than ten (10) Business Days prior to the Expiration Date and providing that in no event shall (i) the Letters of Credit Outstanding exceed, at any one time, $30,000,000 or (ii) the Revolving Facility Usage exceed, at any one time, the Revolving Credit Commitments. Schedule 2.09(a) hereto lists letters of credit which PNC Bank issued for the - ---------------- accounts of certain of the Loan Parties prior to the date hereof pursuant to the Prior Credit Agreement and which shall remain outstanding after the Closing Date (the "Existing Letters of Credit"). Each Existing Letter of Credit shall be a Letters 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. (b) The Borrower shall pay to the Administrative Agent for the ratable account of the Banks a fee (the "Letter of Credit Fee") equal to the applicable interest rate per annum then in effect for Revolving Credit Loans which are subject to the Euro-Rate Option less the Euro-Rate, which fee shall be computed on the daily average Letters of Credit Outstanding (computed on the basis of a year of 360 days and actual days elapsed) and shall be payable quarterly in arrears commencing with the first Business Day of each April, July, October and January following issuance of the first Letter of Credit and on the expiration date for the last Letter of Credit then outstanding, with such fees accruing through and including the expiration date for each Letter of Credit. The Borrower shall pay to the Administrative Agent for its own 36 account a fronting fee equal to 1/8% per annum, which fee shall be computed on the daily average Letters of Credit Outstanding (computed on the basis of a year of 360 days and actual days elapsed) and shall be payable quarterly in arrears commencing with the first business day of each October, January, April and July following issuance of the first Letter of Credit and on the expiration date for the last Letter of Credit then outstanding. The Borrower shall also pay to the Administrative Agent the Administrative Agent's then in effect customary fees and administrative expenses payable with respect to Letters of Credit as the Administrative Agent may generally charge or incur from time to time in connection with the issuance, maintenance, modification (if any), assignment or transfer (if any), negotiation and administration of Letters of Credit. (c) Immediately upon the issuance of each Letter of Credit, each Bank shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Administrative Agent a participation in such Letter of Credit and each drawing thereunder in an amount equal to such Bank's Ratable Share of the maximum amount available to be drawn under such Letter of Credit and the amount of such drawing, respectively. (d) In the event of any request for a drawing under a Letter of Credit by the beneficiary or transferee thereof, the Administrative Agent will promptly notify the Borrower. Provided that it shall have received such notice, the Borrower shall reimburse (such obligation to reimburse the Administrative Agent shall sometimes be referred to as a "Reimbursement Obligation") the Administrative Agent prior to 11:00 a.m., Pittsburgh time on each date that an amount is paid by the Administrative Agent under any Letter of Credit (each such date, a "Drawing Date") in an amount equal to the amount so paid by the Administrative Agent. 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 the Borrower shall be deemed to have requested that Revolving Credit Loans be made by the Banks under the Base Rate Option to be disbursed on the Drawing Date under such Letter of Credit, subject to the amount of the unutilized portion of the Revolving Credit Commitment and subject to the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements. Any notice given by the Administrative Agent pursuant to this Section 2.09(d) may be oral if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (e) Each Bank shall upon any notice pursuant to Section 2.09(d) make available to the Administrative Agent an amount in immediately available funds equal to its Ratable Share of the amount of the drawing, whereupon the participating Banks shall (subject to Section 2.09(f)) each be deemed to have made a Revolving Credit Loan under the Base Rate Option to the Borrower in that amount. If any Bank so notified fails to make available to the Administrative Agent for the account of the Administrative Agent the amount of such Bank's Ratable Share of such amount by no later than 2:00 p.m., Pittsburgh time on the Drawing Date, then interest shall accrue on such Bank's obligation to make such payment, from the Drawing Date to the date on which such Bank makes such payment at a rate per annum equal to the Federal Funds Effective Rate. The Administrative Agent will promptly give notice of the 37 occurrence of the Drawing Date, but failure of the Administrative Agent to give any such notice on the Drawing Date or in sufficient time to enable any Bank to effect such payment on such date shall not relieve such Bank from its obligation under this Section 2.09(e). (f) With respect to any unreimbursed drawing that is not converted into Revolving Credit Loans under the Base Rate Option to the Borrower in whole or in part as contemplated by Section 2.09(d), because of the Borrower's failure to satisfy the conditions set forth in Section 7.1 [Each Additional Loan] other than any notice requirements or for any other reason, the Borrower shall be deemed to have incurred from the Administrative Agent a Letter of Credit Borrowing in the amount of such drawing. Such Letter of Credit Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate per annum applicable to the Revolving Credit Loans under the Base Rate Option. Each Bank's payment to the Administrative Agent pursuant to Section 2.09(e) shall be deemed to be a payment in respect of its participation in such Letter of Credit Borrowing and shall constitute a Participation Advance from such Bank in satisfaction of its participation obligation under this Section 2.09. (g) (i) Upon (and only upon) receipt by the Administrative Agent for its account of immediately available funds from Borrower (i) in reimbursement of any payment made by the Administrative Agent under the Letter of Credit with respect to which any Bank has made a Participation Advance to the Administrative Agent, or (ii) in payment of interest on such a payment made by the Administrative Agent under such a Letter of Credit, the Administrative Agent will pay to each Bank, in the same funds as those received by the Administrative Agent, the amount of such Bank's Ratable Share of such funds, except the Administrative Agent shall retain the amount of the Ratable Share of such funds of any Bank that did not make a Participation Advance in respect of such payment by Administrative Agent. (ii) If the Administrative Agent is required at any time to return to any Loan Party, or to a trustee, receiver, liquidator, custodian, or any official in any Insolvency Proceeding, any portion of the payments made by any Loan Party to the Administrative Agent pursuant to Section 2.09(g)(i) in reimbursement of a payment made under the Letter of Credit or interest or fee thereon, each Bank shall, on demand of the Administrative Agent, forthwith return to the Administrative Agent the amount of its Ratable Share of any amounts so returned by the Administrative Agent plus interest thereon from the date such demand is made to the date such amounts are returned by such Bank to the Administrative Agent, at a rate per annum equal to the Federal Funds Effective Rate in effect from time to time. (h) Each Loan Party agrees to be bound by the terms of the Administrative Agent's application and agreement for letters of credit and the Administrative Agent's written regulations and customary practices relating to letters of credit, though such interpretation may be different from the such Loan Party's own. In the event of a conflict between such application or agreement and this Agreement, this Agreement shall govern. It is understood and agreed that, except in the case of gross negligence or willful misconduct, the Administrative Agent shall not be liable for any error, negligence and/or mistakes, whether of omission or commission, in following any Loan Party's instructions or those contained in the Letters of Credit or any modifications, amendments or supplements thereto. 38 (i) In determining whether to honor any request for drawing under any Letter of Credit by the beneficiary thereof, the Administrative Agent shall be responsible only to determine that the documents and certificates required to be delivered under such Letter of Credit have been delivered and that they comply with their face with the requirements of such Letter of Credit. (j) Each Bank's obligation in accordance with this Agreement to make the Revolving Credit Loans or Participation Advances, as contemplated by Section 2.09, as a result of drawing under a Letter of Credit, and the Obligations of the Borrower to reimburse the Administrative Agent upon a draw under a Letter of Credit, shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Section 2.09 under all circumstances, including the following circumstances: (i) any set-off, counterclaim, recoupment, defense or other right which such Bank may have against the Administrative Agent, the Borrower or any other Person for any reason whatsoever; (ii) the failure of any Loan Party or any other Person to comply, in connection with a Letter of Credit Borrowing, with the conditions set forth in Section 2.01 [Revolving Credit Commitments], 2.05 [Loan Requests], 2.06 [Making Revolving Credit Loans] or 7.1 [Each Additional Loan] or as otherwise set forth in this Agreement for the making of a Revolving Credit Loan, it being acknowledged that such conditions are not required for the making of a Letter of Credit Borrowing and the obligation of the Banks to make Participation Advances under Section 2.09; (iii) any lack of validity or unenforceability of any Letter of Credit; (iv) the existence of any claim, set-off, defense or other right which any Loan Party or any Bank may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), the Administrative Agent or any Bank or any Person or, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between any Loan Party or Subsidiaries of a Loan Party and the beneficiary for which any Letter of Credit was procured); (v) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect even if the Administrative Agent has been notified thereof; (vi) payment by the Administrative Agent under the 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; 39 (vii) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of any Loan Party or Subsidiaries of a Loan Party; (viii) any breach of this Agreement or any other Loan Document by any party thereto; (ix) the occurrence or continuance of an Insolvency Proceeding with respect to any Loan Party; (x) the fact that an Event of Default or a Potential Default shall have occurred and be continuing; (xi) the fact that the Expiration Date shall have passed or this Agreement or the Commitments hereunder shall have been terminated; and (xii) any other circumstances or happening whatsoever, whether or not similar to any of the foregoing. (k) In addition to amounts payable as provided in Section 10.05 [Reimbursement of Administrative Agent by Borrower, Etc.], the Borrower hereby agrees to protect, indemnify, pay and save harmless the Administrative Agent from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which the Administrative Agent may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit, other than as a result of (A) the gross negligence or willful misconduct of the Administrative Agent as determined by a final judgment of a court of competent jurisdiction or (B) subject to the following clause (ii), the wrongful dishonor by the Administrative Agent of a proper demand for payment made under any Letter of Credit, or (ii) the failure of the Administrative Agent to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "Governmental Acts"). (l) As between any Loan Party and the Administrative Agent, such Loan Party assumes all risks of the acts and omissions of, or misuse of the Letter of Credit by, the respective beneficiaries of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Administrative Agent shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for an issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged (even if the Administrative Agent shall have been notified thereof); (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) the failure of the beneficiary of any such Letter of Credit, or any other party to which such Letter of Credit may be transferred, to comply 40 fully with any conditions required in order to draw upon such Letter of Credit or any other claim of any Loan Party against any beneficiary of such Letter of Credit, or any such transferee, or any dispute between or among any Loan Party and any beneficiary of any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Administrative Agent, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of the Administrative Agent's rights or powers hereunder. Nothing in the preceding sentence shall relieve the Administrative Agent from liability for the Administrative Agent's gross negligence or willful misconduct in connection with actions or omissions described in such clauses (i) through (viii) of such sentence. In furtherance and extension and not in limitation of the specific provisions set forth above, any action taken or omitted by the Administrative Agent under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put the Administrative Agent under any resulting liability to the Borrower or any Bank. 2.10 Voluntary Reduction of Revolving Credit Commitments. The --------------------------------------------------- Borrower shall have the right at any time and from time to time upon not less than three (3) Business Days' prior written notice (which notice shall be irrevocable) to the Administrative Agent to terminate or to permanently and ratably reduce, in an aggregate amount of not less than $1,000,000 or an integral multiple thereof, the respective Revolving Credit Commitments without penalty or premium, except as hereinafter set forth. The Administrative Agent shall promptly advise each Bank of the date and amount of each such reduction. After each such reduction, the Commitment Fee shall be calculated upon the unused portion of the Revolving Credit Commitments as so reduced and the amount of reduction may not be reinstated. ARTICLE III [INTENTIONALLY OMITTED] ARTICLE IV INTEREST RATES -------------- 4.01 Interest Rate Options. The Borrower shall pay interest in respect --------------------- of the outstanding unpaid principal amount of the Loans as selected by it from the Base Rate Option or Euro-Rate Option set forth below applicable to the Loans (it being understood that, subject to the provisions of this Agreement, the Borrower may select different Interest Rate Options and different Interest Periods to apply simultaneously to the Loans comprising different Borrowing 41 Tranches and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Loans comprising any Borrowing Tranche; provided that there shall not be at any one time outstanding more than fourteen (14) Borrowing Tranches in the aggregate among all the Loans accruing interest at a Euro-Rate Option). The Administrative Agent's determination of a rate of interest and any change therein shall in the absence of manifest error be conclusive and binding upon all parties hereto. If at any time the designated rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall be limited to such Bank's highest lawful rate. (a) Revolving Credit Interest Rate Options. The Borrower shall -------------------------------------- have the right to select from the following Interest Rate Options applicable to the Revolving Credit Loans for the period commencing on the Eighteenth Amendment Effective Date and thereafter. (i) Revolving Credit Base Rate Option: A fluctuating rate per --------------------------------- annum (computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) equal to the Base Rate plus the applicable percentage set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate.
Ratio of Total Indebtedness to Applicable Consolidated Cash Flow from Operations Interest Rate - ------------------------------------------- --------------------------- Greater than 5.25 to 1.0 Base Rate plus 1.25% Greater than 4.75 to 1.0 but less than or Base Rate plus 1.00% equal to 5.25 to 1.0 Greater than 4.25 to 1.0 but less than or Base Rate plus .75% equal to 4.75 to 1.0 Greater than 3.75 to 1.0 but less than or Base Rate plus .50% equal to 4.25 to 1.0 Less than or equal to 3.75 to 1.0 Base Rate plus .25%
(ii) Revolving Credit Euro-Rate Option: A fluctuating rate --------------------------------- per annum (computed on the basis of a year of 360 days and actual days elapsed) equal to the Euro-Rate plus the applicable percentage (such percentage is sometimes hereafter referred to as the "Applicable Percentage Over Euro-Rate") set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations.
Ratio of Total Indebtedness to Applicable Consolidated Cash Flow from Operations Interest Rate - ------------------------------------------- ---------------------------------- Greater than 5.25 to 1.0 Euro-Rate plus 2.75% Greater than 4.75 to 1.0 but less than or Euro-Rate plus 2.50% equal to 5.25 to 1.0
42
Ratio of Total Indebtedness to Applicable Consolidated Cash Flow from Operations Interest Rate - ------------------------------------------- ---------------------------------- Greater than 4.25 to 1.0 but less than or Euro-Rate plus 2.25% equal to 4.75 to 1.0 Greater than 3.75 to 1.0 but less than or Euro-Rate plus 2.00% equal to 4.25 to 1.0 Less than or equal to 3.75 to 1.0 Euro-Rate plus 1.75%
(b) The ratios pursuant to clause (a) above shall be computed on the date of each Acquisition Requiring Certification as more fully set forth in the third sentence of Section 8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any interest rate adjustment attributable to such computation shall be effective on the date of such Acquisition Requiring Certification. If Borrower does not make any Acquisition Requiring Certification during any fiscal quarter, such ratio shall also be computed as of the end of such quarter with Consolidated Cash Flow from Operations computed for the four fiscal quarters then ended and Total Indebtedness computed as of the end of such fiscal quarter, but any interest adjustments attributable to a change in such ratio shall be effective (x) with respect to an increase of the applicable interest rate, as of the Delivery Date for the Borrower's consolidated financial statements for such quarter and (y) with respect to a decrease of the applicable interest rate, as of the later of the Delivery Date for such financial statements and the date on which such financial statements are actually delivered to the Agents and the Banks. (c) Rate Quotations. The Borrower may call the Administrative --------------- Agent on or before the date on which a Loan Request is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such indication shall not be binding on the Agents or the Banks nor affect the rate of interest which thereafter is actually in effect when the election is made. 4.02 Interest Periods. At any time when the Borrower shall select, ---------------- convert to or renew a Euro-Rate Option, the Borrower shall notify the Administrative Agent thereof at least three (3) Business Days prior to the effective date of such Euro-Rate Option by delivering a Loan Request. The notice shall specify an interest period (the "Interest Period") during which such Interest Rate Option shall apply, such periods to be one, two, three or six months, provided, that the following shall apply to any selection of, renewal of or conversion to a Euro-Rate Option: (a) any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; (b) any Interest Period which begins on the last day of a calendar month for which there is no numerically corresponding day in the subsequent calendar month during which such Interest Period is to end shall end on the last Business Day of such subsequent month; 43 (c) each Borrowing Tranche of Loans subject to a Euro-Rate Option shall be in integral multiples of $500,000 and not less than $5,000,000; (d) the Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date; and (e) in the case of the renewal of a Euro-Rate Option at the end of an Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period, without duplication in payment of interest for such day. 4.03 Interest After Default. To the extent permitted by Law, upon ---------------------- the occurrence and during the continuation of an Event of Default, any principal, interest, fee or other amount payable hereunder shall bear interest for each day thereafter until paid in full (before and after judgment) at a rate per annum which shall be equal to two hundred (200) basis points (2% per annum) above the rate of interest otherwise applicable with respect to such amount or two hundred (200) basis points (2% per annum) above the Base Rate if no rate of interest is otherwise applicable, but in no event in excess of the highest rate permitted under applicable law. The Borrower acknowledges that such increased interest rate reflects, among other things, the fact that such Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk. If an Event of Default shall occur and be continuing, the Administrative Agent may in its discretion limit the Borrower to the Base Rate Option. 4.04 Euro-Rate Unascertainable. ------------------------- (a) If on any date on which a Euro-Rate would otherwise be determined, the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that: (i) adequate and reasonable means do not exist for ascertaining such Euro-Rate, or (ii) a contingency has occurred which materially and adversely affects the London interbank market relating to the Euro-Rate, or (b) if at any time any Bank shall have determined (which determination shall be conclusive absent manifest error) that: (i) the making, maintenance or funding of any Loan to which a Euro-Rate Option applies has been made impracticable or unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any such Official Body (whether or not have the force of Law), or (ii) such Euro-Rate Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or 44 (iii) after making all reasonable efforts that deposits of the relevant amount in Dollars for the relevant Interest Period for a Loan to which a Euro-Rate Option applies, respectively, are not available to such Bank with respect to a proposed Euro-Rate Loan in the London interbank market, in the case of any event specified in subsection (a) above, then the Administrative Agent shall promptly so notify the Banks and the Borrower thereof and in the case of any event specified in subsection (b) above, such Bank shall promptly so notify the Administrative Agent and endorse a certificate to such notice as to the specific circumstances of such notice and the Administrative Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrower. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of (A) the Banks in the case of such notice given by the Administrative Agent or (B) such Bank in the case of such notice given by such Bank to allow the Borrower to select, convert to or renew a Euro-Rate Option shall be suspended until the Administrative Agent shall have later notified the Borrower or such Bank shall have later notified the Administrative Agent, of the Administrative Agent's or such Bank's, as the case may be, determination (which determination shall be conclusive absent manifest error) that the circumstances giving rise to such previous determination no longer exist. If at any time the Administrative Agent makes a determination under subsection (a) or (b) of this Section 4.04 and the Borrower has previously notified the Administrative Agent of its selection of, conversion to or renewal of a Euro-Rate Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to such Loans. If any Bank notifies the Administrative Agent of a determination under subsection (b) of this Section 4.04, the Borrower shall, subject to the Borrower's indemnification obligations under Section 5.06(b), as to any Loan of the Bank to which a Euro-Rate Option applies, on the date specified in such notice either convert such Loan to the Base Rate Option otherwise available with respect to such Loan or prepay such Loan in accordance with Section 5.04 hereof. Absent due notice from the Borrower of conversion or prepayment such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date. 4.05 Selection of Interest Rate Options. If the Borrower fails to ---------------------------------- select a new Interest Period to apply to any Borrowing Tranche of Loans under the Euro-Rate Option at the expiration of an existing Interest Period applicable to such Borrowing Tranche in accordance with the provisions of Section 4.02, the Borrower shall be deemed to have converted such Loan or portion thereof to the Base Rate Option otherwise available with respect to such Loans, commencing upon the last day of the existing Interest Period. If an Event of Default shall occur and be continuing, the Administrative Agent may in its discretion limit the Borrower to the Base Rate Option hereunder. ARTICLE V PAYMENTS -------- 5.01 Payments. All payments and prepayments to be made in respect of -------- principal, interest, Commitment Fees, Closing Fee, Letter of Credit Fees, Administrative Agent's Fee or other fees or amounts due from the Borrower hereunder shall be payable prior to 11:00 45 A.M. (Pittsburgh time) on the date when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, and without setoff, counterclaim or other deduction of any nature, and an action therefor shall immediately accrue. Such payments shall be made to the Administrative Agent at the Principal Office for the ratable accounts of the Banks with respect to the Loans in U.S. Dollars and in immediately available funds, and the Administrative Agent shall promptly distribute such amounts to the Banks in immediately available funds, provided that in the event payments are received by 11:00 A.M. (Pittsburgh time) by the Administrative Agent with respect to the Loans and such payments are not distributed to the Banks on the same day received by the Administrative Agent, the Administrative Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Administrative Agent and not distributed to the Banks. The Administrative Agent's and each Bank's statement of account, ledger or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement and shall be deemed an "account stated." 5.02 Pro Rata Treatment of Banks. Each borrowing, and each selection --------------------------- of, conversion to or renewal of any Interest Rate Option and each payment or prepayment by the Borrower with respect to principal, interest, Commitment Fees, Closing Fee, Letter of Credit Fees, or other fees or amounts due from the Borrower hereunder to the Banks with respect to the Loans, shall (except as provided in Section 4.04(b) [Euro-Rate Unascertainable], 5.04(b) [Voluntary Prepayments] or 5.06(a) [Additional Compensation in Certain Circumstances] hereof) be made in proportion to the Loans outstanding from each Bank and if no such Loans are then outstanding, in proportion to the Ratable Share of each Bank. 5.03 Interest Payment Dates. Interest on Loans to which the Base ---------------------- Rate Option applies shall be due and payable in arrears on the first Business Day of each April, July, October and January after the date hereof and on the Expiration Date or upon acceleration of the Notes. Interest on Loans to which a Euro-Rate Option applies shall be due and payable on the last day of each Interest Period for those Loans, and if any such Interest Period is longer than three months, also on the last day of every third month during such period. 5.04 Voluntary Prepayments. --------------------- (a) The Borrower shall have the right at its option from time to time to prepay the Loans in whole or part without premium or penalty (except as provided in subsection (b) below or in Section 5.06 hereof): (i) at any time with respect to any Loan to which the Base Rate Option applies, (ii) on the last day of the applicable Interest Period with respect to Loans to which a Euro-Rate Option applies, 46 (iii) on the date specified in a notice by any Bank pursuant to Section 4.04(b) [Euro-Rate Unascertainable] hereof with respect to any Loan to which a Euro-Rate Option applies. Whenever the Borrower desires to prepay any part of the Loans, it shall provide a prepayment notice to the Administrative Agent at least one (1) Business Day prior to the date of prepayment of Loans setting forth the following information: (y) the date, which shall be a Business Day, on which the proposed prepayment is to be made; and (z) the total principal amount of such prepayment, which shall not be less than $5,000,000. All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount except with respect to Loans to which the Base Rate Option applies, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made. Except as provided in Section 4.04(b), if the Borrower prepays a Loan but fails to specify the applicable Borrowing Tranche which the Borrower is prepaying, the prepayment shall be applied first to Loans to which the Base Rate Option applies, and then to Loans to which the Euro-Rate Option applies. Any prepayment hereunder shall be subject to the Borrower's obligation to indemnify the Banks under Section 5.06(b). (b) In the event any Bank gives notice under Section 4.04(b) [Euro-Rate Unascertainable] or Section 5.06(a) [Additional Compensation in Certain Circumstances] hereof, the Borrower shall have the right, with the consent of the Administrative Agent, which shall not be unreasonably withheld, to: (y) prepay the Loans of such Bank, in whole together with all interest accrued thereon and thereby permanently and irrevocably terminate the Commitment of such Bank, or (z) replace such Bank, so long as, in the case of (y) or (z), such replacement or prepayment occurs within ninety (90) days after receipt of such Bank's notice under Section 4.04(b) or 5.06(a), provided the Borrower shall also pay to such Bank in the case of either the foregoing (y) or (z) at the time of such prepayment or replacement any amounts required under Section 5.06 and accrued Commitment Fees due on such amount and all other costs, fees and any amounts due to such Bank being prepaid or replaced. 5.05 Mandatory Prepayments. --------------------- (a) Sale of Assets. Subject to the final sentence of this -------------- paragraph, within five (5) Business Days of either any dissolution or winding up in a transaction or series of related transactions authorized by Section 8.02(f)(ii) or of any sale of assets or related sales of assets authorized by Section 8.02(g) hereof with Net Sale Proceeds in excess of $1,000,000 (in either case a "Qualifying Asset Sale"), the Borrower shall make a mandatory prepayment of principal on the Revolving Credit Loans, together with accrued interest thereon plus any amounts required under Section 5.06. At such time as the aggregate Net Sale Proceeds from all Qualifying Asset Sales pursuant to Section 8.02(f)(ii) or Section 8.02(g) exceed $15,000,000 during the period 47 from and after the Eighteenth Amendment Effective Date through and including the date of determination, then any Net Sale Proceeds from Qualifying Asset Sales in excess of such amount shall be used 50% to repay the outstanding Loans and 50% to repay outstanding Indebtedness under the Term Loan Agreement. In addition to the foregoing mandatory prepayment provisions, in the event that any sale of assets will result in the Borrower or any Subsidiary receiving "Net Cash Proceeds" which would otherwise become "Excess Proceeds" (as each of those terms are defined in the Indenture), then at least sixty (60) days prior to the date any Net Cash Proceeds would become Excess Proceeds under the Indenture, the Borrower shall give written notice to the Administrative Agent thereof setting forth the amount of Net Cash Proceeds at issue. After payment in full of the Term Loans, upon the direction of the Administrative Agent with the consent of the Required Banks, the Borrower shall make a permanent payment of principal on the Revolving Credit Loans in the amount of said Net Cash Proceeds, and the Revolving Credit Commitment of each Bank shall be reduced by its Ratable Share of the principal payment made to such Bank from the Net Cash Proceeds. To the extent the aggregate principal amount of Loans then outstanding which bear interest at the Base Rate Option is less than the principal amount required to be prepaid, the Borrower may elect to defer the prepayment until the next Interest Payment Date on its Loans that bear interest at a Euro-Rate Option, by giving written notice to the Administrative Agent of such election not later than four (4) Business Days after the asset disposition in question, whereupon the due date of such prepayment shall automatically be changed to such Interest Payment Date; provided, however, that Net Cash Proceeds shall, notwithstanding the foregoing, be required to make the prepayment specified in the prior sentence at least five days prior to the date such Net Cash Proceeds would become Excess Proceeds under the Indenture. (b) Application Among Interest Rate Options. All prepayments --------------------------------------- required pursuant to Section 5.05 shall first be applied among the Interest Rate Options to the principal amount of the Loans subject to a Base Rate Option, then to Loans subject to Euro-Rate Option. In accordance with Section 5.06(b), the Borrower shall indemnify the Banks for any loss or expense including loss of margin incurred with respect to any such prepayments applied against Loans subject to a Euro-Rate Option on any day other than the last day of the applicable Interest Period. 5.06 Additional Compensation in Certain Circumstances. ------------------------------------------------ (a) Increased Costs or Reduced Return Resulting From Taxes, ------------------------------------------------------- Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or - ------------------------------------------------------- interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body: (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by the Borrower of principal, interest, Commitment Fees, or other amounts due from the Borrower hereunder or under the Notes (except for taxes on the overall net income of such Bank), 48 (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank, or (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank, or (B) otherwise applicable to the obligations of any Bank under this Agreement, and the result under any of the foregoing clauses (i), (ii) or (iii) is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank with respect to this Agreement, the Notes or the making, maintenance or funding of any part of the Loans (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Bank's capital, taking into consideration such Bank's customary policies with respect to capital adequacy) by an amount which such Bank in its sole discretion deems to be material, such Bank shall from time to time notify the Borrower and the Administrative Agent of the amount determined in good faith (using any averaging and attribution methods employed in good faith) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank for such increase in cost, reduction of income or additional expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. (b) Indemnity. In addition to the compensation required by --------- subsection (a) of this Section 5.06, the Borrower shall indemnify each Bank against all liabilities, losses or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to the Euro-Rate Option) which such Bank sustains or incurs as a consequence of any: (i) payment, prepayment, conversion or renewal of any Loan to which the Euro-Rate Option applies on a day other than the last day of the corresponding Euro-Rate Interest Period (whether or not such payment or prepayment is mandatory, voluntary or automatic and whether or not such payment or prepayment is then due), (ii) attempt by the Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any notice relating to Loan Requests under Section 2.05 or Section 4.02 or prepayments under Section 5.04, or reductions of Revolving Credit Commitments under Section 2.10, or (iii) Event of Default by the Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including without limitation any failure of the Borrower to pay when due (by acceleration or otherwise) any principal, interest, Commitment Fee or any other amount due hereunder. 49 If any Bank sustains or incurs any such loss or expense it shall from time to time notify the Borrower of the amount determined in good faith by such Bank (which determination shall be conclusive absent manifest error and may include such assumptions, allocations of costs and expenses and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans, subject to the Euro-Rate Option provided for herein (excluding, however, the Applicable Percentage Over Euro- Rate included therein, if any) over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ 6.01 Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Agents and each of the Banks as follows: (a) Organization and Qualification. The Borrower, each ------------------------------ Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made are duly organized, validly existing and in good standing under the laws of their respective jurisdiction of organization; the Borrower, each Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made have the power to own or lease their properties and to engage in the business they presently conduct or propose to conduct; and the Borrower and each Subsidiary of the Borrower are duly qualified as a foreign corporation, limited liability company or partnership and in good standing in each jurisdiction listed on Schedule 6.01(a) ---------------- hereto and in all other jurisdictions where the property owned or leased by them or the nature of the business transacted by them or both makes such qualification necessary, except where the failure to so qualify would not have a material adverse effect on the Borrower or any Subsidiary. (b) [Intentionally Omitted]. --------------------- (c) Excluded Entities; Subsidiaries. Schedule 6.01(c) attached ------------------------------- ---------------- hereto states (i) the name of each of the Borrower's Restricted Subsidiaries and each Excluded Entity in which a Restricted Investment has been made, (ii) in the case of each Corporate Subsidiary or Excluded Entity which is a corporation, its jurisdiction of incorporation, its authorized capital stock, the issued and outstanding shares (referred to herein as the "Corporate Shares") and the 50 owners thereof, (iii) in the case of each Partnership Subsidiary or Excluded Entity which is a partnership, the jurisdiction in which it is organized, the type of organization (limited or general partnership) and the owners of its partnership interests (the "Partnership Interests"), and (iv) in the case of each Subsidiary or Excluded Entity which is a limited liability company, the jurisdiction in which it is organized, its authorized member interests, the issued and outstanding member interests (the "Member Interests") and the owners thereof. The Borrower and each Subsidiary have good and valid title to all of the Corporate Shares, Partnership Interests or Member Interests they purport to own, free and clear in each case of any Lien other than under the Loan Documents. All Corporate Shares, Partnership Interests and Member Interests have been validly issued. All Corporate Shares are fully paid and nonassessable. There are no options, warrants or other rights outstanding to purchase any Member Interests, Corporate Shares or Partnership Interests except as indicated on Schedule 6.01(c). ---------------- (d) Power and Authority. Each Loan Party has full power to enter ------------------- into, execute, delivery and carry out this Agreement, the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents and to perform its obligations under the Loan Documents to which it is a party and all such actions have been duly authorized by all necessary proceedings on its part. (e) Validity and Binding Effect. This Agreement has been duly --------------------------- executed and delivered by each Loan Party that is a party hereto, and each other Loan Document, when duly executed and delivered by each Loan Party which is a party thereto, will have been duly executed and delivered by such Loan Party. This Agreement and each other Loan Document delivered by the Loan Parties pursuant to the provisions hereof will constitute legal, valid and binding obligations of the Loan Parties thereto, enforceable against such Loan Party in accordance with their respective terms, except to the extent that (i) enforceability of any of the foregoing Loan Documents may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles and (ii) the exercise by the Banks of their rights with respect to the Collateral would be subject to the prior approval of health care regulatory authorities. (f) No Conflict. Neither the execution and delivery of this ----------- Agreement or the other Loan Documents by the Loan Parties nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof by them will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of the certificate of incorporation, by-laws or other organizational documents of any Loan Party or (ii) of any Law or of any material agreement or instrument or order, writ, judgment, injunction or decree to which any Loan Party is a party or by which it is bound or to which it is subject, or result in the creation of enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of any Loan Party (other than Liens granted under the Loan Documents). (g) Litigation. Except as previously disclosed to the ---------- Administrative Agent in that certain letter dated January 2, 1996 by the Borrower, there are no actions, suits, 51 proceedings or investigations pending or, to the knowledge of the Borrower, threatened against the Borrower or any Subsidiary of the Borrower at law or equity before any Official Body which individually or in the aggregate would constitute a Material Adverse Change. Neither the Borrower nor any Subsidiary of the Borrower is in violation of any order, writ, injunction or any decree of any Official Body which would constitute a Material Adverse Change. (h) Title to Properties. The Borrower and each Subsidiary of the ------------------- Borrower have good and marketable title to or valid leasehold interest in all material properties, assets and other rights which they purport to own or lease or which are reflected as owned or leased on their respective books and records, free and clear of all Liens and encumbrances except Permitted Liens, and subject to the term and conditions of the applicable leases. All material leases of real property are in full force and effect without the necessity for any consent which has not previously been obtained for the consummation of the transaction contemplated hereby. (i) Financial Statements. -------------------- (i) Historical Statements. --------------------- The Borrower has delivered to the Administrative Agent copies of its audited consolidated year-end financial statements for and as of the end of the fiscal years ended December 31, 1996, 1997 and the unaudited consolidated statements for the fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 (collectively the "Historical Statements"). The Historical Statements were compiled from the books and records maintained by the Borrower's management, fairly present the consolidated financial condition of the Loan Parties (which were Loan Parties as of the date of the respective Historical Statements) as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP consistently applied, subject (in the case of the interim statements) to normal year-end audit adjustments. (ii) Accuracy of Financial Statements. Neither the Borrower -------------------------------- nor any Subsidiary of Borrower has any liabilities, contingent or otherwise, or material forward or long-term commitments that are not disclosed in the Historical Statements or in the notes thereto or that are required to be disclosed under GAAP, and except as disclosed therein there are no unrealized or anticipated losses from any commitments of the Borrower or any Subsidiary which may cause a Material Adverse Change. Since December 31, 1997, no Material Adverse Change has occurred; provided, however, that with the written approval of the Required Banks, express disclosures to the Banks by the Borrower in the reports provided by the Borrower to the Banks, pursuant to Section 8.03 hereof, shall be deemed to be an update and an exception to the representation made in the foregoing portion of this sentence. (iii) Projections. The Borrower has delivered to the ----------- Administrative Agent financial projections of the Borrower and its Subsidiaries prepared on a combined pro-forma basis for the two fiscal years ending September 30, 1998 and September 30, 1999 and for the fiscal quarter of October 1 through December 31, 1999 (the "Financial Projections") derived from various assumptions of the Borrower's management. The Financial Projections represent a reasonable range of possible results in light of the history of the business, 52 present and foreseeable conditions and the intentions of the management of the Borrower. The Financial Projections accurately reflect the liabilities of the Borrower and its Subsidiaries upon consummation of the transactions contemplated hereby as of the Eighteenth Amendment Effective Date. (j) Margin Stock. Neither the Borrower nor any Subsidiary ------------ engages or intends to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (within the meaning of Regulation U). No part of the proceeds of any Loan has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. (k) Full Disclosure. Neither this Agreement nor any other Loan --------------- Document contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading considered as a whole; provided that any information provided after the date hereof shall be deemed to supersede any prior inconsistent information. There is no fact known to the Borrower or any Subsidiary which materially adversely affects the business, property, assets, financial condition, results of operations or prospects of the Borrower or any Material Subsidiary, which: (i) prior to or at the date hereof, has not been set forth in the Agreement or in the certificates, statements, agreements or other documents furnished in writing to the Administrative Agent and the Banks in connection with the transactions contemplated hereby or in the Borrower's public filings with the Securities and Exchange Commission, or (ii) following the date hereof and with the written approval of the Required Banks, has not been set forth in other documents furnished in writing to the Administrative Agent and the Banks. (l) Taxes. All material federal, state, local and other tax ----- returns required to have been filed with respect to the Borrower or any Subsidiary have been filed and payment or adequate provision has been made for the payment of all taxes, fees, assessments and other governmental charges which have or may become due pursuant to said returns or to assessments received except to the extent that such taxes, fees, assessments and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. As of the date hereof, there are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of the Borrower or any Subsidiary for any period. (m) Consents and Approvals. Except as may be disclosed by the ---------------------- Borrower to the Administrative Agent pursuant to Section 8.01(p),no consent, approval, exemption, order or authorization of, or a registration or filing with any Official Body or any other person is required by any Law or any agreement in connection with the execution, delivery 53 and carrying out of this Agreement, or the other Loan Documents by any Loan Party, all of which have been obtained or made; provided, however, that it is acknowledged that consent of health care regulatory authorities issuing any licenses or regulating any health care facilities may be required if the Administrative Agent on behalf of the Banks exercises the rights and remedies in respect of the Pledged Collateral and such exercise of remedies results in or constitutes an assignment of any health care license issued by a health care regulatory authority or constitutes a change of control with respect to the ownership of a health care facility. (n) Compliance With Instruments. Neither the Borrower nor any --------------------------- Subsidiary is in violation of (i) any term of its certificate of incorporation, by-laws, or other organizational documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound where such violation would constitute a Material Adverse Change. (o) Patents, Trademarks, Copyrights, Etc. The Borrower and each ------------------------------------ Subsidiary owns or possesses all the material patents, trademarks, service marks, trade names, copyrights and other intellectual property rights necessary to own and operate its properties and to carry on its business as presently conducted and planned to be conducted by the Borrower and each Subsidiary, without known conflict with the rights of others. (p) Security Interests in the Collateral. The Liens and security ------------------------------------ interests granted to the Collateral Agent (or, the Agent, in the case of the Mortgages and Leasehold Mortgages filed prior to the Eighteenth Amendment Effective Date, as the case may be) for the benefit of the Banks pursuant to the Pledge Agreements, the Patent, Trademark and Copyright Security Agreement, the Security Agreement, the First Mortgages, the Mortgages and Leasehold Mortgages in the UCC Collateral constitute, and will continue to constitute, Prior Security Interests under the Uniform Commercial Code as in effect in each applicable jurisdiction (the "Uniform Commercial Code") or valid first priority Liens under other applicable Law entitled to all the rights, benefits and priorities provided by the Uniform Commercial Code or such Law to the fullest extent permitted by applicable law, except that the security interests in the Collateral under the Mortgages and Leasehold Mortgages may be subordinated to the security interests granted to certain of the Lessor Lenders or Owned Facility Lenders, as indicated on Schedule 6.01(aa) and, except in the case of the Collateral other than Pledged Collateral, subject to Permitted Liens. Upon the filing of financing statements relating to said security interests in each office and in each jurisdiction where required in order to perfect the security interests described above, recordation of the Patent, Trademark and Copyright Security Agreement in the United States Patent and Trademark Office (and, to the extent of any Collateral consisting of copyrights, in the United States Copyright Office), and taking possession of the stock certificates or certificates of ownership of member interests in a limited liability company, as the case may be, evidencing the Pledged Collateral which constitutes stock of a corporation or certificated member interests of a limited liability company, as the case may be, all such action as is necessary or advisable to establish such rights of the Collateral Agent (or, the Agent, in the case of the Mortgages and Leasehold Mortgages filed prior to the Eighteenth Amendment Effective Date, as the case may be) will have been taken, and there will be upon execution and delivery of the Patent, Trademark and Copyright Security Agreement, the Security Agreement, the First 54 Mortgages, the Pledge Agreements, Mortgages and Leasehold Mortgages, such filings, and such taking of possession no necessity for any further action in order to preserve, protect and continue such rights, except for maintaining possession of such certificates and filing continuation statements with respect to such financing statements within six (6) months prior to each five-year anniversary of the filing of such financing statements. Any expenses in connection with each such action have been or will be paid by the Borrower. It is acknowledged that the exercise by the Banks of their rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license issued by a health care regulatory authority or any change of control with respect to a health care facility may be subject to the prior approval of such health care regulatory authorities. (q) First Mortgage Liens. The Liens granted to the Collateral -------------------- Agent for the benefit of the Banks pursuant to the First Mortgages constitute a valid first priority Lien under applicable law, subject only to Permitted Liens. All such action as will be necessary or advisable to establish such Lien of the Collateral Agent and its priority as described in the preceding sentence will be taken at or prior to the time required for such purpose, and there will be as of the date of execution and delivery of the First Mortgages not necessity for any further action in order to protect, preserve and continue such Lien and such priority. (r) Status of the Pledged Collateral. All the shares of capital --------------------------------- stock, partnership interests, or member interests in a limited liability company, as the case may be, included in the Pledged Collateral to be pledged pursuant to the Pledge Agreements are or will be upon issuance duly authorized and validly issued. All shares of capital stock included in the Pledged Collateral are or will be upon issuance fully paid and nonassessable. All of the Pledged Collateral is owned beneficially and of record by the pledgor free and clear of any Lien or restriction on transfer, except as otherwise provided in the Pledge Agreements and except as the right of the Collateral Agent and the Banks to dispose of the Pledged Collateral may be limited by the Securities Act of 1933, as amended, and the regulations promulgated by the Securities and Exchange Commission thereunder and by applicable state securities laws. Except as otherwise disclosed to the Banks, in writing, there are no shareholder or other agreements or understandings with respect to the Pledged Collateral. (s) Insurance. The insurance policies and bonds to which the --------- Borrower or any Subsidiary is a party provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of the Borrower and its Subsidiaries in accordance with prudent business practice in the industry of the Borrower and its Subsidiaries, including self- insurance to the extent customary, and such policies and bonds are valid and in full force and effect. (t) Compliance with Laws. The Borrower and its Subsidiaries are -------------------- in compliance in all material respects with all applicable Laws (other than Environmental Laws which are specifically addressed in subsection (y)) in all jurisdictions in which the Borrower or any Subsidiary is presently or will be doing business except where the failure to do so would not constitute a Material Adverse Change. 55 (u) Material Contracts, Licenses, Permits and Approvals. --------------------------------------------------- (A) As of the date hereof, Schedule 6.01(u) hereto ---------------- lists the following contracts relating to the business operations of the Borrower and its Subsidiaries: (i) all employee benefit plans, employment agreements where the compensation paid by the Borrower or any Subsidiary exceeds $250,000 in any fiscal year, collective bargaining agreements and labor contracts (the "Labor Contracts"), (ii) all written provider or similar agreements (the "Provider Agreements") pursuant to which the Borrower and its Subsidiaries have received or may claim any entitlement to receive reimbursement from or as a result of (1) Medicaid, Medicare or Blue Cross programs, or (2) any other public or private reimbursement programs where the payments received by the Borrower or any Subsidiary exceeded or are expected to exceed $6,000,000 in the current fiscal year, (iii) all leases of real property where the payments made by the Borrower or any Subsidiary in the current fiscal year exceed or are expected to exceed $250,000, (iv) any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, where the payments made by the Borrower or any Subsidiary exceeded or are expected to exceed $1,000,000 in the aggregate in the current fiscal year; (v) all management contracts pursuant to which the Borrower or a Subsidiary provides management services to any other person where the payments received or expected to be received by the Borrower or any Subsidiary exceed $500,000 in the current fiscal year; and (vi) all other material contracts filed as exhibits to any report filed by the Borrower with the SEC during the past twelve months. All contracts listed on Schedule 6.01(u) and any Provider Agreements which provide ---------------- for annual payments in excess of $6,000,000 which are not listed on Schedule -------- 6.01(u) are valid, binding and enforceable upon the Borrower or its - ------- Subsidiaries, as the case may be, and, to the best knowledge of the Borrower, each of the other parties thereto in accordance with their respective terms and there is no default thereunder, to the knowledge of the Borrower and of its Subsidiaries, with respect to parties other than the Borrower or any of its Subsidiaries. There are no patient care agreements with patients or any other person or organization which deviate in such a material respect from the standard patient care forms used by the Borrower or any of its Subsidiaries as to constitute a Material Adverse Change. (B) Except as set forth on Schedule 6.01(u), the ---------------- Borrower and each of its Subsidiaries has all material accreditations, authorizations, approvals, certificates of need, consents, licenses, permits and qualifications (collectively, "Approvals") required (i) for them to construct, acquire, own, manage, lease and/or operate their facilities and services, (ii) for them to receive payment and reimbursement from any patient or third party payor, to the extent in the case of (i) and (ii) such Approvals are presently required. The Borrower and each of its Subsidiaries have all other material Approvals required for the lawful operation of their businesses. All material Approvals of the Borrower and each of its Subsidiaries are in full force and effect and have not been amended or otherwise modified (except for modifications which would not have a material adverse effect upon the Borrower or any Subsidiary) rescinded, revoked or assigned, and no notice has been received of any violation of applicable Laws or any refusal to renew any Approval which could reasonably be expected to cause any of such Approvals to be modified, rescinded or revoked (except for modifications, rescissions or revocations which would not have a material adverse effect upon the Borrower and 56 its Subsidiaries taken as a whole). The continuation, validity and effectiveness of all such Approvals will be in no way be adversely affected by the transactions contemplated by this Agreement. Neither the Borrower nor any of its Subsidiaries knows of any reason why any of them will not be able to maintain all material Approvals necessary or appropriate to construct, own, lease, manage and operate all of their facilities and to otherwise conduct their businesses as now conducted and presently proposed to be conducted. There are no deficiencies to the conditions for participation by the Borrower or any Subsidiary in any Medicare, Medicaid or other reimbursement programs which would preclude such participation. (v) Investment Companies; Public Utility Holding Company. The ---------------------------------------------------- Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940 or under the "control" of an "investment company" as such terms are defined in the Investment Company Act of 1940 and shall not become such an "investment company" or under such "control." The Borrower is not a "holding company" nor a "subsidiary" or "affiliate" of any Person that is a "holding company" as those terms are defined in the Public Utility Holding Company Act of 1935. (w) Plans and Benefit Arrangements. ------------------------------ (i) The Borrower and each member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans and Multiemployer Plans. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrower, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of the Borrower or any other member of the ERISA Group. The Borrower and all members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any law pertaining thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. (ii) To the best of the Borrower's knowledge, each Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder when due. (iii) Neither the Borrower nor any other member of the ERISA Group has instituted or intends to institute proceedings to terminate any Plan. (iv) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan. (v) The aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as 57 disclosed in, and as of the date of, the most recent actuarial report for such Plan, does not exceed the aggregate fair market value of the assets of such Plan by an amount in excess of $250,000. (vi) Neither the Borrower nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of the Borrower, no Multiemployer Plan or Multiple Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA. (vii) To the extent that any Benefit Arrangement is insured, the Borrower and all members of the ERISA Group have paid when due all premiums required to be paid for all periods. To the extent that any Benefit Arrangement is funded other than with insurance, the Borrower and all members of the ERISA Group have made when due all contributions required to be paid for all periods. (x) Employment Matters. The Borrower and each of its ------------------ Subsidiaries are in compliance with the Labor Contracts and all applicable federal, state and local labor and employment Laws including, but not limited to, those related to equal employment opportunity and affirmative action, labor relations, minimum wage, overtime, child labor, medical insurance continuation, worker adjustment and relocation notices, immigration controls and worker and unemployment compensation, where the failure to comply would constitute a Material Adverse Change. There are no outstanding grievances, arbitration awards or appeals therefrom arising out of the Labor Contracts or current or threatened strikes, picketing, handbilling or other work stoppages or slowdowns at facilities of the Borrower or any of its Subsidiaries which in any case would constitute a Material Adverse Change. The Borrower has delivered to the Administrative Agent true and correct copies of each of the Labor Contracts in effect as of the date hereof. (y) Environmental Matters. Except as disclosed on Schedule --------------------- -------- 6.01(y) hereto and except for matters which would not exceed $5,000,000 in the - ------- aggregate: (i) Neither Borrower nor any of its Subsidiaries has received any Environmental Complaint, whether directed or issued to Borrower or any of its Subsidiaries or relating or pertaining to any prior owner, operator or occupant of the Property. (ii) To the knowledge of Borrower and each of its Subsidiaries, no activity of the Borrower or any of its Subsidiaries at the Property is being or has been conducted in violation of any Environmental Law or Required Environmental Permit and to the knowledge of Borrower and each of its Subsidiaries no activity of any prior owner, operator or occupant of the Property was conducted in violation of any Environmental Law. (iii) To the knowledge of Borrower and each of its Subsidiaries, there are no Regulated Substances present on, in, under or emanating from, or emanating to, the Property or any portion thereof which result in Contamination. 58 (iv) To the knowledge of Borrower and each of its Subsidiaries, Borrower and each of its Subsidiaries have all Required Environmental Permits and all such Required Environmental Permits are in full force and effect. (v) To the knowledge of Borrower and each of its Subsidiaries, Borrower and each of its Subsidiaries have submitted all Required Environmental Notices which they are required to submit to an Official Body and Borrower and each of its Subsidiaries maintain all Required Environmental Notices which they are required to maintain. (vi) To the knowledge of Borrower and each of its Subsidiaries, no structures, improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks located on the Property contain or use, except in compliance with Environmental Law and Required Environmental Permits, Regulated Substances or otherwise are operated or maintained except in compliance with Environmental Law and Required Environmental Permits. To the knowledge of Borrower and each of its Subsidiaries, no structures improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks of prior owners, operators or occupants of the Property contained or used, except in compliance with Environmental Law, Regulated Substances or otherwise were operated or maintained by any such prior owner, operator or occupant except in compliance with Environmental Law. (vii) To the knowledge of Borrower and each of its Subsidiaries, no facility or site to which Borrower or any of its Subsidiaries, either directly or indirectly by a third party, has sent Regulated Substances for storage, treatment, disposal or other management has been or is being operated in violation of Environmental Law or pursuant to Environmental Law is identified or proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Law are the subject of an investigation, cleanup, removal, remediation or other response action by an Official Body. (viii) To the knowledge of Borrower and each of its Subsidiaries, no portion of the Property is identified or proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Law are the subject of an investigation or remediation action by an Official Body, nor to Borrower's or any of its Subsidiary's knowledge is any property adjoining or in the proximity of the Property identified or proposed to be identified on any such lists. (ix) To the knowledge of Borrower and each of its Subsidiaries, no portion of the Property constitutes an Environmentally Sensitive Area. (x) No lien or other encumbrance authorized by Environmental Law exists against the Property and neither Borrower nor any of its Subsidiaries has reason to believe that such a lien or encumbrance may be imposed. (xi) To the knowledge of Borrower and each of its Subsidiaries, there has been no material change in the environmental condition (including but not limited to the presence of Contamination or the presence of Regulated Substances in violation of 59 Environmental Law) of any Property as described in any Phase I Environmental Site Assessment report or similar report regarding the environmental condition of such Property or the Borrower's or its Subsidiaries' compliance with Environmental Law a copy of which Borrower has provided to Agent, except for such changes which would result in the improvement of the environmental condition of any such Property or the Borrower's or its Subsidiaries compliance with Environmental Law. (z) Senior Debt Status. The obligations of the Borrower under ------------------ this Agreement and the Notes and the obligations of the Subsidiaries of Borrower under the Guaranties do rank and will rank at least pari passu in priority of ---- ----- payment with all other Indebtedness of the Borrower or such Subsidiaries, as the case may be, except Indebtedness of the Borrower or its Subsidiaries to the extent secured by Permitted Liens. The obligations of the Borrower under this Agreement and the Notes do not conflict with or violate the terms of the Indenture and any Loans hereafter made to the Borrower will constitute "Permitted Indebtedness" as such term is defined in the Indenture of the type described in clause (i) of such definition and will also constitute "Designated Senior Indebtedness" as such term is also defined in the Indenture. There is no Lien upon or with respect to any of the properties or income of the Borrower or any of its Subsidiaries which secures Indebtedness or other obligations of any person except for Permitted Liens. (aa) Matters Regarding Leased Facilities and Certain ----------------------------------------------- Indebtedness of Subsidiaries. - ---------------------------- (i) Indebtedness Related to Leased Facilities. Schedule ----------------------------------------- -------- 6.01(aa) describes each Leased Facility and with respect thereto: (1) the - -------- Subsidiary Lessee which is the lessee thereof; (2) the Lessor thereof; (3) the amount of Lessor Indebtedness secured by any assets of such Leased Facility; (4) the Lessor Lender which is the obligee under such Lessor Indebtedness; (5) any assets of the Subsidiary Lessee leasing such Leased Facility which relate to such facility in which such Subsidiary Lessee has granted Liens in favor of the Lessor (it is acknowledged that the Lessor has assigned such Liens to the Lessor Lender) or Lessor Lender and confirmation that such Liens are Permitted Leased Facility Liens and Permitted Liens; (6) the original maturity date of such Lessor Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (7) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Administrative Agent (or Collateral Agent, as the case may be) and the Lessor Lender with respect to such Leased Facility; (8) whether the Lessor Lender and Lessor have consented to the grant by the Subsidiary Lessee of a Leasehold Mortgage, in favor of the Administrative Agent (or Collateral Agent, as the case may be) for the benefit of the Banks and Liens on the assets of such Subsidiary Lessee (such Liens to be second in priority to the Liens granted by such Subsidiary Lessee to such Lessor Lender in such assets if such Subsidiary granted Liens in such assets to such Lessor Lender) with respect to such Leased Facility; (9) whether the applicable Lessor Lender has agreed to release its liens in the assets of the applicable Subsidiary Lessee leasing such Leased Facility related to such facility; (10) whether the applicable Lessor Lender has entered into a Non-Disturbance Agreement; (11) whether the applicable Lessor Lender has entered into an Intercreditor Agreement with the Administrative Agent (or Collateral Agent, as the case may be); 60 and (12) whether the applicable Lessor Lender has entered into a Trustee Agreement with the Administrative Agent. (ii) Indebtedness Related to Subsidiary Owned Facilities. --------------------------------------------------- Schedule 6.01(aa) describes each Owned Facility and with respect thereto: (1) - ----------------- the Subsidiary Owner; (2) the amount of the Owned Facility Indebtedness, secured by any assets of such Owned Facility; (3) the Owned Facility lender which is the obligee under such Owned Facility Indebtedness; (4) the assets of the Subsidiary Owner relating to such Owned Facility in which the Subsidiary Owner has granted Liens in favor of such Owned Facility Lender and confirmation that such Liens are Permitted Owned Facility Liens and Permitted Liens; (5) the original maturity date of such Owned Facility Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (6) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Administrative Agent (or Collateral Agent, as the case may be) and the Owned Facility Lender with respect to such Owned Facility; (7) whether the Owned Facility Lender has consented to the grant by the Subsidiary Owner of a Mortgage, in favor of the Administrative Agent (or Collateral Agent, as the case may be) for the benefit of the Banks and Liens on the assets of such Subsidiary Owner (such Liens to be second in priority to the Liens granted by such Subsidiary Owner to such Owned Facility Lender in such assets if such Subsidiary Owner granted Liens in such assets to such Owned Facility Lender) with respect to such Owned Facility; and (8) whether the applicable Owned Facility Lender entered into an Intercreditor Agreement with Administrative Agent (or Collateral Agent, as the case may be). (iii) Other matters regarding Owned and Leased Real --------------------------------------------- Property. In addition to the Owned Facilities and the Leased Facilities, - -------- Schedule 6.01(aa) sets forth a true and complete list of all other Property of - ----------------- the Borrower and all other Property of each Subsidiary of the Borrower. (bb) Mortgage and Leasehold Mortgage Liens. The Liens granted to ------------------------------------- the Administrative Agent (or Collateral Agent, as the case may be) for the benefit of the Banks pursuant to the Mortgages and the Leasehold Mortgages constitute valid Liens under applicable law having priority over all other Liens except that if otherwise permitted by this Agreement they may be subordinate to Liens in favor of the Owned Facility Lenders and Lessor Lenders, as the case may be, and Schedule 6.01(aa) indicates if such Liens are subordinated. All such ----------------- action as will be necessary or advisable to establish such Liens of the Administrative Agent (or Collateral Agent, as the case may be) and its priority as described in the preceding sentence will be taken at or prior to the time required for such purpose, and there will be as of the date of execution and delivery of the Mortgages and Leasehold Mortgages no necessity for any further action in order to protect, preserve and continue such Liens and such priority. Notwithstanding any provision of this Agreement to the contrary, to the extent a Loan Party is required to execute and deliver an Intercreditor Agreement, Leasehold Mortgage or Mortgage, as required by this Agreement, on or after the Eighteenth Amendment Effective Date, such agreement shall be entered into by such Loan Party with the Collateral Agent for the ratable benefit of the Banks and on a pari passu basis, the Term Loan Banks (in lieu of the Administrative Agent for the benefit of the Banks) unless otherwise required by the Administrative Agent. 61 (cc) Affiliate Transactions. Schedule 6.01(cc) hereto sets forth ---------------------- ----------------- a true and complete list of all transactions between the Borrower or any Subsidiary of the Borrower and MPN or any Affiliate of MPN. (dd) Year 2000. The Borrower and its Subsidiaries have reviewed --------- the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the risk that certain computer applications used by the Borrower or its Subsidiaries (or any of their respective material suppliers, customers or vendors) may be unable to recognize and perform properly date-sensitive functions involving dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not result in any Material Adverse Change. (ee) Solvency. The Borrower and each other Loan Party is -------- Solvent. As of the Closing Date and after giving effect to the transactions contemplated by the Loan Documents and the Term Loan Documents, including all Loans made under the Loan Documents and the Term Loan Documents, the Liens granted by the Borrower and each other Loan Party in connection therewith and the payment of all fees related thereto, the Borrower and each other Loan Party will be Solvent. 6.02 Updates to Schedules. Should any of the information or -------------------- disclosures provided on any of the Schedules attached hereto (other than Schedules relating solely to representations and warranties made solely as of the date expressly specified therein, which representations and warranties shall be true and correct as of such specified date) become outdated or incorrect in any material respect, the Borrower shall promptly provide the Administrative Agent in writing with such revisions or updates to such Schedule as may be necessary or appropriate to update or correct the same; provided, however that no Schedule shall be deemed to have been amended, modified or superseded by any such correction or update that would disclose the occurrence of an event or condition which constitutes a Potential Default or Event of Default, nor shall any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule be deemed to have been cured thereby, unless and until the Required Banks, in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule. ARTICLE VII CONDITIONS OF LENDING --------------------- The obligation of each Bank to make Revolving Credit Loans and of the Administrative Agent to issue Letters of Credit hereunder is subject to the performance by the Borrower of its obligations to be performed hereunder at or prior to the making of any such Revolving Credit Loans or issuance of such Letters of Credit and to the satisfaction of the following conditions: 7.01 Each Additional Revolving Credit Loan. At the time of making ------------------------------------- any Revolving Credit Loans or issuing any Letters of Credit other than the Revolving Credit Loan made on the Closing Date hereunder and after giving effect to the proposed borrowings: the representations and warranties of the Borrower contained in Article VI hereof shall be true on 62 and as of the date of such additional Revolving Credit Loan with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein) and the Borrower shall have performed and complied with all covenants and conditions hereof; no Event of Default or Potential Default shall have occurred and be continuing or shall exist; the making of the Revolving Credit Loans or issuing of such Letters of Credit shall not contravene any Law applicable to the Borrower or any of the Banks; and the Borrower shall have delivered to the Administrative Agent a duly executed and completed Loan Request. ARTICLE VIII COVENANTS --------- 8.01 Affirmative Covenants. The Borrower covenants and agrees that --------------------- until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower shall comply at all times with the following affirmative covenants: (a) Preservation of Existence, Etc. The Borrower shall, and ------------------------------ shall cause each of its Subsidiaries to, maintain its corporate existence and its qualification to do business as a foreign corporation and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such qualification necessary, except where the failure to be so qualified or in such good standing would not constitute a Material Adverse Change. (b) Payment of Liabilities, Including Taxes, Etc. The Borrower -------------------------------------------- shall, and shall cause each of its Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges, are being contested in good faith and by appropriate and lawful proceedings diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, but only to the extent that failure to discharge any such liabilities would not result in any additional liability which would adversely affect to a material extent the financial condition of the Borrower and its Subsidiaries taken as a whole and which would affect the Collateral. (c) Maintenance of Insurance. The Borrower shall, and shall ------------------------ cause each of its Subsidiaries to, insure its properties and assets against loss or damage by fire and such other insurable hazards as such assets are commonly insured (including fire, extended coverage, property damage, worker's compensation, public liability and business interruption insurance) and against other risks (including errors and omissions) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary. At the request of the Administrative Agent, the Borrower shall deliver to the 63 Administrative Agent certificates of insurance signed by the Borrower's independent insurance broker describing and certifying as to the existence of the insurance on the Collateral required to be maintained by this Agreement and other Loan Documents and a summary schedule indicating all insurance then in force with respect to the Borrower. Such policies of insurance shall contain special endorsements, which shall (i) specify the Collateral Agent as additional insured, mortgagee and lender loss payee as its interests may appear, regardless of any breach or violation by the Borrower or its applicable subsidiary of any warranties, declarations or conditions contained in such policies, (ii) provide, except in the case of public liability insurance and workmen's compensation insurance, that all insurance proceeds shall be adjusted and payable in accordance with the terms of the applicable Mortgage or First Mortgage, and (iii) provide that no cancellation of such policies shall be effective until at least thirty (30) days after receipt by the Administrative Agent of written notice of such cancellation or change. Any monies received by the Administrative Agent or Collateral Agent constituting insurance proceeds or condemnation proceeds (pursuant to the Mortgage or First Mortgage) shall be applied in accordance with the terms of the applicable Mortgage or First Mortgage. The insurance requirements set forth herein may be satisfied through blanket insurance obtained and maintained by MPN. (d) Maintenance of Properties and Leases. The Borrower shall, ------------------------------------ and shall cause each of its Subsidiaries to, maintain in good repair, working order and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and from time to time, the Borrower will make or cause to be made all appropriate repairs, renewals or replacements thereof. (e) Maintenance of Patents, Trademarks, Etc. The Borrower shall, ---------------------------------------- and shall cause each of its Subsidiaries to, maintain in full force and effect all patents, trademarks, trade names, copyrights, licenses, franchises, permits and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change. (f) Visitation Rights. The Borrower shall, and shall cause each ----------------- of its Subsidiaries to, permit any of the officers or authorized employees or representatives of any Agent or any of the Banks to visit and inspect any of its properties and to examine and make excerpts from its books and records and discuss its business affairs, finances and accounts with its officers, all in such detail and at such times during normal business hours and as often as any of the Banks may reasonably request, provided that each Bank shall provide the Borrower and the Administrative Agent with reasonable notice prior to any visit or inspection. In the event any Bank desires to conduct an audit of the Borrower, such Bank shall make a reasonable effort to conduct such audit contemporaneously with any audit to be performed by the Administrative Agent. (g) Keeping of Records and Books of Account. The Borrower shall, ---------------------------------------- and shall cause each of its Subsidiaries to, maintain and keep proper books of record and account which enable the Borrower and its Subsidiaries to issue financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction 64 over the Borrower or any of its Subsidiaries, and which accurately and fairly reflect the transactions and dispositions of assets of the Borrower or such Subsidiary. (h) Plans and Benefit Arrangements. The Borrower shall, and ------------------------------ shall cause each member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other applicable Laws applicable to Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, the Borrower shall cause all of its Plans and all Plans maintained by any member of the ERISA Group to be funded in accordance with the minimum funding requirements of ERISA and shall make, and cause each member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans. (i) Compliance With Laws. The Borrower shall, and shall cause -------------------- each of its Subsidiaries to, comply with all applicable Laws, including all Environmental Laws, in all respects provided that it shall not be deemed to be a violation of this Section 8.01(i) if any failure to comply with any Law would not result in fines, penalties, other similar liabilities or injunctive relief which in the aggregate would constitute a Material Adverse Change. Upon the reasonable request of the Required Banks, the Borrower shall deliver to the Agents and the Banks such opinions of counsel regarding the Loan Parties' compliance with the representations set forth in Sections 6.01(m) and 6.01(u)(B) hereof and other customary matters regarding the compliance of the Loan Parties with applicable healthcare regulatory Laws. (j) Use of Proceeds. The Borrower will use the proceeds of the --------------- Loans only for lawful purposes in accordance with Section 2.08 hereof as applicable and such uses shall not contravene any applicable Law or any other provision hereof. (k) [Intentionally Omitted]. ----------------------- (l) Subordination of Intercompany Loans, Other Loans and ---------------------------------------------------- Advances to the Borrower. Except for Indebtedness described on Schedule 8.01(l), - ------------------------ ---------------- the Borrower shall cause any intercompany Indebtedness, and shall cause any other Indebtedness, loans or advances owed by any Loan Party to any other person (other than a Loan Party) to be subordinated to the Loan Parties' obligations under the Loan Documents on the terms set forth in Exhibit 8.01(l), with such --------------- revisions thereto as are reasonably satisfactory to the Agents. (m) Approval of Financial Statements in Permitted Acquisitions; ----------------------------------------------------------- Notice of Permitted Acquisition. - ------------------------------- (i) Approval of Financial Statements. The Borrower shall -------------------------------- deliver to the Banks a certificate in the form of Exhibit 8.01(m)(i) hereof (the ------------------ "Acquisition Approval Certificate") before making a Permitted Acquisition if they desire that the cash flow of the business to be acquired during periods prior to the acquisition shall be included when they compute Cash Flow from Operations under this Agreement. The Borrower shall attach to such Acquisition Approval Certificate copies of the historical financial statements of the business to be acquired including the annual and interim balance sheets and income statements for at least 65 three (3) fiscal years prior to the Permitted Acquisition and pro forma statements which shall include a combined balance sheet as of the acquisition date and cash flow statements for the preceding year. The pro forma statements shall set forth: (1) Consolidated Cash Flow from Operations of the Loan Parties and the acquired business, adjusted in accordance with clause (A) of the definition of Consolidated Cash Flow from Operations, for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and the Loans to be made on such date, and (3) the ratio of the amount in clause (2) to the amount in clause (1), which ratio shall not exceed (A) 5.75 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. The Acquisition Approval Certificate shall confirm the accuracy of the foregoing computations and that, after giving effect to the Permitted Acquisition and the Loans made on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such Permitted Acquisition. The Loan Parties may make the Permitted Acquisition prior to receiving the Required Banks' approval of Borrower's Acquisition Approval Certificate with respect thereto; provided that the Loan Parties may not, until they have received such approval, include the cash flow of the business to be acquired for periods prior to the acquisition in their net income when they compute Consolidated Cash Flow from Operations. The Banks shall use their best efforts to respond to the Borrower's request for approval of each Acquisition Approval Certificate within two (2) Business Days following the Banks' receipt of such certificate and shall not unreasonably withhold or delay such approval. (ii) Notice. The Borrower shall deliver to the Banks a ------ notice in the form of Exhibit 8.01(m)(ii) (the "Acquisition Notice Certificate") ------------------- at least two (2) Business Days before making any Permitted Acquisition except for: (1) a Permitted Acquisition described in Section 8.01(m)(i) with respect to which the Borrower is delivering an Acquisition Approval Certificate, or (2) a Permitted Acquisition if the Purchase Price in connection therewith is less than $2,500,000. The Acquisition Notice Certificate shall set forth the ratio of (1) Consolidated Cash Flow From Operations (excluding the cash flow of the acquired business) for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and the Loans to be made on such date, which ratio shall not exceed (A) 5.75 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. The Acquisition Notice Certificate also shall confirm that, after giving effect to the Permitted Acquisition and the Loans made on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such Permitted Acquisition. 66 (iii) Additional Information. With respect to any ---------------------- Acquisition Approval Certificate or Acquisition Notice Certificate, the Borrower shall provide to the Banks, as the Banks may reasonably request detailed calculations and information supporting the financial calculations therein and the financial statements attached thereto. (n) [Intentionally Omitted]. ----------------------- (o) [Intentionally Omitted]. ----------------------- (p) Further Assurances. Each Loan Party shall, from time to ------------------ time, at its expense, faithfully preserve and protect the Administrative Agent's Lien and the Collateral Agent's Lien on or perfected security interest in the Collateral as a continuing first priority perfected Lien, subject only to Permitted Liens, and shall do such other acts and things as the Administrative Agent or the Collateral Agent, as the case may be, in its sole discretion may deem necessary or advisable from time to time in order to preserve, perfect and protect the Liens granted under the Loan Documents and to exercise and enforce its respective rights and remedies thereunder with respect to the Collateral. The Loan Parties shall (i) provide to the Administrative Agent and the Collateral Agent within thirty (30) days of the Eighteenth Amendment Effective Date a list of all material contracts or agreements which by their terms do not permit the grant of a security interest therein; (ii) use commercial reasonable best efforts to obtain within ninety (90) days of the Eighteenth Amendment Effective Date any consents or approvals of security interests in any such contract or agreement granted to the Administrative Agent or the Collateral Agent; (iii) to the extent any such consent or approval is obtained and upon receipt thereof, promptly deliver to the Administrative Agent and the Collateral Agent any original of such consent or approval obtained or such other evidence in a form satisfactory to the Administrative Agent and the Collateral Agent of any such consent or approval obtained. (q) Certain Owned Facilities - Termination of Liens; ----------------------------------------------- Intercreditor Agreements. - ------------------------ The Borrower shall: (i) Cause any Lien securing any Owned Facility Indebtedness to be terminated on or before the earlier of: the maturity of such Owned Facility Indebtedness (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless such extension of maturity is otherwise approved in accordance with this Agreement) or any refinancing, replacement or substitution of such Owned Facility Indebtedness, unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Owned Facility Indebtedness secured by Liens in favor of an Owned Facility Lender to exceed the amount of such Owned Facility Indebtedness existing on the Sixteenth Amendment Effective Date; 67 (iii) Cause each Subsidiary Owner to not grant a Lien on any asset of such Subsidiary Owner if the Owned Facility Lender has previously terminated its Liens or has never obtained a Lien on such asset; and (iv) Cause each Owned Facility Lender and any other person which loans money to any Subsidiary Owner, or otherwise obtains a Lien in any of the assets of any Subsidiary Owner relating to any of the Owned Facilities (whether by assignment of the Owned Facility Indebtedness or otherwise), on the date of such loan or lien to execute and deliver to Administrative Agent (or the Collateral Agent, as the case may be) an Intercreditor Agreement and Borrower shall deliver or cause to be delivered to Administrative Agent a true and correct copy of the original of each Intercreditor Agreement within one (1) Business Day after such agreement has been executed. The Borrower shall use its best efforts to obtain each Intercreditor Agreement in the form of Exhibit 1.01(I)(2)(A), and if the Borrower is not successful in obtaining such form of Intercreditor Agreement after using best efforts, then the Borrower shall use best efforts to obtain an Intercreditor Agreement in the form of Exhibit 1.01(I)(2)(B). If the Borrower is not successful, after using best efforts, in obtaining either such form of Intercreditor Agreement, then the Borrower shall negotiate such other Intercreditor Agreement as is reasonably satisfactory, in form and substance, to the Administrative Agent. (r) Certain Leased Facilities - Termination of Liens; ------------------------------------------------- Intercreditor Agreements; Trustee Agreements. - -------------------------------------------- The Borrower shall: (i) Cause any Lien securing any Lessor Indebtedness to be terminated on or before the earlier of: (i) the maturity of such Lessor Indebtedness (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date unless such extension of maturity is otherwise approved in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Lessor Indebtedness secured by Liens in favor of the Lessor Lenders to exceed the amount of such Indebtedness existing on the Sixteenth Amendment Effective Date; and (iii) Cause each Subsidiary Lessee not to grant a Lien on any asset of such Subsidiary Lessee if the applicable Lessor or Lessor Lender has previously terminated its Liens or has never obtained a Lien on such asset; (iv) Deliver to the Administrative Agent for the benefit of the Banks an Intercreditor Agreement with respect each Lessor Lender and, if reasonably requested by the Administrative Agent, a Non-Disturbance Agreement. Each Non-Disturbance Agreement shall be satisfactory, in form and substance to the Agents. Borrower shall deliver or cause to be delivered to Administrative Agent a true and correct copy of each Non-Disturbance Agreement and the original of each Intercreditor Agreement within one (1) Business Day after such 68 agreement has been executed pursuant to the preceding sentence. The Borrower shall use its best efforts to obtain each Intercreditor Agreement in the form of Exhibit 1.01(I)(1)(A), and if the Borrower is not successful in obtaining such form of Intercreditor Agreement after using best efforts, then the Borrower shall use best efforts to obtain an Intercreditor Agreement in the form of Exhibit 1.01(I)(1)(B). If the Borrower is not successful, after using best efforts, in obtaining either such form of Intercreditor Agreement, then the Borrower shall negotiate such other Intercreditor Agreement as is reasonably satisfactory, in form and substance, to the Administrative Agent; and (v) Cause if reasonably requested by the Administrative Agent, each Lessor listed on Schedule 6.01(aa) to execute and deliver to the ----------------- Administrative Agent a Trustee Agreement; provided, however, that if, with respect to Leased Facilities leased by Loan Parties prior to the Sixteenth Amendment Effective Date, following the Sixteenth Amendment Effective Date the Loan Parties are otherwise in compliance with all requirements under this Agreement relating to Lessor Indebtedness, Leased Facilities and Permitted Leased Facility Liens, then no additional Trustee Agreements will be required with respect to such Leased Facilities so long as the lease of such facility continues following the Sixteenth Amendment Effective Date on terms and conditions identical to those approved by the Required Banks prior to the Sixteenth Amendment Effective Date. Each Trustee Agreement shall be satisfactory, in form and substance to the Administrative Agent. 8.02 Negative Covenants. The Borrower covenants and agrees that ------------------ until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower shall comply with the following negative covenants: (a) Indebtedness. Subject to Section 8.02(v), the Borrower ------------ shall not, and shall not permit any of its Restricted Subsidiaries to, at any time create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness under the Loan Documents; (ii) Existing Indebtedness as of the Sixteenth Amendment Effective Date as set forth on Schedule 8.02(a) hereto (including, subject to ---------------- the other provisions of this Agreement, any extensions or renewals thereof provided there is no increase in the amount thereof or other significant change in the terms thereof adverse to any Loan Party or to any Bank unless otherwise specified on Schedule 8.02(a)); provided further that the Owned Facility ----------------- Indebtedness and Lessor Indebtedness are also subject to the covenants and limitations described in Sections 8.01(q) and (r) and any refinancing, extension or renewal of any Owned Facility Indebtedness or Lessor Indebtedness is also subject to satisfaction of the conditions set forth in Exhibit 1.01(C) hereto; (iii) Capitalized leases existing as of September 30, 1998 and as and to the extent permitted under Section 8.02(w); 69 (iv) Indebtedness which is subordinated in accordance with the provisions of Section 8.01(1); (v) Indebtedness secured by Purchase Money Security Interests permitted under Section 8.02(b); (vi) Indebtedness of a Loan Party to the Borrower or to a wholly-owned Subsidiary of the Borrower; (vii) the Subordinated Notes, provided that neither the subordination provisions contained in the Indenture nor Section 1008 [Limitation on Indebtedness] of the Indenture shall be amended after the Subordinated Indebtedness Incurrence Date and provided further that the Indenture is not otherwise amended after the Subordinated Indebtedness Incurrence Date if the effect thereof would (i) accelerate the due date or increase the amount of any payment due from the Borrower thereunder, (ii) change the rate at which interest is charged thereunder, or (iii) impose material restrictions or obligations on the Borrower or the other Loan Parties which are not imposed thereunder on the Closing Date or add any term thereto which is less favorable in any material respect to the Loan Parties than the terms of the Indenture on the Subordinated Indebtedness Incurrence Date or which is more restrictive to any of the Loan Parties than the terms of the Credit Agreement; (viii) Guaranties which constitute Indebtedness as permitted pursuant to Section 8.02(c); (ix) Indebtedness not exceeding $500,000 of the Borrower to First Union National Bank (a.k.a. CoreStates Bank, N.A.) in respect of an overnight unsecured overdraft facility at any time; (x) Owned Facility Indebtedness incurred after the Sixteenth Amendment Effective Date, if the principal amount of and other terms and conditions with respect to such Owned Facility Indebtedness are acceptable to the Required Banks, (including, without limitation, satisfaction of all conditions set forth on Exhibit 1.01(C)); provided, that all Owned Facility --------------- Indebtedness is subject to the covenants and limitations set forth in Section 8.01(q); (xi) the Permitted Subordinated Indebtedness; (xii) Indebtedness under the Term Loan Agreement; and (xiii) Indebtedness not otherwise permitted under clauses (i) through (xii) of this Section 8.02(a), provided that the aggregate amount of Indebtedness outstanding pursuant to this paragraph and Indebtedness outstanding pursuant to Section 8.02(a)(v) shall not at any time exceed $15,000,000. (b) Liens. The Borrower shall not, and shall not permit any of ----- the other Loan Parties or Unrestricted Subsidiary which is an Excluded Entity with respect to which 70 Restricted Investments have been made as permitted pursuant to Section 8.02(d)(iv) to, at any time create, incur, assume or suffer to exist any Lien on any of its or their property or assets, tangible or intangible, now owned or hereafter acquired, or agree or become liable to do so, except Permitted Liens. (c) Guaranties. Except as described in Schedule 8.02(c), the ---------- ---------------- Borrower shall not, and shall not permit any of the other Loan Parties to, at any time, directly or indirectly, become or be liable in respect of any Guaranty except: (i) Guaranties of any obligation or liability of another Loan Party that is permitted under the other provisions of this Agreement, (ii) Guaranties which are not required by GAAP to be disclosed in the Borrower's audited consolidated financial statements (including the footnotes thereto), (iii) Guaranties of Indebtedness incurred as part of a permitted Restricted Investment pursuant to Section 8.02(d)(iv), (iv) Guaranties which are subordinated on terms reasonably acceptable to the Administrative Agent, and (v) Guaranties of Indebtedness under the Term Loan Agreement. (d) Loans and Investments. The Borrower shall not, and shall --------------------- not permit any of the other Loan Parties, to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other investment or interest in, or make any capital contribution to, any other person, or agree, become or remain liable to do any of the foregoing, except: (i) trade credit extended on usual and customary terms in the ordinary course of business; (ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business; (iii) Permitted Investments; (iv) Restricted Investments made prior to the Eighteenth Amendment Effective Date as set forth on Schedule 8.02(d) and, subject to ---------------- Section 8.02(w), Restricted Investments made on or after the Eighteenth Amendment Effective Date; provided that with respect to any Restricted Investment, the Borrower is in compliance with all of the following: (i) the Excluded Entity in which a Restricted Investment is or has been made is engaged in a business which is ancillary and related to the business of the Loan Parties; (ii) the Loan Party that makes or made the Restricted Investment is either a shareholder, member or partner of the Excluded Entity in which the Restricted Investment was made; (iii) the stock, equity interests in a limited liability company or partnership interests owned by a Loan Party in the Excluded Entity in which the Restricted Investment is or has been made are pledged to the Collateral Agent on a first priority basis for the benefit of the Banks; (iv) to the extent that any Excluded Entity incurs Indebtedness payable to any person other than a Loan Party (the "Third Party Lender") in excess of $5,000,000, prior to incurring such Indebtedness, the Borrower shall cause the Third Party Lender to enter into an intercreditor agreement with the Collateral Agent on behalf of the Banks, in form and substance satisfactory to the Administrative Agent and the Collateral Agent in their sole discretion with respect to the Indebtedness of such Excluded Entity 71 payable to the Third Party Lender and any Indebtedness of such Excluded Entity payable to either the Banks or any Loan Party; and (v) to the extent that any individual Restricted Investment exceeds $7,500,000 or any series of related Restricted Investments in the aggregate exceeds $7,500,000 prior to making any such Restricted Investment, the Borrower obtained the written approval of the Required Banks; (v) loans, advances and investments in Restricted Subsidiaries; and (vi) loans and advances in the aggregate not to exceed $8,000,000 at any time outstanding to officers and senior management of the Loan Parties, so long as each such advance is on terms and conditions reasonably satisfactory to the Agents and so long as the Borrower gives five (5) Business Days' prior notice to the Administrative Agent of each loan or advance and the recipient of each loan or advance is reasonably satisfactory to the Agents. (e) Amounts Paid by the Borrower to MPN; Dividends and Related ---------------------------------------------------------- Distributions. The Borrower shall not, and shall not permit any of its - ------------- Subsidiaries to, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of their respective shares of capital stock or partnership interests, as the case may be, or on account of the purchase, redemption, retirement or acquisition of their respective shares of capital stock (or warrants, options or rights therefor) or partnership interests, as the case may be, except (i) dividends or distributions in respect of a partnership interest or capital stock payable by any Subsidiary to the Borrower or any other Restricted Subsidiary, (ii) dividends payable by the Borrower solely in shares of capital stock of the Borrower, (iii) up to the Permitted Distribution Amount of distributions per year payable in the aggregate by any Subsidiary of the Borrower which is a limited liability company or partnership to non-Affiliate members of such limited liability company or non- Affiliate limited partners of such partnership, so long as after giving effect thereto no Event of Default or Potential Default has occurred and is continuing and so long as at least five (5) Business Days prior to the making of any such distribution the Borrower provides written notice to the Administrative Agent, together with a detailed calculation, certified by the Chief Financial Officer of Borrower, setting forth in detail the relevant Subsidiary's compliance with the ratio set forth in clause (A) of the definition of Permitted Distribution Amount or, as the case may be, such Subsidiary's compliance with clause (B) of the definition of Permitted Distribution Amount, in either case with respect to the proposed distribution as of the date of the making thereof, (iv) so long as no Event of Default or Potential Default exists and is continuing after giving effect thereto, a one-time dividend by the Borrower to MPN payable on such date as the Borrower elects (so long as at least seven (7) days prior to such payment, the Borrower has delivered to the Administrative Agent a certification that after giving effect to such dividend or distribution no Event of Default or Potential Default exists and is continuing and that the Borrower is in pro-forma compliance with the financial covenants set forth in Section 8.02(r) [Maximum Leverage Ratio] and Section 8.02(u) [Senior Indebtedness to Cash Flow from Operations Ratio], with such certification setting forth a detailed calculation of the Borrower's pro-forma compliance with such financial covenants), in an amount not exceeding, as of the date 72 of payment, the Adjusted Net Income of the Borrower and its Subsidiaries determined in accordance with GAAP for the most recent twelve fiscal calendar months prior to such date of payment; (v) amounts payable by the Borrower to MPN as reimbursement of ordinary course business expenses of the Borrower paid by MPN on behalf of the Borrower; and (vi) during periods prior to the effectiveness of the Eighteenth Amendment, dividends or distributions by the Borrower to MPN not to exceed in the aggregate $25 million to reimburse MPN for costs and expenses incurred in connection with the Paragon Acquisition. For purposes of this Section 8.02(e) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02(r) and (u): (i) Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination (after giving effect, without duplication, to each dividend or distribution and each purchase or redemption of the Borrower's stock as applicable); and (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination (after giving effect to each dividend or distribution and each purchase or redemption of the Borrower's stock) based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent. (f) Liquidations, Mergers, Consolidations, Acquisitions. The --------------------------------------------------- Borrower shall not, and shall not permit any of the other Loan Parties to, dissolve, liquidate or wind-up its affairs, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any other person, provided that: (i) any wholly owned Subsidiary of the Borrower may consolidate or merge into the Borrower (so long as the Borrower is the survivor) or any other wholly owned Subsidiary of the Borrower; (ii) a Subsidiary of the Borrower that is not a Material Subsidiary may be dissolved, liquidated or wound up provided that from the date of this Agreement through the Expiration Date, the total assets of the non- Material Subsidiaries which so dissolve, liquidate or wind up shall not exceed $25,000,000 in the aggregate; (iii) subject to Section 8.02(w), the Borrower or a Restricted Subsidiary of the Borrower may acquire all of the capital stock of another corporation so long as (u) the assets of such acquired corporation are pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Security Agreement, First Mortgage and other Loan Documents, as applicable and such acquired corporation, simultaneous with the acquisition thereof by a Loan Party, executes and delivers to the Administrative Agent for the benefit of the Banks a Guaranty Agreement and to the Collateral Agent for the benefit of the Banks a Pledge Agreement in form and substance satisfactory to the Administrative Agent, and also delivers to the Administrative Agent such opinions of counsel and other documents in 73 connection therewith as the Administrative Agent may reasonably request, (v) all of the issued and outstanding capital stock of such acquired corporation owned by a Loan Party is pledged to the Collateral Agent for the benefit of the Banks pursuant to a Pledge Agreement in form and substance satisfactory to the Administrative Agent, (w) after giving effect to such proposed acquisition, no Event of Default shall have occurred and be continuing, (x) after giving effect to such proposed acquisition (and without limiting the generality of the preceding clause (iii)(w)), the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance), and (y) in the case of a merger involving the Borrower, the Borrower shall be the survivor of such merger, and in the case of a merger involving any Restricted Subsidiary the survivor of such merger shall be either such Restricted Subsidiary or a person which, effective upon consummation of such merger shall have become a Restricted Subsidiary of the Borrower, shall have joined this Agreement and the other Loan Documents as a Loan Party (including, without limitation, execution and delivery of a Guaranty Agreement substantially in the form of Exhibit 1.01(G)), shall have delivered such opinions of counsel and other documents as the Administrative Agent may reasonably request, whose equity interests shall have been pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Pledge Agreement and whose assets shall have been pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Security Agreement, First Mortgage and other Loan Documents, as applicable; and (iv) subject to Section 8.02(w), the Borrower or any Restricted Subsidiary may merge or consolidate with, or acquire all or substantially all of the assets of another person so long as (y) after giving effect to such proposed acquisition, merger or consolidation the Borrower or a Restricted Subsidiary of the Borrower is the survivor entity, all of the assets acquired pursuant to such merger are pledged pursuant to a Security Agreement, First Mortgage and other Loan Documents on a first priority perfected basis, and no Event of Default shall have occurred and be continuing; and (z) after giving effect to such proposed acquisition, merger or consolidation, the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance). For purposes of the preceding clauses (iii)(y) and (iv)(z), the Leverage Ratio set forth in Section 8.02(r) shall be calculated as follows: (i) Total Indebtedness shall be determined as of the date of the proposed acquisition, after giving effect thereto, and (ii) Consolidated Cash Flow from Operations shall be calculated for the twelve-month period ending on the last day of the fiscal quarter of the Borrower which precedes such date of acquisition. (g) Dispositions of Assets or Subsidiaries. The Borrower shall -------------------------------------- not, and shall not permit any of the other Loan Parties to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper, equipment or general intangibles with or without 74 recourse or of capital stock, shares of beneficial interest or partnership interests of a Subsidiary of the Borrower), except: (i) any sale, transfer or lease of assets in the ordinary course of business which are no longer necessary or required in, or which are not material to, the conduct of the Borrower's or such Subsidiary's business, provided that such sales, transfers or leases of assets shall not exceed in the aggregate for the Borrower and its Subsidiaries $10,000,000 (based upon fair market value at the time of the sale) for the period from and after the Eighteenth Amendment Effective Date; (ii) any sale, transfer or lease of assets by any wholly- owned Loan Party to the Borrower or any other wholly owned Loan Party (or by the Borrower to a wholly owned Loan Party); (iii) any sale, transfer or lease of assets in the ordinary course of business which are replaced by substitute assets acquired or leased within the parameters of Section 8.02(w) provided such substitute assets are subject to the Banks' Prior Security Interest; (iv) any sale or transfer of assets which are obsolete or no longer used or useful in the business of the Borrower or its Subsidiaries; provided that such sales, transfers or dispositions shall not exceed, in any fiscal year, $1,000,000 in the aggregate for the Borrower and its Subsidiaries; (v) any sale, transfer or lease of assets, other than those specifically excepted pursuant to clauses (i) through (iv) above, which either: (A) has aggregate Net Sale Proceeds for the Borrower and its Subsidiaries for the period from and after the Eighteenth Amendment Effective Date which do not exceed $35,000,000 or (B) is approved by the Required Banks so long as in the case of a transaction under clause (A) or (B), the Borrower complies with all of the following: (w) the proceeds received by the applicable Loan Party shall equal the fair market value of the asset sold, transferred or leased, (x) the proceeds of such sale, transfer or lease are applied as a mandatory prepayment of the Loans in accordance with the provisions of Section 5.05 of this Agreement, (y) after giving effect to such proposed disposition, no Event of Default or Potential Default shall have occurred and be continuing, and (z) after giving effect to such proposed disposition (and without limiting the generality of the foregoing clause (y)), the Borrower is in compliance (and with respect to sales, transfers or leases of assets which individually or in a series of related transactions equal or exceed $5,000,000, the Borrower demonstrates such compliance to the Administrative Agent in detail reasonably satisfactory to the Administrative Agent by the delivery to the Administrative Agent, at least five (5) days prior to such transaction of a compliance certificate,) on a proforma basis, after giving effect to such sale, transfer or lease, with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u); and (vi) any distribution or dividend permitted under Section 8.02 (e) (iv), (v) or (vi). 75 For purposes of this Section 8.02(g) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u): (i) Consolidated Net Worth, Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination (after giving effect to the proposed sale, transfer or lease of assets); (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent, but excluding therefrom all amounts attributable to the assets sold, transferred or leased; and (iii) the denominator (set forth in clause (y) of Section 8.02(q)) of the Fixed Charge Coverage Ratio shall be determined after giving effect to the proposed sale, transfer or lease of assets for purposes of the pro forma determination of interest expense and of current maturities of long-term Indebtedness. (h) Affiliate Transactions. The Borrower shall not, and shall ---------------------- not permit any of its Subsidiaries to, enter into or carry out any transaction with any Affiliate (including, without limitation, purchasing property or services from or selling property or services) unless such transaction is entered into in the ordinary course of business upon terms and conditions that are no less favorable to the Borrower or such Subsidiary than those that would be available in comparable transactions in arms-length dealings with unrelated third parties or unless such transaction is not otherwise prohibited by this Agreement. (i) Subsidiary, Partnerships and Joint Ventures. The Borrower ------------------------------------------- shall not, and shall not permit any Subsidiary to, own or create directly or indirectly any Subsidiaries other than those listed in Schedule 6.01(c); ---------------- provided, however, that the Borrower or a Restricted Subsidiary may acquire a Subsidiary pursuant to Section 8.02(f) or form a new Subsidiary so long as (A) if such Subsidiary is a Restricted Subsidiary it executes and delivers to the Administrative Agent for the benefit of the Banks a Guaranty Agreement substantially in the form of Exhibit 1.01(G), and also delivers to the --------------- Administrative Agent such opinions of counsel and other documents as the Administrative Agent may reasonably request; and (B) all of the issued and outstanding capital stock or other equity interests of such Subsidiary owned by a Loan Party are pledged to the Collateral Agent for the benefit of the Banks, such pledge to be a first priority perfected pledge pursuant to a Pledge Agreement and all of the assets of such Subsidiary are pledged on a first priority perfected basis to the Collateral Agent for the benefit of the Banks pursuant to a Security Agreement, Mortgage, Leasehold Mortgage and the other applicable Loan Documents. If Borrower is forming a new Subsidiary (as opposed to acquiring a Subsidiary) the obligations set forth in clauses (A) and (B) of the preceding sentence shall arise only at such time as such new Subsidiary either commences construction of a health care facility or related health care business, acquires a health care facility or makes another acquisition permitted under this Agreement or has a net book value, as determined under GAAP, of at least $250,000. Except for investments permitted under Section 8.02(d)(iv), neither the Borrower nor any Subsidiary shall 76 become or agree to become a general or limited partner in any general or limited partnership or a joint venturer in any joint venture. (j) Continuation of or Change in Business. The Borrower shall ------------------------------------- not, and shall not permit any Subsidiary to, engage in any business other than (i) its existing business, substantially as conducted and operated as of the Closing Date and (ii) related health care businesses. (k) Plans and Benefit Arrangements. The Borrower shall not, ------------------------------ and shall not permit any of its Subsidiaries to: (i) fail to satisfy the minimum funding requirements of ERISA and the Internal Revenue Code with respect to any Plan; (ii) request a minimum funding waiver from the Internal Revenue Service with respect to any Plan; (iii) engage in a Prohibited Transaction with any Plan, Benefit Arrangement or Multiemployer Plan which, alone or in conjunction with any other circumstances or set of circumstances resulting in liability under ERISA, would constitute a Material Adverse Change; (iv) permit the aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as disclosed in the most recent actuarial report completed with respect to such Plan, to exceed, as of any actuarial valuation date, the fair market value of the assets of such Plan by an amount in excess of $250,000; (v) fail to make when due any contribution to any Multiemployer Plan that the Borrower or any member of the ERISA Group may be required to make under any agreement relating to such Multiemployer Plan, or any Law pertaining thereto; (vi) withdraw (completely or partially) from any Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to withdraw) from any Multiple Employer Plan, where any such withdrawal is likely to result in a material liability of Borrower or any member of the ERISA Group; (vii) terminate, or institute proceedings to terminate, any Plan, where such termination is likely to result in a material liability to the Borrower or any member of the ERISA Group; (viii) make any amendment to any Plan with respect to which security is required under Section 307 of ERISA; or 77 (ix) fail to give any and all notices and make all disclosures and governmental filings required under ERISA or the Internal Revenue Code, where such failure is likely to result in a Material Adverse Change. (l) Fiscal Year. The Borrower shall not, and shall not permit ----------- any of its Subsidiaries to, change its fiscal year from the twelve-month period beginning January 1 and ending December 31. (m) Issuance of Stock. The Borrower shall not permit any of its ----------------- Subsidiaries to issue any additional shares of capital stock, partnership interests or member interests in a limited liability company or any options, warrants or other rights in respect thereof; provided, however, than an Unrestricted Subsidiary which is an Excluded Entity may issue additional capital stock, partnership interests or member interests in a limited liability company so long as all such capital stock, partnership interests or member interests in a limited liability company which are owned, beneficially, of record, or otherwise, by any Loan Party are pledged to the Banks as a first priority perfected pledge pursuant to a Pledge Agreement, and provided further that any Restricted Subsidiary may issue additional capital stock, partnership interests or member interests in a limited liability company so long as such capital stock, partnership interests or member interests in a limited liability company are pledged to the Collateral Agent for the benefit of the Banks (subject only to any pari passu pledge to the Term Loan Banks and to the Collateral Sharing Agreement) as a first priority perfected pledge pursuant to a Pledge Agreement. (n) [Intentionally Omitted]. ----------------------- (o) [Intentionally Omitted]. ----------------------- (p) [Intentionally Omitted]. ----------------------- (q) Minimum Fixed Charge Coverage Ratio. The Borrower shall not ----------------------------------- at any time permit the ratio (the "Fixed Charge Coverage Ratio") of (x) the sum of Consolidated Cash Flow from Operations and operating lease expense to (y) the sum of its interest expense, operating lease expense and current maturities of long-term Indebtedness (other than the sum of (i) current maturities of obligations in respect of capital leases, (ii) for fiscal quarters ending on and after March 31, 1999, current maturities of the Loans; and (iii) for fiscal quarters ending on and after March 31, 1999 current maturities of Indebtedness under the Term Loan Agreement) in each case determined and consolidated in accordance with GAAP to be less than 1.85 to 1.0. Such ratio shall be calculated as of the end of each fiscal quarter. Calculations as of the end of each fiscal quarter shall be for the four fiscal quarters then ended. (r) Maximum Leverage Ratio. The Borrower shall not at any time ---------------------- permit the ratio of Total Indebtedness to Consolidated Cash Flow from Operations to and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. For purposes of this Section 8.02(r), Total Indebtedness shall be calculated as of each date of determination and Consolidated Cash 78 Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (s) Minimum Consolidated Cash Flow from Operations. The ---------------------------------------------- Borrower shall not at any time permit Consolidated Cash Flow from Operations as of the end of any fiscal quarter for the four fiscal quarters then ended to be less than $116,000,000. (t) Minimum Net Worth. The Borrower shall not at any time ----------------- permit Consolidated Net Worth to be less than the amount under the following clause (A) reduced by the amount under the following clause (B): (A) The sum of (i) $323,789,000 plus (ii) fifty percent (50%) of Consolidated Net Income of the Borrower and its Subsidiaries for each fiscal quarter in which net income was earned (as opposed to a net loss) during the period October 1, 1998 through (and including) the date of determination, plus (iii) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances for cash of equity securities and other equity capital investments on or after October 1, 1998, plus (iv) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances of equity securities in connection with the acquisition of any Subsidiary on or after October 1, 1998 (so long as the fair market value at the time of acquisition of the Subsidiary so acquired is at least equal to the value of the capital stock or other equity securities so issued), reduced by (B) The sum of (i) the amount of any dividend or other distribution actually paid by the Borrower to MPN on or after October 1, 1998 pursuant to Section 8.02(e)(iv), plus (ii) the amount of any dividend or other distribution actually paid by the Borrower to MPN on or after October 1, 1998 pursuant to Section 8.02(e)(vi) in respect of costs or expenses incurred by MPN in connection with the Paragon Acquisition to the extent that the reimbursed item is not deducted as an expense in the determination of Consolidated Net Income of the Borrower and its Subsidiaries, plus (iii) the amount of any net losses (determined on a consolidated basis for the Borrower and its Restricted Subsidiaries in accordance with GAAP) arising solely as a result of charges described in clauses (i), (ii) or (iii) of the definition of Approved Charges, plus (iv) subject to the prior written approval of the Required Banks, the amount of any non-cash charges to write-down goodwill in accordance with FAS 121. (u) Senior Indebtedness to Cash Flow From Operations Ratio. The ------------------------------------------------------ Borrower shall not at any time permit the ratio of (i) Adjusted Total Indebtedness to (ii) Consolidated Cash Flow from Operations to exceed (A) 4.50 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 4.25 to 1.0 from July 1, 1999 and thereafter. For purposes of this Section 8.02(u), Adjusted Total Indebtedness shall be calculated as of each date of determination and Consolidated Cash Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (v) Incurrence of Indebtedness Permitted by the Indenture. So ----------------------------------------------------- long as any Indebtedness or other obligations (monetary or otherwise) are outstanding under the Indenture the Borrower shall not, and shall not permit any of its Subsidiaries to, at any time 79 create, incur, assume or suffer to exist any Indebtedness unless the incurrence thereof complies with the provisions of Section 1008. [Limitation on Indebtedness] of the Indenture as in effect on the Ninth Amendment Effective Date without giving any effect to any grace period under the Indenture or waiver under the Indenture of any default of such covenant. (w) Maximum Amount of Certain Expenditures of the Borrower. The ------------------------------------------------------ Borrower shall not and shall not permit any of its Subsidiaries, during the period commencing on the Eighteenth Amendment Effective Date through and including the Expiration Date, to make aggregate expenditures in excess of $61,700,000 (the "Designated Amount") in respect of the following: (i) acquisitions permitted by clauses (iii) or (iv) of Section 8.02(f); (ii) maintenance and replacement capital expenditures and other capital expenditures; (iii) amounts expended for construction of facilities which are not considered capital expenditures under GAAP and therefore would not be included under clause (ii) above; and (iv) Restricted Investments made on or after the Eighteenth Amendment Effective Date as permitted by Section 8.02(d)(iv); At least seven (7) days prior to making any expenditure specified in clauses (i), or (iv ), above, the Borrower shall deliver to the Administrative Agent, for the benefit of the Banks a detailed certificate showing Borrower's pro-forma compliance with the financial covenants set forth in Sections 8.02(q), 8.02(r), 8.02(s), 8.02(t) and 8.02(u), after giving effect to the proposed expenditure, including, without limitation, the effect of any cash to be expended or Indebtedness to be incurred in connection therewith. The Borrower expressly agrees that, notwithstanding the foregoing, at least $20,000,000 of the Designated Amount shall be designated for expenditures by the Borrower and its Subsidiaries in the nature of maintenance capital expenditures. For purposes of this Section 8.02(w) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u): (i) Consolidated Net Worth, Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination after giving effect to the proposed transaction under items (i) through (v) above (including any Indebtedness incurred in connection therewith); (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent and shall be adjusted to give effect to any transaction under items (ii) 80 through (v) above but shall only be adjusted to give effect to any acquisition under clause (i) above only if permitted by Section 8.01(m); and (iii) the denominator (set forth in clause (y) of Section 8.02(q)) of the Fixed Charge Coverage Ratio shall be determined after giving effect to the proposed transaction under items (i) through (v) above (including any Indebtedness incurred in connection therewith) for purposes, without limitation, of the pro forma determination of interest expense and of current maturities of long-term Indebtedness. (x) Negative Pledges. Except as set forth on Schedule 8.02(x), ---------------- ---------------- Borrower shall not and shall not permit any of its Subsidiaries to enter into any agreement with any person which prohibits the Loan Parties from granting Liens to the Collateral Agent, the Agents or the Banks. (y) Prohibition of Defeasance of Subordinated Notes. The ----------------------------------------------- Borrower shall not and shall not permit any of its Subsidiaries to make any payments to the trustee under the Indenture or to any holders of Subordinated Notes in payment of the defeasance or covenant defeasance of the Subordinated Notes pursuant to Section 402 or 403 of the Indenture or any similar provision in any supplement to the Indenture. Nothing in this subsection (y) shall prohibit the purchase by the Borrower of Subordinated Notes pursuant to Section 8.02(d)(vii) or the refinancing of the Subordinated Notes with Permitted Subordinated Indebtedness. 8.03 Reporting Requirements. The Borrower covenants and agrees that ---------------------- until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower will furnish or cause to be furnished to the Administrative Agent and each of the Banks: (a) [Intentionally Omitted]. ----------------------- (b) Quarterly Financial Statements. As soon as available and in ------------------------------ any event within forty-five (45) calendar days after the end of each fiscal quarter in each fiscal year, financial statements of the Borrower, consisting of a consolidated balance sheet as of the end of such fiscal quarter and related consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified by a Responsible Officer of the Borrower as having been prepared in accordance with GAAP, consistently applied (subject to normal year-end audit adjustments), and setting forth in comparative form the respective financial statements for the corresponding date and period in the previous fiscal year. (c) Annual Financial Statements. As soon as available and in any --------------------------- event within ninety (90) days after the end of each fiscal year of the Borrower, financial statements of the Borrower consisting of a consolidated balance sheet as of the end of such fiscal year, and related consolidated statements of income, retained earnings and cash flows for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the financial statements as of the end of and for the preceding fiscal year, and certified by independent certified public accountants of nationally recognized standing satisfactory to the Administrative 81 Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not include a statement which indicates the occurrence or existence of any event, condition or contingency which would materially impair the prospect of payment or performance of any covenant, agreement or duty of the Borrower or any of its Subsidiaries under any of the Loan Documents, together with a letter of such accountants substantially to the effect that, based upon their ordinary and customary examination of the affairs of the Borrower and its Subsidiaries, performed in connection with the preparation of such consolidated financial statements, and in accordance with generally accepted auditing standards, they are not aware of the existence of any condition or event with constitutes an Event of Default or Potential Default or, if they are aware of such condition or event, stating the nature thereof. (d) Certificate of the Borrower. Concurrent with the financial --------------------------- statements of the Borrower furnished to the Administrative Agent and to the Banks pursuant to Sections 8.03(b) and 8.03(c) hereof, a certificate of the Borrower signed by a Responsible Officer, in the form of Exhibit 8.03(d) hereto --------------- (the "Compliance Certificate"), to the effect that, except as described pursuant to Section 8.03(e) below, (i) the representations and warranties of the Borrower contained in Article VI hereof are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and the Borrower has performed and complied with all covenants and conditions hereof, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate, (iii) containing calculations in sufficient detail to demonstrate compliance as of the date of the financial statements with all financial covenants contained in Section 8.02 hereof and with the covenant contained in Section 1008 [Limitation on Indebtedness] of the Indenture with respect to indebtedness incurred during the period applicable to such compliance certificate and (iv) setting forth a list of payments summarized by category only made by the Borrower to MPN as reimbursement of ordinary course business expenses paid by MPN on behalf of the Borrower during the period applicable to such certificate and also setting forth all other dividends and distributions to MPN during such period. (e) Notice of Default. Promptly after any officer of the ----------------- Borrower has learned of the occurrence of an Event of Default or Potential Default, a certificate signed by a Responsible Officer of the Borrower, setting forth the details of such Event of Default or Potential Default and the action which the Borrower proposes to take with respect thereto. (f) Notice of Litigation. Promptly after the commencement -------------------- thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other person against the Borrower which relate to the Collateral, involve a claim or series of related claims in excess of $1,000,000 or which if adversely determined would constitute a Material Adverse Change. (g) Certain Events. Written notice to the Administrative Agent -------------- (and upon the Administrative Agent's receipt of such notice, the Administrative Agent shall provide a 82 copy thereof to each Bank) at least thirty (30) calendar days prior thereto, with respect to any proposed sale or transfer of assets pursuant to Section 8.02(g)(iii) or (iv). (h) Budgets, Forecasts, Other Reports and Information. Promptly ------------------------------------------------- upon their becoming available to the Borrower: (i) [Intentionally Omitted] (ii) any reports including management letters submitted to the Borrower by independent accountants in connection with any annual, interim or special audit, (iii) any reports, notices or proxy statements generally distributed by the Borrower to its stockholders on a date no later than the date supplied to the stockholders, (iv) any regular or periodic reports, including Forms 10-K, 10-Q and 8-K, registration statements and prospectuses, filed by the Borrower with the Securities and Exchange Commission, (v) a copy of any material order in any proceeding to which the Borrower or any of its Subsidiaries is a party issued by any Official Body, (vi) regular, periodic utilization reports including in detail reasonably satisfactory to the Administrative Agent for the period of such reports the patient census, the number of occupied beds, the payment source (Medicare, Medicaid, private pay or otherwise) for each patient, (vii) such other reports and information as the Banks may from time to time reasonably request. The Borrower shall also notify the Banks promptly of the enactment or adoption of any Law or the occurrence of any other event which may result in a Material Adverse Change with respect to the Borrower after the Borrower becomes aware or should reasonably have become aware thereof, and (viii) annual reports in detail satisfactory to the Administrative Agent setting forth the real property owned, leased or managed by the Borrower or any Subsidiary, to be supplied not later than March 31, 1999 with respect to the fiscal year ended December 31, 1998 and thereafter not later than ninety (90) days after the commencement of the fiscal year to which any of the foregoing may be applicable. (i) Notices Regarding Plans and Benefit Arrangements. (i) ------------------------------------------------ Promptly upon becoming aware of the occurrence thereof, notice (including the nature of the event and, when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto) of: (A) any Reportable Event with respect to the Borrower or any member of the ERISA Group, 83 (B) any Prohibited Transaction which could be subject the Borrower or any member of the ERISA Group to a material civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code in connection with any Plan, Benefit Arrangement or any trust created thereunder, (C) any assertion of material withdrawal liability with respect to any Multiemployer Plan, (D) any partial or complete withdrawal from a Multiemployer Plan by the Borrower or any member of the ERISA Group under Title IV of ERISA (or assertion thereof), where such withdrawal is likely to result in material withdrawal liability, (E) any cessation of operations (by the Borrower or any member of the ERISA Group) at a facility in the circumstances described in Section 4062(e) of ERISA, (F) withdrawal by the Borrower or any member of the ERISA Group from a Multiple Employer Plan to which Section 4063 of ERISA applies, (G) a failure by the Borrower or any member of the ERISA Group to make a payment to a Plan required to avoid imposition of a lien under Section 302(f) of ERISA, (H) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (I) any change in the actuarial assumptions or funding methods used for any Plan, where the effect of such change is to materially increase the unfunded benefit liability or obligation to make periodic contributions. (ii) Promptly after receipt thereof, copies of (a) all notices received by the Borrower or any member of the ERISA Group of the PBGC's intent to terminate any Plan administered or maintained by the Borrower or any member of the ERISA Group, or to have a trustee appointed to administer any such Plan; and (b) at the request of the Administrative Agent or any Bank each annual report (IRS Form 5500 series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or any member of the ERISA Group, and schedules showing the amounts contributed to each such Plan by or on behalf of the Borrower or any member of the ERISA Group in which any of their personnel participate or from which such personnel may derive a benefit, and each Schedule B (Actuarial Information) to the annual report ---------- filed by the Borrower or any member of the ERISA Group with the Internal Revenue Service with respect to each such Plan. 84 (iii) Promptly upon the filing thereof, copies of Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC in connection with the termination of any Plan. (j) Notices With Respect to Indenture. Written notice to the --------------------------------- Administrative Agent (and upon the Administrative Agent's receipt of each such notice, the Administrative Agent shall provide a copy thereof to each Bank): (i) immediately upon the occurrence of a "Default" or an "Event of Default," as such terms are defined in the Indenture; (ii) immediately upon a "Change of Control," as such term is defined in the Indenture; (iii) immediately upon receipt of a "notice of acceleration" from either the trustee for the Subordinated Notes or the holders of the Subordinated Notes pursuant to Section 502 of the Indenture or any similar provision in any supplement to the Indenture; (iv) simultaneous with the sending thereof, all notices required to be sent to the trustee or holders of the Subordinated Notes under the Indenture; and (v) immediately upon the receipt thereof, all notices received from the trustee under the Indenture. ARTICLE IX DEFAULT ------- 9.01 Events of Default. An Event of Default shall mean the ----------------- occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary or effected by operation of Law): (a) The Borrower shall fail to pay any principal of any Loan (including scheduled or mandatory prepayments or the payment due at maturity) or shall fail to pay any interest on any Loan or any other amount owing hereunder or under the other Loan Documents after such principal or within three (3) Business Days after such interest or other amount becomes due in accordance with the terms hereof or thereof; (b) Any representation and warranty made at any time by the Borrower herein or by the Borrower or any of its Subsidiaries in any other Loan Document, or in any certificate, other instrument or statement furnished pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or furnished regardless of whether such representation and warranty was qualified as to Borrower's knowledge or best knowledge; (c) The Borrower shall default in the observance or performance of any covenant contained in Section 8.01(f) or Section 8.02 hereof; 85 (d) The Borrower or any of its Subsidiaries shall default in the observance or performance of any other covenant, condition or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) Business Days after any officer of the Borrower or any Subsidiary becomes aware of the occurrence thereof (such grace period to be applicable only in the event such default can be remedied by corrective action of the Borrower or such Subsidiary as determined by the Administrative Agent in its sole discretion); (e) A default or event of default shall occur at any time under the terms of any agreement involving borrowed money or the extension of credit or any other Indebtedness under which the Borrower or any of its Subsidiaries may be obligated as borrower or guarantor in excess of $10,000,000 in aggregate principal amount, and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any indebtedness when due (whether at stated maturity, by acceleration or otherwise) or if such breach or default permits or causes the acceleration of any indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend; (f) Any final judgment or orders for the payment of money in excess of $1,000,000 in the aggregate (not paid or fully covered by insurance) shall be entered against the Borrower or any of its Subsidiaries by a court having jurisdiction in the premises which judgment is not discharged, vacated, bonded or stayed pending appeal within a period of thirty (30) days from the date of entry; (g) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the party executing the same or such party's successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or shall in any way be challenged or contested or cease to give or provide the respective Liens, security interests, rights, titles, interests, remedies, powers or privileges intended to be created thereby; (h) The Collateral or any other of the Borrower's or any of its Subsidiaries' assets are attached, seized, levied upon or subject to a writ or distress warrant; or such come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within thirty (30) days thereafter; (i) A notice of lien or assessment in excess of $1,000,000 is filed of record with respect to all or any part of the Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including, without limitation, the Pension Benefit Guaranty Corporation, or if any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within thirty (30) days after the same becomes payable unless the same is being contested in good faith in accordance with Section 8.01(b); (j) The Borrower or any of its Material Subsidiaries ceases to be solvent or admits in writing its inability to pay its debts of as they mature; 86 (k) Any of the following occurs: the Administrative Agent determines in good faith that the amount of Borrower's liability is likely to exceed 10% of its Consolidated Net Worth upon the occurrence of (i), (ii), (iii) or (iv) below: (i) any Reportable Event constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan or a termination notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; or (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; or, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix) below, the Administrative Agent determines in good faith that any such occurrence could be reasonably likely to materially and adversely affect the total enterprise represented by the Borrower and the other members of the ERISA Group; (v) the Borrower or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) the Borrower or any member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) the Borrower or any member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) the Borrower or any member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements; (l) The Borrower ceases to conduct its business as contemplated or the Borrower or any of its Material Subsidiaries is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business and such injunction, restraint or other preventative order is not dismissed within thirty (30) days after the entry thereof; (m) A Change of Ownership occurs; (n) An event of default shall occur at any time under the terms of the MPN Credit Agreement which causes the acceleration of any indebtedness thereunder, or an event of default shall occur at any time under the terms of the Paragon Senior Subordinated Note Indenture which causes the acceleration of any indebtedness thereunder; (o) A default or event of default shall occur at any time under the terms of the Term Loan Agreement, and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any indebtedness when due (whether at stated maturity, by acceleration or otherwise) or if such breach or default permits or causes the acceleration of any indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend; (p) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of MPN, the Borrower or any Subsidiary of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or a receiver, 87 liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of MPN, the Borrower, or any Subsidiary of the Borrower for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding; or (q) MPN, the Borrower, or any Subsidiary of the Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or other similar official) of itself or for any substantial part of its property or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing. 9.02 Consequences of Event of Default. -------------------------------- (a) If an Event of Default specified under subsections (a) through (o) of Section 9.01 hereof shall occur and be continuing, the Banks shall be under no further obligation to make Loans hereunder and the Administrative Agent upon the request of the Required Banks, shall (i) by written notice to the Borrower, declare the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Administrative Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, and (ii) require the Borrower to, and the Borrower shall thereupon, deposit in a non-interest bearing account with the Administrative Agent, as cash collateral for its obligations under the Loan Documents, an amount equal to the maximum amount currently or at any time thereafter available to be drawn on all outstanding Letters of Credit, and the Borrower hereby pledges to the Administrative Agent and the Banks, and grants to the Administrative Agent and the Banks a security interest in, all such cash as security for such obligations. Upon the curing of all existing Events of Default to the satisfaction of the Required Banks, the Administrative Agent shall return such cash collateral to the Borrower; and (b) If an Event of Default specified under subsections (p) or (q) of Section 9.01 hereof shall occur, the Banks shall be under no further obligations to make Loans hereunder and the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and (c) If an Event of Default shall occur and be continuing, any Bank to whom any obligation is owed by any Loan Party hereunder or under any other Loan Document or any participant of such Bank which has agreed in writing to be bound by the provisions of Section 10.13 hereof and any branch, subsidiary or affiliate of such Bank or participant anywhere 88 in the world shall have the right, in addition to all other rights and remedies available to it, without notice to such Loan party, to set-off against and apply to the then unpaid balance of all the Loans and all other obligations of such Loan party hereunder or under any other Loan Document any debt owing to, and any other fund held in any manner for the account of, such Loan Party by such Bank or participant or by such branch, subsidiary or affiliate, including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by such Loan Party for its own account (but not including funds held in custodian or trust accounts) with such Bank or participant or such branch, subsidiary or affiliate. Such right shall exist whether or not any Bank or the Administrative Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of such Loan Party is or are matured or unmatured and regardless of the existence or adequacy of any Collateral, Guaranty or any other security, right or remedy available to any Bank or the Administrative Agent; and (d) If an Event of Default shall occur and be continuing, and whether or not the Administrative Agent shall have accelerated the maturity of Loans of the Borrower pursuant to any of the foregoing provisions of this Section 9.02, the Agents or any Bank, if owed any amount with respect to the Notes, may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the Notes, including as permitted by applicable Law the obtaining of the ex parte appointment of a -------- receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the agent or such Bank; and (e) From and after the date on which the Administrative Agent has taken any action pursuant to this Section 9.02 and until all obligations of the Loan Parties have been paid in full, any and all proceeds received by the Administrative Agent from any sale or other disposition of the Collateral, or any part thereof, or the exercise of any other remedy by the Administrative Agent, shall be applied as follows: (i) first, to reimburse the Administrative Agent and the Banks for reasonable out-of-pocket costs, expenses and disbursements, including without limitation reasonable attorneys' fees and legal expenses, incurred by the Administrative Agent or the Banks in connection with realizing on the Collateral or collection of any obligations of the Loan Parties under any of the Loan Documents, including advances made by the Banks or any one of them or the Administrative Agent for the reasonable maintenance, preservation, protection or enforcement of, or realization upon, the Collateral, including without limitation, advances for taxes, insurance, repairs and the like and reasonable expenses incurred to sell or otherwise realize on, or prepare for sale or other realization on, any of the Collateral; (ii) second, to the prepayment of all Indebtedness then due and unpaid of the Loan Parties to the Banks incurred under this Agreement or any of the Loan Documents, whether of principal, interest, fees, expenses or otherwise, in such manner as the 89 Administrative Agent may reasonably determine in its discretion and with respect to principal, interest, and fees, shall be made in proportion to the Ratable Share of each Bank; and (iii) the balance, if any, as required by Law. (f) In addition to all of the rights and remedies contained in this Agreement or in any of the other Loan Documents, the Administrative Agent and the Collateral Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code or other applicable Law, all of which rights and remedies shall be cumulative and non- exclusive, to the extent permitted by Law. The Administrative Agent may, and upon the request of the Required Banks shall (or shall, if applicable cause the Collateral Agent to), exercise all post-default rights granted to the Administrative Agent (or Collateral Agent, as the case may be) and the Banks under the Loan Documents or applicable Law. (g) Following the occurrence and continuance of an Event of Default, the Borrower, at its cost and expense (including the cost and expense of any of the following referenced consents, approvals, etc.) will promptly execute and deliver or cause the execution and delivery of all applications, certificates, instruments, registration statements, and all other documents and papers the Administrative Agent may request in connection with the obtaining of any consent, approval, registration, qualification, permit, license, accreditation, or authorization of any other Official Body or other person necessary or appropriate for the effective exercise of any rights hereunder or under the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees that in the event the Administrative Agent or the Collateral Agent on behalf of the Banks shall exercise its rights, hereunder or pursuant to the other Loan Documents, to sell, transfer, or otherwise dispose of, or vote, consent, operate, or take any other action in connection with any of the Collateral, the Borrower shall execute and deliver (or cause to be executed and delivered) all applications, certificates, assignments, and other documents that the Administrative Agent requests to facilitate such actions and shall otherwise promptly, fully, and diligently cooperate with the Administrative Agent or the Collateral Agent and any other necessary persons in making any application for the prior consent or approval of any Official Body or any other person to the exercise by the Administrative Agent or the Collateral Agent on behalf of the Banks of any of such rights relating to all or any of the Collateral. Furthermore, because the Borrower agrees that the remedies at law, of the agent on behalf of the Banks, for failure of the Borrower to comply with the provisions of Section 8.01(f) and of this Section 9.02(g) would be inadequate and that any such failure would not be adequately compensable in damages, the Borrower agrees that the covenants of Sections 8.01(f) and 9.02(g) may be specifically enforced. (h) Upon the occurrence and continuance of an Event of Default, the Administrative Agent may request, without limiting the rights and remedies of the Administrative Agent on behalf of the Banks otherwise provided hereunder and under the other Loan Documents, that the Borrower do any of the following: (i) give the Collateral Agent on behalf of the Banks specific assignments of the accounts receivable of the Borrower and each Subsidiary after such accounts receivable come into existence, and schedules of such accounts 90 receivable, the form and content of such assignment and schedules to be satisfactory to the Collateral Agent and the Administrative Agent, (ii) immediately notify the Administrative Agent if any of such accounts receivable arise out of contracts with the U.S. Government or any department, agency or instrumentality thereof, and execute any instruments and take any steps required by the Administrative Agent in order that all moneys due and to become due under such contract shall be assigned (to the extent permitted by law) to the Collateral Agent on behalf of the Banks and notice thereof given to the government under the Federal Assignment of Claims Act, if applicable, or any other applicable law or regulation; and in order to better secure the Collateral Agent on behalf of the Banks, in relation to such accounts receivable, and (iii) to the extent permitted by Law, enter into such lockbox agreements and establish such lockbox accounts as the Administrative Agent may require, with the local banks in areas in which the Borrower and its Subsidiaries may be operating (in such cases, all local lockbox accounts shall be depository transfer accounts entitled "In trust for PNC Bank, National Association, as Collateral Agent") which shall have agreed in writing to the Collateral Agent's requirements for the handling of such accounts and the transfer of account funds to the Collateral Agent on behalf of the Banks, all at the Borrower's sole expense, and shall direct all payments from Medicare, Medicaid, Blue Cross and Blue Shield, private payors, health maintenance organizations, all commercial payors and all other payors due to the Borrower or any Subsidiary, to such lockbox accounts. 9.03 Notice of Sale. Any notice required to be given by the -------------- Administrative Agent or Collateral Agent of a sale, lease, or other disposition of the Collateral or any other intended action by the Administrative Agent or Collateral Agent, if given ten (10) days prior to such proposed action, shall constitute commercially reasonable and fair notice thereof to the relevant Loan Party. ARTICLE X THE AGENT --------- 10.01 Appointment. Each Bank hereby irrevocably designates, ----------- appoints and authorizes PNC Bank to act as Administrative Agent for such Bank under this Agreement to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Administrative Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agents, the Administrative Agent or any of them by the terms hereof, together with such powers as are reasonably incidental thereto. PNC Bank agrees to act as the Administrative Agent on behalf of the Banks to the extent provided in this Agreement, and each of PNC Bank and First Union National Bank agrees to act as Agent on behalf of the Banks to the extent provided in this Agreement. 10.02 Delegation of Duties. The Agents and the Administrative Agent -------------------- may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agents and the Administrative Agent) and, 91 subject to Sections 10.05 and 10.06 hereof, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained. 10.03 Nature of Duties; Independent Credit Investigation. Neither -------------------------------------------------- the Agents nor the Administrative Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Administrative Agent and of the Agents shall be mechanical and administrative in nature; neither the Administrative Agent nor the Agents shall have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Administrative Agent or any Agent any obligation in respect of this Agreement except as expressly set forth herein. Without limiting the generality of the foregoing, the use of the term "Agents" in this Agreement with reference to the Agents or Administrative Agent, as the case may be, 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. Each Bank expressly acknowledges (i) neither the Administrative Agent nor any Agent has made any representations and warranties to it and that no act by the Administrative Agent or any Agent hereafter taken, including any review of the affairs of the Loan Parties, shall be deemed to constitute any representation or warranty by the Administrative Agent or any Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Administrative Agent or any Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of the Loan Parties in connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that neither the Administrative Agent nor any Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter. 10.04 Actions in Discretion of Agents; Instructions From the Banks. ------------------------------------------------------------ The Administrative Agent and each Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Administrative Agent's or such Agent's rights, powers or discretion herein, provided that neither the Administrative Agent nor any Agent -------- shall be required to take any action which exposes the Administrative Agent or any Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Administrative Agent and each Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 10.06 hereof. Subject to the provisions of Section 10.06, no Bank shall have any right of action whatsoever against the Administrative Agent or any Agent as a result of the Administrative Agent or any Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or 92 in the absence of such instructions, in the absolute discretion of the Administrative Agent or the Agents so long as the Administrative Agent or such Agent is otherwise authorized to act within its rights and powers as provided in this Agreement. 10.05 Reimbursement and Indemnification of Agents by the Borrower. ----------------------------------------------------------- The Borrower unconditionally agrees to pay or reimburse the Administrative Agent and each Agent and save the Administrative Agent and each Agent harmless against (a) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements, including but not limited to reasonable fees and expenses of counsel, appraisers and environmental consultants, incurred by the Administrative Agent or any Agent (i) in connection with the development, negotiation, preparation, execution, performance by a Loan Party or an Excluded Entity and interpretation of this Agreement and the other Loan Documents, (ii) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (iii) in connection with the enforcement of this Agreement or any other Loan Document or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (iv) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including, without limitation, all documentary stamp tax, non-recurring intangible personal property tax, recording or transfer taxes due to any Official Body together with all interest, fines, penalties, costs or other charges thereon which may be imposed on, incurred by or asserted against the Administrative Agent or any Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Administrative Agent or any Agent hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Administrative Agent's or any Agent's gross negligence or willful misconduct, or if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. In addition, upon the occurrence of an Event of Default, the Borrower agrees to reimburse and pay all reasonable out-of-pocket expenses of the Administrative Agent's or any Agent's regular employees and agents engaged periodically to perform audits of the Borrower's books, records and business properties. 10.06 Exculpatory Provisions. Neither the Administrative Agent, any ---------------------- Agent nor any of their respective directors, officers, employees, agents, attorneys or affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including without limitation pursuant to any Loan Document, unless caused by its or their own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection 93 with this Agreement or any other Loan Documents, unless caused by its or their own gross negligence or willful misconduct, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Loan Parties or any Excluded Entity, or the financial condition of the Loan Parties or any Excluded Entity, or the existence or possible existence of any Event of Default or Potential Default, unless caused by its or their own gross negligence or willful misconduct. Neither the Agent nor any Bank nor any of their respective directors, officers, employees, agents, attorneys or affiliates shall be liable to the Loan Parties or any Excluded Entity for consequential damages resulting from any breach of contract, tort or other wrong in connection with the negotiation, documentation, administration or collection of the Loans or any of the Loan Documents. 10.07 Reimbursement and Indemnification of Agents by Banks. Each ---------------------------------------------------- Bank agrees to reimburse and indemnify the Administrative Agent and each Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion of its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent, the Agents, or any of them, in their respective capacities as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Administrative Agent or any Agent hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Administrative Agent's or any Agent's gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank. In addition, each Bank agrees promptly to reimburse the Administrative Agent and each Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrower to the Administrative Agent or the Agents in connection with the periodic audit of the Borrower's books, records and business properties by the Administrative Agent or the Agents. In the event the Banks reimburse or indemnify the Administrative Agent or any Agent pursuant to this Section 10.07 and subsequent thereto the Administrative Agent or such Agent is reimbursed or indemnified by the Borrower with respect to the same matter for which indemnification or reimbursement was previously made by the Banks, such Administrative Agent or Agent will promptly refund to the Banks, in accordance with each Bank's Ratable Share, the duplicative amount. 10.08 Reliance by Agents. The Administrative Agent and each Agent ------------------ shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons, and upon the advice and opinions of counsel and other professional advisers selected by the Administrative Agent or any Agent. The Administrative Agent and each Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall 94 first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.09 Notice of Default. Neither the Administrative Agent nor any ----------------- Agent shall be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless such person has received written notice from a Bank or the Borrower referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." 10.10 Notices. Each of the Administrative Agent and each Agent shall ------- promptly send to each Bank a copy of all notices received from any Loan Party pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Administrative Agent shall promptly notify the Borrower and the other Banks of each change in the Base Rate and the effective date thereof. 10.11 Banks in Their Individual Capacities. With respect to its ------------------------------------ Commitments and the Loans made by it, the Administrative Agent and each Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Administrative Agent or an Agent, and the term "Banks" shall, unless the context otherwise indicates, include the Administrative Agent and each Agent in its individual capacity. PNC Bank and its affiliates, First Union National Bank and its affiliates and each of the Banks and their respective affiliates may, without liability to account, except as prohibited herein, make Loans to, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking or trust business with, the Borrower and its affiliates, in the case of the Administrative Agent or any Agent, as though it were not acting as Administrative Agent or Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder. 10.12 Holders of Notes. The Administrative Agent and each Agent may ---------------- deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Administrative Agent and the Agents. Any request, authority or consent of any person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 10.13 Equalization of Banks. The Banks and the holders of any --------------------- participations in any Notes agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any obligation hereunder or under any Note or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or by any other non-pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts shall be shared ratably among the Banks and such holders in proportion to their interests in payments under the Notes, except as otherwise provided in Sections [4.04(b), 5.04(b) or 5.06(a)] hereof. The Banks or any such holder receiving any such 95 amount shall purchase for cash from each of the other Banks an interest in such Bank's Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount under the Notes, provided that if all or any portion of such excess amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase. 10.14 Successor Agents. Any Agent or the Administrative Agent (i) ---------------- may resign as Agent or Administrative Agent, as the case may be, or (ii) shall resign if such resignation is requested by the Required Banks, in the case of either (i) or (ii) upon not less than thirty (30) days' prior written notice to the Borrower and the Banks. If any Agent or the Administrative Agent shall resign under this Agreement, then either (a) the Required Banks shall appoint from among the Banks a successor Agent or Administrative Agent, as the case may be, for the Banks, or (b) if a successor Agent shall not be so appointed and approved within the thirty (30) day period following the Agent's or the Administrative Agent's notice to the Banks of its resignation, then the resigning Administrative Agent or resigning Agent, as the case may be, shall appoint, with the consent of the Borrower, such consent not to be unreasonably withheld, a successor Agent who shall serve as Agent, or Administrative Agent, as the case may be, until such time as the Required Banks appoint a successor agent. Upon its appointment pursuant to either clause (a) or (b) above, such successor agent shall succeed to the rights, powers and duties of the agent and the terms "Agent" and "Administrative Agent" shall mean such successor Agent or Administrative Agent, as the case may be, effective upon its appointment, and the former Administrative Agent's or Agent's rights, powers and duties as Agent or Administrative Agent shall be terminated without any other or further act or deed on the part of such former Agent or Administrative Agent or any of the parties to this Agreement. After the resignation of any Administrative Agent or Agent hereunder, the provisions of this Article X shall inure to the benefit of such former Agent and former Administrative Agent, and such former Agent and former Administrative Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was the Administrative Agent or an Agent under this Agreement. 10.15 Administrative Agent's Fee. The Borrower shall pay to the -------------------------- Administrative Agent a non refundable, annual fee (the "Administrative Agent's Fee") as set forth in the agreement dated December 3, 1998, between the Borrower and the Administrative Agent, such fee to be payable in the manner and on the dates set forth in such letter agreement. 10.16 Availability of Funds. Unless the Administrative Agent shall --------------------- have been notified by a Bank prior to the date upon which a Loan is to be made that such Bank does not intend to make available to the Administrative Agent such Bank's portion of such Loan, the Administrative Agent may assume that such Bank has made or will make such proceeds available to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption (but shall not be required to), make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Bank, the Administrative Agent shall be entitled to recover such 96 amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand from the Borrower) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrower and ending on the date the Administrative Agent recovers such amount, at a rate per annum equal to the Federal Funds Effective Rate in respect of the Loan. 10.17 Calculations. In the absence of gross negligence or willful ------------ misconduct, the Administrative Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Administrative Agent, the Borrower and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate. 10.18 Beneficiaries. Except as expressly provided herein, the ------------- provisions of this Article X are solely for the benefit of the Administrative Agent, each Agent and the Banks, and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Administrative Agent and each Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. 10.19 Holding of Loan Documents. Administrative Agent agrees that all ------------------------- original Loan Documents retained by it shall be retained for the benefit of the Banks, and the Administrative Agent shall make available copies of such documents retained by it upon the reasonable request of any of the Banks. ARTICLE XI MISCELLANEOUS ------------- 11.01 Modifications, Amendments or Waivers. With the written consent ------------------------------------ of the Required Banks, the Administrative Agent, acting on behalf of the Banks, and the Borrower or the other applicable Loan Party may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Borrower or such Loan Party hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the obligations of the Borrower or such Loan Party hereunder or thereunder. Any such agreement, waiver or consent made with such written consent shall be effective to bind all the Loan Parties and all of the Banks; provided that, no such agreement, waiver or consent may be made which will: (a) without the written consent of all Banks, reduce the amount of the Commitment Fee or any other fees payable to any Bank hereunder, or amend Sections 5.02 [Pro Rata Treatment of Banks], 10.06 [Exculpatory Provisions] or 10.13 [Equalization of Banks] hereof; 97 (b) without the written consent of all Banks, whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan, or reduce the principal amount of or the rate of interest borne by any Loan; (c) without the written consent of all Banks, release any Collateral or other security, if any, for the Borrower's obligations hereunder (provided that, upon the request by the Borrower and so long as no Potential Default or Event of Default exists or is continuing as certified by the Borrower to the Agents and the Banks, with respect to any disposition or sale of assets which is permitted by Section 8.02(f) or (g), the Administrative Agent is hereby authorized to release liens on the assets so disposed of or sold and to release the Guaranty of any Subsidiary sold or disposed of without the consent of any Bank); (d) without the written consent of all Banks, release or terminate any Guaranty Agreement of any Loan Party; (e) without the written consent of the Supermajority Required Banks and each Bank whose Combined Commitment equals $25,000,000 or more, amend Sections 2.01(c), 4.01(a) or 8.02(r), or change the definitions or the method of computing the ratios contained within such foregoing sections; (f) without the written consent of all Banks, amend Section 11.01 or change the definition of Supermajority Required Banks or the definition of Required Banks, or change any requirement providing for the Banks, the Supermajority Required Banks or the Required Banks to authorize the taking of any action hereunder; or (g) without the written consent of all Banks, extend the Expiration Date or increase the amount of Commitment of any Bank hereunder. 11.02 No Implied Waivers; Cumulative Remedies; Writing Required. No --------------------------------------------------------- course of dealing and no delay or failure of the Administrative Agent, any Agent or any Bank in exercising any right, power or remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Administrative Agent, each Agent and the Banks under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. 11.03 Reimbursement and Indemnification of Banks by the Borrower; ----------------------------------------------------------- Taxes. The Borrower agrees unconditionally upon demand to pay or reimburse to - ----- each Bank (other than the Administrative Agents and the Agents, as to which the Borrower's obligations are set forth in Section 9.05) and to save such Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including reasonable fees and 98 expenses of counsel for each Bank except with respect to (a) and (b) below), incurred by such Bank (a) in connection with the interpretation of this Agreement, and other instruments and documents to be delivered hereunder, (b) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including, without limitation, all documentary stamp tax, non-recurring intangible personal property tax, recording or transfer taxes due to any Official Body together with all interest, fines, penalties, costs or other charges thereon which may be imposed on, incurred by or asserted against such Bank, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by such Bank hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (A) if the same results from such Bank's gross negligence or willful misconduct, or (B) if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrower hereunder by considering the usage of one law firm to represent the Banks and the Administrative Agents, and the Agents if appropriate under the circumstances. The Borrower agrees unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Administrative Agent, any Agent or any Bank to be payable in connection with this Agreement or any other Loan Document, and the Borrower agrees unconditionally to save the Administrative Agent, each Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions. 11.04 Holidays. Whenever any payment or action to be made or taken -------- hereunder shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (except as provided in Sections 4.02(a) and (b) with respect to Interest Periods for Loans subject to a Euro-Rate Option), and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 11.05 Funding by Branch, Subsidiary or Affiliate. ------------------------------------------ (a) Notional Funding. Each Bank shall have the right from time to ---------------- time, without notice to the Borrower, to deem any branch, subsidiary or affiliate (which for the purposes of this Section 11.05 shall mean any corporation or association which is directly or 99 indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained or funded any Loan to which the Euro-Rate Option applies at any time, provided that immediately following (on the assumption that a payment were then due from the Borrower to such other office) and as a result of such change the Borrower would not be under any greater financial obligation pursuant to Section 5.06 hereof than it would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to the Bank's actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to -------------- time, to make or maintain any Loan by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 11.05(b). If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Banks but in no event shall any Bank's use of a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, subsidiary or affiliate to incur any cost or expenses payable by the Borrower hereunder or require the Borrower to pay any other compensation to any Bank (including, without limitation, any expenses incurred or payable pursuant to Section 5.06 hereof) which would otherwise not be incurred). 11.06 Notices. All notices, requests, demands, directions and other ------- communications (collectively "notices") given to or made upon any party hereto under the provisions of this Agreement shall be by telephone or in writing (including telex or facsimile communication) unless otherwise expressly permitted hereunder and shall be delivered or sent by telex or facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages hereof or in accordance with any subsequent unrevoked written direction from any party to the others. All notices shall, except as otherwise expressly herein provided, be effective (a) in the case of telex or facsimile, when received, (b) in the case of hand-delivered notice, when hand delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective, telephonic notices must be confirmed in writing no later than the next day by letter, facsimile or telex, (d) if given by mail, four (4) days after such communication is deposited in the mails with first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, that notices to the Administrative Agent shall not be effective until received. Any Bank giving any notice to the Borrower shall simultaneously send a copy thereof to the Administrative Agent, and the Administrative Agent shall promptly notify the other Banks of the receipt by it of any such notice. 11.07 Severability. The provisions of this Agreement are intended to ------------ be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity and unenforceability without in any manner affecting the validity or 100 enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.08 Governing Law. This Agreement shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 11.09 Prior Understanding. This Agreement supersedes all prior ------------------- understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments, except that for periods from January 1, 1998 through the date prior to the Eighteenth Amendment Effective Date, the fees and interest rates set forth in the Credit Agreement, as amended through Amendment No. 17 to Credit Agreement shall be and remain applicable for such periods. 11.10 Duration; Survival. All representations and warranties of the ------------------ Borrower contained herein or made in connection herewith shall survive the making of Loans and shall not be waived by the execution and delivery of this Agreement, any investigation by the Administrative Agent, any Agent or the Banks, the making of Loans, or payment in full of the Loans. All covenants and agreements of the Borrower contained in Sections 8.01, 8.02 and 8.03 herein shall continue in full force and effect from and after the date hereof so long as the Borrower may borrow hereunder and until termination of the Commitments and payment in full of the Loans. All covenants and agreements of the Borrower contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in the Notes, Article V and Sections 10.05, 10.07 and 11.03 hereof, shall survive payment in full of the Loans and termination of the Commitments. 11.11 Successors and Assigns. ---------------------- (i) This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agents, the Administrative Agent, the Borrower and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights and obligations hereunder or any interest herein. Each Bank may, at its own cost, make assignments of or sell participations in all or any part of its Commitment and the Loans made by it to one or more banks or other entities, subject in the case of assignments to the consent of the Borrower (which consent shall not be required (A) during any period in which an Event of Default exists or (B) in the case of an assignment by a Bank to an Affiliate of such Bank) and the Administrative Agent with respect to any assignee, such consent not to be unreasonably withheld, and provided that assignments may not be made in amounts less than $1,000,000. It is expressly agreed that upon and after the occurrence and during the continuation of an Event of Default the consent of the Administrative Agent shall be required, however the consent of the Borrower shall not be required for a Bank to make an assignment of all or any part of its Commitment. In order for a Bank, at any time to sell a participation in all or any part of its Commitment, the consent of the Administrative Agent shall be required, however the consent of the Borrower shall not be 101 required. In the case of an assignment, upon receipt by the Administrative Agent of the Assignment and Assumption Agreement and payment to the Administrative Agent of a fee in the amount of $3,500, the assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Commitments in Section 2.01 shall be adjusted accordingly, and upon surrender of any Note subject to such assignment, the Borrower shall execute and deliver a new Note to the assignee in an amount equal to the amount of the Commitment or Loan assumed by it and a new Note to the assigning Bank in an amount equal to the Commitment or Loan retained by it hereunder. In the case of a participation, the participant shall only have the rights specified in Section 9.02(c) (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights except with respect to changes of the type referenced in clauses (a), (b) or (c) under Section 11.01 hereof), all of such Bank's obligations under this Agreement or any other Loan Document shall remain unchanged and all amounts payable by any Loan party hereunder or thereunder shall be determined as if such Bank had not sold such participation. Each Bank may furnish any publicly available information concerning any Loan Party and any other information concerning any Loan Party in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants) provided such assignees and participants agree to be bound by the provisions of Section 11.2 hereof. (ii) Notwithstanding any other provision of this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Note and the other Loan Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Relegation 31 CFR Section 203.14 without notice to or consent of the Borrower or the Administrative Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document. 11.12 Confidentiality. The Agents, the Administrative Agent and the --------------- Banks each agree to keep confidential all information obtained from any Loan Party which is nonpublic and confidential or proprietary in nature (including any information any Loan Party specifically designates as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agents, the Administrative Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement, subject to agreement of such persons to maintain the confidentiality, (ii) assignees and participants as contemplated by Section 11.11, (iii) to the extent requested by any bank regulatory authority or, with notice to the Borrower, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not subject to confidentiality restrictions, or (v) the Borrower shall have consented to such disclosure. 102 11.13 Counterparts. This Agreement may be executed by different ------------ parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. 11.14 Agent's or Bank's Consent. Whenever the Administrative ------------------------- Agent's, any Agent's or any Bank's consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Administrative Agent, each Agent and each Bank shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter. 11.15 Exceptions. The representations, warranties and covenants ---------- contained herein shall be independent of each other and no exception to any representation, warranty or covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law. 11.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL. THE BORROWER HEREBY -------------------------------------- IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY AND UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESSES PROVIDED FOR IN SECTION 11.06 HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. THE BORROWER WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE. THE BORROWER, THE ADMINISTRATIVE AGENT, THE AGENTS AND THE BANKS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW. 11.17 Tax Withholding Clause. At least five (5) Business Days prior ---------------------- to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or state thereof agrees that it will deliver to each of the Borrower and the Administrative Agent two (2) duly completed copies of (i) Internal Revenue Service Form W-9, 4224 or 1001, or other applicable form prescribed by the Internal Revenue Service, certifying in either case that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes, or is subject to such tax at a reduced rate under an applicable tax treaty, or (ii) Form W-8 or other applicable form or a certificate of the Bank indicating that no such exemption or reduced rate is allowable with respect to such payments. 103 Each Bank which so delivers a Form W-8, W-9, 4224 or 1001 further undertakes to deliver to each of the Borrower and the Administrative Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Administrative Agent, either certifying that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes or is subject to such tax at a reduced rate under an applicable tax treaty or stating that no such exemption or reduced rate is allowable. The Administrative Agent shall be entitled to withhold United States federal income taxes at the full withholding rate unless the Bank establishes an exemption or at the applicable reduced rate as established pursuant to the above provisions. 11.18 Appointment of Collateral Agent. Each Agent and each Bank has ------------------------------- reviewed a copy of the Collateral Sharing Agreement and hereby consents to: (a) the Collateral Sharing Agreement and the appointment of PNC Bank as Collateral Agent under the Collateral Sharing Agreement, the First Mortgages, Pledge Agreements, Security Agreement, Patent, Trademark and Copyright Security Agreement and other Loan Documents and (b) the execution of the Collateral Sharing Agreement by the Administrative Agent on behalf of each Agent and each Bank. 104 EXHIBIT 1 AMENDED AND RESTATED RECITALS AND ARTICLES I THROUGH XI OF THE REVOLVING CREDIT AGREEMENT (Cover Page, table of contents and first paragraph are also attached for convenience) 105 EX-10.64 25 MARINER SAVINGS PLAN EXHIBIT 10.64 MARINER SAVINGS PLAN THIS INDENTURE made on the _____ day of _____________, 1998, by MARINER POST-ACUTE NETWORK, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Primary Sponsor"); W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Primary Sponsor desires to establish for the benefit of its eligible employees and the eligible employees of its adopting subsidiaries a profit sharing plan with a cash or deferred feature; WHEREAS, the Plan is intended to be a profit sharing plan within the meaning of Treasury Regulations Section 1.401-1(b)(1)(ii) and also contains a cash or deferred arrangement as described in Section 401(k) of the Internal Revenue Code of 1986; and NOW, THEREFORE, the Primary Sponsor does hereby establish the Plan, effective as of October 1, 1998, to read as follows: MARINER SAVINGS PLAN TABLE OF CONTENTS
Page ---- SECTION 1 DEFINITIONS..................................................................................... 1 SECTION 2 ELIGIBILITY..................................................................................... 9 SECTION 3 CONTRIBUTIONS................................................................................... 9 SECTION 4 ALLOCATIONS..................................................................................... 11 SECTION 5 PLAN LOANS...................................................................................... 11 SECTION 6 IN-SERVICE AND HARDSHIP WITHDRAWALS............................................................. 13 SECTION 7 INDIVIDUAL FUNDS AND INVESTMENTS OF TRUST ASSETS................................................ 14 SECTION 8 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT................................................ 15 SECTION 9 PAYMENT OF BENEFITS ON RETIREMENT............................................................... 17 SECTION 10 DEATH BENEFITS................................................................................. 18 SECTION 11 GENERAL RULES ON DISTRIBUTIONS................................................................. 18 SECTION 12 ADMINISTRATION OF THE PLAN..................................................................... 20 SECTION 13 CLAIM REVIEW PROCEDURE......................................................................... 22 SECTION 14 LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS.. 23 SECTION 15 PROHIBITION AGAINST DIVERSION.................................................................. 24 SECTION 16 LIMITATION OF RIGHTS........................................................................... 24 SECTION 17 AMENDMENT TO OR TERMINATION OF THE PLAN AND THE TRUST.......................................... 25 SECTION 18 ADOPTION OF PLAN BY AFFILIATES................................................................. 26 SECTION 19 QUALIFICATION AND RETURN OF CONTRIBUTIONS...................................................... 26 SECTION 20 INCORPORATION OF SPECIAL LIMITATIONS........................................................... 27 APPENDIX A LIMITATION ON ALLOCATIONS...................................................................... 1 APPENDIX B TOP-HEAVY PROVISIONS........................................................................... 1 APPENDIX C SPECIAL NONDISCRIMINATION RULES................................................................ 1 APPENDIX D SPECIAL TRANSITION RULES....................................................................... 1
i MARINER SAVINGS PLAN SECTION 1 DEFINITIONS ----------- Wherever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise and the following words and phrases shall, when used herein, have the meanings set forth below: 1.1 "Account" means a Member's aggregate balance in the following ------- accounts, as adjusted pursuant to the Plan as of any given date: (a) "Employee Deferral Account" which shall reflect a Member's ------------------------- interest in contributions made by a Plan Sponsor under Plan Section 3.1. (b) "Matching Account" which shall reflect a Member's interest in ---------------- matching contributions made by a Plan Sponsor under Plan Section 3.2. (c) "Prior Matching Account" which shall reflect a Member's interest ---------------------- in matching contributions made under any other tax-qualified plan, the assets of which have been merged into the Plan. (d) "Company Account" which shall reflect a Member's interest in the --------------- Company Account under the GranCare, Inc. 401(k) Savings Plan. (e) "Rollover Account" which shall reflect a Member's interest in ---------------- Rollover Amounts. In addition, the Plan Administrator shall allocate the interest of a Member in any funds transferred to the Plan in a trust-to-trust transfer (other than Rollover Amounts) or pursuant to the merger of another tax-qualified retirement plan with the Plan among the above accounts as the Plan Administrator determines best reflects the interest of the Member. 1.2 "Affiliate" means (a) any corporation which is a member of the same --------- controlled group of corporations (within the meaning of Code Section 414(b)) as is a Plan Sponsor, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with a Plan Sponsor, (c) any other corporation, partnership or other organization which is a member of an affiliated service group (within the meaning of Code Section 414(m)) with a Plan Sponsor, and (d) any other entity required to be aggregated with a Plan Sponsor pursuant to regulations under Code Section 414(o). Notwithstanding the forgoing, for purposes of applying the limitations set forth in Appendix A and for purposes of determining Annual Compensations under Appendix A, the references to Code Sections 414(b) and (c) above shall be as modified by Code Section 415(h). 1.3 "Annual Compensation" means wages within the meaning of Code Section ------------------- 3401(a) (for purposes of income tax withholding at the source) paid to an Employee by a Plan Sponsor (and Affiliates for purposes of Appendices A, B and C) during a Plan Year (but without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed, such as the exception for agricultural labor in Code Section 3401(a)(2)), to the extent not in excess of the Annual Compensation Limit for all purposes under the Plan except determining Highly Compensated Employees or Key Employees. Notwithstanding the above, Annual Compensation shall be determined as follows: (a) in determining with respect to each Plan Sponsor the amount of contributions made by or on behalf of an Employee under Plan Section 3, except Plan Section 3.3, and allocations under Plan Section 4, except under Plan Section 4.1(b), and (2) for purposes of applying the provisions of Appendix C hereto for such Plan Years as the Secretary of the Treasury may allow, Annual Compensation shall only include amounts received for the portion of the Plan Year during which the Employee was a Member; (b) in determining the amount of contributions made by or on behalf of an Employee under Plan Section 3 and allocations under Plan Section 4, Annual Compensation shall exclude car allowances, relocations allowances, income attributable to stock options and stock grants, severance pay and taxable fringe benefits; (c) for purposes of applying the Annual Compensation Limit, the rules contained in Subsection (c) of the Plan Section containing the definition of the term "Highly Compensated Employee"; (d) Annual Compensation shall include any amount which would have been paid during a Plan Year, but was contributed by a Plan Sponsor on behalf of an Employee pursuant to a salary reduction agreement which is not includable in the gross income of the Employee under Section 125, 402(g)(3), or 457 of the Code; and 1.4 "Annual Compensation Limit" means $160,000 for the 1998 Plan Year, ------------------------- which amount may be adjusted in subsequent Plan Years based on changes in the cost of living as announced by the Secretary of the Treasury. 1.5 "Beneficiary" means the person or trust that a Member designated most ----------- recently in writing to the Plan Administrator; provided, however, that if the Member has failed to make a designation, no person designated is alive, no trust has been established, or no successor Beneficiary has been designated who is alive, the term "Beneficiary" means (a) the Member's spouse or (b) if no spouse is alive, the Member's surviving children, or (c) if no children are alive, the Member's parent or parents, or (d) if no parent is alive, the deceased Member's estate. Notwithstanding the preceding sentence, the spouse of a married Member shall be his Beneficiary unless that spouse has consented in writing to the designation by the Member of some other person or trust and the spouse's consent acknowledges the effect of the designation and is witnessed by a notary public or a Plan representative. A Member may change his designation at any time. However, a Member may not change his designation without further consent of his spouse under the terms of the preceding sentence unless the spouse's consent permits designation of another person or trust without further spousal consent and acknowledges that the spouse has the right to limit consent to a specific beneficiary and that the spouse voluntarily relinquishes this right. Notwithstanding the above, the spouse's consent shall not be required if the Member establishes to the satisfaction of the Plan Administrator that the spouse cannot be located, if the Member has a court order indicating that he is legally separated or has been abandoned (within the meaning of local law) unless a "qualified domestic relations order" (as defined in Code Section 414(p)) provides otherwise, or if there are other circumstances as the Secretary of the Treasury prescribes. If the spouse is legally incompetent to give consent, consent by the spouse's legal guardian shall be deemed to be consent by the 2 spouse. If, subsequent to the death of a Member, the Member's Beneficiary dies while entitled to receive benefits under the Plan, the successor Beneficiary, if any, or the Beneficiary listed under Subsection (a), (b) (c) or (d) shall be the Beneficiary. 1.6 "Board of Directors" means the Board of Directors of the Primary ------------------ Sponsor. 1.7 "Break in Service" means: ---------------- (a) with respect to a Part-Time Employee, the failure of an Employee, in connection with a termination of employment other than by reason of death or attainment of a Retirement Date, to complete more than 500 Hours of Service in any Plan Year; and (b) with respect to a Full-Time Employee, the failure of an Employee to perform an Hour of Service within the twelve-consecutive-month period commencing on his Severance Date. 1.8 "Code" means the Internal Revenue Code of 1986, as amended. ---- 1.9 "Company Stock" means the stock of a Plan Sponsor or any other company ------------- required to be aggregated with the Plan Sponsor under Section 414(b) of the Code. 1.10 "Deferral Amount" means a contribution of a Plan Sponsor on behalf of --------------- a Member pursuant to Plan Section 3.1. 1.11 "Direct Rollover" means a payment by the Plan to the Eligible --------------- Retirement Plan specified by the Distributee. 1.12 "Distributee" means an Employee or former Employee. In addition, the ----------- Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order (as defined in Code Section 414(p)), are Distributees with regard to the interest of the spouse or former spouse. 1.13 "Elective Deferrals" means, with respect to any taxable year of the ------------------ Member, the sum of (a) any Deferral Amounts; (b) any contributions made by or on behalf of a Member under any other qualified cash or deferred arrangement as defined in Code Section 401(k), whether or not maintained by a Plan Sponsor, to the extent such contributions are not or would not, but for Code Section 402(g)(1) be included in the Member's gross income for the taxable year; and (c) any other contributions made by or on behalf of a Member pursuant to Code Section 402(g)(3). 3 1.14 "Eligibility Service" means; ------------------- (a) with respect to a Part-Time Employee, a six-consecutive-month period during which the Employee completes no less than 500 Hours of Service beginning on the date on which the Employee first performs an Hour of Service upon his employment or reemployment or, in the event the Employee fails to complete 500 Hours of Service in that six-consecutive- month period, any six-consecutive-month thereafter during which the Employee completes no less than 500 Hours of Service; provided, however, that in the event that the Part-Time Employee is granted past service credit in accordance with the rules set forth in Section 1.25(g), "Eligibility Service" shall mean six (6) months of Service; and (b) with respect to a Full-Time Employee, six (6) months of Service. 1.15 "Eligible Employee" means any Employee of a Plan Sponsor other than ----------------- an Employee who is (a) covered by a collective bargaining agreement between a union and a Plan Sponsor, provided that retirement benefits were the subject of good faith bargaining, unless the collective bargaining agreement provides for participation in the Plan, (b) a leased employee within the meaning of Code Section 414(n)(2), or (c) deemed to be an Employee of a Plan Sponsor pursuant to regulations under Code Section 414(o). 1.16 "Eligible Retirement Plan" means an individual retirement account ------------------------ described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a) that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. 1.17 "Eligible Rollover Distribution" means any distribution of all or ------------------------------ any portion of the Distributee's Account, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). 1.18 "Employee" means any person who is (a) employed by a Plan Sponsor -------- or an Affiliate for purposes of the Federal Insurance Contributions Act, (b) a leased employee within the meaning of Code Section 414(n)(2) with respect to a Plan Sponsor, or (c) deemed to be an employee of a Plan Sponsor pursuant to regulations under Code Section 414(o). 1.19 "Entry Date" means the first day of each month. ---------- 1.20 "ERISA" means the Employee Retirement Income Security Act of 1974, ----- as amended. 1.21 "Fiduciary" means each Named Fiduciary and any other person who --------- exercises or has any discretionary authority or control regarding management or 4 administration of the Plan, any other person who renders investment advice for a fee or has any authority or responsibility to do so with respect to any assets of the Plan, or any other person who exercises or has any authority or control respecting management or disposition of assets of the Plan. 1.22 "Full-Time Employee" means each Employee who is regularly scheduled ------------------ to work at least 30 hours per week, as reflected on the payroll records of a Plan Sponsor. 1.23 "Fund" means the amount at any given time of cash and other ---- property held by the Trustee pursuant to the Plan. 1.24 "Highly Compensated Employee" means each Employee who: --------------------------- (a) (1) was at any time during the Plan Year in the immediately preceding Plan Year an owner of more than five percent (5%) of the outstanding stock of a Plan Sponsor or Affiliate or more than five percent (5%) of the total combined voting power of all stock of a Plan Sponsor or Affiliate; or (2) received Annual Compensation in excess of $80,000 (for the Plan Year beginning in 1997) during the immediately preceding Plan Year, which amount shall be adjusted for changes in the cost of living as provided in regulations issued by the Secretary of the Treasury. (b) For purposes of this Section, a former Employee shall be treated as a Highly Compensated Employee if (1) the former Employee was a Highly Compensated Employee at the time the former Employee separated from service with the Plan Sponsor or Affiliate or (2) the former Employee was a Highly Compensated Employee at any time after the former Employee attained age 55. (c) For purposes of this Section, Employees who are nonresident aliens and who receive no earned income from the Plan Sponsor or an Affiliate from sources within the United States shall not be treated as Employees. 1.25 "Hour of Service" means: --------------- (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Plan Sponsor or any Affiliate during the applicable computation period, and such hours shall be credited to the computation period in which the duties are performed; (b) Each hour for which an Employee is paid, or entitled to payment, by a Plan Sponsor or any Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Plan Sponsor or any Affiliate, and such hours shall be credited to the computation period or periods to which the award or agreement for back pay pertains rather than to the computation period in which the award, agreement or payment is made; 5 provided, that the crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in Subsection (b) of this Section shall be subject to the limitations set forth in Subsection (f); (d) Solely for purposes of determining whether a Break in Service has occurred, each hour during any period that the Employee is absent from work (1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of the child by the Employee, or (4) for purposes of caring for such child for a period immediately following its birth or placement. The hours described in this Subsection (d) shall be credited (A) only in the computation period in which the absence from work begins, if the Employee would be prevented from incurring a Break in Service in that year solely because of that credit, or (B), in any other case, in the next following computation period; (e) Without duplication of the Hours of Service counted pursuant to Subsection (d) hereof and solely for such purposes as required pursuant to the Family and Medical Leave Act of 1993 and the regulations thereunder (the "Act"), each hour (as determined pursuant to the Act) for which an Employee is granted leave under the Act (1) for the birth of a child, (2) for placement with the Employee of a child for adoption or foster care, (3) to care for the Employee's spouse, child or parent with a serious health condition, or (4) for a serious health condition that makes the Employee unable to perform the functions of the Employee's job; (f) The Plan Administrator shall credit Hours of Service in accordance with the provisions of Section 2530.200b-2(b) and (c) of the U.S. Department of Labor Regulations or such other federal regulations as may from time to time be applicable and determine Hours of Service from the employment records of a Plan Sponsor or in any other manner consistent with regulations promulgated by the Secretary of Labor, and shall construe any ambiguities in favor of crediting Employees with Hours of Service. Notwithstanding any other provision of this Section, in no event shall an Employee be credited with more than 501 Hours of Service during any single continuous period during which he performs no duties for the Plan Sponsor or Affiliate; and (g) In the event that a Plan Sponsor or an Affiliate acquires assets of another corporation or entity or a controlling interest of the stock of another corporation, merges with another corporation or entity and is the surviving entity, or acquires the lease to or management contract for a facility, then service of an Employee who was employed by the prior corporation or entity and who is employed by the Plan Sponsor or an Affiliate at the time of the acquisition or merger shall be counted in the manner provided, with the consent of an officer of the Primary Sponsor. 1.26 "Individual Fund" means such subfunds of the Fund as may be --------------- established by the Plan Administrator for the investment of Accounts, other than the Matching Account. 1.27 "Investment Committee" means a committee which may be established -------------------- to direct the Trustee with respect to investments of the Fund. 1.28 "Investment Manager" means a Fiduciary, other than the Trustee, ------------------ the Plan Administrator, or a Plan Sponsor, who may be appointed by the Primary Sponsor: 6 (a) who has the power to manage, acquire, or dispose of any assets of the Fund or a portion thereof; and (b) who (1) is registered as an investment adviser under the Investment Advisers Act of 1940; (2) is a bank as defined in that Act; or (3) is an insurance company qualified to perform services described in Subsection (a) above under the laws of more than one state; and (c) who has acknowledged in writing that he is a Fiduciary with respect to the Plan. 1.29 "Member" means any Employee or former Employee who has become a ------ participant in the Plan for so long as his vested Account has not been fully distributed pursuant to the Plan. 1.30 "Named Fiduciary" means only the following: --------------- (a) The Plan Administrator; (b) The Trustee; (c) The Board of Directors; (d) The Investment Committee; and (e) The Investment Manager. 1.31 "Normal Retirement Age" means age 65. --------------------- 1.32 "Part-Time Employee" means each Employee who is regularly ------------------ scheduled to work less than thirty (30) hours per week, as reflected on the payroll records of a Plan Sponsor. 1.33 "Plan Administrator" means the organization or person designated ------------------ to administer the Plan. 1.34 "Plan Sponsor" means individually the Primary Sponsor and any ------------ Affiliate or other entity which has adopted the Plan and Trust. 1.35 "Plan Year" means the calendar year. --------- 1.36 "Retirement Date" means the date on which the Member retires on --------------- or after attaining Normal Retirement Age. 1.37 "Rollover Amount" means any amount transferred to the Fund by a --------------- Member, which amount qualifies as an eligible rollover distribution under Code Section 402(c)(4), or for rollover treatment under Code Sections 403(a)(4) or 408(d)(3)(A)(ii), and any regulations issued thereunder. However, no amount transferred from an individual retirement account shall be considered a Rollover Account. 7 1.38 "Service" means the sum of each period elapsed between the date ------- the Employee first performs and Hour of Service due to his employment or reemployment and any Severance Date immediately following thereafter. In determining Service, the following rules shall apply: (a) if an Employee performs one Hour of Service within twelve (12) months of a Severance Date described in Plan Section 1.39(a), or of the date the Employee was first absent from service for any other reason, any period of severance which would otherwise occur shall be ignored and be required to be taken into account in computing the Employee's period of Service; and (b) the period between the first anniversary and second anniversary of an absence from service for the reasons specified in Plan Section 1.39(b)(2) shall be neither a period of severance nor a period of Service, except as may otherwise be required under the Family and Medical Leave Act effective August 5, 1993. 1.39 "Severance Date" means the earlier of: -------------- (a) the date on which an Employee quits, is discharged, retires or dies; or (b) (1) the first anniversary of the first date of a period in which an Employee remains absent from service (with or without pay) with the Plan Sponsor for any other reason, such as vacation, layoff, or leave of absence, except that, effective August 5, 1993, an approved leave of absence pursuant to the Family and Medical Leave Act will not be considered as an absence from service for this purpose; or (2) in the case of an Employee who remains absent from service beyond the first anniversary of the first day of absence by reason of the Employee's pregnancy, the birth of the Employee's child, the placement of a child in the Employee's home or adoption by the Employee, or the caring for the child for the period immediately following its birth or adoption, the second anniversary of the first day of absence from service. 1.40 "Termination Completion Date" means the last day of the fifth --------------------------- consecutive Break in Service computation period, determined under the Plan Section that defines Break in Service, in which a Member completes a Break in Service. 1.41 "Termination of Employment" means the termination of employment of an ------------------------- Employee from all Plan Sponsors and Affiliates for any reason other than death or attainment of a Retirement Date. The transfer of an Employee from one Plan Sponsor to another Plan Sponsor or to an Affiliate shall not be deemed for any purpose under the Plan to be a Termination of Employment. In addition, transfer of an Employee to another company in connection with a corporate transaction involving a sale of assets, merger or sale of an Affiliate, shall not be deemed to be a Termination of Employment, for purposes of the timing of distributions (but not vesting or eligibility) under Plan Section 8, if the company to which such Employee is transferred agrees to accept a transfer of assets from the Plan to its tax qualified plan in a trust-to-trust transfer meeting the requirements of Code Section 414(l). 1.42 "Trust" means the trust established under an agreement between the ----- Primary Sponsor and the Trustee to hold the Fund or any successor agreement. 8 1.43 "Trustee" means the trustee under the Trust. ------- 1.44 "Valuation Date" means each business day. -------------- 1.45 "Vesting Service" means the number of years, disregarding fractional --------------- years, of Service credited to that Employee. Notwithstanding anything contained herein to the contrary, Vesting Service shall not include: (a) In the case of an Employee who completes five consecutive Breaks in Service for purposes of determining the vested portion of his Account derived from Plan Sponsor contributions which accrued before his Termination Completion Date, all service in Plan Years after his Termination Completion Date. (b) In the case of an Employee who completes five consecutive Breaks in Service and at that time does not have any vested right in Plan Sponsor contributions, all service before those Breaks in Service commenced. SECTION 2 ELIGIBILITY ----------- 2.1 Each Eligible Employee shall become a Member as of the Entry Date coinciding with or next following the date he completes his Eligibility Service. 2.2 Each former Member who is reemployed by a Plan Sponsor shall become a Member as of the date of his reemployment as an Eligible Employee. 2.3 Solely for the purpose of contributing a Rollover Amount to the Plan, an Eligible Employee who has not yet become a Member pursuant to any other provision of this Section 2 shall become a Member as of the date on which the Rollover Amount is contributed to the Plan. SECTION 3 CONTRIBUTIONS ------------- 3.1 (a) The Plan Sponsor shall make a contribution to the Fund on behalf of each Member who is an Eligible Employee and has elected to defer a portion of Annual Compensation otherwise payable to him for the Plan Year and to have such portion contributed to the Fund. The election must be made before the Annual Compensation is payable and may only be made in the form and manner as the Plan Administrator may prescribe and shall specify the percentage of Annual Compensation that the Member desires to defer and to have contributed to the Fund. Once a Member has made an election for a Plan Year, the Member may revoke or modify his election to reduce the rate of future deferrals, effective as of the beginning of the payroll period coinciding with or next following the Plan Administrator's processing of the revocation or modification pursuant to normal administrative procedures. Once an election has been revoked or modified, any subsequent election by the Member shall be effective as of the Entry Date coinciding with or next following the Plan Administrator's processing of the election 9 pursuant to normal administrative procedures. The contribution made by a Plan Sponsor on behalf of a Member under this Section 3.1 shall be in an amount equal to the amount specified in the Member's election in whole percentages of the Member's Annual Compensation, but not less than one percent (1%) or greater than twenty percent (20%) of the Member's Annual Compensation. (b) Elective Deferrals shall in no event exceed $10,000 (for 1998) in any one taxable year of the Member, which amount shall be adjusted for changes in the cost of living as provided by the Secretary of the Treasury. In the event the amount of Elective Deferrals exceeds $10,000 (for 1998) as adjusted, in any one taxable year then, (1) not later than the immediately following March 1, the Member may designate to the Plan the portion of the Member's Deferral Amount which consists of excess Elective Deferrals, and (2) not later than the immediately following April 15, the Plan may distribute the amount designated to it under Paragraph (1) above, as adjusted to reflect income, gain, or loss attributable to it through the date of the distribution, and reduced by any "Excess Deferral Amounts," as defined in Appendix C hereto, previously distributed or recharacterized with respect to the Member for the Plan Year beginning with or within that taxable year. The payment of the excess Elective Deferrals, as adjusted and reduced, from the Plan shall be made to the Member without regard to any other provision in the Plan. In the event that a Member's Elective Deferrals exceed $10,000, as adjusted, in any one taxable year under the Plan and other plans of the Plan Sponsor and its Affiliates, the Member shall be deemed to have designated for distribution under the Plan the amount of excess Elective Deferrals, as adjusted and reduced, by taking into account only Elective Deferral amounts under the Plan and other plans of the Plan Sponsor and its Affiliates. (c) Notwithstanding anything contained in Subsection (a) hereof to the contrary, in the event that (1) a Member, immediately prior to his participation in the Plan, was a participant in another tax-qualified plan containing a cash or deferred arrangement under Code Section 401(k) maintained by a Plan Sponsor (a "Prior Plan"), (2) such Member's active participation ceased in the Prior Plan immediately prior to the time he became a Member, and (3) the Member had an election under the cash or deferred feature of the Prior Plan in effect immediately prior to the date he became a Member, the Member's election under such Prior Plan shall be deemed to be an election under Subsection (a) hereof if the Member is provided with the opportunity to revoke or otherwise change such election prior to the date of the first reduction in his Annual Compensation under the Plan pursuant to Subsection (a). 3.2 The Plan Sponsor proposes to make contributions to the Fund with respect to each payroll period for each Member who is an Eligible Employee in an amount equal to fifty percent (50%) of the contribution made on behalf of a Member pursuant to Plan Section 3.1 for such payroll period, to the extent that the contribution made on the Member's behalf under Section 3.1 does not exceed three percent (3%) of the portion of his Annual Compensation payable for such payroll period. 3.3 Any Eligible Employee may, with the consent of the Plan Administrator and subject to such rules and conditions as the Plan Administrator may prescribe, transfer a Rollover Amount to the Fund; provided, however, that the Plan Administrator shall not administer this provision in a manner which is discriminatory in favor of Highly Compensated Employees. 10 3.4 Forfeitures shall be used to reduce Plan Sponsor contributions and not to increase benefits. 3.5 Contributions may be made only in cash, Company Stock, or other property which is acceptable to the Trustee. In no event will the sum of contributions under Plan Sections 3.1, 3.2 and 3.3 exceed the deductible limits under Code Section 404. 3.6 Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Internal Revenue Code. SECTION 4 ALLOCATIONS ----------- 4.1 As soon as reasonably practicable following the date of withholding by the Plan Sponsor, if applicable, and receipt by the Trustee, Plan Sponsor contributions made on behalf of each Member under Plan Sections 3.1 and 3.2, and Rollover Amounts contributed by the Member, shall be allocated to the Employee Deferral Account, Matching Account and Rollover Account, respectively, of the Member on behalf of whom the contributions were made. 4.2 As of each Valuation Date, the Trustee shall determine the net income or net loss of each Individual Fund pursuant to the provisions of the Trust. The net income or loss shall be allocated as of the Valuation Date to each Account in the proportion that the value of the Account invested in that Individual Fund, as of the preceding Valuation Date, bears to the value of all Accounts invested in that Individual Fund as of the preceding Valuation Date. SECTION 5 PLAN LOANS ---------- 5.1 Subject to the provisions of the Plan and the Trust, each Member who is an Employee shall have the right, subject to prior approval by the Plan Administrator, to borrow from the Fund. In addition, each "party in interest," as defined in ERISA Section 3(14), who is (a) a Member but no longer an Employee, (b) the Beneficiary of a deceased Member, or (c) an alternate payee of a Member pursuant to the provisions of a "qualified domestic relations order," as defined in Code Section 414(p), shall also have the right, subject to prior approval by the Plan Administrator, to borrow from the Fund; provided, however, that loans to such parties in interest may not discriminate in favor of Highly Compensated Employees. 5.2 In order to apply for a loan, a borrower must complete and submit to the Plan Administrator documents provided by the Plan Administrator for this purpose. 5.3 Loans shall be available to all eligible borrowers on a reasonably equivalent basis which may take into account the borrower's creditworthiness, ability to repay, and ability to provide adequate security. Loans shall not be made available to Highly Compensated Employees, officers or shareholders of a Plan Sponsor in an amount greater than the amount made available to other borrowers. This provision shall be deemed to be satisfied if all borrowers have the right to borrow the same percentage of their interest in the Member's vested 11 Account, notwithstanding that the dollar amount of such loans may differ as a result of differing values of Members' vested Accounts. 5.4 Each loan shall bear a "reasonable rate of interest" and provide that the loan be amortized in substantially level payments, made no less frequently than quarterly, over a specified period of time. A "reasonable rate of interest" shall be that rate that provides the Plan with a return commensurate with the interest rates charged by persons in the business of lending money for loans which would be made under similar circumstances. 5.5 Each loan shall be adequately secured, with the security for the outstanding balance of all loans to the borrower to consist of one-half (1/2) of the borrower's interest in the Member's vested Account, or such other security as the Plan Administrator deems acceptable. No portion of the Member's Employee Deferral Account shall be used as security for any loan hereunder unless and until such time as the loan amount exceeds the value of the borrower's interest in the Member's vested Account in all other Accounts. 5.6 Each loan, when added to the outstanding balance of all other loans to the borrower from all retirement plans of the Plan Sponsor and its Affiliates which are qualified under Section 401 of the Code, shall not exceed the lesser of: (a) $50,000, reduced by the excess, if any, of (1) the highest outstanding balance of loans made to the borrower from all retirement plans qualified under Code Section 401 of the Plan Sponsor and its Affiliates during the one (1) year period immediately preceding the day prior to the date on which such loan was made, over (2) the outstanding balance of loans made to the borrower from all retirement plans qualified under Code Section 401 of the Plan Sponsor and its Affiliates on the date on which such loan was made, or (b) one-half (1/2) of the value of the borrower's interest in the vested Account attributable to the Member's Account. For purposes of this Section, the value of the vested Account attributable to a Member's Account shall be established as of the latest preceding Valuation Date, or any later date on which an available valuation was made, and shall be adjusted for any distributions or contributions made through the date of the origination of the loan. 5.7 Each loan, by its terms, shall be repaid within five (5) years, except that any loan which is used to acquire any dwelling unit which within a reasonable time is to be used (determined at the time the loan is made) as the principal residence of the borrower may, by its terms, be repaid within fifteen (15) years. 5.8 Each loan shall be made in an amount of no less than $1,000. 5.9 A borrower is permitted to have only one loan existing under this Plan at any one time. 12 5.10 The entire unpaid principal sum and accrued interest shall, at the option of the Plan Administrator, become due and payable if (a) a borrower fails to make any loan payment when due, (b) a borrower ceases to be a "party in interest", as defined in ERISA Section 3(14), (c) the vested Account held as security under the Plan for the borrower will, as a result of an impending distribution or withdrawal, be reduced to an amount less than the amount of all unpaid principal and accrued interest then outstanding under the loan, or (d) a borrower makes any untrue representations or warranties in connection with the obtaining of the loan. In that event, the Plan Administrator may take such steps as it deems necessary to preserve the assets of the Plan, including, but not limited to, the following: (1) direct the Trustee to deduct the unpaid principal sum, accrued interest, and any other applicable charge under the note evidencing the loan from any benefits that may become payable out of the Plan to the borrower, (2) direct the Plan Sponsor to deduct and transfer to the Trustee the unpaid principal balance, accrued interest, and any other applicable charge under the note evidencing the loan from any amounts owed by the Plan Sponsor to the borrower, or (3) liquidate the security given by the borrower, other than amounts attributable to a Member's Employee Deferral Account, and deduct from the proceeds the unpaid principal balance, accrued interest, and any other applicable charge under the note evidencing the loan. If any part of the indebtedness under the note evidencing the loan is collected by law or through an attorney, the borrower shall be liable for attorneys' fees in an amount equal to ten percent of the amount then due and all costs of collection. 5.11 Each loan shall be made only in accordance with regulations and rulings of the Internal Revenue Service and the Department of Labor. The Plan Administrator shall be authorized to administer the loan program of this Section and shall act in his sole discretion to ascertain whether the requirements of such regulations and rulings and this Section have been met. SECTION 6 IN-SERVICE AND HARDSHIP WITHDRAWALS ----------------------------------- 6.1 The Trustee shall, upon the direction of the Plan Administrator, withdraw all or a portion of a Member's Employee Deferral Account consisting of Deferral Amounts (but not earnings thereon) prior to the time such account is otherwise distributable in accordance with the other provisions of the Plan; provided, however, that any such withdrawal shall be made only if the Member is an Employee and demonstrates that he is suffering from "hardship" as determined herein. For purposes of this Section, a withdrawal will be deemed to be an account of hardship if the withdrawal is on account of: (a) expenses for medical care described in Section 213(d) of the Code incurred by the Member, his spouse, or any dependents of the Member (as defined in Section 152 of the Code) or necessary for these persons to obtain medical care described in Code Section 213(d); (b) purchase (excluding mortgage payments) of a principal residence for the Member; (c) payment of tuition and related educational fees for the next twelve (12) months of post-secondary education for the Member, his spouse, children, or dependents; (d) the need to prevent the eviction of the Member from his principal residence or foreclosure on the mortgage of the Member's principal residence; or 13 (e) any other contingency determined by the Internal Revenue Service to constitute an "immediate and heavy financial need" within the meaning of Treasury Regulations Section 1.401(k)-1(d). 6.2 In addition to the requirements set forth in Plan Section 6.1, any withdrawal pursuant to Plan Section 6.1 shall not be in excess of the amount necessary to satisfy the need determined under Section 6.1 and shall also be subject to the following requirements: (a) The Member shall first obtain all withdrawals, other than hardship withdrawals, and all nontaxable loans currently available under all plans maintained by the Plan Sponsor; (b) the Plan Sponsor shall not permit Elective Deferrals or after-tax employee contributions to be made to the Plan or any other plan maintained by the Plan Sponsor, for a period of twelve (12) months after the Member receives the withdrawal pursuant to this Section; and (c) the Plan Sponsor shall not permit Elective Deferrals to be made to the Plan or any other plan maintained by the Plan Sponsor for the Member's taxable year immediately following the taxable year of the hardship withdrawal in excess of the limit under Plan Section 3.1(b) for the taxable year, less the amount of the Elective Deferrals made to the Plan or any other plan maintained by the Plan Sponsor for the taxable year in which the withdrawal under this Section occurs. Such withdrawals shall be made only in accordance with such rules, policies, procedures, restrictions, and conditions as the Plan Administrator may from time to time adopt. Any determination of the existence of hardship and the amount to be withdrawn on account thereof shall be made by the Plan Administrator (or such other person as may be required to make such decisions) in accordance with the foregoing rules as applied in a uniform and nondiscriminatory manner; provided that, unless the Member requests otherwise, any such withdrawal shall include the amount necessary to pay any federal, state and local income taxes and penalties reasonably anticipated to result from the withdrawal. A withdrawal under this Section shall be made in a lump sum to the Member, and shall be subject to the Eligible Rollover Distribution requirements set forth in Plan Section 11.2. 6.3 Withdrawals from a Member's Rollover Account shall be permitted subject to the rules prescribed by the Plan Administrator. In no event shall the amount of any withdrawal under this Section 6.3 be less than the lesser of $1,000 or the Member's Entire Rollover Account. 6.4 Withdrawals from a Member's vested Account shall be permitted after age 59 1/2, subject to the rules prescribed by the Plan Administrator. SECTION 7 INDIVIDUAL FUNDS AND INVESTMENTS OF TRUST ASSETS ------------------------------------------------ 7.1 Until such time as the Plan Administrator may direct otherwise, each Member may direct the Plan Administrator to invest contributions to his Account other than his or her Matching Account in one or more Individual Funds. 14 (a) All investment directions shall be in any ratio directed by the Member; provided that all elections shall be in one percent (1%) increments. A Member can change the investment of his current contributions or his existing Account at any time. A new investment direction shall be effective as soon as reasonably practicable after timely election is received by the Plan Administrator, provided that the election is made according to the procedures established by the Plan Administrator. (b) An investment direction, once given, shall be deemed to be a continuing direction until changed as otherwise provided herein. If no direction is effective for the date a contribution is to be made, all contributions which are to be made for such date shall be invested in such Individual Fund as the Plan Administrator, the Investment Committee, the Investment Manager, or the Trustee, as applicable, may determine to best preserve principal. To the extent permissible by law, no Fiduciary shall be liable for any loss, which results from a Member's exercise or failure to exercise his investment election. (c) Notwithstanding anything contained in Subsection (a) hereof to the contrary, in the event that (1) a Member, immediately prior to his participation in the Plan, was a participant in another tax-qualified plan containing a cash or deferred arrangement under Code Section 401(k) maintained by a Plan Sponsor (a "Prior Plan"), (2) such Member's active participation ceased in the Prior Plan immediately prior to the time he became a Member, and (3) the Member had an investment election under the Prior Plan in effect immediately prior to the date he became a Member, the Member's election under such Prior Plan shall be deemed to be an election under Subsection (a) hereof if the Member is provided with the opportunity to revoke or otherwise change such election prior to the date of the first reduction in his Annual Compensation under the Plan pursuant to Subsection (a). The Plan Administrator shall effect such investment election by investing such Member's Account among the Individual Funds that most closely resemble, in the discretion of the Plan Administrator, the investment alternatives selected by the Member in the Prior Plan. 7.2 Notwithstanding anything in the Plan to the contrary, the Trustee, at the direction of the Investment Committee, shall invest the assets of Member's Matching Accounts primarily in shares of Company Stock. SECTION 8 PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT ------------------------------------------------ 8.1 In the event of a Termination of Employment of a Participant, the Participant's vested Accrued Benefit shall be determined as of' the Valuation Date coinciding with or immediately preceding the date the Participant's Accrued Benefit is valued for imminent payout purposes pursuant to normal administrative procedures, increased by any contributions or Rollover Amounts allocated to the Account of the Participant after that Valuation Date and reduced by any distributions therefrom. 15 8.2 (a) A Member's Accrued Benefit attributable to his Employee Deferred Account and Rollover Account shall always be 100% vested and nonforfeitable. (b) A Member's Accrued Benefit attributable to Plan Sponsor contributions under Plan Section 3.2 shall become vested based upon the following vesting schedule: Years of Vesting Service Vested Percentage ------------------------ ----------------- Less than 1 year 0% 1 years 25% 2 years 50% 3 years 75% 4 years or more 100% Notwithstanding anything contained in this Section 8.2 to the contrary, a Member (i) whose employment with the Plan Sponsor terminates by reason of his death or attains a Retirement Date, (ii) who attains the age of 65, or (iii) incurs a Disability, shall become 100% vested in his Accrued Benefit attributable to Plan Sponsor contributions. 8.3 A Member's Accrued Benefit shall be paid to him, or in the event of his death, to his Beneficiary, in the case of a Member: (a) who has a vested Accrued Benefit of $5,000 or less, as soon as practicable after the later of the date he ceases to be an Employee; and (b) who has a vested Accrued Benefit greater than $5,000, as soon as practicable following the date the Member's election is processed pursuant to the administrative procedures adopted by the Plan Administrator but in no event prior to the date he ceases to be an Employee. (c) If a retired Member has not previously received a distribution under Subsection (a) or (b), his Account will be distributed to him on or before sixty (60) days following the end of the Plan Year in which the later of the date the Member (1) attains Normal Retirement Age, or (2) incurs a Retirement Date. 8.4 The payment of a Member's vested Accrued Benefit shall be in the form of one lump sum in cash to the extent practicable. A Member with a vested Accrued Benefit greater than $5,000 may instead elect, at the time and in the manner prescribed by the Plan Administrator, to receive payment of his vested Accrued Benefit in the form of quarterly installments over a period of not less than three (3) years and not greater than fifteen (15) years. The first installment payments will commence as soon as practicable following the date the Member's election is processed pursuant to the administrative procedures adopted by the Plan Administrator. Each next installment payment will be made each third month thereafter. The Account of a Member who elects installment payments shall be credited with its pro rata share of the net income, gain or loss of the Fund during the period over which installments are paid. All distributions will be in cash except to a Member with a Vested Accrued Benefit greater than $5,000 16 may elect, at the time and in the manner prescribed by the Plan Administrator, to have any shares of Company Stock held in a Member's Account distributed in kind. 8.5 Except as otherwise provided herein, payment of the Member's Accrued Benefit shall be made as soon as administratively feasible after the Participant terminates employment; provided, however, if the Member's Accrued Benefit exceeds $5,000 it will not be distributed before the Member's attainment of Normal Retirement Age, without the Member's consent. 8.6 If a Plan amendment directly or indirectly changes the vesting schedule, the vesting percentage for each Member in his Account accumulated to the date when the amendment is adopted shall not be reduced as a result of the amendment. In addition, any Member with at least three (3) years of Vesting Service may irrevocably elect to remain under the pre-amendment vesting schedule with respect to all of his benefits accrued both before and after the amendment. 8.7 If a Member has a Termination of Employment and is subsequently reemployed by a Plan Sponsor or an Affiliate on or prior to receiving a distribution of his Accrued Benefit, the Member's Account shall be treated as the Account of a Member who has not terminated employment other than in regard to allocations of Plan Sponsor contributions which would have been made to his Account at any Valuation Date occurring while the Member was not employed by a Plan Sponsor. SECTION 9 PAYMENT OF BENEFITS ON RETIREMENT --------------------------------- 9.1 Determination of Benefit. The Accrued Benefit of a Member who has ------------------------ attained a Retirement Date or has attained Normal Retirement Age shall be fully vested and nonforfeitable. As of a Member's Retirement Date while an Employee, he shall be entitled to his Accrued Benefit to be paid in accordance with this Plan Section 9. The Accrued Benefit of a Member which is to be paid under this Section 9 shall be determined as of the Valuation Date coinciding with or immediately preceding the date the Accrued Benefit is valued for imminent payout purposes pursuant to normal administrative procedures, and shall be increased by any amounts allocated to the Member's Account after that Valuation Date and reduced by any distributions made from the Member's account after that Valuation Date. 9.2 Form of Payment. The Member shall be entitled to payment from the --------------- Plan in the form and manner provided under Sections 8.3 and 8.4. 9.3 Consent. Except as otherwise provided herein, payment of the Member's ------- Accrued Benefit shall be made as soon as administratively feasible after the Member terminates employment; provided, however, if the Member's Accrued Benefit exceeds $5,000 it will not be distributed before the Member's attainment of Normal Retirement Age without the Member's consent. 17 SECTION 10 DEATH BENEFITS -------------- If a Member dies before receiving a distribution of his Accrued Benefit, his Beneficiary shall receive the Member's Accrued Benefit as soon as administratively feasible following the death of the Member. If a Member dies before beginning to receive a distribution of his Accrued Benefit, the Member's Beneficiary shall receive the Member's Accrued Benefit in one lump sum as soon as administratively feasible following the death of the Member. If a Member dies after beginning to receive a distribution of his Accrued Benefit, the Member's Beneficiary shall receive the undistributed portion of the Accrued Benefit. The Accrued Benefit of a Member who dies while an Employee shall be fully vested. SECTION 11 GENERAL RULES ON DISTRIBUTIONS ------------------------------ 11.1 Accounts shall not be adjusted for earnings or losses incurred after the Valuation Date coinciding with or following the date the Account is valued for imminent payout purposes after the Member's Termination of Employment. Prior to distribution of an Account, the Account shall be reduced by the amount necessary to satisfy the unpaid principal, accrued interest, and penalties on any loan made to the Member. 11.2 Notwithstanding any provisions of the Plan to the contrary that would otherwise limit a Distributee's election under this Section 11, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of a distribution pursuant to this Section which is an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover so long as all Eligible Rollover Distributions to a Distributee for a calendar year total or are expected to total at least $200 and, in the case of a Distributee who elects to directly receive a portion of an Eligible Rollover Distribution and directly roll the balance over to an Eligible Retirement Plan, the portion that is to be directly rolled over totals at least $500. If the Eligible Rollover Distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such Eligible Rollover Distribution may commence less than thirty (30) days after the notice required under section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (a) the Plan Administrator clearly informs the Distributee that the Distributee has a right to a period of at least thirty (30) days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (b) the Distributee, after receiving the notice, affirmatively elects a distribution. 11.3 Notwithstanding any other provisions of the Plan, (a) Prior to the death of a Member, all retirement payments hereunder shall-- (1) be distributed to the Member not later than the required beginning date (as defined below) or, 18 (2) be distributed, commencing not later than the required beginning date (as defined below)-- (A) in accordance with regulations prescribed by the Secretary of the Treasury, over the life of the Member or over the lives of the Member and his designated individual Beneficiary, if any, or (B) in accordance with regulations prescribed by the Secretary of the Treasury, over a period not extending beyond the life expectancy of the Member or the joint life and last survivor expectancy of the Member and his designated individual Beneficiary, if any. (b) (1) If -- (A) the distribution of a Member's retirement payments have begun in accordance with Subsection (a)(2) of this Section, and (B) the Member dies before his entire vested Account has been distributed to him, then the remaining portion of his vested Account shall be distributed at least as rapidly as under the method of distribution being used under Subsection (a)(2) of this Section as of the date of his death. (2) If a Member dies before the commencement of retirement payments hereunder, the entire interest of the Member shall be distributed within five (5) years after his death. (3) If -- (A) any portion of a Member's vested Account is payable to or for the benefit of the Member's designated individual Beneficiary, if any, (B) that portion is to be distributed, in accordance with regulations prescribed by the Secretary of the Treasury, over the life of the designated individual Beneficiary or over a period not extending beyond the life expectancy of the designated individual Beneficiary, and (C) the distributions begin not later than one (1) year after the date of the Member's death or such later date as the Secretary of the Treasury may by regulations prescribe, then, for purposes of Paragraph (2) of this Subsection (b), the portion referred to in Subparagraph (A) of this Paragraph (3) shall be treated as distributed on the date on which the distributions to the designated individual Beneficiary begin. (4) If the designated individual Beneficiary referred to in Paragraph (3)(A) of this Subsection (b) is the surviving spouse of the Member, then -- 19 (A) the date on which the distributions are required to begin under Paragraph (3)(C) of this Subsection (b) shall not be earlier than the date on which the Member would have attained age 70-1/2, and (B) if the surviving spouse dies before the distributions to such spouse begin, this Subsection (b) shall be applied as if the surviving spouse were the Member. (c) For purposes of this Section, the term "required beginning date" means April 1 of the calendar year following the later of the calendar year in which the Member attains age 70-1/2 or the calendar year in which the Member retires or otherwise terminates employment. Notwithstanding the foregoing, in the case of a Member who is described in Section 1(b)(3) of Appendix B hereto the term "required beginning date" means April 1 of the calendar year following the calendar year in which the Member attains age 70-1/2. (d) Distributions will be made in accordance with the regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Treas. Reg. Section 1.401(a)(9)-2. SECTION 12 ADMINISTRATION OF THE PLAN -------------------------- 12.1 Trust Agreement. The Primary Sponsor shall establish a Trust with --------------- the Trustee designated by the Board of Directors for the management of the Fund, which Trust shall form a part of the Plan and is incorporated herein by reference. 12.2 Operation of the Plan Administrator. The Primary Sponsor shall ----------------------------------- appoint a Plan Administrator. If an organization is appointed to serve as the Plan Administrator, then the Plan Administrator may designate in writing a person who may act on behalf of the Plan Administrator. The Primary Sponsor shall have the right to remove the Plan Administrator at any time by notice in writing. The Plan Administrator may resign at any time by written notice of resignation to the Trustee and the Primary Sponsor. Upon removal or resignation, or in the event of the dissolution of the Plan Administrator, the Primary Sponsor shall appoint a successor. 12.3 Fiduciary Responsibility. ------------------------ (a) The Plan Administrator, as a Named Fiduciary, may allocate its fiduciary responsibilities among Fiduciaries other than the Trustee, designated in writing by the Plan Administrator and may designate in writing persons other than the Trustee to carry out its fiduciary responsibilities under the Plan. The Plan Administrator may remove any person designated to carry out its fiduciary responsibilities under the Plan by notice in writing to such person. (b) The Plan Administrator and each other Fiduciary may employ persons to perform services and to render advice with regard to any of the Fiduciary's responsibilities under the Plan. Charges for all such services performed and advice rendered may be paid by the Fund to the extent permitted under ERISA. 20 (c) Each Plan Sponsor shall indemnify and hold harmless each person constituting the Plan Administrator or the Investment Committee, if any, from and against any and all claims, losses, costs, expenses (including, without limitation, attorney's fees and court costs), damages, actions or causes of action arising from, on account of or in connection with the performance by such person of his duties in such capacity, other than such of the foregoing arising from, on account of or in connection with the willful neglect or willful misconduct of such person. 12.4 Duties of the Plan Administrator. -------------------------------- (a) The Plan Administrator shall advise the Trustee with respect to all payments under the terms of the Plan and shall direct the Trustee in writing to make such payments from the Fund; provided, however, in no event shall the Trustee be required to make such payments if the Trustee has actual knowledge that such payments are contrary to the terms of the Plan and the Trust. (b) The Plan Administrator shall from time to time establish rules, not contrary to the provisions of the Plan and the Trust, for the administration of the Plan and the transaction of its business. All elections and designations under the Plan by a Member or Beneficiary shall be made on forms prescribed by the Plan Administrator. The Plan Administrator shall have discretionary authority to construe the terms of the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan, including, but not limited to, those concerning eligibility for benefits and it shall not act so as to discriminate in favor of any person. All determinations of the Plan Administrator shall be conclusive and binding on all Employees, Members, Beneficiaries and Fiduciaries, subject to the provisions of the Plan and the Trust and subject to applicable law. (c) The Plan Administrator shall furnish Members and Beneficiaries with all disclosures now or hereafter required by ERISA or the Code. The Plan Administrator shall file, as required, the various reports and disclosures concerning the Plan and its operations as required by ERISA and by the Code, and shall be solely responsible for establishing and maintaining all records of the Plan and the Trust. (d) The statement of specific duties for a Plan Administrator in this Section is not in derogation of any other duties which a Plan Administrator has under the provisions of the Plan or the Trust or under applicable law. 12.5 Investment Manager. The Primary Sponsor may, by action in writing ------------------ certified by notice to the Trustee, appoint an Investment Manager. Any Investment Manager may be removed in the same manner in which appointed, and in the event of any removal, the Investment Manager shall, as soon as possible, but in no event more than thirty (30) days after notice of removal, turn over all assets managed by it to the Trustee or to any successor Investment Manager appointed, and shall make a full accounting to the Primary Sponsor with respect to all assets managed by it since its appointment as an Investment Manager. 12.6 Investment Committee. The Primary Sponsor may, by action in writing -------------------- certified by notice to the Trustee, appoint an Investment Committee. The Primary Sponsor shall have the right to remove any person on the Investment Committee at any time by notice in writing to such person. A person on the 21 Investment Committee may resign at any time by written notice of resignation to the Primary Sponsor. Upon such removal or resignation, or in the event of the death of a person on the Investment Committee, the Primary Sponsor may appoint a successor. Until a successor has been appointed, the remaining persons on the Investment Committee may continue to act as the Investment Committee. 12.7 Action by a Plan Sponsor. Any action to be taken by a Plan Sponsor ------------------------ shall be taken by resolution or written direction duly adopted by its board of directors or appropriate governing body, as the case may be; provided, however, that by such resolution or written direction, the board of directors or appropriate governing body, as the case may be, may delegate to any officer or other appropriate person of a Plan Sponsor the authority to take any such actions as may be specified in such resolution or written direction, other than the power to amend, modify or terminate the Plan or the Trust or to determine the basis of any Plan Sponsor contributions. SECTION 13 CLAIM REVIEW PROCEDURE ---------------------- 13.1 If a Member or Beneficiary is denied a claim for benefits under a Plan, the Plan Administrator shall provide to the claimant written notice of the denial within ninety (90) days after the Plan Administrator receives the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall the extension exceed a period of ninety (90) days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the final decision. 13.2 If the claimant is denied a claim for benefits, the Plan Administrator shall provide, within the time frame set forth in Plan Section 13.1, written notice of the denial which shall set forth: (a) the specific reasons for the denial; (b) specific references to the pertinent provisions of the Plan on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why the material or information is necessary; and (d) an explanation of the Plan's claim review procedure. 13.3 After receiving written notice of the denial of a claim, a claimant or his representative may: (a) request a full and fair review of the denial by written application to the Plan Administrator; 22 (b) review pertinent documents; and (c) submit issues and comments in writing to the Plan Administrator. 13.4 If the claimant wishes a review of the decision denying his claim to benefits under the Plan, he must submit the written application to the Plan Administrator within sixty (60) days after receiving written notice of the denial. 13.5 Upon receiving the written application for review, the Plan Administrator may schedule a hearing for purposes of reviewing the claimant's claim, which hearing shall take place not more than thirty (30) days from the date on which the Plan Administrator received the written application for review. 13.6 At least ten (10) days prior to the scheduled hearing, the claimant and his representative designated in writing by him, if any, shall receive written notice of the date, time, and place of the scheduled hearing. The claimant or his representative may request that the hearing be rescheduled for his convenience on another reasonable date or at another reasonable time or place. 13.7 All claimants requesting a review of the decision denying their claim for benefits may employ counsel for purposes of the hearing. 13.8 No later than sixty (60) days following the receipt of the written application for review, the Plan Administrator shall submit its decision on the review in writing to the claimant involved and to his representative, if any; provided, however, a decision on the written application for review may be extended, in the event special circumstances such as the need to hold a hearing require an extension of time, to a day no later than one hundred twenty (120) days after the date of receipt of the written application for review. The decision shall include specific reasons for the decision and specific references to the pertinent provisions of the Plan on which the decision is based. SECTION 14 LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS ---------------------------------------------- 14.1 No benefit which shall be payable under the Plan to any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for, or against, such person, and the same shall not be recognized under the Plan, except to such extent as may be required by law. Notwithstanding the above, this Section shall not apply to a "qualified domestic relations order" (as defined in Code Section 414(p)), and benefits may be paid pursuant to the provisions of such an order. The Plan Administrator shall develop procedures (in accordance with applicable federal regulations) to determine whether a domestic relations order is qualified, and, if so, the method and the procedures for complying therewith. In addition, a distribution to an "alternate payee" (as defined in Code Section 414(p)) shall be permitted if such distribution is authorized by a Qualified Domestic 23 Relations Order, even if the affected Member has not yet separated from service and has not yet reached the "earliest retirement age" (as defined in Code Section 414(p)). 14.2 If any person who shall be entitled to any benefit under the Plan shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge such benefit under the Plan, then the payment of any such benefit in the event a Member or Beneficiary is entitled to payment shall, in the discretion of the Plan Administrator, cease and terminate and in that event the Trustee shall hold or apply the same for the benefit of such person, his spouse, children, other dependents or any of them in such manner and in such proportion as the Plan Administrator shall determine. 14.3 Whenever any benefit which shall be payable under the Plan is to be paid to or for the benefit of any person who is then a minor or determined to be incompetent by qualified medical advice, the Plan Administrator need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of such minor or incompetent, or to cause the same to be paid to such minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of such minor or incompetent if one has been appointed or to cause the same to be used for the benefit of such minor or incompetent. 14.4 If the Plan Administrator cannot ascertain the whereabouts of any Member to whom a payment is due under the Plan, the Plan Administrator may direct that the payment and all remaining payments otherwise due to the Member be cancelled on the records of the Plan and the amount thereof applied as a forfeiture in accordance with Plan Section 3.4, or (c) as applicable, except that, in the event the Member later notifies the Plan Administrator of his whereabouts and requests the payments due to him under the Plan, the Plan Sponsor shall contribute to the Plan an amount equal to the payment to be paid to him as soon as administratively feasible. SECTION 15 PROHIBITION AGAINST DIVERSION ----------------------------- At no time shall any part of the Fund be used for or diverted to purposes other than the exclusive benefit of the Members or their Beneficiaries, subject, however, to the payment of all taxes and administrative expenses and subject to the provisions of the Plan with respect to returns of contributions. SECTION 16 LIMITATION OF RIGHTS -------------------- Membership in the Plan shall not give any Employee any right or claim except to the extent that such right is specifically fixed under the terms of the Plan. The adoption of the Plan and the Trust by any Plan Sponsor shall not be construed to give any Employee a right to be continued in the employ of a Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the employment of any Employee at any time. 24 SECTION 17 AMENDMENT TO OR TERMINATION OF THE PLAN AND THE TRUST ---------------------- 17.1 The Primary Sponsor reserves the right at any time to modify or amend or terminate the Plan or the Trust in whole or in part; provided, however, that the Primary Sponsor shall have no power to modify or amend the Plan in such manner as would cause or permit any portion of the funds held under a Plan to be used for, or diverted to, purposes other than for the exclusive benefit of Members or their Beneficiaries, or as would cause or permit any portion of a fund held under the Plan to become the property of a Plan Sponsor; and provided further, that the duties or liabilities of the Trustee shall not be increased without its written consent. No such modifications or amendments shall have the effect of retroactively changing or depriving Members or Beneficiaries of rights already accrued under the Plan. No Plan Sponsor other than the Primary Sponsor shall have the right to so modify, amend or terminate the Plan or the Trust. Notwithstanding the foregoing, each Plan Sponsor may terminate its own participation in the Plan and Trust pursuant to the Plan. 17.2 Each Plan Sponsor other than the Primary Sponsor shall have the right to terminate its participation in the Plan and Trust by resolution of its board of directors or other appropriate governing body and notice in writing to the Primary Sponsor and the Trustee unless such termination would result in the disqualification of the Plan or the Trust or would adversely affect the exempt status of the Plan or the Trust as to any other Plan Sponsor. If contributions by or on behalf of a Plan Sponsor are completely terminated, the Plan and Trust shall be deemed terminated as to such Plan Sponsor. Any termination by a Plan Sponsor, shall not be a termination as to any other Plan Sponsor. 17.3 (a) If the Plan is terminated by the Primary Sponsor or if contributions to the Trust should be permanently discontinued, it shall terminate as to all Plan Sponsors and the Fund shall be used, subject to the payment of expenses and taxes, for the benefit of Members and Beneficiaries, and for no other purposes, and the Account of each affected Member shall be fully vested and nonforfeitable, notwithstanding the provisions of the Section of the Plan which sets forth the vesting schedule. (b) In the event of the partial termination of the Plan, each affected Member's Account shall be fully vested and nonforfeitable, notwithstanding the provisions of the Section of the Plan which sets forth the vesting schedule. 17.4 In the event of the termination of the Plan or the Trust with respect to a Plan Sponsor, the Accounts of the Members with respect to the Plan as adopted by such Plan Sponsor shall be held subject to the instructions of the Plan Administrator; provided that the Trustee shall not be required to make any distribution until it receives a copy of an Internal Revenue Service determination letter to the effect that the termination does not affect the qualified status of the Plan or the exempt status of the Trust or, in the event that such letter is applied for and is not issued, until the Trustee is reasonably satisfied that adequate provision has been made for the payment of all taxes which may be due and owing by the Trust. 17.5 In the case of any merger or consolidation of the Plan with, or any transfer of the assets or liabilities of the Plan to, any other plan qualified under Code Section 401, the terms of the merger, consolidation or transfer shall be such that each Member would receive (in the event of termination of the Plan or its successor immediately thereafter) a benefit which is no less than the 25 benefit which the Member would have received in the event of termination of the Plan immediately before the merger, consolidation or transfer. 17.6 Notwithstanding any other provision of the Plan, an amendment to the Plan -- (a) which eliminates or reduces an early retirement benefit, if any, or which eliminates or reduces a retirement-type subsidy (as defined in regulations issued by the Department of the Treasury), if any, or (b) which eliminates an optional form of benefit shall not be effective with respect to benefits attributable to service before the amendment is adopted. In the case of a retirement-type subsidy described in Subsection (a) above, this Section shall be applicable only to a Member who satisfies, either before or after the amendment, the preamendment conditions for the subsidy. SECTION 18 ADOPTION OF PLAN BY AFFILIATES ------------------------------ Any corporation or other business entity related to the Primary Sponsor by function or operation and any Affiliate, if the corporation, business entity or Affiliate is authorized to do so by written direction adopted by the Board of Directors, may adopt the Plan and the related Trust by action of the board of directors or other appropriate governing body of such corporation, business entity or Affiliate. Any adoption shall be evidenced by certified copies of the resolutions of the foregoing board of directors or governing body indicating the adoption and by the execution of the Trust by the adopting corporation, or business entity or Affiliate. The resolution shall state and define the effective date of the adoption of the Plan by the Plan Sponsor and, for the purpose of Code Section 415, the "limitation year" as to such Plan Sponsor. Notwithstanding the foregoing, however, if the Plan and Trust as adopted by an Affiliate or other corporation or business entity under the foregoing provisions shall fail to receive the initial approval of the Internal Revenue Service as a qualified Plan and Trust under Code Sections 401(a) and 501(a), any contributions by the Affiliate or other corporation or business entity after payment of all expenses will be returned to such Plan Sponsor free of any trust, and the Plan and Trust shall terminate, as to the adopting Affiliate or other corporation or business entity. SECTION 19 QUALIFICATION AND RETURN OF CONTRIBUTIONS ----------------------------------------- 19.1 If the Plan and the related Trust fail to receive the initial approval of the Internal Revenue Service as a qualified plan and trust within one (1) year after the date of denial of qualification (a) the contribution of a Plan Sponsor after payment of all expenses will be returned to a Plan Sponsor free of the Plan and Trust, (b) contributions made by a Member shall be returned to the Member who made the contributions, and (c) the Plan and Trust shall thereupon terminate. 19.2 All Plan Sponsor contributions to the Plan are contingent upon deductibility. To the extent permitted by the Code and other applicable laws and regulations thereunder, upon a Plan Sponsor's request, a contribution which was made by reason of a mistake of fact or which was nondeductible under Code 26 Section 404, shall be returned to a Plan Sponsor within one (1) year after the payment of the contribution, or the disallowance of the deduction (to the extent disallowed), whichever is applicable. In the event of a contribution which was made by reason of a mistake of fact or which was nondeductible, the amount to be returned to the Plan Sponsor shall be the excess of the contribution above the amount that would have been contributed had the mistake of fact or the mistake in determining the deduction not occurred, less any net loss attributable to the excess. Any net income attributable to the excess shall not be returned to the Plan Sponsor. No return of any portion of the excess shall be made to the Plan Sponsor if the return would cause the balance in a Member's Account to be less than the balance would have been had the mistaken contribution not been made. SECTION 20 INCORPORATION OF SPECIAL LIMITATIONS ------------------------------------ Appendices A, B, C and D to the Plan, attached hereto, are incorporated by reference and the provisions of the same shall apply notwithstanding anything to the contrary contained herein. WHEREOF, the Primary Sponsor has caused this indenture to be executed as of the date first above written. MARINER POST-ACUTE NETWORK, INC. By: ------------------------------- Title: ----------------------------- ATTEST: - -------------------------------------- Title: -------------------------------- CORPORATE SEAL 27 APPENDIX A LIMITATION ON ALLOCATIONS ------------------------- SECTION 1 The "annual addition" for any Member for any one limitation year may not exceed the lesser of: (a) $30,000 (or, if greater, one-quarter of the dollar limitation in effect under Code Section 415(b)(1)(A), as adjusted for changes in the cost of living as provided in regulations issued by the Secretary of the Treasury); or (b) 25% of the Member's Annual Compensation. SECTION 2 For the purposes of this Appendix A, the term "annual addition" for any Member means for any limitation year, the sum of certain Plan Sponsor, Affiliate, and Member contributions, forfeitures, and other amounts as determined in Code Section 415(c)(2) in effect for that limitation year. SECTION 3 In the event that a Plan Sponsor maintains a defined benefit plan under which a Member also participates, the sum of the defined benefit plan fraction and the defined contribution plan fraction for any limitation year for any Member may not exceed 1.0. (a) The defined benefit plan fraction for any limitation year is a fraction: (1) the numerator of which is the projected annual benefit of the Member under the defined benefit plan (determined as of the close of such year); and (2) the denominator of which is the lesser of (A) the product of 1.25, multiplied by the maximum annual benefit allowable under Code Section 415(b)(1)(A), or (B) the product of (i) 1.4, multiplied by (ii) the maximum amount which may be taken into account under Section 415(b)(1)(B) of the Code with respect to the Member under the defined benefit plan for the limitation year (determined as of the close of the limitation year). A-1 (b) The defined contribution plan fraction for any limitation year is a fraction: (1) the numerator of which is the sum of a Member's annual additions as of the close of the year; and (2) the denominator of which is the sum of the lesser of the following amounts determined for the year and for all prior limitation years during which the Member was employed by a Plan Sponsor: (A) the product of 1.25, multiplied by the dollar limitation in effect under Code Section 415(c)(1)(A) for the limitation year (determined without regard to Section 415(c)(6) of the Code); or (B) the product of (i) 1.4, multiplied by (ii) the amount which may be taken into account under Code Section 415(c)(1)(B) (or Code Section 415(c)(7), if applicable) with respect to the Member for the limitation year. SECTION 4 For purposes of this Appendix A, the term "limitation year" shall mean a Plan Year unless a Plan Sponsor elects, by adoption of a written resolution, to use any other twelve-month period adopted in accordance with regulations issued by the Secretary of the Treasury. SECTION 5 For purposes of applying the limitations of this Appendix A, all defined contribution plans maintained or deemed to be maintained by a Plan Sponsor shall be treated as one defined contribution plan, and all defined benefit plans now or previously maintained or deemed to be maintained by a Plan Sponsor shall be treated as one defined benefit plan. In the event any of the actions to be taken pursuant to Section 5 of this Appendix A or pursuant to any language of similar import in another defined contribution plan are required to be taken as a result of the annual additions of a Member exceeding the limitations set forth in Section 1 of this Appendix A, because of the Member's participation in more than one defined contribution plan, the actions shall be taken first with regard to this Plan. SECTION 6 In the event that as a result of either the allocation of forfeitures to the Account of a Member or a reasonable error in estimating the Member's Annual Compensation, the annual addition allocated to the Account of a Member exceeds the limitations set forth in Section 1 of this Appendix A or in the event that the aggregate contributions made on behalf of a Member under both a defined benefit plan and a defined contribution plan, subject to the reduction of allocations in other defined contribution plans required by Section 5 of this A-2 Appendix A, cause the aggregate limitation fraction set forth in Section 3 of this Appendix A to be exceeded, the Plan Administrator shall, in writing, direct the Trustee to take such of the following actions as the Plan Administrator shall deem appropriate, specifying in each case the amount or amounts of contributions involved: (a) Contributions made by the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.1 with respect to which no contribution is made under Plan Section 3.2 shall be reduced in the amount of the excess and distributed to the Member; (b) If further reduction is necessary, contributions made by the Plan Sponsor on behalf of the Member pursuant to Plan Section 3.1 and contributions of the Plan Sponsor thereon pursuant to Plan Section 3.2 shall be reduced in the amount of the remaining excess. The amount of the reduction under Plan Section 3.1 shall be distributed to the Member. The amount of the reduction under Plan Section 3.2 shall be reallocated to the Matching Accounts of Members who are not affected by the limitation in the same proportion as the contribution of the Plan Sponsor for the year is allocated under Plan Section 4.1 to the Accounts of such Members; (c) If further reduction is necessary, contributions made by the Plan on behalf of the Member pursuant to Plan Section 3.3 shall be reduced in the amount of the remaining excess. The amount of the reduction shall be reallocated to the Accounts of Members who are not affected by the limitations in the same proportion as the contribution of the Plan Sponsor for the year is allocated under Plan Section 4.1(b) to the Accounts of such Members; and (d) If the contribution of the Plan Sponsor would cause the annual addition to exceed the limitations set forth herein with respect to all Members under the Plan, the portion of such contribution in excess of the limitations shall be segregated in a suspense account. While the suspense account is maintained, (1) no Plan Sponsor contributions under the Plan shall be made which would be precluded by this Appendix B, (2) income, gains and loses of the Fund shall not be allocated to such suspense account and (3) amounts in the suspense account shall be allocated in the same manner as Plan Sponsor contributions and forfeitures under the Plan as of each Valuation Date on which Plan Sponsor contributions may be allocated until the suspense account is exhausted. In the event of the termination of the Plan, the amounts in the suspense account shall be returned to the Plan Sponsor to the extent that such amounts may not then be allocated to the Members' Accounts. A-3 APPENDIX B TOP-HEAVY PROVISIONS -------------------- SECTION 1 As used in this Appendix B, the following words shall have the following meanings: (a) "Determination Date" means, with respect to any Plan Year, the ------------------ last day of the preceding Plan Year, or, in the case of the first Plan Year, means the last day of the first Plan Year. (b) "Key Employee" means an Employee or former Employee (including a ------------ Beneficiary of a Key Employee or former Key Employee) who at any time during the Plan Year containing the Determination Date or any of the four (4) preceding Plan Years is: (1) An officer of the Plan Sponsor or of any Affiliate whose Annual Compensation was greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for the calendar year in which the Plan Year ends, where the term "officer" means an administrative executive in regular and continual service to the Plan Sponsor or Affiliate; provided, however, that in no event shall the number of officers exceed the lesser of Clause (A) or (B) of this Subparagraph (1), where: (A) equals fifty (50) Employees; and (B) equals the greater of (i) three (3) Employees or (ii) ten percent (10%) of the number of Employees during the Plan Year, with any non-integer being increased to the next integer. If for any year no officer of the Plan Sponsor meets the requirements of this Subsection (a), the highest paid officer of the Plan Sponsor for the Plan Year shall be considered an officer for purposes of this Subsection (a). (2) One of the ten (10) Employees owning both (A) more than one- half percent (1/2%) of the outstanding stock of the Plan Sponsor or an Affiliate, more than one-half percent (1/2%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate, or more than one-half percent (1/2%) of the capital or profits interest in the Plan Sponsor or an Affiliate, and (B) the largest percentage ownership interests in the Plan Sponsor or any of its Affiliates, and whose Annual Compensation is equal to or greater than the amount in effect under Section 1(a) of Appendix A to the Plan for the calendar year in which the Determination Date falls; or (3) An owner of more than five percent (5%) of the outstanding stock of the Plan Sponsor or an Affiliate or more than five percent (5%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate; or B-1 (4) An owner of more than one percent (1%) of the outstanding stock of the Plan Sponsor or an Affiliate or more than one percent (1%) of the total combined voting power of all stock of the Plan Sponsor or an Affiliate, and who in such Plan Year had Annual Compensation from the Plan Sponsor and all of its Affiliates of more than $150,000. Employees other than Key Employees are sometimes referred to in this Appendix B, as "non-key employees." (c) "Required Aggregation Group" means: -------------------------- (1) each plan of the Plan Sponsor and its Affiliates which qualifies under Code Section 401(a) in which a Key Employee is a Member, and (2) each other plan of the Plan Sponsor and its Affiliates which qualifies under Code Section 401 (a) and which enables any plan described in Subsection (a) of this Section to meet the requirements of Section 401(a)(4) or 410 of the Code. (d) (1) "Top-Heavy" means: --------- (A) if the Plan is not included in a Required Aggregation Group, the Plan's condition in a Plan Year for which, as of the Determination Date: (i) the present value of the cumulative Accounts under the Plan for all Key Employees exceeds 60 percent of the present value of the cumulative Accounts under the Plan for all Members; and (ii) the Plan, when included in every potential combination, if any, with any or all of: (I) any Required Aggregation Group, and (II) any plan of the Plan Sponsor which is not part of any Required Aggregation Group and which qualifies under Code Section 401 (a) is part of a Top-Heavy Group (as defined in Paragraph (2) of this Subsection); and (B) if the Plan is included in a Required Aggregation Group, the Plan's condition in a Plan Year for which, as of the Determination Date: (i) the Required Aggregation Group is a Top-Heavy Group (as defined in Paragraph (2) of this Subsection); and B-2 (ii) the Required Aggregation Group, when included in every potential combination, if any, with any or all of the plans of the Plan Sponsor and its Affiliates which are not part of the Required Aggregation Group and which qualify under Code Section 401(a), is part of a Top-Heavy Group (as defined in Paragraph (2) of this Subsection). (C) For purposes of Subparagraphs (A)(ii) and (B)(ii) of this Paragraph (1), any combination of plans must satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (2) A group shall be deemed to be a Top-Heavy Group if: (A) the sum, as of the Determination Date, of the present value of the cumulative accrued benefits for all Key Employees under all plans included in such group exceeds (B) sixty percent (60%) of a similar sum determined for all participants in such plans. (3)(A) For purposes of this Section, the present value of the accrued benefit for any participant in a defined contribution plan as of any Determination Date or last day of a plan year shall be the sum of: (i) as to any defined contribution plan other than a simplified employee pension, the account balance as of the most recent valuation date occurring within the plan year ending on the Determination Date or last day of a plan year, and (ii) as to any simplified employee pension, the aggregate employer contributions, and (iii) an adjustment for contributions due as of the Determination Date or last day of a plan year. In the case of a plan that is not subject to the minimum funding requirements of Code Section 412, the adjustment in Clause (iii) of this Subparagraph (A) shall be the amount of any contributions actually made after the valuation date but on or before the Determination Date or last day of the plan year to the extent not included under Clause (i) or (ii) of this Subparagraph (A); provided, however, that in the first plan year of the plan, the adjustment in Clause (iii) of this Subparagraph (A) shall also reflect the amount of any contributions made thereafter that are allocated as of a date in such first plan year. In the case of a plan that is subject to the minimum funding requirements, the account balance in Clause (i) and the aggregate contributions in Clause (ii) of this Subparagraph (A) shall include contributions that would be allocated as of a date not later than the Determination Date or last day of a plan year, even though those amounts are not yet required to be contributed, and the adjustment in Clause (iii) of this Subparagraph (A) shall be the amount of any contribution actually made (or due to be made) B-3 after the valuation date but before the expiration of the extended payment period in Code Section 412(c)(10) to the extent not included under Clause (i) or (ii) of this Subparagraph (A). (B) For purposes of this Subsection, the present value of the accrued benefit for any participant in a defined benefit plan as of any Determination Date or last day of a plan year must be determined as of the most recent valuation date which is within a 12-month period ending on the Determination Date or last day of a plan year as if such participant terminated as of such valuation date; provided, however, that in the first plan year of a plan, the present value of the accrued benefit for a current participant must be determined either (i) as if the participant terminated service as of the Determination Date or last day of a plan year or (ii) as if the participant terminated service as of such valuation date, but taking into account the estimated accrued benefit as of the Determination Date or last day of a plan year. For purposes of this Subparagraph (B), the valuation date must be the same valuation date used for computing plan costs for minimum funding, regardless of whether a valuation is performed that year. The actuarial assumptions utilized in calculating the present value of the accrued benefit for any participant in a defined benefit plan for purposes of this Subparagraph (B) shall be established by the Plan Administrator after consultation with the actuary for the plan, and shall be reasonable in the aggregate and shall comport with the requirements set forth by the Internal Revenue Service in Q&A T- 26 and T-27 of Regulation Section 1.416-1. (C) For purposes of determining the present value of the cumulative accrued benefit under a plan for any participant in accordance with this Subsection, the present value shall be increased by the aggregate distributions made with respect to the participant (including distributions paid on account of death to the extent they do not exceed the present value of the cumulative accrued benefit existing immediately prior to death) under each plan being considered, and under any terminated plan which if it had not been terminated would have been in a Required Aggregation Group with the Plan, during the 5-year period ending on the Determination Date or last day of the plan year that falls within the calendar year in which the Determination Date falls. (D) For purposes of this Paragraph (3), participant contributions which are deductible as "qualified retirement contributions" within the meaning of Code Section 219 or any successor, as adjusted to reflect income, gains, losses, and other credits or charges attributable thereto, shall not be considered to be part of the accrued benefits under any plan. (E) For purposes of this Paragraph (3), if any employee is not a Key Employee with respect to any plan for any plan year, but such employee was a Key Employee with respect to such plan for any prior plan year, any accrued benefit for such employee shall not be taken into account. B-4 (F) For purposes of this Paragraph (3), if any employee has not performed any service for any Plan Sponsor or Affiliate maintaining the plan during the five-year period ending on the Determination Date, any accrued benefit for that employee shall not be taken into account. (G) (i) In the case of an "unrelated rollover" (as defined below) between plans which qualify under Code Section 401(a), (a) the plan providing the distribution shall count the distribution as a distribution under Subparagraph (C) of this Paragraph (3), and (b) the plan accepting the distribution shall not consider the distribution part of the accrued benefit under this Section; and (ii) in the case of a "related rollover" (as defined below) between plans which qualify under Code Section 401(a), (a) the plan providing the distribution shall not count the distribution as a distribution under Subparagraph (C) of this Paragraph (3), and (b) the plan accepting the distribution shall consider the distribution part of the accrued benefit under this Section. For purposes of this Subparagraph (G), an "unrelated rollover" is a rollover as defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan transfer which is both initiated by the participant and made from a plan maintained by one employer to a plan maintained by another employer where the employers are not Affiliates. For purposes of this Subparagraph (G), a "related rollover" is a rollover as defined in Code Section 402(c)(4) or 408(d)(3) or a plan-to-plan transfer which is either not initiated by the participant or made to a plan maintained by the employer or an Affiliate. SECTION 2 (a) Notwithstanding anything contained in the Plan to the contrary, except as otherwise provided in Subsection (b) of this Section, in any Plan Year during which the Plan is Top-Heavy, allocations of Plan Sponsor contributions for the Plan Year for the Account of each Member who is not a Key Employee and who has not separated from service with the Plan Sponsor prior to the end of the Plan Year shall not be less than 3 percent of the Member's Annual Compensation. For purposes of this Subsection, an allocation to a Member's Account resulting from any Plan Sponsor contribution attributable to a salary reduction or similar arrangement shall not be taken into account. (b) (1) The percentage referred to in Subsection (a) of this Section for any Plan Year shall not exceed the percentage at which allocations are made or required to be made under the Plan for the Plan Year for the Key Employee for whom the percentage is highest for the Plan Year. For purposes of this Paragraph, an allocation to the Account of a Key Employee resulting from any Plan Sponsor contribution attributable to a salary reduction or similar agreement shall be taken into account. (2) For purposes of this Subsection (b), all defined contribution plans which are members of a Required Aggregation Group shall be treated as part of the Plan. B-5 (3) This Subsection (b) shall not apply to any plan which is a member of a Required Aggregation Group if the plan enables a defined benefit plan which is a member of the Required Aggregation Group to meet the requirements of Code Section 401(a)(4) or 410. SECTION 3 In any limitation year (as defined in Section 4 of Appendix A to the Plan) which contains any portion of a Plan Year in which the Plan is Top-Heavy, the number "1.0" shall be substituted for the number "1.25" in Section 3 of Appendix A to the Plan. SECTION 4 Notwithstanding anything contained in the Plan to the contrary, in any Plan Year during which the Plan is Top-Heavy, a Member's interest in his Account shall not vest at any rate which is slower than the following schedule, effective as of the first day of that Plan Year: Full Years of Percentage Vesting Service Vested --------------- ---------- Less than 3 0% 3 or More 100% B-6 APPENDIX C SPECIAL NONDISCRIMINATION RULES ------------------------------- SECTION 1 As used in this Appendix, the following words shall have the following meanings: (a) "Eligible Member" means a Member who is an Employee during any --------------- particular Plan Year. (b) "Highly Compensated Eligible Member" means any Eligible Member ---------------------------------- who is a Highly Compensated Employee. (c) "Matching Contribution" means any contribution made by a Plan --------------------- Sponsor to a Matching Account and any other contribution made to a plan by a Plan Sponsor or an Affiliate on behalf of an Employee on account of a contribution made by an Employee or on account of an Elective Deferral. (d) "Qualified Matching Contributions" means Matching Contributions -------------------------------- which are immediately nonforfeitable when made, and which would be nonforfeitable, regardless of the age or service of the Employee or whether the Employee is employed on a certain date, and which may not be distributed, except upon one of the events described under Section 401(k)(2)(B) of the Code and the regulations thereunder. (e) "Qualified Nonelective Contributions" means contributions of the ----------------------------------- Plan Sponsor or an Affiliate, other than Matching Contributions or Elective Deferrals, which are nonforfeitable when made, and which would be nonforfeitable regardless of the age or service of the Employee or whether the Employee is employed on a certain date, and which may not be distributed, except upon one of the events described under Code Section 401(k)(2)(B) and the regulations thereunder. SECTION 2 In addition to any other limitations set forth in the Plan, for each Plan Year one of the following tests must be satisfied: (a) the actual deferral percentage for the Highly Compensated Eligible Members for the Plan Year must not be more than the actual deferral percentage of all other Eligible Members for the preceding Plan Year multiplied by 1.25; or (b) the excess of the actual deferral percentage for the Highly Compensated Eligible Members for the Plan Year over that of all other Eligible Members for the preceding Plan Year must not be more than two (2) percentage points, and the actual deferral percentage for the Highly Compensated Eligible Members for the Plan Year must not be more than the actual deferral percentage of all other Eligible Members for the preceding Plan Year multiplied by two (2). C-1 The "actual deferral percentage" for the Highly Compensated Eligible Members and all other Eligible Members for a Plan Year is the average in each group of the ratios, calculated separately for each Employee, of the Deferral Amounts contributed by the Plan Sponsor on behalf of an Employee for the Plan Year to the Annual Compensation of the Employee in the Plan Year. In addition, for purposes of calculating the "actual deferral percentage" as described above, Deferral Amounts of Employees who are not Highly Compensated Employees which are prohibited by Code Section 401(a)(30) shall not be taken into consideration. Except to the extent limited by Treasury Regulation section 1.401(k)-1(b)(5) and any other applicable regulations promulgated by the Secretary of the Treasury, all or part of the Qualified Matching Contributions and Qualified Nonelective Contributions made pursuant to the Plan may be treated as Deferral Amounts for purposes of determining the "actual deferral percentage." Notwithstanding anything to the contrary in the Plan, the Plan may utilize the transition rule under Internal Revenue Service Notice 97-2 regarding the use of current year data for calculating the actual deferral percentage. SECTION 3 If the Deferral Amounts contributed on behalf of any Highly Compensated Eligible Member exceeds the amount permitted under the "actual deferral percentage" test described in Section 2 of this Appendix C for any given Plan Year, then before the end of the Plan Year following the Plan Year for which the Excess Deferral Amount was contributed, (a) the amount of the Excess Deferral Amount for the Plan Year, as adjusted to reflect income, gain, or loss attributable to it through the date the Excess Deferral Amount is distributed to the Member and reduced by any excess Elective Deferrals as determined pursuant to Plan Section 3.1 previously distributed to the Member for the Member's taxable year ending with or within the Plan Year, may be distributed to the Highly Compensated Eligible Member. The income allocable to such Excess Deferral Amount shall be determined in a similar manner as described in Section 4.2 of the Plan. The Excess Deferral Amount to be distributed shall be reduced by Deferral Amounts previously distributed for the taxable year ending in the same Plan Year, and shall also be reduced by Deferral Amounts previously distributed for the Plan Year beginning in such taxable year. For all other purposes under the Plan other than this Appendix C recharacterized amounts shall continue to be treated as Deferral Amounts. In the event the multiple use of limitations contained in Sections 2(b) and 5(b) of this Appendix C, pursuant to Treasury Regulations section 1.401(m)-2 as promulgated by the Secretary of the Treasury, requires a corrective distribution, such distribution shall be made pursuant to this Section 3, and not Section 6 of Appendix C. For purposes of this Section 3, "Excess Deferral Amount" means, with respect to a Plan Year, the excess of: (a) the aggregate amount of Deferral Amounts contributed by a Plan Sponsor on behalf of Highly Compensated Eligible Members for the Plan Year, over (b) the maximum amount of Deferral Amounts permitted under Section 2 of this Appendix C for the Plan Year, which shall be determined by reducing the Deferral Amounts contributed on behalf of Highly Compensated Eligible Members in order of the amount of Deferral Amounts contributed by such Eligible Members beginning with the greatest of such amounts. C-2 Distribution of the Excess Deferral Amounts for any Plan Year shall be made to the Highly Compensated Eligible Members on the basis of the respective portions of the Excess Deferral Amount attributable to each Highly Compensated Eligible Member. SECTION 4 The Plan Administrator shall have the responsibility of monitoring the Plan's compliance with the limitations of this Appendix C and shall have the power to take all steps it deems necessary or appropriate to ensure compliance, including, without limitation, restricting the amount which Highly Compensated Eligible Members can elect to have contributed pursuant to Plan Section 3.1. Any actions taken by the Plan Administrator pursuant to this Section 4 shall be pursuant to non-discriminatory procedures consistently applied. SECTION 5 In addition to any other limitations set forth in the Plan, Matching Contributions under the Plan and the amount of nondeductible employee contributions under the Plan, for each Plan Year must satisfy one of the following tests: (a) The contribution percentage for Highly Compensated Eligible Members for the Plan Year must not exceed 125% of the contribution percentage for all other Eligible Members for the preceding Plan Year; or (b) The contribution percentage for Highly Compensated Eligible Members for the Plan Year must not exceed the lesser of (1) 200% of the contribution percentage for all other Eligible Members for the preceding Plan Year, and (2) the contribution percentage for all other Eligible Members for the preceding Plan Year plus two (2) percentage points. Notwithstanding the foregoing, for purposes of this Section 5, the terms Highly Compensated Eligible Member and Eligible Member shall not include any Member who is not eligible to receive a Matching Contribution under the provisions of the Plan, other than as a result of the Member failing to contribute to the Plan or failing to have an Elective Deferral contributed to the Plan on the Member's behalf. Notwithstanding the foregoing, if Qualified Matching Contributions are taken into account for purposes of applying the test contained in Section 2 of this Appendix C, they shall not be taken into account under this Section 5. In applying the above tests, the Plan Administrator shall comply with any regulations promulgated by the Secretary of the Treasury which prevent or restrict the use of the test contained in Section 2(b) of this Appendix C and the test contained in Section 5(b) of this Appendix C. The "contribution percentage" for Highly Compensated Eligible Members and for all other Eligible Members for a Plan Year shall be the average of the ratios, calculated separately for each Member, of (A) to (B), where (A) is the amount of Matching Contributions under the Plan (excluding Qualified Matching Contributions which are used to apply the test set forth in Section 2 of this Appendix C or Matching Contributions which are used to satisfy the minimum required contributions to the Accounts of Eligible Members who are not Key Employees pursuant to Section 1 of Appendix B to the Plan) and nondeductible employee contributions made under the Plan for the Eligible Member for the Plan Year, and where (B) is the Annual Compensation of the Eligible Member for the Plan Year. Except to the extent limited by Treasury Regulation Section C-3 1.401(m)-1(b)(5) and any other applicable regulations promulgated by the Secretary of the Treasury, a Plan Sponsor may elect to treat Deferral Amounts and Qualified Nonelective Contributions as Matching Contributions for purpose of determining the "contribution percentage," provided the Deferral Amounts, excluding those treated as Matching Contributions, satisfy the test set forth in Section 2 of Appendix C. Notwithstanding anything to the contrary in the Plan, the Plan may utilize the transition rule under Internal Revenue Service Notice 97-2 regarding the use of current year data for calculating the contribution percentage. SECTION 6 If the Matching Contributions and nondeductible employee contributions and, if taken into account under Section 5 of this Appendix C, the Deferral Amounts made by or on behalf of Highly Compensated Eligible Members exceed the amount permitted under the "contribution percentage test" for any given Plan Year, then, before the close of the Plan Year following the Plan Year for which the excess aggregate contributions were made, the amount of the excess aggregate contributions attributable to the Plan for the Plan Year, as adjusted to reflect any income, gain or loss attributable to such contributions through the date the excess aggregate contributions are distributed or forfeited, shall be distributed or, if the excess aggregate contributions are forfeitable, forfeited. The income allocable to such contributions shall be determined in a similar manner as described in Section 4.2 of the Plan. As to any Highly Compensated Employee, any distribution or forfeiture of his allocable portion of the excess aggregate contributions for a Plan Year shall first be attributed to any nondeductible employee contributions made by the Member during the Plan Year for which no corresponding Plan Sponsor contribution is made and then to any remaining nondeductible employee contributions made by the Member during the Plan Year and any Matching Contributions thereon. As between the Plan and any other plan or plans maintained by the Plan Sponsor in which excess aggregate contributions for a Plan Year are held, each such plan shall distribute or forfeit a pro rata share of each class of contribution based on the respective amounts of a class of contribution made to each plan during the Plan Year. The payment of the excess aggregate contributions shall be made without regard to any other provision in the Plan. In the event the multiple use of limitations contained in Sections 2(b) and 5(b) of this Appendix C, pursuant to Treasury Regulation section 1.401(m)-2 as promulgated by the Secretary of the Treasury, requires a corrective distribution, such distribution shall be made pursuant to Section 3 of Appendix C, and not this Section 6. For purposes of this Section 6, with respect to any Plan Year, "excess aggregate contributions" means the excess of: (a) the aggregate amount of the Matching Contributions and nondeductible employee contributions and, if taken into account under Section 5 of this Appendix C, the Deferral Amounts actually made on behalf of Highly Compensated Eligible Members for the Plan Year, over (b) the maximum amount of the contributions permitted under the limitations of Section 5 of this Appendix C, determined by reducing contributions made on behalf of Highly Compensated Eligible Members in order of the amount of such contributions beginning with the greatest of such amounts. C-4 Distribution or forfeiture of nondeductible employee contributions or Matching Contributions in the amount of the excess aggregate contributions for any Plan Year shall be made with respect to Highly Compensated Employees on the basis of the respective portions of the excess aggregate contributions attributable to each Highly Compensated Employee. Forfeitures of excess aggregate contributions may not be allocated to Members whose contributions are reduced under this Section 6. The determination of the amount of excess aggregate contributions under this Section 6 shall be made after (1) first determining the excess Elective Deferrals under Section 3.1(b) of the Plan, and (2) then determining the Excess Deferral Amounts under Section 3 of this Appendix C. SECTION 7 Except to the extent limited by rules promulgated by the Secretary of the Treasury, if a Highly Compensated Eligible Member is a participant in any other plan of the Plan Sponsor or any Affiliate which includes Matching Contributions, deferrals under a cash or deferred arrangement pursuant to Code Section 401(k), or nondeductible employee contributions, any contributions made by or on behalf of the Member to the other plan shall be allocated with the same class of contributions under the Plan for purposes of determining the "actual deferral percentage" and "contribution percentage" under the Plan; provided, however, contributions that are made under an "employee stock ownership plan" (within the meaning of Code Section 4975(e)(7)) shall not be combined with contributions under any plan which is not an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)). Except to the extent limited by rules promulgated by the Secretary of the Treasury, if the Plan and any other plans which include Matching Contributions, deferrals under a cash or deferred arrangement pursuant to Code Section 401(k), or nondeductible employee contributions are considered as one plan for purposes of Code Section 401(a)(4) and 410(b)(1), any contributions under the other plans shall be allocated with the same class of contributions under the Plan for purposes of determining the "contribution percentage" and "actual deferral percentage" under the Plan; provided, however, contributions that are made under an "employee stock ownership plan" (within the meaning of Code Section 4975(e)(7)) shall not be combined with contributions under any plan which is not an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)). C-5 APPENDIX D SPECIAL TRANSITION RULES SECTION 1 GRANCARE , INC. 401(K) SAVINGS PLAN PARTICIPANTS Notwithstanding the provisions of Section 8 of the Plan upon the merger of the GranCare, Inc. 401(k) Savings Plan with the Plan, the Accrued Benefit of a Member who was a participant in the GranCare, Inc. 401(k) Savings Plan shall be and become at all times 100% vested and nonforfeitable thereafter. D-1 EX-10.65 26 1ST AMD TO MARINER SAVINGS PLAN EXHIBIT 10.65 FIRST AMENDMENT TO THE MARINER SAVINGS PLAN THIS FIRST AMENDMENT is made on this day of , 1998, by MARINER --- -------- POST-ACUTE NETWORK, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "Plan Sponsor"). W I T N E S S E T H: ------------------- WHEREAS, the Plan Sponsor established by indenture the Mariner Savings Plan (the "Plan"), effective October 1, 1998; and WHEREAS, the Plan Sponsor desires to amend the Plan to reflect the preservation of optional forms of benefit, within the meaning of Section 411(d)(6) of the Internal Revenue Code of 1986, as a result of the receipt of a direct transfer of assets from the Mariner Health Care Retirement Savings Plan, as well as to make certain other changes; NOW, THEREFORE, the Plan is hereby amended to read as follows: 1. Effective October 1, 1998, , a new Section 1.46 shall be added to the Plan, to read as follows: "1.46 `Disability' means a disability of a Member within the meaning ---------- of Code Section 72(m)(7), to the extent that the Member is, or would be, entitled to disability retirement benefits under the federal Social Security Act or to the extent that the Member is entitled to recover benefits under any long term disability plan or policy maintained by the Plan Sponsor. The determination of whether or not a Disability exists shall be determined by the Plan Administrator and shall be substantiated by competent medical evidence." 2. Effective October 1, 1998, existing Section 3.1(a) of the Plan shall be deleted in its entirety and the following new Section 3.1(a) shall be substituted therefor: "3.1 (a) The Plan Sponsor shall make a contribution to the Fund on behalf of each Member who is an Eligible Employee and has elected to defer a portion of Annual Compensation otherwise payable to him for the Plan Year and to have such portion contributed to the Fund. The election to defer may be made by a Member at any time, but must be made before the Annual Compensation is payable, may only be made in the form and manner as the Plan Administrator may prescribe, and shall specify the percentage of Annual Compensation that the Member desires to defer and to have contributed to the Fund. A Member may revoke his election, or may modify his election, either to increase or decrease the rate of future deferrals, at any time during the Plan Year, such revocation or modification to be effective as soon as reasonably practicable pursuant to the Plan's normal administrative procedures. Further, once an election has been revoked or modified, any subsequent election by the Member shall be effective as soon as reasonably practicable pursuant to the Plan's normal administrative procedures. The contribution made by a Plan Sponsor on behalf of a Member under this Section 3.1 shall be in an amount equal to the amount specified in the Member's election in whole percentages of the Member's Annual Compensation, but not less than one percent (1%) or greater than twenty percent (20%) of the Member's Annual Compensation." 3. Effective October 1, 1998, Section 8.3(a) of the Plan shall be deleted in its entirety, and the following new Section 8.3(a) shall be substituted therefor: "(a) who has a vested Accrued Benefit of $5,000 or less, as soon as practicable after he ceases to be an Employee; and" 4. By adding the following new Section 2 to Appendix D, which shall be effective as of December 1, 1998: "SECTION 2 MARINER HEALTHCARE RETIREMENT SAVINGS PLAN 2.1 `Old Mariner Plan' means the Mariner Health Care Retirement ----------------- Savings Plan, as amended, originally effective March 1, 1993. 2.2 Notwithstanding the provisions of Section 8 of the Plan, a Member may elect, with respect to the portion of his account, if any, attributable to amounts transferred to the Trust from the Old Mariner Plan, to have distributions made in whole or in part in the form of: (a) Payments over a period certain in monthly, quarterly, semi- annual or annual installments. The period over which such payments are to be made shall not extend beyond the Member's life expectancy (or the life expectancy of the Member and his designated Beneficiary). (b) An immediate annuity for the life of the Member with a survivor annuity for the life of his spouse which is fifty percent (50%) of the amount of the annuity payable during the joint lives of the Member and his spouse and which is the actuarial equivalent of an immediate lump sum payment of such Member's Account balance (hereinafter referred to as `Qualified Joint and Survivor Annuity'). If the Member's Account balance is payable in the form of a Qualified Joint and Survivor Annuity, and the Member dies before beginning to receive benefits under the Plan, the Member's spouse shall receive a single life annuity, payable in monthly installments, which is an immediate annuity for the life of the 2 spouse and which is the actuarial equivalent of an immediate lump sum payment of such Member's Account balance (hereinafter referred to as `Qualified Pre-Retirement Survivor Annuity'); or (c) A joint and survivor annuity, payable in monthly installments, which is an immediate annuity for the life of the Member with a survivor annuity for the life of his designated Beneficiary which is fifty percent (50%) of the amount of the annuity payable during the joint lives of the Member and his designated Beneficiary and which is the actuarial equivalent of an immediate lump sum payment of such Member's Account balance; or (d) A single life annuity, payable in monthly installments for the life of the Member which is the actuarial equivalent of an immediate lump sum payment of such Member's account balance. If an annuity is to be paid pursuant to this Plan Section, such annuity may be purchased from an insurance company designated by the Plan Administrator in writing to the Trustee, and may be distributed to the Member or his Beneficiary, as the case may be. The distribution, if any, shall be in full satisfaction of the benefits to which the Member or his Beneficiary is entitled under the Plan. For purposes of this Section, actuarial equivalence shall be determined based on the factors employed by the insurance company from which the annuity is purchased and any commissions or other costs associated with the purchase. 2.3 (a) Notwithstanding anything to the contrary herein, if the Member has elected to receive an annuity and is married on the date of his or her death or the date distributions are to commence, the benefit shall be payable in the form of a Qualified Joint and Survivor Annuity in accordance with Section 2.2 above, unless an optional form of distribution is selected during the applicable election period in accordance with Subparagraphs (d) and (e) below. (b) If a Member elects to receive an annuity, the Plan Administrator shall furnish to the Member a written explanation of: (1) the terms and conditions of the Qualified Joint and Survivor Annuity and the Qualified Pre-Retirement Survivor Annuity, (2) the Member's right to make, and the effect of, an election not to receive the Qualified Joint and Survivor Annuity or the Qualified Pre-Retirement Survivor Annuity, (3) the rights of the Member's spouse as described below, and 3 (4) the right to make, and the effect of, an election pursuant to this Subparagraph. (c) The written explanation of the Qualified Joint and Survivor Annuity shall be provided to the Member not less than thirty (30) days nor more than ninety (90) days prior to the first date on which he is entitled to payment from the Fund. The written explanation of the Qualified Pre- Retirement Survivor Annuity shall be provided to the Member in whichever of the following periods ends last: (1) the period beginning with the first day of the Plan Year in which the Member attains age thirty-two (32) and ending with the close of the Plan Year preceding the Plan Year in which the Member attains age thirty-five (35); (2) the period beginning one year before and ending one year after the Employee first becomes a Member; (3) the period beginning one year before and ending one year after the provisions of this Subsection apply to the Member; or (4) a reasonable period of time after separation from Service in the case of a Member who separates from Service before attaining age thirty-five (35). (d) A Member who elects to receive an annuity pursuant to Section 2.2 of this Appendix D may elect during the applicable election period not to receive the Qualified Joint and Survivor Annuity or Qualified Pre- Retirement Survivor Annuity by execution and delivery to the Plan Administrator of a form provided for that purpose by the Plan Administrator. (e) The term `applicable election period' means with respect to a Qualified Joint and Survivor Annuity, the 90-day period ending on the first date on which the Member is entitled to payment from the Fund, and with respect to a Qualified Pre-Retirement Survivor Annuity, the period which begins on the first day of the Plan Year in which the Employee becomes a Member and ends on the Member's death. In the case of a Member who has a spouse, no election shall be effective unless: (1) the spouse of the Member has consented in writing to the election (including, if applicable, the identity of any Beneficiary selected other than the Member's spouse and the optional form of payment selected), and the spouse's consent 4 acknowledges the effect of the election and is witnessed by a notary public or Plan representative, or (2) the Member establishes to the satisfaction of the Plan Administrator that the consent required pursuant to Subsection (1) may not be obtained because the spouse cannot be located, the Member has a court order indicating that he is legally separated or has been abandoned (within the meaning of local law) unless a `qualified domestic relations order' (as defined in Code Section 414(p)) provides otherwise, or there are other circumstances as the Secretary of the Treasury prescribes. If an election is made, the Member's vested accrued benefit shall be paid in the optional form of payment chosen by the Member by written instrument delivered to the Plan Administrator. Any waiver of a Qualified Pre- Retirement Survivor Annuity made prior to the first day of the Plan Year in which the Member attains age thirty-five (35) shall become invalid as of the first day of the Plan Year in which the Member attains age thirty-five (35) and a Qualified Pre-Retirement Survivor Annuity shall be provided unless a new waiver is obtained. The Member may revoke any election not to receive payment in the form of a Qualified Joint and Survivor Annuity or a Qualified Pre-Retirement Survivor Annuity at any time prior to commencement of payments from the Fund, and may make a new election at any time prior to the commencement of payments from the Fund." Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the Plan Sponsor has caused this First Amendment to be executed on the day and year first above written. MARINER POST-ACUTE NETWORK, INC. By: -------------------------- Title: ------------------------- ATTEST: By: -------------------------- Title: ----------------------- [CORPORATE SEAL] 5 EX-10.66 27 GUARANTY AND SURETY AGMT (MAY 18, 1998) EXHIBIT 10.66 GUARANTY AND SURETYSHIP AGREEMENT --------------------------------- This Agreement (the "Agreement") dated as of May 18, 1994, is made and -- given by the undersigned signatories, each a subsidiary of Mariner Health Group, Inc., a Delaware corporation, identified in Schedule 1 attached hereto and made a part hereof (each a "Guarantor" and collectively, the "Guarantors"), in favor of the Banks (as defined in that certain Credit Agreement dated as of even date herewith (as it may hereinafter from time to time be amended, restated, modified or supplemented, the "Credit Agreement") among PNC Bank, National Association, a national banking association, as agent (the "Agent"), the Banks party thereto and Mariner Health Group, Inc., a Delaware corporation (the "Borrower")) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as Agent for the Banks under the Credit Agreement. W I T N E S S E T H: ------------------- WHEREAS, Borrower has entered into the Credit Agreement with the Agent and the Banks; and WHEREAS, this Agreement is made by the Guarantors among other things to induce the Agent and the Banks to enter into and make loan advances pursuant to the Credit Agreement, to induce the Agent and the Banks to extend credit to the Borrower from time to time under the Credit Agreement, and to comply with the requirements of the Credit Agreement; and WHEREAS, the respective businesses and investments of the Guarantors are interdependent and loans made to the Borrower under the Credit Agreement are with the expectation that the profits and other opportunities from such investment will directly or indirectly inure to the benefit of each Guarantor and to all of them taken as an affiliated group. NOW, THEREFORE, in consideration of the premises, and intending to be legally bound, the Guarantors hereby agree as follows: ARTICLE I DEFINITIONS ----------- 1.01. Definitions. Capitalized terms used herein and not otherwise ----------- defined herein shall have such meanings as given to them in the Credit Agreement. In addition to the other terms defined elsewhere in this Agreement, the following terms shall have the following meanings: "Guaranteed Obligations" shall mean all obligations from time to time of the Borrower to the Agent and the Banks under or in connection with the Credit Agreement or any other Loan Document or which arise in any other manner, whether for principal, interest, fees, indemnities, expenses or otherwise, and all refinancings or refundings thereof, whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency, reorganization or similar proceeding with respect to the Borrower or any other individual or entity including any Guarantor (a "Person") or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not enforceable or allowable in such proceeding). Without limitation of the foregoing, such obligations include all obligations arising from any extensions of credit under or in connection with the Loan Documents from time to time, regardless of whether any such extensions of credit are in excess of the amount committed under or contemplated by the Loan Documents or are made in circumstances in which any condition to extension of credit is not satisfied. Without limitation of the foregoing, the Agent and the Banks (or any successive assignee or transferee) from time to time may assign or otherwise transfer all of their respective rights and obligations under the Loan Documents (including, without limitation, all of any commitment to extend credit), or any other Guaranteed Obligations, to any other Person, and such Guaranteed Obligations (including, without limitation, any Guaranteed Obligations resulting from extension of credit by such other Person under or in connection with the Loan Documents) shall be and remain Guaranteed Obligations entitled to the benefit of this Agreement. ARTICLE II GUARANTY AND SURETYSHIP ----------------------- 2.01 Guaranty and Suretyship. The Guarantors jointly and severally ----------------------- hereby absolutely, unconditionally and irrevocably guarantee and become surety for the full and punctual payment and performance of the Guaranteed Obligations as and when such payment or performance shall become due (at scheduled maturity, by acceleration or otherwise) in accordance with the terms of the Loan Documents. This Agreement is an agreement of suretyship as well as of guaranty, is a guarantee of payment and performance and not merely of collectibility, and is in no way conditioned upon any attempt to collect from or proceed against the Borrower or any other Person or any other event or circumstance. The obligations of the Guarantors under this Agreement are direct and primary obligations of each Guarantor and are independent of the Guaranteed Obligations, and a separate action or actions may be brought against any one or more of the Guarantors regardless of whether action is brought against the Borrower, any other Guarantor or any other Person or whether the Borrower, any other Guarantor or any other Person is joined in any such action or actions. 2.02 Obligations Absolute. The Guarantors agree that the Guaranteed -------------------- Obligations will be paid and performed strictly in accordance with the terms of the Loan Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting the Guaranteed Obligations, any of the terms of the Loan Documents or the rights of the Agent and the Banks or any other Person with respect thereto. The obligations of the Guarantors under this Agreement shall be absolute, unconditional and irrevocable, irrespective of any of the following: (a) Any lack of genuineness, legality, validity, enforceability or allowability (in a bankruptcy, insolvency, reorganization or similar proceeding, or otherwise), or -2- any avoidance or subordination, in whole or in part, of any Loan Document or any of the Guaranteed Obligations. (b) Any increase, decrease or change in the amount, nature, type or purpose of any of the Guaranteed Obligations (whether or not contemplated by the Loan Documents as presently constituted); any change in the time, manner, method or place of payment or performance of, or in any other term of, any of the Guaranteed Obligations; any execution or delivery of any additional Loan Documents; or any amendment, modification or supplement to, or refinancing or refunding of, any Loan Document or any of the Guaranteed Obligations. (c) Any failure to assert any breach of or default under any Loan Document or any of the Guaranteed Obligations; any extensions of credit in excess of the amount committed under or contemplated by the Loan Documents, or in circumstances in which any condition to such extensions of credit has not been satisfied; any other exercise or non-exercise, or any other failure, omission, breach, default, delay or wrongful action in connection with any exercise or non-exercise, of any right or remedy against the Borrower or any other Person under or in connection with any Loan Document or any of the Guaranteed Obligations; any refusal of payment or performance of any of the Guaranteed Obligations, whether or not with any reservation of rights against any Guarantor; or any application of collections (including but not limited to collections resulting from realization upon any direct or indirect security for the Guaranteed Obligations) to other obligations, if any, not entitled to the benefits of this Agreement, in preference to Guaranteed Obligations entitled to the benefits of this Agreement, or if any collections are applied to Guaranteed Obligations, any application to particular Guaranteed Obligations. (d) Any taking, exchange, amendment, modification, supplement, termination, subordination, release, loss or impairment of, Or any failure to protect, perfect, or preserve the value of, Or any enforcement of, realization upon, or exercise of rights, or remedies under or in connection with, Or any failure, omission, breach, default, delay or wrongful action by the Agent and the Banks, or any of them, or any other Person in connection with the enforcement of, realization upon, or exercise of rights or remedies under or in connection with, Or, any other action or inaction by the Agent and the Banks, or any of them, or any other Person in respect of, any direct or indirect security for any of the Guaranteed Obligations. As used in this Agreement, "direct or indirect security" for the Guaranteed Obligations, and similar phrases, includes but is not limited to any collateral security, guaranty, suretyship, letter of credit, capital maintenance agreement, put option, subordination agreement or other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any of the Guaranteed Obligations, made by or on behalf of any Person. (e) Any merger, consolidation, liquidation, dissolution, winding-up, charter revocation or forfeiture, or other change in, restructuring or termination of the corporate structure or existence of, the Borrower or any other Person; any bankruptcy, insolvency, reorganization or similar proceeding with respect to the Borrower or any other Person; or any action taken or election made by the Agent and the Banks, or any of them (including but not -3- limited to any election under Section 1111(b)(2) of the United States Bankruptcy Code), the Borrower or any other Person in connection with any such proceeding. (f) Any defense, setoff or counterclaim (excluding only the defense of full, strict and indefeasible payment and performance), which may at any time be available to or be asserted by the Borrower or any other person with respect to any Loan Document or any of the Guaranteed Obligations; or any discharge by operation of law or release of the Borrower or any other Person from the performance or observance of any Loan Document or any of the Guaranteed Obligations. (g) Any other event or circumstance, whether similar or dissimilar to the foregoing, and whether known or unknown, which might otherwise constitute a defense available to, or limit the liability of, any Guarantor, a guarantor or a surety, excepting only full, strict and indefeasible payment and performance of the Guaranteed Obligations in full. 2.03. Waivers, etc. The Guarantors hereby waive any defense to or ------------- limitation on their obligations under this Agreement arising out of or based on any event or circumstance referred to in Section 2.02 hereof. Without limitation and to the full extent permitted by applicable law, the Guarantors waive each of the following: (a) All notices, disclosures and demand of any nature which otherwise might be required from time to time to preserve intact any rights against any Guarantor, including without limitation the following: any notice of any event or circumstance described in Section 2.02 hereof; any notice required by any law, regulation or order now or hereafter in effect in any jurisdiction; any notice of nonpayment, nonperformance, dishonor, or protest under any Loan Document or any of the Guaranteed Obligations; any notice of the incurrence of any Guaranteed obligation; any notice of any default or any failure on the part of the Borrower or any other Person to comply with any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations; and any notice of any information pertaining to the business, operations, condition (financial or otherwise) or prospects of the Borrower or any other Person. (b) Any right to any marshalling of assets, to the filing of any claim against the Borrower or any other Person in the event of any bankruptcy, insolvency, reorganization or similar proceeding, or to the exercise against the Borrower or any other Person of any other right or remedy under or in connection with any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations; any requirement of promptness or diligence on the part of the Agent and the Banks, or any of them, or any other Person; any requirement to exhaust any remedies under or in connection with, or to mitigate the damages resulting from default under, any Loan Document or any of the Guaranteed Obligations or any direct or indirect security for any of the Guaranteed Obligations; any benefit of any statute of limitations; and any requirement of acceptance of this Agreement, and any requirement that any Guarantor receive notice of such acceptance. (c) Any defense or other right arising by reason of any law now or hereafter in effect in any jurisdiction pertaining to election of remedies (including but not limited to anti-deficiency laws, "one action" laws or the like), or by reason of any election of remedies or -4- other action or inaction by the Agent and the Banks, or any of them (including but not limited to commencement or completion of any judicial proceeding or nonjudicial sale or other action in respect of collateral security for any of the Guaranteed Obligations), which results in denial or impairment of the right of the Agent and the Banks, or any of them, to seek a deficiency against the Borrower or any other Person or which otherwise discharges or impairs any of the Guaranteed Obligations. 2.04. Reinstatement. This Agreement shall continue to be effective, or be ------------- automatically reinstated, as the case may be, if at any time payment of any of the Guaranteed Obligations is avoided, rescinded or must otherwise be returned by the Agent and the Banks, or any of them, for any reason (including, without limitation, by reason of such payment being a preference, fraudulent transfer or fraudulent conveyance), all as though such payment had not been made. 2.05. No Stay. Without limitation of any other provision of this ------- Agreement, if any declaration of default or acceleration or other exercise or condition to exercise of rights or remedies under or with respect to any Guaranteed obligation shall at any time be stayed, enjoined or prevented for any reason (including but not limited to stay or injunction resulting from the pendency against the Borrower or any other Person of a bankruptcy, insolvency, reorganization or similar proceeding), the Guarantors agree that, for the purposes of this Agreement and their obligations hereunder, the Guaranteed Obligations shall be deemed to have been declared in default or accelerated, and such other exercise or conditions to exercise shall be deemed to have been taken or met. 2.06. Payments. All payments to be made by any Guarantor pursuant to this -------- Agreement shall be made without setoff, counterclaim, withholding or other deduction of any nature. 2.07. Continuing Guaranty. This Agreement is a continuing agreement and ------------------- shall continue in full force and effect (notwithstanding that no Guaranteed Obligations may be outstanding from time to time, or any other event or circumstance) until all Guaranteed Obligations and all other amounts payable under this Agreement have been paid and performed in full, and all commitments to extend credit under the Loan Documents have terminated, subject in any event to reinstatement in accordance with Section 2.04 hereof. Any purported termination, revocation or discharge of this Agreement shall be void and of no effect. For purposes of this Agreement the Guaranteed Obligations shall not be deemed to have been paid in full until the Agent and the Banks shall have indefeasibly received payment of the Guaranteed Obligations in full and in cash and all commitments to extend credit under the Loan Documents have terminated. ARTICLE III REPRESENTATIONS AND WARRANTIES ------------------------------ Each Guarantor hereby represents and warrants to the Agent and the Banks with respect to itself as follows: -5- 3.01. No Conditions Precedent. There are no conditions precedent to the ----------------------- effectiveness of this Guaranty that have not been satisfied or waived. 3.02. No Reliance. The Guarantor has, independently and without reliance ----------- upon the Agent and the Banks, or any of them, and based upon such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. 3.03. Representations and Warranties Remade at Each Extension of Credit. ------------------------------------------------------------------ Each request (including any deemed request) by the Borrower for any extension of credit under the Credit Agreement shall be deemed to constitute a representation and warranty by each Guarantor to the Agent and the Banks that the representations and warranties made by each Guarantor in this Agreement are true and correct on and as of the date of such request with the same effect as though made on and as of such date. Failure by the Agent and the Banks to receive notice from such Guarantor to the contrary before the Agent and the Banks make any extension of credit under any Loan Document shall constitute a further representation and warranty by such Guarantor to the Agent and the Banks that the representations and warranties made by the Borrower are true and correct on and as of the date of such extension of credit with the same effect as though made on and as of such date. ARTICLE IV MISCELLANEOUS ------------- 4.01. Amendments, etc. No amendment to or waiver of any provision of this ---------------- Agreement, and no consent to any departure by any Guarantor herefrom, shall in any event be effective unless in a writing manually signed by or on behalf of the Agent and the Banks. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 4.02. No Implied Waiver; Remedies Cumulative. No delay or failure of the -------------------------------------- Agent and the Banks, or any of them, in exercising any right or remedy under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the Agent and the Banks under this Agreement are cumulative and not exclusive of any other rights or remedies available hereunder, under any other agreement or instrument, by law, or otherwise. 4.03. Notices. Each Guarantor agrees that all notices, statements, ------- requests, demands and other communications under this Agreement shall be given to such Guarantor at the address set forth below its name on the signature page hereof in the manner provided in Section 11.06 of the Credit Agreement. The Agent and the Banks may rely on any notice (whether or not made in a manner contemplated by this Agreement) purportedly made by or on behalf of a Guarantor, and the Agent and the Banks shall have no duty to verify the identity or authority of the Person giving such notice. 4.04. Expenses. Each Guarantor unconditionally agrees to pay all costs and -------- expenses, including reasonable attorney's fees incurred by the Agent and any of the Banks in enforcing this Agreement against any Guarantor. -6- 4.05. Prior Understandings. This Agreement constitutes the entire -------------------- agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior and contemporaneous understandings and agreements. 4.06. Survival. All representations and warranties of the Guarantors -------- contained in or made in connection with this Agreement shall survive, and shall not be waived by, the execution and delivery of this Agreement, any investigation by or knowledge of the Agent and the Banks, or any of them, any extension of credit, or any other event or circumstance whatsoever. 4.07. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 4.08. Setoff. In the event that at any time any obligation of the ------ Guarantors now or hereafter existing under this Agreement shall have become due and payable, the Agent and the Banks, or any of them, shall have the right from time to time, without notice to any Guarantor, to set off against and apply to such due and payable amount any obligation of any nature of the Agent and the Banks to any Guarantor, including but not limited to all deposits (whether time or demand, general or special, provisionally credited or finally credited, however evidenced) now or hereafter maintained by any Guarantor with the Agent or the Banks. Such right shall be absolute and unconditional in all circumstances and, without limitation, shall exist whether or not the Agent and/or the Banks, or any of them, shall have given any notice or made any demand under this Agreement or under such obligation to the Guarantor, whether such obligation to the Guarantor is absolute or contingent, matured or unmatured (it being agreed that the Agent and the Banks, or any of them, may deem such obligation to be then due and payable at the time of such setoff), and regardless of the existence or adequacy of any collateral, guaranty or other direct or indirect security, right or remedy available to the Agent and the Banks. The rights of the Agent and the Banks under this Section are in addition to such other rights and remedies (including, without limitation, other rights of setoff and banker's lien) which the Agent and the Banks, or any of them, may have, and nothing in this Agreement or in any other Loan Document shall be deemed a waiver of or restriction on the right of setoff or banker's lien of the Agent and the Banks, or any of them. The Guarantors hereby agree that, to the fullest extent permitted by law, any affiliate of the Agent and the Banks, or any of them, and any holder of a participation in any obligation of any Guarantor under this Agreement, shall have the same rights of setoff as the Agent and the Banks as provided in this Section 4.08 (regardless of whether such affiliate or participant otherwise would be deemed a creditor of the Guarantor). 4.09. Construction. The section and other headings contained in this ------------ Agreement are for reference purposes only and shall not affect interpretation of this Agreement in any respect. This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly neither any doctrine of construction of guaranties or suretyships in favor of the guarantor or surety, nor any doctrine of construction of ambiguities in agreement or instruments against the party controlling the drafting thereof, shall apply to this Agreement. -7- 4.10. Successors and Assigns. This Agreement shall be binding upon each ---------------------- Guarantor, its successors and assigns, and shall inure to the benefit of and be enforceable by the Agent and the Banks, or any of them, and their successors and assigns. Without limitation of the foregoing, the Agent and the Banks, or any of them (and any successive assignee or transferee), from time to time may assign or otherwise transfer all or any portion of its rights or obligations under the Loan Documents (including, without limitation, all or any portion of any commitment to extend credit), or any other Guaranteed Obligations, to any other person and such Guaranteed Obligations (including, without limitation, any Guaranteed Obligations resulting from extension of credit by such other Person under or in connection with the Loan Documents) shall be and remain Guaranteed Obligations entitled to the benefit of this Agreement, and to the extent of its interest in such Guaranteed Obligations such other Person shall be vested with all the benefits in respect thereof granted to the Agent and the Banks in this Agreement or otherwise. 4.11. Governing Law; Submission to Jurisdiction; Waiver of Jury Trial. ---------------------------------------------------------------- (a) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ------------- ENFORCED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES. (b) Certain Waivers. EACH GUARANTOR HEREBY IRREVOCABLY: --------------- (i) CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY AND THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS PROVIDED FOR IN THE CREDIT AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF; (ii) WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE; AND (iii) WAIVES TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE CREDIT AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW. (c) Limitation of Liability. TO THE FULLEST EXTENT PERMITTED BY LAW, NO ----------------------- CLAIM MAY BE MADE BY ANY GUARANTOR OR ANY OTHER PERSON AGAINST THE AGENT AND THE BANKS, OR ANY OF THEM, OR ANY AFFILIATE, DIRECTOR, OFFICER, EMPLOYEE, ATTORNEY OR AGENT OF THE AGENT AND THE BANKS FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN RESPECT OF ANY CLAIM ARISING FROM OR RELATING TO THIS AGREEMENT OR ANY STATEMENT, COURSE OF CONDUCT, ACT, OMISSION, OR EVENT -8- OCCURRING IN CONNECTION HEREWITH (WHETHER FOR BREACH OF CONTRACT, TORT OR ANY OTHER THEORY OF LIABILITY); AND EACH GUARANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. 4.12. Severability; Modification to Conform to Law. -------------------------------------------- (a) It is the intention of the parties that this Agreement be enforceable to the fullest extent permissible under applicable law, but that the unenforceability (or modification to conform to such Law) of any provision or provisions hereof shall not render unenforceable, or impair, the remainder hereof. If any provision in this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, this Agreement shall, as to such jurisdiction, be deemed amended to modify or delete, as necessary, the offending provision or provisions and to alter the bounds thereof in order to render it or them valid and enforceable to the maximum extent permitted by applicable Law, without in any matter affecting the validity or enforceability of such provision or provisions in any other jurisdiction or the remaining provisions hereof in any jurisdiction. (b) Without limitation of the preceding subsection (a), to the extent that mandatory applicable law (including but not limited to applicable laws pertaining to fraudulent conveyance or fraudulent transfer) otherwise would render the full amount of the Guarantor's obligations hereunder invalid or unenforceable, the Guarantor's obligations hereunder shall be limited to the maximum amount which does not result in such invalidity or unenforceability. (c) Notwithstanding anything to the contrary in this Section 4.12 or elsewhere in this Agreement, this Agreement shall be presumptively valid and enforceable to its full extent in accordance with its terms, as if this Section 4.12 (and references elsewhere in this Agreement to enforceability to the fullest extent permitted by Law) were not a part of this Agreement, and in any related litigation the burden of proof shall be on the party asserting the invalidity or unenforceability of any provision hereof or asserting any limitation on any Guarantor's obligations hereunder as to each element of such assertion. 4.13. Additional Guarantors. At any time after the initial execution and --------------------- delivery of this Agreement to the Agent and the Banks, additional Persons may become parties to this Agreement and thereby acquire the duties and rights of being Guarantors hereunder by executing and delivering to the Agent and the Banks a counterpart signature page for attachment hereto. No notice of the addition of any Guarantor shall be required to be given to any pre-existing Guarantor. 4.14. WARRANT OF ATTORNEY TO ENTER JUDGMENT BY CONFESSION. --------------------------------------------------- (a) EACH GUARANTOR ACKNOWLEDGES THAT (I) IT HAS READ AND UNDERSTANDS, AFTER CONSULTATION WITH ITS COUNSEL, THAT THE PROVISIONS OF SECTION 4.14(B) COULD ENABLE THE AGENT AND THE BANKS, OR ANY OF THEM, TO OBTAIN A JUDGMENT AGAINST SUCH GUARANTOR AND -9- COMMENCE EXECUTION PROCEEDINGS THAT RESULT IN THE SEIZURE OF ASSETS OF SUCH GUARANTOR, IN EITHER CASE, WITHOUT SUCH GUARANTOR HAVING THE BENEFIT OF PRIOR NOTICE OR A HEARING; AND (II) SUCH GUARANTOR NEVERTHELESS KNOWINGLY AND VOLUNTARILY AGREES TO SUCH POSSIBLE CONSEQUENCES AND THE PROVISIONS OF SECTION 4.14(B). (b) EACH GUARANTOR DOES HEREBY EMPOWER THE PROTHONOTARY OR ANY ATTORNEY OF ANY FEDERAL OR STATE COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA TO APPEAR FOR ANY GUARANTOR, AND WITH OR WITHOUT ONE OR MORE COMPLAINTS FILED, CONFESS A JUDGMENT OR JUDGMENTS AGAINST GUARANTOR IN ANY FEDERAL OR STATE COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA, AT ANY TIME AFTER DEFAULT BY BORROWER UNDER THE LOAN DOCUMENTS OR THE FAILURE BY GUARANTOR TO PERFORM ANY OF ITS OBLIGATIONS UNDER THIS AGREEMENT, IN FAVOR OF THE AGENT AND THE BANKS, OR ANY OF THEM, OR THEIR SUCCESSORS OR ASSIGNS FOR THE UNPAID BALANCE OF THE GUARANTEED OBLIGATIONS, TOGETHER WITH COSTS OF SUIT AND REASONABLE ATTORNEY'S COMMISSION FOR COLLECTION, AND UNDERSIGNED HEREBY FOREVER WAIVES AND RELEASES ANY AND ALL ERRORS IN SAID PROCEEDINGS AND WAIVES STAY OF EXECUTION AND STAY, CONTINUANCE OR ADJOURNMENT OF SALE ON EXECUTION, THE RIGHT OF INQUISITION AND EXTENSION OF TIME OF PAYMENT, AND AGREES TO CONDEMNATION OF ANY PROPERTY LEVIED UPON BY VIRTUE OF ANY EXECUTION ISSUED ON ANY SUCH JUDGMENT, AND EACH GUARANTOR SPECIFICALLY WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR MAY HEREAFTER BE EXEMPT UNDER ANY EXISTING OR FUTURE LAWS OF THE UNITED STATES OF AMERICA OR THE COMMONWEALTH OF PENNSYLVANIA OR OF ANY OTHER JURISDICTION. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST UNDERSIGNED SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, AND MAY BE EXERCISED FROM TIME TO TIME AND AS OFTEN AS THE AGENT AND THE BANKS, OR ANY OF THEM, OR THEIR SUCCESSORS OR ASSIGNS SHALL DEEM NECESSARY OR DESIRABLE. 4.15. Joint and Several Obligations. The obligations of each Guarantor under ----------------------------- this Agreement are joint and several. 4.16 Receipt of Credit Agreement and Other Loan Documents. Each Guarantor ---------------------------------------------------- hereby acknowledges that it has received a copy of the Credit Agreement and the other Loan Documents and each Guarantor certifies that the representations and warranties made therein with respect to such Guarantor are true and correct. Further, each Guarantor acknowledges and agrees to perform, comply with and be bound by all of the provisions of the Credit Agreement and the other Loan Documents including, without limitation, those covenants contained in Sections 8.01 and 8.02 of the Credit Agreement. -10- [SIGNATURE PAGE 1 OF 1 TO THE GUARANTY AND SURETYSHIP AGREEMENT] IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of the date first above written. GUARANTORS: ----------- ATTEST: EACH GUARANTOR LISTED ON SCHEDULE 1 WHICH IS A CORPORATION By: By: --------------------------- ----------------------------------------- Title: ------------------------ -----------------------------------[Name] the [Title] of ------------------------------- each Guarantor listed on Schedule 1 which is a corporation -11- SCHEDULE 1 TO THE GUARANTY AND SURETYSHIP AGREEMENT DATED AS OF MAY ___, 1994 PNC BANK, NATIONAL ASSOCIATION, AS AGENT
STATE OF FOREIGN SUBSIDIARIES INCORPORATION QUALIFICATION - --------------------------------------------------- ------------- ------------- Subsidiaries of Mariner: - ----------------------- 1. Compass Pharmacy Services, Inc. MA -- 2. Bride Brook Nursing & Rehabilitation Center, Inc. CT -- 3. Longwood Rehabilitation Center, Inc. MA -- 4. Long Ridge Nursing & Rehabilitation Center, Inc. CT -- 5. Mansfield Nursing & Rehabilitation Center, Inc. CT -- 6. Mariner Health Care, Inc. MA CT 7. Mariner Health Care of Greater Laurel, Inc. MA MD 8. Mariner Health Care of North Hills, Inc. DE PA 9. Mariner Health Resources, Inc. MA PA, CT 10. Merrimack Valley Nursing & Rehabilitation Center, Inc. MA -- 11. Methuen Nursing & Rehabilitation Center, Inc. MA -- 12. Mystic Nursing & Rehabilitation Center, Inc. MA -- 13. Park Terrace Nursing & Rehabilitation Center, Inc. MA -- 14. Pendleton Nursing & Rehabilitation Center, Inc. CT --
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STATE OF FOREIGN SUBSIDIARIES INCORPORATION QUALIFICATION - --------------------------------------------------- ------------- ------------- 15. Pinnacle Care Corporation ("PCC") DE TN 16. Rehabilitation Network, Inc. MA CT 17. Sassaquin Nursing & Rehabilitation Center, Inc. MA -- 18. Windward Health Care, Inc. MA -- Subsidiaries of PCC: - ------------------- 19. Acme Repackaging, Inc. TN -- 20. Pinnacle Care Corporation of Huntington ("PCCH") TN WV 21. Pinnacle Care Corporation of Hutchinson TN -- 22. Pinnacle Care Corporation of Lexington TN -- 23. Pinnacle Care Corporation of Louisville TN -- 24. Pinnacle Care Corporation of Marion TN -- 25. Pinnacle Care Corporation of McMurray TN -- 26. Pinnacle Care Corporation of Morganton TN -- 27. Pinnacle Care Corporation of Nashville TN -- 28. Pinnacle Care Corporation of North Carolina TN NC 29. Pinnacle Care Corporation of Salina TN -- 30. Pinnacle Care Corporation of Seneca TN SC 31. Pinnacle Care Corporation of Sumter ("PCCS") TN SC 32. Pinnacle Care Corporation of Williams Bay TN WI 33. Pinnacle Care Corporation of Wilmington TN NC 34. Pinnacle Care Management Corp. TN IA, KY, PA
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STATE OF FOREIGN SUBSIDIARIES INCORPORATION QUALIFICATION - --------------------------------------------------- ------------- ------------- 35. Pinnacle Pharmaceutical Services, Inc. TN KY 36. Pinnacle Rehabilitation, Inc. ("PR") TN NC, WI, FL, GA, KY, SC, WV, OH, IA, PA 37. Pinnacle Rehabilitation of Georgia, Inc. TN GA 38. Tennessee Occupational Medicine, Inc. TN -- Subsidiary of PCCH: - ------------------ 39. Tri-State Health Care, Inc. WV -- Subsidiaries of PCCS: - -------------------- 40. Cypress Nursing Facility, Inc. SC -- 41. Hampton Nursing Center, Inc. SC -- Subsidiaries of PR: - ------------------ 42. Pinnacle Rehabilitation of Missouri, Inc. MO AK, IA, KS 43. Mid-America Professional Services, Inc. KY FL, TN, IL, OH ("MAPS") Subsidiaries of MAPS: - -------------------- 44. Pinnacle Rehabilitation of Florida, Inc. FL NC, TX, VA 45. Seventeenth Street Associates Limited WV -- Partnership
-14- EX-10.67 28 COLLATERAL AGENCY AND SHARING AGMT EXHIBIT 10.67 COLLATERAL AGENCY AND SHARING AGREEMENT dated as of December 23, 1998 among MARINER HEALTH GROUP, INC., SUBSIDIARY GUARANTORS, CERTAIN BANKS AND THEIR AGENTS, and PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent 1. DEFINITIONS; CONSTRUCTION ........................ 2 ------------------------- 1.1 Certain Definitions........................... 2 ------------------- 1.2 Construction.................................. 7 ------------ 2. SECURED PARTY DOCUMENTS........................... 7 ----------------------- 2.1 Subsidiary Guarantors......................... 7 --------------------- 2.2 Amendments to Loan Documents.................. 7 ---------------------------- 2.3 Delivery of Documents......................... 8 --------------------- 2.4 Termination of a Secured Party................ 8 ------------------------------ 2.5 Certain Intercreditor Matters................. 8 ----------------------------- 3. SHARED SECURITY ACTIONS........................... 9 ----------------------- 3.1 General Relation to Secured Parties........... 9 ----------------------------------- 3.2 Directing Party Direction; --------------------------- Directing Party Appointment................... 9 --------------------------- 3.3 Form of Directing Party Direction.............10 --------------------------------- 3.4 Requested Directions..........................10 -------------------- 3.5 Release of Collateral; ----------------------- Distributions; Waivers; Amendments............10 ---------------------------------- 4. ACCOUNTS; UNSHARED COLLATERAL.....................10 ----------------------------- 4.1 Shared Collateral Account.....................10 ------------------------- 4.2 Investment....................................10 ---------- 4.3 Deposits......................................11 -------- 4.4 Distributions.................................11 ------------- 4.5 Calculations..................................12 ------------ 4.6 Application of Monies.........................12 --------------------- 4.7 General Provisions Relating to Accounts.......12 --------------------------------------- 4.8 Unshared Collateral...........................13 ------------------- 5. THE COLLATERAL AGENT..............................14 -------------------- 5.1 Appointment...................................14 ----------- 5.2 General Nature of Collateral Agent's Duties...14 ------------------------------------------- 5.3 Exercise of Powers............................15 ------------------ 5.4 General Exculpatory Provisions................15 ------------------------------ 5.5 Administration by the Collateral Agent........16 -------------------------------------- 5.6 Collateral Agent in its Individual Capacity...18 ------------------------------------------- 5.7 Facility Parties..............................18 ---------------- 5.8 Successor Collateral Agent....................18 -------------------------- 5.9 Calculations..................................19 ------------ 5.10 Collateral Agent's Fee.......................19 ---------------------- 5.11 Expenses; Indemnity..........................19 ------------------- 5.12 Monies Held As Collateral Agent..............20 ------------------------------- 6. MISCELLANEOUS.....................................20 ------------- 6.1 Notices.......................................20 ------- 6.2 No Implied Waiver; Cumulative Remedies........21 -------------------------------------- 6.3 Severability..................................21 ------------ 6.4 Prior Understandings..........................21 -------------------- 6.5 Counterparts..................................22 ------------ 6.6 Termination of Liens;.........................22 --------------------- Termination of this Agreement. ----------------------------- 6.7 Successors and Assigns........................22 ---------------------- 6.8 Governing Law; Submission to Jurisdiction; ----------------------------------------- Waiver of Jury Trial; Limitation of Liability.22 --------------------------------------------- COLLATERAL AGENCY AND SHARING AGREEMENT THIS COLLATERAL AGENCY AND SHARING AGREEMENT is dated as of December 23, 1998, among Mariner Health Group, Inc., a Delaware corporation ("Mariner"), the Guarantors (as defined herein), the Term Loan Agent (as defined herein) on behalf of the Term Loan Banks (as defined herein), the Revolving Credit Agent (as defined herein) on behalf of the Revolving Credit Banks (as defined herein), and PNC Bank, National Association, as collateral agent (in such capacity, together with its successors in such capacity, the "Collateral Agent"). W I T N E S S E T H ------------------- WHEREAS, Mariner has entered into a Term Loan Agreement, dated as of December 23, 1998, with and among the banks from time to time parties thereto, First Union National Bank, as syndication agent, and PNC Bank, National Association, in its capacity as administrative agent for such banks (in such capacity, the "Term Loan Agent") (such agreement, as amended, restated, modified, or supplemented from time to time, being referred to herein as the "Term Loan Agreement"), with the obligations of Mariner under the Term Loan Agreement being guarantied by certain Mariner subsidiaries (the "Term Loan Guarantors") pursuant to and as more fully set forth in an Agreement of Guaranty and Suretyship, dated as of December 23, 1998, given by the Term Loan Guarantors to the Term Loan Agent for the benefit of such banks (Mariner and the Term Loan Guarantors are collectively referred to herein as the "Term Loan Parties"); WHEREAS, Mariner has entered into a Credit Agreement dated as of May 18, 1994, as amended, with and among the banks from time to time parties, First Union National Bank, as syndication agent, and PNC Bank, National Association, in its capacity as Administrative Agent for such banks (in such capacity, the "Revolving Credit Agent") (such agreement, as amended, restated, modified, or supplemented from time to time, being referred to herein as the "Revolving Credit Agreement"), with the obligations of Mariner under the Revolving Credit Agreement being guarantied by certain Mariner subsidiaries (the "Revolving Credit Guarantors") pursuant to and as more fully set forth in that certain Guaranty and Suretyship Agreement, dated as of May 18, 1994, given by the Revolving Credit Guarantors to the Revolving Credit Agent for the benefit of such banks (Mariner and the Revolving Credit Guarantors are collectively referred to herein as the " Revolving Credit Loan Parties"); WHEREAS, to secure the obligations of the Term Loan Parties in connection with the Term Loan Agreement, the Term Loan Parties have entered into, and may continue to grant security in certain of their assets pursuant to, various security documents in favor of the Collateral Agent or the Term Loan Agent for the benefit of the Term Loan Agent and the Term Loan Banks; and WHEREAS, to secure the obligations of the Revolving Credit Loan Parties in connection with the Revolving Credit Agreement, the Revolving Credit Loan Parties have entered into, and may continue to grant security in certain of their assets pursuant to, various security documents in favor of the Collateral Agent or the Revolving Credit Agent for the benefit of the Revolving Credit Agent and the Revolving Credit Banks. NOW, THEREFORE, intending to be legally bound hereby, incorporating the above-defined terms herein, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS; CONSTRUCTION ------------------------- 1.1 Certain Definitions. ------------------- All capitalized terms used herein and not otherwise defined herein shall have the meanings specified in the Revolving Credit Agreement. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Bankruptcy Proceeding" shall mean any bankruptcy, insolvency, reorganization, receivership, dissolution (but excluding any dissolution permitted pursuant to Section 8.02(f)(ii) of the Revolving Credit Agreement or Section 8.20(f)(ii) of the Term Loan Agreement) or similar proceeding or the assignment for the benefit of creditors or any other marshalling of assets and liabilities. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or other day on which banking institutions are authorized or obligated to close in the city in which is located the Collateral Agent's Office. "Collateral Agent Obligations" shall mean all obligations from time to time of any of the Revolving Credit Loan Parties or of any of the Term Loan Parties to the Collateral Agent in its capacity as such, including but not limited to amounts payable pursuant to Sections 5.10 and 5.11 of this Agreement, in each case whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency or similar proceedings with respect to any such Loan Party, or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not allowed in such proceeding under applicable Law). "Collateral Agent's Office" shall mean the office of the Collateral Agent located at One PNC Plaza, Pittsburgh, Pennsylvania, or at such other domestic office or offices of the Collateral Agent as may be designated in writing from time to time by the Collateral Agent to Mariner, the Term Loan Agent and the Revolving Credit Agent. "Contingent Indemnification Obligations" shall mean collectively the Contingent Indemnification Revolving Credit Obligations and the Contingent Indemnification Term Loan Obligations. 2 "Contingent Indemnification Revolving Credit Obligations" at any time shall mean Revolving Credit Obligations which at such time are contingent obligations under indemnification provisions of the Revolving Credit Loan Documents, which survive indefinitely; provided, that a Revolving Credit Obligation under such an -------- indemnification provision shall not constitute a Contingent Indemnification Revolving Credit Obligation to the extent that (a) an unsatisfied claim for payment of such Revolving Credit Obligation has been made, or (b) an action, suit or proceeding is pending or threatened at such time which may give rise to a claim under such indemnification provision. "Contingent Indemnification Term Loan Obligations" at any time shall mean Term Loan Obligations which at such time are contingent obligations under indemnification provisions of the Term Loan Documents, which survive indefinitely; provided, that a Term Loan Obligation under such an -------- indemnification provision shall not constitute a Contingent Indemnification Term Loan Obligation to the extent that (a) an unsatisfied claim for payment of such Term Loan Obligation has been made, or (b) an action, suit or proceeding is pending or threatened at such time which may give rise to a claim under such indemnification provision. "Directing Party" at any time shall mean the Revolving Credit Agent, unless all Revolving Credit Obligations (other than Contingent Indemnification Revolving Credit Obligations) have been paid in full and all commitments to extend credit under the Revolving Credit Loan Documents have terminated, in which case "Directing Party" shall mean the Term Loan Agent. "Facility Parties" shall mean the Term Loan Agent on behalf of the Term Loan Banks, and each of the Term Loan Banks, and the Revolving Credit Agent on behalf of the Revolving Credit Banks, and each of the Revolving Credit Banks. "Foreclosure Action" shall mean any Revolving Credit Bank or the Revolving Credit Agent or any Term Loan Bank or the Term Loan Agent (i) takes any action to foreclose upon, collect, or otherwise realize upon the Shared Collateral or any portion thereof or takes any other action with respect to the Shared Collateral or any portion thereof, (ii) receives any amount on account of the Obligations through the exercise of any set-off, banker's lien or similar right, and/or (iii) makes any demand under or institutes any action, suit or proceeding against any party to any of the Shared Security Documents with respect to the Shared Collateral. "Guarantors" shall mean collectively the Term Loan Guarantors and the Revolving Credit Guarantors. "Guaranty Agreements" shall mean collectively the Revolving Credit Guaranty Agreement and the Term Loan Guaranty Agreement. "Loan Documents" shall mean collectively the Revolving Credit Loan Documents and the Term Loan Documents. 3 "Loan Party" shall mean any of the Revolving Credit Loan Parties or any of the Term Loan Parties. "Obligations" shall mean all Revolving Credit Obligations, Term Loan Obligations and Collateral Agent Obligations. "Restricted Investments" shall mean: (a) readily marketable obligations backed by the full faith and credit of the United States of America, maturing not later than 90 days from the date of acquisition; (b) overnight dollar- denominated deposits in, overnight certificates of deposit in, or overnight repurchase agreements with, a United States commercial bank having shareholders' equity of at least $1,000,000,000 which has outstanding general unsecured short- term debt rated "A-1" or better, and general unsecured short-term debt rated "P- 1," in each case by Moody's Investors Service, Inc.; (c) readily marketable commercial paper maturing not later than 90 days from the date of acquisition and rated "P-1" by Moody's Investors Service, Inc.; and (d) freely redeemable shares of stock or beneficial interest in a money market mutual fund, substantially all of the assets of which consist of obligations described in the foregoing clauses (a) through (c). "Revolving Credit Agent" is defined in the Preamble. "Revolving Credit Bank" shall mean each Person which is defined as a Bank under the Revolving Credit Agreement. "Revolving Credit Collateral" shall mean all real and personal property now and hereafter in or upon which a Revolving Credit Loan Party or other third Person has granted to any Revolving Credit Bank or to the Revolving Credit Agent for the benefit of the Revolving Credit Banks a lien, security interest, mortgage, encumbrance, or the like to secure one or more of the Revolving Credit Obligations, or any guaranty which is in favor of any Revolving Credit Bank or the Revolving Credit Agent for the benefit of the Revolving Credit Banks, but excluding any Shared Collateral. "Revolving Credit Collateral Documents" shall mean collectively the Guaranty Agreements given or to be given in connection with the Revolving Credit Agreement and all other documents, instruments and agreements that now or hereafter grant a Lien on any Collateral to the Revolving Credit Agent for the benefit of any of the Revolving Credit Banks, as any of the foregoing may be restated, supplemented, modified, or amended from time to time in accordance therewith. "Revolving Credit Guarantors" are defined in the Preamble. "Revolving Credit Guaranty Agreement" shall mean any Guaranty Agreement as such term is defined in the Revolving Credit Agreement. "Revolving Credit Loan Documents" shall mean those documents which are defined as Loan Documents in the Revolving Credit Agreement. 4 "Revolving Credit Obligations" shall mean all obligations from time to time of any Revolving Credit Loan Party to any Revolving Credit Bank or the Revolving Credit Agent from time to time arising under or in connection with or related to or evidenced by or secured by the Revolving Credit Agreement or any other Revolving Credit Loan Document, whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency reorganization or similar proceedings with respect to any Revolving Credit Loan Party, or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not allowed in such proceeding under applicable Law). Without limitation of the foregoing, such obligations include (i) the principal amount of Revolving Credit Loans, interest, letter of credit reimbursement obligations, and fees, indemnities or expenses under or in connection with any Revolving Credit Loan Document and all refinancings or refundings thereof; (ii) all obligations arising from any extensions of credit under or in connection with the Revolving Credit Loan Documents from time to time, regardless of whether any such extensions of credit are in excess of the amount committed under or contemplated by the Revolving Credit Loan Documents or are made in circumstances in which any condition to extension of credit is not satisfied; and (iii) with respect to Revolving Credit Guarantors, their guarantee and suretyship obligations under the Revolving Credit Guaranty Agreement. Revolving Credit Obligations shall remain such notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Revolving Credit Obligations or any interest therein. "Secured Party" shall mean each of the Collateral Agent and Facility Parties. "Secured Party Documents" shall mean the Revolving Credit Loan Documents, the Term Loan Documents, and the Shared Security Documents. "Shared Collateral" shall mean all real and personal property now and hereafter in or upon which a Term Loan Party, Revolving Credit Loan Party, or other third Person has granted to all of the Secured Parties or to the Collateral Agent for the benefit of all Secured Parties or to both the Revolving Credit Banks and the Term Loan Banks or to both the Revolving Credit Agent for the benefit of the Revolving Credit Banks and to the Term Loan Agent for the benefit of the Term Loan Banks, a lien, security interest, mortgage, encumbrance, or the like to secure all of the Obligations (or all Obligations other than those to the Collateral Agent) or any guaranty which is in favor of all of the Secured Parties or the Collateral Agent for the benefit of all Secured Parties or both the Revolving Credit Banks and the Term Loan Banks or both the Revolving Credit Agent for the benefit of the Revolving Credit Banks and the Term Loan Agent for the benefit of the Term Loan Banks. "Shared Collateral Account" shall have the meaning given that term in Section 4.1 of this Agreement. "Shared Obligations" shall mean those Obligations secured by the Shared Collateral. 5 "Shared Security Documents" shall mean (i) this Agreement and any document, instrument, or agreement that now or hereafter grants a lien, security interest, mortgage, encumbrance, or the like on any Shared Collateral, and (ii) any Term Loan Guaranty Agreement or Revolving Credit Guaranty Agreement or other guaranty that guaranties payment or performance of all of the Revolving Credit Obligations and the Term Loan Obligations. "Term Loan Agent" is defined in the Preamble. "Term Loan Bank" shall mean each Person which is defined as a Bank under the Term Loan Agreement. "Term Loan Collateral" shall mean all real and personal property now and hereafter in or upon which a Term Loan Party or other third Person has granted to any Term Loan Bank or to the Term Loan Agent for the benefit of the Term Loan Banks, a lien, security interest, mortgage, encumbrance, or the like to secure one or more of the Term Loan Obligations, or any guaranty which is in favor of any Term Loan Bank or the Term Loan Agent for the benefit of the Term Loan Banks, but excluding any Shared Collateral. "Term Loan Collateral Documents" shall mean collectively the Guaranty Agreements given or to be given in connection with the Term Loan Agreement and all other documents, instruments and agreements that now or hereafter grant a Lien on any Collateral (as such term is defined in the Term Loan Agreement) to the Term Loan Agent for the benefit of any of the Term Loan Banks, as any of the foregoing may be restated, supplemented, modified, or restated from time to time in accordance therewith. "Term Loan Documents" shall mean those documents which are defined as Loan Documents in the Term Loan Agreement. "Term Loan Guarantors" are defined in the Preamble. "Term Loan Guaranty Agreement" shall mean any Guaranty Agreement as such term is defined in the Term Loan Agreement. "Term Loan Obligations" shall mean all obligations from time to time of any Term Loan Party to any Term Loan Bank or the Term Loan Agent from time to time arising under or in connection with or related to or evidenced by or secured by the Term Loan Agreement or any other Term Loan Document, whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency reorganization or similar proceedings with respect to any Term Loan Party, or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not allowed in such proceeding under applicable Law). Without limitation of the foregoing, such obligations include (i) the principal amount of Term Loans (as defined in the Term Loan Agreement), interest, and fees, indemnities or expenses under or in connection with 6 any Term Loan Document and all refinancings or refundings thereof; (ii) all obligations arising from any extensions of credit under or in connection with the Term Loan Documents from time to time, regardless of whether any such extensions of credit are in excess of the amount committed under or contemplated by the Term Loan Documents or are made in circumstances in which any condition to extension of credit is not satisfied; and (iii) with respect to the Term Loan Guarantors, their guarantee and suretyship obligations under the Term Loan Agreement Guaranty Agreement. Term Loan Obligations shall remain such notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Term Loan Obligations or any interest therein. 1.2 Construction. ------------ In this Agreement, unless the context otherwise clearly requires, references to the plural include the singular, the singular the plural, and the part the whole; the neuter case includes the masculine and feminine cases; and "or" is not exclusive. In this Agreement, any references to property (or similar terms) include any interest in such property (or other item referred to); "include," "includes," "including" and similar terms are not limiting; "hereof," "herein," "hereunder" and similar terms refer to this Agreement as a whole and not to any particular provision; and "expenses," "costs," "out-of- pocket expenses" and similar terms include the charges of in-house counsel, auditors and other professionals of the relevant Person to the extent that such charges are routinely identified and charged under such Person's cost accounting system. Section and other headings in this Agreement, and any table of contents herein, are for reference purposes only and shall not affect the interpretation of this Agreement in any respect. Section and other references in this Agreement are to this Agreement unless otherwise specified. This Agreement has been fully negotiated between the applicable parties, each party having the benefit of legal counsel, and accordingly neither any doctrine of construction of security documents in favor of a borrower, nor any doctrine of construction of ambiguities against the party controlling the drafting, shall apply to this Agreement. 2. SECURED PARTY DOCUMENTS ----------------------- 2.1 Subsidiary Guarantors. --------------------- As provided in the Term Loan Documents and the Revolving Credit Loan Documents, each Person which now or hereafter becomes a Term Loan Party or a Revolving Credit Loan Party as a Term Loan Guarantor or a Revolving Credit Guarantor shall, by such act, become a party to this Agreement and shall be subject to and bound by all of the provisions hereof. 2.2 Amendments to Loan Documents. ----------- ----------------- This Agreement shall remain in full force and effect in accordance with its terms regardless of any amendment, modification, restatement, or supplement to, or refinancing of, the Revolving Credit Agreement or the Term Loan Agreement or any other Term Loan Document or Revolving Credit Loan Document, and no consent of any party hereto shall be required in connection therewith. Without limitation of the foregoing, this Agreement shall apply in 7 accordance with its terms notwithstanding any increase, decrease, addition or change in the amount, nature, type or purpose of any of the Obligations or any execution or delivery of any Term Loan Document or any Revolving Credit Loan Document from time to time. 2.3 Delivery of Documents. --------------------- Mariner shall, promptly upon the execution thereof, deliver to the Collateral Agent a true and complete copy of any and all Shared Security Documents and all amendments, modifications, restatements, and supplements to any of the Shared Security Documents, the Revolving Credit Loan Documents and all amendments, modifications, restatements, and supplements to any of the Revolving Credit Loan Documents, and the Term Loan Documents and all amendments, modifications, restatements, and supplements to any of the Term Loan Documents. 2.4 Termination of a Secured Party. ------------------------------ In the event there is delivered to the Collateral Agent at any time written notice from any Facility Party, referring specifically to this Section 2.4, to the effect that such Facility Party wishes to cease to be a Secured Party hereunder, then such party shall for all purposes hereof cease to be a Secured Party. 2.5 Certain Intercreditor Matters. ----------------------------- (a) Payment Obligations Not Subordinated. The provisions of Section 4.4 ------------------------------------ [Distributions] apply solely to priorities of distributions resulting from realization on the Shared Collateral, and not to the priorities of the Obligations. Nothing contained in this Agreement is intended to effect a subordination of any Obligation to any other Obligation. Nothing contained in this Agreement shall limit or impair the right of each Secured Party to receive payment of the Obligations owing to it when due (whether at the stated maturity thereof, by acceleration or otherwise) or to institute suit for the enforcement of such payment on or after such due date. (b) Rights and Remedies of Secured Parties Not Impaired. Except to the --------------------------------------------------- extent specifically provided in this Agreement, nothing contained herein shall be construed to limit any right or remedy otherwise available to any Secured Party under any Shared Security Document or any Revolving Credit Loan Document, any Term Loan Document, or at law, in equity, or otherwise. Nothing contained in this Agreement shall limit or otherwise derogate from the right of any Revolving Credit Bank or Term Loan Bank or of the Revolving Credit Agent or the Term Loan Agent to initiate a proceeding with respect to any Revolving Credit Loan Party or Term Loan Party under the U.S. Bankruptcy Code or similar Laws or to file, vote, give or withhold consent or otherwise exercise rights in respect to Obligations or any claim in respect thereof in connection with any proceeding under the U.S. Bankruptcy Code or similar Laws. (c) Shared Security. The Secured Parties hereby agree that, if any Secured --------------- Party (other than the Collateral Agent, in its capacity as such) shall realize any funds from any Foreclosure Action with respect to any Shared Collateral, such Secured Party shall forthwith 8 remit the same to the Collateral Agent, who shall deposit the same in the Shared Collateral Account. If, during the course of or pursuant to, any Bankruptcy Proceeding of any Loan Party, a Secured Party (the "Returning Secured Party") is required by a court or other tribunal of competent jurisdiction to disgorge, refund, rebate, or otherwise return any payment or distribution received in connection with a Foreclosure Action with respect to Shared Collateral (including any proceeds thereof) (each such payment or distribution referred to herein as a "Disputed Payment") (whether by reason that such Disputed Payment constituted or was alleged to constitute a preference, a fraudulent transfer, or for such other reason as such court or tribunal shall find), the other Secured Parties shall immediately pay (out of the Shared Collateral Account to the extent available) to the Returning Secured Party their pro rata share of such Disputed Payment, such pro rata share being determined on the basis of each Secured Party's share of the Shared Obligations at the time of such return. Each holder of a participation in any of the Shared Obligations shall be bound by this Subsection 2.5(c) [Shared Security] fully as if it were a Secured Party hereunder. 3. SHARED SECURITY ACTIONS ----------------------- 3.1 General Relation to Secured Parties. ----------------------------------- Each Secured Party hereby appoints and authorizes the Collateral Agent to act as its exclusive agent for the purposes of enforcing such Secured Party's rights pursuant to the Shared Security Documents. 3.2 Directing Party Direction; Directing Party Appointment. ------------------------------------------------------ The Collateral Agent agrees to file financing statements and take other action to perfect security interests or liens granted pursuant to the Shared Security Documents in the public record offices as directed by, and to make such demands and give such notices with respect to the Shared Collateral under the Shared Security Documents as may be requested by, to take such action with respect to the Shared Collateral, and to enforce the Shared Security Documents and to foreclose upon, collect, and realize upon the Shared Collateral or any portion thereof or take any other action with respect to the Shared Collateral or any portion thereof as may be directed by, the Directing Party; provided, --------- however, that the Collateral Agent shall not be required to take any action that - ------- is in its opinion contrary to law or to the terms of this Agreement or the Shared Security Documents or which would in its reasonable opinion subject it or its officers, agents, employees, or directors to liability. Each Secured Party hereby irrevocably appoints, designates, and authorizes the Revolving Credit Agent to act as the Directing Party as set forth herein and as reasonably incidental hereto, and each Secured Party hereby agrees to indemnity and hold harmless the Directing Party and each of its affiliates and subsidiaries and each of their officers, agents, directors, and employees from any and all loss, liability, claims, judgments, costs, and disbursements arising out of any actions or inactions taken or not taken by the Directing Party hereunder except to the extent caused by the gross negligence or willful misconduct of the Directing Party as determined by a final judgment rendered by a court of competent jurisdiction. 9 3.3 Form of Directing Party Direction. --------------------------------- Any request or direction given by the Directing Party to the Collateral Agent shall be: (i) in writing and (ii) provided in any manner consistent with the terms of Section 6.1 [Notices] hereof. 3.4 Requested Directions. -------------------- The Collateral Agent may at any time request directions in connection with a Foreclosure Action in connection with Shared Collateral from the Directing Party as to any course of action or other matter relating to the performance of its duties under this Agreement and the Secured Party Documents or the Shared Security Documents. The Directing Party will promptly comply with any such request. Directions given to the Collateral Agent by the Directing Party in a manner consistent with the terms of this Article 3 [Shared Security Actions] shall, as between the Collateral Agent and each Secured Party, be binding on each of the Secured Parties. 3.5 Release of Collateral; Distributions; Waivers; Amendments. --------------------------------------------------------- The Collateral Agent shall not, without the consent of the Directing Party, (i) release any security interest, mortgage, lien, or other encumbrance on any of the Shared Collateral, other than as permitted by each Shared Security Document and Secured Party Document relevant thereto, (ii) make any distributions of proceeds or other monies or property received from or with respect to any Foreclosure Action with respect to Shared Collateral, other than as set forth in Section 4.4 [Distributions] hereof, (iii) waive any provision of a Secured Party Document or Shared Security Document or (iv) amend or modify this Agreement. 4. ACCOUNTS; UNSHARED COLLATERAL ----------------------------- 4.1 Shared Collateral Account. ------------------------- Not later than the first date on which funds are required to be deposited therein pursuant to this Agreement or any other Shared Security Document, the Collateral Agent shall maintain one or more accounts (collectively, the "Shared Collateral Account") at such office of the Collateral Agent as it may designate from time to time in its own name as Collateral Agent. All right, title and interest in and to the Shared Collateral Account shall vest in the Collateral Agent and the Shared Collateral Account shall be subject to the exclusive dominion and control of the Collateral Agent. 4.2 Investment. ---------- The Collateral Agent shall invest and reinvest monies on deposit in the Shared Collateral Account in its own name in such Restricted Investments as the Collateral Agent may select in its discretion, and all such investments and the interest and income received thereon and the net proceeds on the sale or redemption thereof shall be held in the Shared Collateral Account. The Collateral Agent shall not be responsible or liable for any loss or decline in value of such 10 investments or any loss or penalties incurred in the liquidation or sale thereof. The Collateral Agent may liquidate investments prior to maturity to make a distribution pursuant to Section 4.4 [Distributions] or otherwise as permitted or required by this Agreement. 4.3 Deposits. -------- Except to the extent, if any, otherwise expressly provided in this Agreement, all monies which are required by this Agreement or any other Shared Security Document to be delivered to the Collateral Agent in its capacity as such, or which are received by the Collateral Agent in its capacity as such in respect of any property described in any of the Shared Security Documents (as proceeds of Shared Collateral or otherwise) or pursuant to the terms of any of the Shared Security Documents, shall be deposited by the Collateral Agent in the Shared Collateral Account. No other funds shall be deposited in the Shared Collateral Account or commingled with funds in the Shared Collateral Account. Any non-cash proceeds and any cash proceeds resulting from a Foreclosure Action with respect to Shared Collateral or received by the Collateral Agent in its capacity as such in respect of any Shared Collateral which, due to a restraining order or otherwise are not permitted to be applied, or because the Collateral Agent determined it to be impracticable to divide and apply such proceeds to the payment of any of the Shared Obligations owed to the Secured Parties ("Non- available Proceeds"), shall be held by the Collateral Agent or, as the case may be, the Secured Party so receiving such Proceeds as agent for the Secured Parties until such Non-available Proceeds are later converted to cash or such Non-available Proceeds are later permitted to be applied, or later become practicable to divide and may otherwise be applied, against any of the obligations enumerated above and shall be divided at such time in accordance with the terms of this Agreement. 4.4 Distributions. ------------- The Collateral Agent shall make distributions from the Shared Collateral Account from time to time when directed by the Directing Party or at such other times as it may in good faith believe are required by Law, except that the Collateral Agent shall have the right at any time to apply monies held by it in the Shared Collateral Account to the payment of due and unpaid Collateral Agent Obligations. All remaining monies held by the Collateral Agent in the Shared Collateral Account shall be distributed by the Collateral Agent as follows: First, to the Collateral Agent for any Collateral Agent Obligations due and unpaid upon such distribution date; Second, to each of the Revolving Credit Agent and the Term Loan Agent, for the payment of all amounts respectively due to each in its capacity as such which are unpaid on such distribution date; provided, that if such ---------- monies to be distributed by the Collateral Agent shall be insufficient to pay in full the amounts referred to in this clause, then such distribution shall be made ratably (without priority of any one over any other) to the Revolving Credit Agent and the Term Loan Agent in proportion to the respective amounts of the Obligations respectively owing to the Revolving Credit Agent and the Term Loan Agent on such distribution date; 11 Third, to (a) the Revolving Credit Agent, for the account of the Revolving Credit Banks, in an amount equal to all amounts due and payable to the Revolving Credit Banks on such distribution date with respect to the Revolving Credit Obligations, (b) the Term Loan Agent, for the account of the Term Loan Banks, in an amount equal to all amounts due and payable to the Term Loan Banks on such distribution date with respect to the Term Loan Obligations; provided, that if such monies to be distributed by the --------- Collateral Agent shall be insufficient to pay in full the amounts referred to in the foregoing clauses (a) and (b), then such distribution shall be made ratably (without priority of any one over any other) to the designated parties in proportion to the respective amounts of the Obligations referred to in the foregoing clauses (a) and (b) on such distribution date; and Finally, if all Obligations (other than Contingent Indemnification Obligations) shall have been indefeasibly paid in full in cash and all Commitments to extend credit under the Revolving Credit Agreement and the Term Loan Agreement shall have terminated, any surplus then remaining shall be paid to whomsoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 4.5 Calculations. ------------ In making the determinations and allocations required by Section 4.4 [Distributions], the Collateral Agent may rely upon information supplied by the Revolving Credit Agent or the Term Loan Agent, with any discrepancies in any such information being resolved by the Directing Party. The Collateral Agent shall have no liability to any Secured Party for actions taken in reliance on such information. All distributions made by the Collateral Agent pursuant to Section 4.4 [Distributions] shall be final as against the Collateral Agent (subject to any decree of any court of competent jurisdiction), and the Collateral Agent shall have no duty to inquire as to the application by any Secured Party of any amounts distributed to it. 4.6 Application of Monies. --------------------- Each Secured Party agrees to apply monies distributed under Section 4.4 [Distributions] to the corresponding obligation described therein. 4.7 General Provisions Relating to Accounts. --------------------------------------- (a) General. To the extent that the Collateral Agent is permitted or ------- required by this Agreement or any other Shared Security Document to establish or maintain any deposit, custody or other account (including, but not limited to, the Shared Collateral Account), Mariner shall from time to time pay to the Collateral Agent, for its own account, all custodial fees, service charges, and other fees and charges as the Collateral Agent customarily charges in respect of similar accounts from time to time. The Collateral Agent may establish and maintain such subaccounts as it may elect from time to time within any such account, and to the extent it does so, each such subaccount shall be accounted for separately and the Collateral Agent may apportion deposits and withdrawals among such subaccounts in such manner as it may elect. Nothing in this Agreement or any other Secured Party Document shall be construed to require or 12 prohibit the Collateral Agent to make any investment in the Collateral Agent's own certificates of deposit or in other investment media of the Collateral Agent. Notwithstanding any other provision of this Agreement or any other Secured Party Document, the Collateral Agent shall not be liable for any failure to perform, inability to perform, or delay in performance due to acts of God, war, civil commotion, governmental action, fire, explosion, strikes, other labor disturbances, equipment malfunction, interruption of communications facilities, any action, non-action or delayed action on the part of any other Person other than the Collateral Agent, or causes beyond the Collateral Agent's reasonable control. (b) Security Interest. As security for the Obligations, each Loan Party ----------------- hereby grants to and creates in favor of the Collateral Agent for the benefit of the Secured Parties, a security interest in all right, title and interest of such Loan Party in, to or under the following, whether now or hereafter existing or acquired: the Shared Collateral Account and all other accounts (custodial, deposit or other) from time to time maintained by or with the Collateral Agent pursuant to the Shared Security Documents, all cash, securities, instruments, investment property, financial assets and other property from time to time in transit to or held therein, all cash, securities, instruments, investment property, financial assets and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any of the foregoing, and all proceeds of any of the foregoing. Each Loan Party agrees that such security interest shall at all times be a valid and perfected first priority security interest on the foregoing collateral, and no Loan Party shall create or suffer to exist any Lien on any of the foregoing collateral, other than the Lien in favor of the Collateral Agent granted under this Subsection 4.7(b) [Security Interest]. 4.8 Unshared Collateral. ------------------- With respect to the Revolving Credit Collateral, the Revolving Credit Agent and each Revolving Credit Bank hereby agrees, to the extent practicable and without in any manner jeopardizing any rights it may have to the Shared Collateral, to apply the Revolving Credit Collateral to the Revolving Credit Obligations prior to the application of Shared Collateral to any such Obligations. With respect to the Term Loan Collateral, the Term Loan Agent and each Term Loan Bank hereby agrees, to the extent practicable and without in any manner jeopardizing any rights it may have to the Shared Collateral, to apply the Term Loan Collateral to the Term Loan Obligations prior to the application of Shared Collateral to any such Obligations. In the event that any Term Loan Bank or the Term Loan Agent or any Revolving Credit Bank or the Revolving Credit Agent shall take any action whatsoever to foreclose upon or collect any Term Loan Collateral or Revolving Credit Collateral, respectively, it shall provide five (5) days prior written notice thereof to the Collateral Agent who shall thereupon provide a copy of such notice to the Revolving Credit Agent and the Term Loan Agent for the other parties hereto (other than any Loan Party). 13 5. THE COLLATERAL AGENT -------------------- 5.1 Appointment. ----------- Each Facility Party hereby irrevocably appoints PNC Bank, National Association, to act as Collateral Agent for such Facility Party under this Agreement and the other Shared Security Documents. PNC Bank, National Association, hereby agrees to act as Collateral Agent on behalf of the Facility Parties on the terms and conditions set forth in this Agreement and the other Shared Security Documents, subject to its right to resign as provided herein. The Directing Party and each Secured Party hereby appoints any officer or agent of the Collateral Agent as its true and lawful attorney, for it and in its name, to or to cause to record or file and enforce and realize upon the Shared Security Documents with respect to the Shared Collateral, granting unto said attorney full power to do any and all things it may consider reasonably necessary or appropriate to be done with respect to the Shared Collateral and the Shared Security Documents as fully and effectively as the Directing Party or Secured Party might or could do, and hereby ratifies and confirms all that its said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and all transactions hereunder. 5.2 General Nature of Collateral Agent's Duties. ------------------------------------------- (a) No Implied Duties. The Collateral Agent shall have no duties or ----------------- responsibilities except those expressly set forth in this Agreement. The Collateral Agent shall not be responsible to the Facility Parties for any recitals, statements, representations, or warranties contained in this Agreement, any Shared Security Document, any other Secured Party Documents, or in any certificate or other document referred to or provided for herein or therein, or for the value, validity, effectiveness, genuineness, enforceability, or sufficiency of this Agreement, any Shared Security Document, any other Secured Party Documents, or any other document referred to or provided for herein or therein, or any security interest, lien, mortgage, encumbrance, or the like granted by any of the Loan Parties or the perfection or priority of any such security interest, lien, mortgage, encumbrance, or the like or for any failure by any of the Loan Parties to perform any of their obligations under any document, instrument, or agreement, or otherwise. The Collateral Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it. (b) Not a Fiduciary. The duties and responsibilities of the Collateral --------------- Agent under this Agreement and the other Shared Security Documents shall be mechanical and administrative in nature, and the Collateral Agent shall not have a fiduciary relationship in respect of any Facility Party or Loan Party. (c) Agent of Facility Parties. The Collateral Agent is and shall be solely ------------------------- the agent of the Facility Parties. The Collateral Agent does not assume, and shall not at any time be deemed to have, any relationship of agency or trust with or for any Loan Party or any Person other than the Facility Parties. The provisions of this Article 5 [The Collateral Agent] are for the benefit of the Facility Parties (and the other Persons named in Sections 5.5 [Administration by Collateral 14 Agent] and 5.11 [Expenses; Indemnity]), and no Loan Party shall have any rights under any of the provisions of this Article 5 [The Collateral Agent]. (d) No Obligation to Take Action. The Collateral Agent shall be under no ---------------------------- obligation to take any action hereunder or under any other Shared Security Document or otherwise if the Collateral Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Shared Security Document, may expose the Collateral Agent or any Secured Party to liability or may require the Collateral Agent to qualify to do business in any jurisdiction where it is not then so qualified. 5.3 Exercise of Powers. ------------------ Subject to the other provisions of this Agreement and the other Shared Security Documents, the Collateral Agent shall take any action of the type specified in this Agreement or any other Shared Security Document as being within the Collateral Agent's rights, powers or discretion in accordance with directions from the Directing Party (or, to the extent this Agreement or such Shared Security Document expressly requires the direction or consent of some other Person or Persons, then instead in accordance with the directions of such other Person or Persons). In the absence of such directions, the Collateral Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Shared Security Document expressly requires the direction or consent of the Directing Party (or some other Person or Persons), in which case the Collateral Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Facility Parties. The Collateral Agent shall not have any liability to any Person as a result of (x) the Collateral Agent acting or refraining from acting in accordance with the directions of the Directing Party (or other applicable Person or Persons), (y) the Collateral Agent refraining from acting in the absence of instructions to act from the Directing Party (or other applicable Person or Persons), whether or not the Collateral Agent has discretionary power to take such action, or (z) the Collateral Agent taking discretionary action it is authorized to take under this Section 5.3 (subject, in the case of this clause (z), to the provisions of Section 5.2 [General Nature of Collateral Agent's Duties] ). 5.4 General Exculpatory Provisions. ------------------------------ (a) General. Neither the Collateral Agent nor any of its directors, ------- officers, employees, attorneys, or agents shall be liable or responsible for any action taken or omitted to be taken by it or them hereunder or in connection with any Shared Security Document, except for its or their own gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. (b) Collateral Agent Not Responsible for Shared Security Documents, Etc. ------------------------------------------------------------------- The Collateral Agent shall not be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any Shared Security Document or any other Secured Party Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection 15 with, this Agreement or any other Shared Security Document or any other Secured Party Document, (iii) any failure of any Loan Party or any Facility Party to perform any of their respective obligations under this Agreement or any other Shared Security Document or any other Secured Party Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any lien or other direct or indirect security afforded or purported to be afforded by any of the Shared Security Documents or any other Secured Party Document or otherwise from time to time. (c) No Duty of Inquiry. The Collateral Agent shall not be under any ------------------ obligation hereunder to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Shared Security Document or any other Secured Party Document on the part of any Loan Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any other Person, or (iii) the existence of any default under any Shared Security Document or any other Secured Party Document. (d) Notices. Except as expressly set forth in Section 4.8 of this ------- Agreement, the Collateral Agent shall not be under any obligation hereunder, either initially or on a continuing basis, to provide any Facility Party with any notices, reports or information of any nature. 5.5 Administration by the Collateral Agent. -------------------------------------- (a) Reliance on Notices, etc. The Collateral Agent may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Shared Security Document or any other Secured Party Document) purportedly made by or on behalf of the proper party or parties, and the Collateral Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Collateral Agent shall in all cases be duly protected in acting, or in refraining from acting, hereunder in accordance with instructions signed by the Directing Party, which instructions and action taken or failure to act pursuant thereto shall, as between Collateral Agent and Secured Parties, be binding on all of the Secured Parties. The Collateral Agent may deem and treat the payee of any promissory note or other evidence of indebtedness relating to the Shared Obligations as the owner thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof, signed by such payee and in form satisfactory to the Collateral Agent, shall have been filed with the Collateral Agent. Any request, authority, or consent of any Person who at the time of making such request or giving such authority or consent is the holder of any such note or other evidence of indebtedness shall be conclusive and binding on any subsequent holder, transferee, or assignee of such note or evidence and of any note or notes or evidence issued in exchange therefor. Except as expressly directed by the Directing Party, the Collateral Agent shall have no duty to take any affirmative action with respect to the collection of any amount payable in respect of any Shared Collateral or any Revolving Credit Collateral or any Term Loan Collateral. The Collateral Agent shall incur no liability as a result of any sale of any Shared Collateral or any Revolving Credit Collateral or any Term Loan Collateral at any private sale conducted at the direction of the Directing Party. 16 (b) Consultation. The Collateral Agent may consult with legal counsel ------------ (including, without limitation, in-house counsel for the Collateral Agent or in- house or other counsel for the Loan Parties), independent public accountants and any other experts selected by it from time to time, and the Collateral Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) Reliance on Certificates, etc. The Collateral Agent may conclusively ----------------------------- rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to the Collateral Agent in accordance with the requirements of this Agreement or any other Shared Security Document or any other Secured Party Document. Whenever the Collateral Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Loan Party or any Facility Party, such matter may be established by a certificate of such Loan Party or Facility Party, as the case may be, and the Collateral Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Shared Security Document). (d) Indemnity. Each Revolving Credit Bank and each Term Loan Bank agrees to --------- indemnify, ratably as hereafter provided, the Collateral Agent, its directors, officers, attorneys, agents and employees, to the extent not reimbursed by any of the Loan Parties, for any and all liabilities, penalties, actions, judgments, suits, costs, expenses (including reasonable attorney's fees), or disbursements of any kind and nature whatsoever which may be imposed on, incurred by, or asserted against the Collateral Agent in any way relating to or arising out of this Agreement, any Shared Security Document, or any Secured Party Document or any other document contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or of any such other documents; provided, however, that no ----------------- Revolving Credit Bank or Term Loan Bank shall be liable for, or shall indemnify the Collateral Agent for, any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Collateral Agent as determined by a final judgment of a court of competent jurisdiction. Each Revolving Credit Bank's and Term Loan Bank's indemnity obligations hereunder shall be ratable based upon its then existing Revolving Credit Loans and Term Loans outstanding under the Revolving Credit Agreement and the Term Loan Agreement, respectively. Except for action expressly required of the Collateral Agent hereunder, the Collateral Agent may fail or refuse to take any action unless it shall be indemnified to its reasonable satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against the Collateral Agent by reason of taking or continuing to take any such action. (e) Performance through Agents. The Collateral Agent may perform any of its -------------------------- duties under this Agreement or any other Shared Security Document by or through agents or attorneys-in-fact. The Collateral Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 17 5.6 Collateral Agent in its Individual Capacity. ------------------------------------------- The Collateral Agent may be one or more Facility Parties, and in such event the Collateral Agent, in its capacity as any such Facility Party, shall have the same rights and powers under this Agreement and each other Shared Security Document and other Secured Party Document as any other Facility Party and may exercise the same as though it were not the Collateral Agent. The Collateral Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, enter into interest rate or currency hedging transactions with, act as trustee under indentures of, and engage in any other business or transaction with, the Loan Parties or any stockholder, subsidiary or affiliate of the Loan Parties as though the Collateral Agent were not the Collateral Agent hereunder. 5.7 Facility Parties. ---------------- Each Facility Party agrees to deliver to the Collateral Agent promptly upon its request such information with respect to the Obligations held by such Facility Party as the Collateral Agent may request from time to time for the purpose of taking any action required or permitted to be taken by the Collateral Agent under this Agreement or any other Shared Security Document, and the Collateral Agent may rely conclusively upon such information. Without limiting the generality of the foregoing, the Collateral Agent may rely conclusively upon information supplied by each of the Revolving Credit Agent and Term Loan Agent as to the identity of each Facility Party respectively under the Revolving Credit Agreement and Term Loan Agreement. Any authority, direction or consent of any Person who at the time of giving such authority, direction or consent is a Facility Party shall be conclusive and binding on each present and subsequent holder, transferee or assignee of such Facility Party. 5.8 Successor Collateral Agent. -------------------------- The Collateral Agent may resign at any time by giving forty-five (45) days' prior written notice thereof to each of the Revolving Credit Agent, the Term Loan Agent, and Mariner. The Collateral Agent may be removed by the Directing Party at any time by giving ten (10) days' prior written notice thereof to the Collateral Agent, the Term Loan Agent, and Mariner. Upon any such resignation or removal the Directing Party shall have the right to appoint a successor Collateral Agent. If no successor Collateral Agent shall have been so appointed and consented to, and shall have accepted such appointment, within thirty (30) days after such notice of resignation or removal, then the retiring Collateral Agent may (but shall not be required to) appoint a successor Collateral Agent. If no successor Collateral Agent shall be appointed and shall have accepted such appointment within thirty (30) days after such notice of resignation or removal, any Facility Party may apply to any court of competent jurisdiction to appoint a successor Collateral Agent until such time, if any, as a successor Collateral Agent shall have been appointed as provided in this Section 5.8. Any successor so appointed by such court shall immediately and without further act be superseded by any successor Collateral Agent appointed by the Directing Party as provided in this Section 5.8. Each successor Collateral Agent shall be a commercial bank or trust company organized under or operating pursuant to the laws of the 18 United States of America or any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance by a successor Collateral Agent of its appointment as Collateral Agent hereunder, such successor Collateral Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Collateral Agent in its capacity as such, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Collateral Agent, such Collateral Agent shall be discharged from its duties as such under this Agreement and the other Shared Security Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was Collateral Agent under this Agreement. Notwithstanding any other provision of this Agreement or any other Shared Security Document or any other Secured Party Document to the contrary, neither the Collateral Agent nor any of its directors, officers, employees or agents shall be liable to any Facility Party for any action taken or omitted to be taken by it or them under or in connection with this Section 5.8. 5.9 Calculations. ------------ The Collateral Agent shall not be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Facility Party to whom payment was due but not made shall be to recover from the other Facility Parties any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by a Loan Party, to recover such amount from such Loan Party. 5.10 Collateral Agent's Fee. ---------------------- Mariner hereby agrees to pay to the Collateral Agent, from time to time upon demand, reasonable compensation (which shall not be limited by any provision of Law in regard to compensation of fiduciaries or of a trustee of an express trust) for its services hereunder and under the other Shared Security Documents; provided, that if and so long as the Collateral Agent is also the Revolving Credit Agent and no Event of Default has occurred and is continuing, the Collateral Agent shall not be entitled to any compensation under this Section . 5.11 Expenses; Indemnity. ------------------- (a) Expenses. Mariner agrees to pay or cause to be paid and to save the -------- Collateral Agent, its officers, directors, employees, and agents harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of outside counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by the Collateral Agent from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Shared Security Documents, and any other documents and agreements related hereto or referenced herein, (ii) any requested amendments, modifications, supplements, waivers or consents (whether or not ultimately entered into or granted) to this Agreement or any Shared Security Document or any other document or agreement related hereto or referenced herein, (iii) the enforcement or preservation of rights 19 under this Agreement or any Shared Security Document or any other document or agreement related hereto or referenced herein (including but not limited to any such costs or expenses arising from or relating to (A) the creation, perfection or protection of any Lien on any Shared Collateral, (B) the protection, collection, lease, sale, taking possession of, preservation of, or realization on, any Shared Collateral, including without limitation advances for taxes, filing fees and the like, (C) collection or enforcement by the Collateral Agent of any amount owing hereunder or thereunder, and (D) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Shared Security Documents or any other document or agreement related hereto or referenced herein). (b) Interest. All amounts payable by any Loan Party to the Collateral -------- Agent in its capacity as such under this Agreement or any other Shared Security Document shall bear interest for each day from the date when due to the date of payment (before and after judgment) at a rate per annum (based on a year of 365 or 366 days, as the case may be, and actual days elapsed) equal to 2% above the Revolving Credit Base Rate Option then in effect. (c) Survival. The agreements contained in this Section 5.11 shall -------- survive the termination of this Agreement and the other Shared Security Documents. 5.12 Monies Held As Collateral Agent. - ---- ------------------------------- All monies received by the Collateral Agent (other than fees and costs and expenses, as provided in Sections 5.10 and 5.11) under or pursuant to any provision of this Agreement or any other Shared Security Document shall be held by it as agent for the purposes for which they were paid or are held. The Collateral Agent shall not be liable for any interest thereon (except to the extent, if any, otherwise expressly provided herein or therein). 6. MISCELLANEOUS ------------- 6.1 Notices. ------- (a) Generally. Except to the extent otherwise expressly permitted --------- hereunder or thereunder, all notices, requests, demands, directions and other communications (collectively "notices") to any party under this Agreement or any other Shared Security Document shall be given in writing (including telexes and facsimile transmission) and shall be sent by first-class mail, or by nationally- recognized overnight courier, or by telex or facsimile transmission (with confirmation in writing mailed first-class or sent by such an overnight courier) or by personal delivery. All notices shall be sent to, in the case of a Loan Party or Facility Party, to its address for notices pursuant to the Revolving Credit Agreement or Term Loan Agreement, as the case may be, or in accordance with the last unrevoked written direction from such party to the other parties hereto, in all cases with postage or other charges prepaid. Any such properly given notice to any Secured Party shall be effective when received. Any such properly given notice to a Loan Party shall be effective upon the earliest to occur of receipt, telephone confirmation of receipt of telex or facsimile transmission, one (1) Business Day after delivery to a nationally-recognized overnight courier, or three (3) Business Days after deposit in the mail. 20 (b) Multiple Capacities. To the extent that this Agreement or any ------------------- other Shared Security Document permits or requires any notice to be given by a Person to itself, acting in a different capacity (such as notices by the Collateral Agent to the Revolving Credit Agent, or vice versa, when the same Person is acting in both such capacities), such Person need not give actual notice to itself, but may deem such notice to have been given. 6.2 No Implied Waiver; Cumulative Remedies. -------------------------------------- No course of dealing and no delay or failure of any Secured Party in exercising any right, power or privilege hereunder or under any other Shared Security Document, or any other documents or instruments pursuant to or in connection herewith shall affect any other or future exercise thereof or exercise of any other right, power or privilege; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies of each Secured Party under this Agreement, the other Shared Security Documents, and all other agreements and instruments pursuant to or in connection herewith or therewith are cumulative and not exclusive of any rights or remedies which any of them would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Secured Party of any breach or default under, or term or condition of, this Agreement, the other Shared Security Documents, and all other agreements and instruments pursuant to or in connection herewith or therewith shall be in writing and shall be effective only to the extent specifically set forth in such writing. 6.3 Severability. ------------ The provisions of this Agreement and of the other Shared Security Documents are intended to be severable. If any provision of this Agreement or any other Shared Security Document shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof or thereof in any jurisdiction. Where, however, such invalidity or unenforceability may be waived, it is hereby waived by the Loan Parties to the fullest extent permitted by Law, to the end that this Agreement and the other Shared Security Documents shall be valid and binding agreements enforceable in accordance with their terms. 6.4 Prior Understandings. -------------------- This Agreement and the other Shared Security Documents supersede all prior understandings and agreements, whether written or oral, among the parties hereto relating to the transactions provided for herein. 21 6.5 Counterparts. ------------ This Agreement and any other Shared Security Document may be executed in any number of counterparts and by the different parties hereto or thereto on separate counterparts each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 6.6 Termination of Liens; Termination of this Agreement. --------------------------------------------------- (a) Upon indefeasible payment in full of all Obligations (other than Contingent Indemnification Obligations) and receipt by the Collateral Agent of written notices from each of the Revolving Credit Agent and Term Loan Agent to the effect that any liens or other security created by the Shared Security Documents are to be released and discharged and have been paid in full in cash, the Collateral Agent shall, at the request of Mariner, release or cause to be released any liens or security interests created by the Shared Security Documents with respect to the Shared Collateral. (b) In the event all Obligations are paid in full and liens or security interests in the Shared Collateral are released in accordance with Section 6.6(a), upon the indefeasible payment in full of the Contingent Indemnification Obligations this Agreement shall be terminated and the parties hereto released of any further obligations under this Agreement, except for outstanding indemnification obligations, if any, under Sections 5.5(a) [Reliance on Notices, etc.], 5.5(d) [Indemnity] and 5.11[Expenses; Indemnity] which shall survive termination of this Agreement. 6.7 Successors and Assigns. ---------------------- This Agreement shall be binding upon and inure to the benefit of the Collateral Agent, the Facility Parties, the Loan Parties and their respective successors and assigns, except that no Loan Party may assign or transfer any of its rights hereunder or any interest therein, and any such purported assignment or transfer shall be void. No other Person, including without limitation any Loan Party, shall have any rights hereunder or shall be entitled to rely on any provision hereof. 6.8 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial; Limitation --------------------------------------------------------------------------- of Liability. ------------ (a) Governing Law. This Agreement and all other Shared Security ------------- Documents (except to the extent, if any, otherwise expressly stated in such other Shared Security Documents) shall be governed by, construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania, without regard to conflict of law principles. (b) Certain Waivers. Each of the parties hereto irrevocably and --------------- unconditionally: (i) agrees that any action, suit or proceeding by any Person arising from or relating to this Agreement or any other Shared Security Document or any statement, 22 course of conduct, act, omission or event occurring in connection herewith or therewith (collectively, "Related Litigation") may be brought in any state or federal court of competent jurisdiction sitting in Allegheny County, Pennsylvania, submits to the non-exclusive jurisdiction of such courts, and to the fullest extent permitted by Law agrees that will not bring any Related Litigation in any other forum (but nothing herein shall affect the right of any Secured Party to bring any action, suit or proceeding in any other forum); (ii) waives any objection which it may have at any time to the laying of venue of any Related Litigation brought in any such court, waives any claim that any such Related Litigation has been brought in an inconvenient forum, and waives any right to object, with respect to any Related Litigation brought in any such court, that such court does not have jurisdiction over such Loan Party; (iii) consents and agrees to service of any summons, complaint or other legal process in any Related Litigation by registered or certified U.S. mail, postage prepaid, to such Loan Party at the address for notices described in Section 6.1, and consents and agrees that such service shall constitute in every respect valid and effective service (but nothing herein shall affect the validity or effectiveness of process served in any other manner permitted by Law); and (iv) waives the right to trial by jury in any Related Litigation. (c) Limitation of Liability. To the fullest extent permitted by Law, ----------------------- no claim may be made by any Loan Party against any Secured Party or any affiliate, director, officer, employee, attorney or agent of any of them for any special, incidental, indirect, consequential or punitive damages in respect of any claim arising from or relating to this Agreement or any other Shared Security Document or any statement, course of conduct, act, omission, or event occurring in connection herewith or therewith (whether for breach of contract, tort or any other theory of liability). Each Loan Party hereby waives, releases and agrees not to sue upon any claim for any such damages, whether such claim presently exists or arises hereafter and whether or not such claim is known or suspected to exist in its favor. (d) Conflict. To the extent that there is an irreconcilable conflict or -------- inconsistency with the terms of this Agreement and any of the agreements among any of the Secured Parties or with an agreement among a Secured Party and any one or more Loan Parties, this Agreement shall control as between the parties hereto. All of the terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective parties hereto and their respective successors and assigns, and shall be binding upon and inure to the benefit of and be enforceable by any holder or holders at any time of the obligations owed to a Secured Party, or any part thereof. [SIGNATURES APPEAR ON NEXT PAGE] 23 [SIGNATURE PAGE 1 OF 2 TO COLLATERAL AGENCY AND SHARING AGREEMENT] IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed and delivered this Agreement as of the date first above written. PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By: ---------------------------------------- Title: ---------------------------------------- PNC BANK, NATIONAL ASSOCIATION, as Term Loan Agent, on its on behalf in such capacity and on behalf of each Term Loan Bank By: ---------------------------------------- Title: ---------------------------------------- PNC BANK, NATIONAL ASSOCIATION, as Revolving Credit Agent, on its on behalf in such capacity and on behalf of each Revolving Credit Bank By: ---------------------------------------- Title: ---------------------------------------- 24 [SIGNATURE PAGE 2 OF 2 TO COLLATERAL AGENCY AND SHARING AGREEMENT] MARINER HEALTH GROUP, INC. EACH SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A CORPORATION AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT BOTH FOR ITSELF AND, IF APPLICABLE: (i) AS GENERAL PARTNER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A PARTNERSHIP AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT, AND (ii) AS A MEMBER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A LIMITED LIABILITY COMPANY AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT By: ---------------------------------------- Name: Boyd P. Gentry Title: Vice President/Treasurer of each of the foregoing corporations 25 EX-10.68 29 EMPLOYEE STOCK PURCHASE PLAN (MARINER) EXHIBIT 10.68 Execution Draft $210,000,000 TERM LOAN FACILITY CREDIT AGREEMENT by and among MARINER HEALTH GROUP, INC. and THE BANKS PARTY HERETO and PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent and FIRST UNION NATIONAL BANK, as Syndication Agent Dated as of December 23, 1998 TABLE OF CONTENTS (i) SCHEDULES SCHEDULE 1.01(C) COMMITMENTS OF BANKS SCHEDULE 1.01(P) PERMITTED LIENS SCHEDULES 6.01(a) QUALIFICATIONS TO DO BUSINESS, SUBSIDIARIES AND and 6.01(c) EXCLUDED ENTITIES SCHEDULE 6.01(u) MATERIAL CONTRACTS SCHEDULE 6.01(y) ENVIRONMENTAL DISCLOSURES SCHEDULE 6.01(z) CERTAIN DISCLOSURES REGARDING OTHER DEBT OF THE BORROWER SCHEDULE 6.01(aa) OWNED AND LEASED REAL PROPERTY OF THE LOAN PARTIES; MATTERS REGARDING CERTAIN LEASED FACILITIES AND INDEBTEDNESS OF CERTAIN SUBSIDIARIES SCHEDULE 6.01(cc) CERTAIN AFFILIATE TRANSACTIONS SCHEDULE 8.01(1) CERTAIN DISCLOSURES REGARDING SUBORDINATION OF INDEBTEDNESS SCHEDULE 8.02(a) PERMITTED INDEBTEDNESS SCHEDULE 8.02(c) CERTAIN GUARANTEES SCHEDULE 8.02(d) RESTRICTED INVESTMENTS SCHEDULE 8.02(x) EXISTING NEGATIVE PLEDGE COVENANTS (ii) EXHIBITS EXHIBIT 1.01(A) ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT 1.01(C) CONDITIONS FOR INCURRENCE OF CERTAIN LIENS AND CERTAIN INDEBTEDNESS EXHIBIT 1.01(C)(1) COLLATERAL SHARING AGREEMENT EXHIBIT 1.01(F) FIRST MORTGAGE EXHIBIT 1.01(G) GUARANTY AND SURETYSHIP AGREEMENT EXHIBIT 1.01(I) INDEMNITY EXHIBIT 1.01(P) PATENT, TRADEMARK AND COPYRIGHT SECURITY AGREEMENT EXHIBIT 1.01(S)(1) SECURITY AGREEMENT EXHIBIT 1.01(S) SUBORDINATION AGREEMENT (Intercompany) EXHIBIT 1.01(T) TERM NOTE EXHIBIT 2.05 LOAN REQUEST EXHIBIT 8.01(l) TERMS OF CERTAIN SUBORDINATED INDEBTEDNESS EXHIBIT 8.01(m)(i) ACQUISITION APPROVAL CERTIFICATE EXHIBIT 8.01(m)(ii) ACQUISITION NOTICE CERTIFICATE EXHIBIT 8.03(d) COMPLIANCE CERTIFICATE (iii) CREDIT AGREEMENT THIS CREDIT AGREEMENT is dated as of December 23, 1998 , and is made by and among MARINER HEALTH GROUP, INC., a Delaware corporation (the "Borrower"), the BANKS (as hereinafter defined), FIRST UNION NATIONAL BANK, in its capacity as syndication agent (hereinafter referred to in such capacity as the "Syndication Agent"), and PNC BANK, NATIONAL ASSOCIATION, in its capacity as administrative agent for the Banks under this Agreement (hereinafter referred to in such capacity as the "Administrative Agent"). WITNESSETH: WHEREAS, the Borrower has requested that the Agents and the Banks provide a $210,000,000 term loan facility to the Borrower (the "Term Loan Facility"); and WHEREAS, the Banks are willing to agree to the foregoing subject to the terms and conditions hereafter set forth. NOW, THEREFORE, the parties hereto, in consideration of their mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, covenant and agree as follows: ARTICLE I CERTAIN DEFINITIONS ------------------- 1.01 Certain Definitions. In addition to words and terms defined ------------------- elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context hereof clearly requires otherwise: Acquisition Approval Certificate shall have the meaning set -------------------------------- forth in Section 8.01(m)(i). Acquisition Income Reporting Period shall mean the period during ----------------------------------- which Borrower shall measure Consolidated Cash Flow from Operations pursuant to Section 8.01(m) for purposes of computing Borrower's leverage ratio and its other financial covenants on the date on which Borrower makes any Permitted Acquisition, which period shall be either: (1) the four fiscal quarters ending immediately before the date of such Permitted Acquisition (the "Immediately Preceding Four Quarters") if such Permitted Acquisition occurs after the Delivery Date for the financial statements of Borrower for such Immediately Preceding Four Quarters, or (2) the four fiscal quarters ending one quarter period prior to the end of the Immediately Preceding Four Quarters (the "Second Preceding Four Quarters") if such Permitted Acquisition occurs before the Delivery Date for the financial statements of Borrower for the Immediately Preceding Four Quarters. Acquisition Notice Certificate shall have the meaning given to ------------------------------ such term in Section 8.01(m)(ii). Acquisition Reporting Certification shall mean any Permitted ----------------------------------- Acquisition with respect to which Borrower delivers or is required to deliver either an Acquisition Notice Certificate or an Acquisition Approval Certificate pursuant to Section 8.01(m). Adjusted Net Income shall mean for any period of determination ------------------- an amount equal to the net income (loss) of the Borrower and its Subsidiaries for such period determined and consolidated in accordance with GAAP; provided, however, that there shall not be included in such Adjusted Net Income any non- recurring items related to costs and expenses incurred in connection with acquisitions and dispositions of assets, merger transactions or other business combinations, any extraordinary gain or loss, the cumulative effect of a change in accounting principles and costs related to the discharge of legal judgments or settlement costs related to the settlement of a bona fide dispute between the Borrower or any of its Subsidiaries and any other Person. Adjusted Total Indebtedness shall mean, as of any date of --------------------------- determination, Total Indebtedness, less, the aggregate amount of the sum without duplication, of the following items (a), (b) and (c): (a) the outstanding principal amount of the Subordinated Notes, (b) the outstanding principal amount of Permitted Subordinated Indebtedness which refinances or is used to purchase Subordinated Notes, and (c) the outstanding principal amount of Indebtedness permitted pursuant to Section 8.02(a)(iv) of the Revolving Credit Agreement. Notwithstanding the foregoing, it is expressly agreed that Total Indebtedness shall, in no event, be reduced by more than $150,000,000 with respect to the aggregate amount of items (a) and (b) described in the previous sentence. Administrative Agent shall mean PNC Bank, National Association, -------------------- in its capacity as administrative agent for the Banks under this Agreement and its successors in such capacity. Administrative Agent's Fee shall have the meaning assigned to -------------------------- that term in Section 10.15 hereof. Affiliate as to any person shall mean any other person (i) which --------- directly or indirectly controls, is controlled by, or is under common control with such person, (ii) which beneficially owns or holds 50% or more of any class of the voting stock of the Borrower, or (iii) 50% or more of the voting stock (or in the case of a person which is not an individual or a corporation, 50% or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Borrower. Control, as used herein, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, including the power to elect a majority of the directors or trustees of a corporation or trust, as the case may be. Agents shall mean collectively the Administrative Agent and the ------ Syndication Agent, and Agent shall mean any one of the Agents, individually. 2 Agreement shall mean this Credit Agreement as the same may be --------- supplemented, amended, modified or restated from time to time including all schedules and exhibits hereto. Ansonia shall mean Mariner Health Care of Southern Connecticut, ------- a corporation organized and existing under the laws of the State of Connecticut. Applicable Percentage Over Euro-Rate shall have the meaning ------------------------------------ assigned to such term in Section 4.01(a)(ii). Approved Charges shall mean, for any period of determination, ---------------- the following charges, determined and consolidated in accordance with GAAP, to Consolidated Net Income: (i) charges for Medicare Recoupment (taken or to be taken with respect to fiscal years 1996, 1997, or 1998 and relating to Medicare's disallowance of costs under related party rules), not to exceed for the Borrower and its Subsidiaries on a consolidated basis, $50,000,000 in the aggregate for the period commencing on the Closing Date through and including the Expiration Date; (ii) charges to increase accounts receivable reserves (solely for the purpose of achieving consistency of accounts receivable reserve levels of the Borrower and its Subsidiaries with the policies of MPN), not to exceed for the Borrower and its Subsidiaries on a consolidated basis, $25,000,000 in the aggregate for the period commencing on the Closing Date through and including the Expiration Date; (iii) non-recurring cash charges for employee related costs of the Borrower including, without limitation, relocation and recruitment costs, retention bonuses, severance payments to employees of the Borrower, reasonable and customary transaction fees, including without limitation, legal and other professional fees, paid or to be paid following the Seventeenth Amendment Effective Date, all as related to the Eighteenth Amendment to the Revolving Credit Agreement or the Paragon Acquisition, not to exceed for the Borrower and its Subsidiaries on a consolidated basis $13,000,000 and other cash charges of a similar nature which shall have been approved in writing by the Agents prior to the taking of such charge; and (iv) subject to the prior written approval of the Required Banks, other cash charges (recurring or nonrecurring), extraordinary items, or non-recurring expenses incurred in connection with any Permitted Acquisition. Assignment and Assumption Agreement shall mean an Assignment and ----------------------------------- Assumption Agreement by and among a Purchasing Bank, the Transferor Bank and the Administrative Agent, as agent and on behalf of the remaining Banks, substantially in the form of Exhibit 1.01(A) hereto. --------------- Authorized Officer shall mean with respect to each Loan Party ------------------ those persons designated by written notice to the Administrative Agent from the Borrower, authorized 3 to execute notices, reports and other documents required hereunder. The Borrower may amend such list of persons from time to time by giving written notice of such amendment to the Administrative Agent. Bank shall mean the financial institutions named on Schedule ---- -------- 1.01(R)(2) hereto and their respective successors and assigns as permitted - ---------- hereunder, each of which is referred to herein as a Bank. ---- Base Rate shall mean the greater of (i) the interest rate per --------- annum announced from time to time by the Administrative Agent at its Principal Office as its then prime rate, which rate may not necessarily be the lowest rate then being charged commercial borrowers by the Administrative Agent, or (ii) the Federal Funds Effective Rate plus one-half percent (0.5%) per annum. Base Rate Option shall mean the Term Loan Base Rate Option. ---------------- Benefit Arrangement shall mean at any time an "employee benefit ------------------- plan," within the meaning of Section 3(3) of ERISA, which is neither a Plan or a Multiemployer Plan and which is maintained, sponsored or otherwise contributed to, by any member of the ERISA Group. Borrower shall mean Mariner Health Group, Inc., a corporation -------- organized and existing under the laws of the State of Delaware. Borrowing Date shall mean, with respect to any Loan, the date -------------- for the making thereof or the renewal thereof or conversion thereof to the same or a different Interest Rate Option, which shall be a Business Day. Borrowing Tranche shall mean specified portions of Loans ----------------- outstanding as follows: (i) any loan to which a Euro-Rate Option applies which becomes subject to the same Interest Rate Option under the same Loan Request by the Borrower and which have the same Interest Period shall constitute one Borrowing Tranche, and (ii) all Loans to which a Base Rate Option applies shall constitute one Borrowing Tranche. Business Day shall mean (i) with respect to matters relating to ------------ the Euro-Rate Option, a day on which banks in the London interbank market are dealing in U.S. Dollar deposits and on which commercial banks are open for domestic and international business in Pittsburgh, Pennsylvania and New York, New York, and (ii) with respect to any other matter, a day on which commercial banks are open for business in Pittsburgh, Pennsylvania and New York, New York. 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. 4 Change in Ownership shall mean the occurrence of any of the ------------------- following: (i) if, from and after the Seventeenth Amendment Effective Date, any person or group within the meaning of Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") excluding the Permitted Investors, shall at any time designate or obtain the right to designate a percentage (the "Third Party Board Percentage") equal to 25% or more of the members of the Board of Directors of MPN unless at such time the percentage of ------ the members of the Board of Directors of MPN designated by the Permitted Investors is greater than the Third Party Board Percentage; (ii) any "person" or "group" (as such terms are defined above), excluding the Permitted Investors, shall at any time become, or obtain rights (whether by means of warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rule 13(d)3 and 13(d)5 under the Exchange Act), directly or indirectly, of a percentage (the "Third Party Stock Percentage") equal to 33-1/3% or more of the Voting Stock of MPN unless at such time the percentage of outstanding Voting ------ Stock of MPN beneficially owned by the Permitted Investors (determined on a fully diluted basis) is equal to or greater than the Third Party Stock Percentage, provided, that for the purposes of this clause (ii), Voting Stock -------- that a Permitted Investor has the power to vote in its sole discretion pursuant to contract or proxy shall be deemed to be beneficially owned by such Permitted Investor and not by any other "person" or "group"; (iii) a Specified Change of Control shall occur; or (iv) MPN shall cease to own, directly or indirectly, one hundred percent (100%) of all Voting Stock of the Borrower. Class A Excluded Entities shall mean collectively those Excluded ------------------------- Entities which have not incurred any Restricted Indebtedness nor are subject to or bound by the terms of any agreement with respect to Restricted Indebtedness, and Class A Excluded Entity shall mean separately any Class A Excluded Entity. ----------------------- Closing Date shall mean December 23, 1998. ------------ Collateral Agent shall mean 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. Collateral shall mean the Pledge Collateral, the UCC Collateral, ---------- the Intellectual Property Collateral, all of the collateral (consisting of real or personal property) under the First Mortgages, the Mortgages and the Leasehold Mortgages and any other collateral security in which any of the Loan Parties may hereafter grant a security interest or other lien to the Administrative Agent or the Collateral Agent, as the case may be, for the benefit of the Banks as security for their obligations under the Loan Documents. Collateral Sharing Agreement shall mean the Collateral Sharing ---------------------------- Agreement among the Administrative Agent, the Loan Parties, the Revolving Credit Loan Parties, the Revolving Agent and the Collateral Agent, substantially in the form of Exhibit 1.01(C)(1). ------------------ Combined Commitment shall mean, as to any Bank, as of any date ------------------- of determination, the aggregate of its Revolving Credit Commitment (if any) and its Term Loan Commitment. 5 Commitment shall mean as to any Bank its Term Loan Commitment ---------- and Commitments shall mean the aggregate of the Term Loan Commitments of all of ----------- the Banks. Compliance Certificate shall have the meaning set forth in ---------------------- Section 8.03(d). Conditions for Incurrence of Certain Liens and Certain ------------------------------------------------------ Indebtedness shall mean those conditions set forth on Exhibit 1.01(C). - ------------ --------------- Consolidated Cash Flow from Operations for any period of -------------------------------------- determination shall mean the difference between the amounts determined under the following clauses (i) and (ii): (i) the sum, without duplication, of (X) the sum of Consolidated Net Income, depreciation, amortization, Approved Charges, other non-cash charges to Consolidated Net Income (including, without limitation, ordinary course reserves with respect to bad debts arising out of ordinary course accounts receivable), interest expense, and income tax expense of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, plus (Y) the sum of the Consolidated Cash Flow from Operations Adjustment Amount for all Class A Excluded Entities, minus (ii) non- cash credits to net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, subject to the adjustments described in this definition below. If the Loan Parties make a Permitted Acquisition and the Banks approve of the historical and pro forma financial statements of the business acquired in such Permitted Acquisition pursuant to Section 8.01(m) hereof, Consolidated Cash Flow from Operations shall be adjusted as set forth in paragraphs (A) and (B) below. The adjustments in Paragraphs (A) and (B) below shall apply to computations of the ratios in Sections 2.01, 2.03, 4.01(a), 8.02(f), 8.02(q), 8.02(r), 8.02(s) and 8.02(u) on the date of such Permitted Acquisition and at the end of each of the four fiscal quarters after such Permitted Acquisition. (The adjustments described in Paragraph (A) below shall not apply to computations of such ratios made as of the end of the fiscal quarter immediately preceding the date of such Permitted Acquisition.) (A) Consolidated Cash Flow from Operations for periods prior to such Permitted Acquisition shall include (i) the sum of net income, depreciation, amortization, other non-cash charges to net income, interest expense and income tax expense of the acquired business, plus the adjustment, if any pursuant to clause (B) below, minus (ii) non-cash credits to net income of such business, in each case as determined in accordance with GAAP; and (B) To the extent, in the determination of net income of the acquired business utilized in clause (A) above, deductions were taken in respect of rental expense pursuant to operating leases in accordance with GAAP and following the consummation of a Permitted Acquisition the Borrower appropriately amends such leases so that, in accordance with GAAP, such rental expense pursuant to operating leases may properly be treated as rental expense pursuant to capital leases (and the Borrower treats such leases as capital leases for periods following the consummation by the Borrower of such Permitted Acquisition) then, such net income for purposes of clause (A) above shall be increased by the deductions taken in respect of rental expense pursuant to such operating leases during the period of determination. 6 Consolidated Cash Flow from Operations Adjustment Amount shall -------------------------------------------------------- mean, for each Class A Excluded Entity, for any period of determination, the amount equal to the product of (A) a percentage, as determined by the Administrative Agent in its reasonable discretion, multiplied by (B) the difference between (i) the sum of net income, depreciation, amortization, other non-cash charges to such net income, interest expense and income tax expense of such Class A Excluded Entity for such period, as determined in accordance with GAAP, minus (ii) non-cash credits to net income of such Class A Excluded Entity for such period, as determined in accordance with GAAP. In determining the applicable percentage under clause (A) above, the Administrative Agent shall review with the Borrower the constituent documents of each Excluded Entity, including without limitation, partnership agreements, shareholder agreements and other relevant documents which the Borrower agrees to provide as the Administrative Agent may reasonably request, and the Administrative Agent shall also review the equity ownership interests of the Loan Parties in each Excluded Entity and the actual cash flow available to be distributed to the Loan Parties from the operations of each Excluded Entity. Consolidated Net Income shall mean for any period of ----------------------- determination an amount equal to the net income of the Borrower and its Restricted Subsidiaries for such period determined in accordance with GAAP, but without regard to net income attributable to Excluded Entities. Consolidated Net Worth shall mean as of any date of ---------------------- determination total stockholders' equity of the Borrower and its Subsidiaries as of such date determined and consolidated in accordance with GAAP. Contamination shall mean the presence or release or threat of ------------- release of Regulated Substances in, on, under or emanating to or from the Property, which pursuant to Environmental Laws requires notification or reporting to an Official Body, or which pursuant to Environmental Laws requires the identification, investigation, cleanup, removal, remediation, containment, control, abatement of or other response action or which otherwise constitutes a violation of Environmental Laws. Control Investment Affiliate shall mean as to any Person, any ---------------------------- other Person which (a) directly or indirectly, is in control of, is controlled by, or is under common control with, such Person and (b) is organized by such Person primarily for the purpose of making equity or debt investments in one or more companies. For purposes of this definition, "control" of a Person means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. Corporate Shares shall have the meaning assigned to that term in ---------------- Section 6.01(c). Corporate Subsidiaries shall mean collectively the Subsidiaries ---------------------- of Borrower which are corporations, and Corporate Subsidiary shall mean -------------------- individually any of them. 7 Delivery Date shall mean the date which is the earlier of (i) ------------- the date on which the Borrower delivers its consolidated financial statements to the Administrative Agent and the Banks pursuant to Sections 8.03(b) and (c), or (ii) one Business Day following the date on which such financial statements are due to be delivered pursuant to such Sections. Designated Portion of the Subordinated Notes shall mean, as of -------------------------------------------- any date of determination, that portion of the Subordinated Notes, held by NationsBank, N.A., pursuant to the LMS Swap Agreement. Dollar, Dollars, U.S. Dollars and the symbol $ shall mean lawful ----------------------------- - money of the United States of America. Drawing Date shall have the meaning assigned to that term in ------------ Section 2.09(d). Eighteenth Amendment to Revolving Credit Agreement shall mean -------------------------------------------------- that certain Amendment No. 18 to Revolving Credit Agreement, dated December 23, 1998 among Borrower, the Banks and the Agents. Eighteenth Amendment Effective Date shall mean December 23, ----------------------------------- 1998. Environmental Complaint shall mean any written complaint by any ----------------------- Person or Official Body setting forth a cause of action for personal injury or property damage, natural resource damage, contribution or indemnity for response costs, civil or administrative penalties, criminal fines or penalties, or declaratory or equitable relief arising under any Environmental Law or any order, notice of violation, citation, subpoena, request for information or other written notice or demand of any type issued by an Official Body pursuant to any Environmental Law. Environmental Law shall mean all federal, state, local and ----------------- foreign Laws and any consent decrees, settlement agreements, judgments, orders, directives, policies or programs issued by or entered into with an Official Body pertaining or relating to: (i) pollution or pollution control; (ii) protection of human health or the environment; (iii) employee safety in the workplace; (iv) the management, presence, use, generation, processing, extraction, treatment, recycling, refining, reclamation, labeling, transport, storage, collection, distribution, disposal or release or threat of release of Regulated Substances; (v) the presence of Contamination; (vi) the protection of endangered or threatened species; and (vii) the protection of Environmentally Sensitive Areas. Environmentally Sensitive Area shall mean (i) any wetland as ------------------------------ defined by applicable Environmental Law; (ii) any area designated as a coastal zone pursuant to applicable Laws, including Environmental Law; (iii) any area of historic or archeological significance or scenic area as defined or designated by applicable Laws, including Environmental Law; (iv) habitats of endangered species or threatened species as designated by applicable Laws, including Environmental Law; or (v) a floodplain or other flood hazard area as defined pursuant to any applicable Laws. 8 ERISA shall mean the Employee Retirement Income Security Act of ----- 1974, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. ERISA Group shall mean, at any time, the Borrower and all ----------- members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control and all other entities which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code. Euro-Rate shall mean with respect to the Loans comprising any --------- Borrowing Tranche to which the Euro-Rate Option applies for any Interest Period, the interest rate per annum determined by the Administrative Agent by dividing (the resulting quotient rounded upward to the nearest 1/100 of 1% per annum) (i) the rate of interest determined by the Administrative Agent in accordance with its usual procedures (which determination shall be conclusive absent manifest error) to be the "offered" eurodollar rate as quoted by Exco-Noonan Incorporated (or appropriate successor or, if Exco-Noonan or its successor ceases to provide such quotes, a comparable replacement as determined by the Administrative Agent) as evidenced on Dow Jones Markets Service (formerly known as Telerate) display page 4756 (or such other display page on the Dow Jones Markets Service system as may replace Dow Jones Markets Service display page 4756), two (2) Business Days prior to the first day of such Interest Period for an amount comparable to such Borrowing Tranche and having a borrowing date and maturity comparable to such Interest Period by (ii) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The Euro-Rate may also be expressed by the following formula: Dow Jones Markets Service page 4756 as quoted by Exco-Noonan, Euro-Rate = (or appropriate successor) -------------------------- 1.00 - Euro-Rate Reserve Percentage The Euro-Rate shall be adjusted with respect to any Euro-Rate Option outstanding on the effective date of any change in the Euro-Rate Reserve Percentage as of such effective date. The Administrative Agent shall give prompt notice to the Borrower of the Euro-Rate as determined or adjusted in accordance herewith, which determination shall be conclusive absent manifest error. Euro-Rate Option shall mean the Term Loan Euro-Rate Option. ---------------- Euro-Rate Reserve Percentage shall mean the maximum percentage ---------------------------- (expressed as a decimal rounded upward to the nearest 1/100 of 1%) as determined by the Administrative Agent (which determination shall be conclusive absent manifest error) which is in effect during any relevant period, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the reserve requirements (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency Liabilities") of a member bank in such System. Event of Default shall mean any of the Events of Default ---------------- described in Section 9.01 of this Agreement. 9 Excluded Entities shall mean (i) any partnership, corporation or ----------------- limited liability company which is neither MPN nor a MPN Subsidiary nor a Subsidiary of any Loan Party and with respect to which a Loan Party has made a Restricted Investment permitted by Section 8.02(d)(iv), and (ii) any Unrestricted Subsidiary of the Borrower which the Borrower has designated as one of the Excluded Entities and with respect to which a Loan Party has made a Restricted Investment permitted by Section 8.02(d)(iv), and Excluded Entity --------------- shall mean separately any Excluded Entity. Expiration Date shall mean, with respect to the Commitments, --------------- January 3, 2000. Facility Purchase Option shall mean an option provided by a ------------------------ Lessor Lender or Owned Facility Lender in an Intercreditor Agreement giving the Administrative Agent or the Banks the right to purchase the Lessor Indebtedness or Owned Facility Indebtedness from such Lessor Lender or Owned Facility Lender upon certain events of default relating to such Indebtedness. FAS 121 shall mean Financial Accounting Standard No. 121 ------- promulgated by the Financial Accounting Standards Board, as in effect from time to time. Federal Funds Effective Rate for any day shall mean the rate per ---------------------------- annum (based on a year of 360 days and actual days elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal Reserve Bank of New York (or any successor) on such day as being the weighted average of the rates on overnight Federal funds transactions arranged by Federal funds brokers on the previous trading day, as computed and announced by such Federal Reserve Bank (or any successor) in substantially the same manner as such Federal Reserve Bank computes and announces the weighted average it refers to as the "Federal Funds Effective Rate" as of the date of this Agreement; provided, if such Federal Reserve Bank (or its successor) does not announce such rate on any day, the "Federal Funds Effective Rate" for such day shall be the Federal Funds Effective Rate for the last day of which such rate was announced. First Mortgages shall mean the First Mortgages in substantially --------------- the form of Exhibit 1.01(F) with respect to all owned real property of the Loan --------------- Parties (other than owned real property subject to a Mortgage as of the Eighteenth Amendment Effective Date), executed and delivered by the applicable Loan Party to the Collateral Agent for the benefit of the Banks. Fixed Charge Coverage Ratio shall have the meaning set forth in --------------------------- Section 8.02(q). GAAP shall mean generally accepted accounting principles as are ---- in effect on the Closing Date, subject to the provisions of Section 1.03 hereof, and applied on a consistent basis (except for changes in application in which the Borrower's independent certified public accountants concur) both as to classification of items and amounts. Guaranty of any person shall mean any obligation of such person -------- guaranteeing or in effect guaranteeing any liability or obligation of any other person in any 10 manner, whether directly or indirectly, including, without limiting the generality of the foregoing, any agreement to indemnify or hold harmless any other person, any performance bond or other suretyship arrangement and any other form of assurance against loss, except endorsement of negotiable or other instruments for deposit or collection in the ordinary course of business. Guaranty Agreements shall mean collectively the Guaranty and ------------------- Suretyship Agreements, in substantially the form attached hereto as Exhibit ------- 1.01(G) executed and delivered by the Subsidiaries of Borrower to the - ------- Administrative Agent for the benefit of the Banks, and Guaranty Agreement shall ------------------ mean separately any Guaranty Agreement. Historical Statements shall have the meaning given to such term --------------------- in Section 6.01(i)(i). Indebtedness shall mean as to any person at any time, any and ------------ all indebtedness, obligations or liabilities (whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, or joint or several) of such person for or in respect of: (i) borrowed money, including, without limitation the Subordinated Notes, (ii) amounts raised under or liabilities in respect of any note purchase or acceptance credit facility, (iii) reimbursement obligations under any letter of credit, currency swap agreement, interest rate swap, cap, collar or floor agreement or other interest rate protection agreement, (iv) any other transaction (including without limitation forward sale or purchase agreements, capitalized (not operating) leases required under GAAP to be disclosed as a liability on the Loan Party's balance sheet and conditional sales agreements) having the commercial effect of a borrowing of money entered into by such person to finance its operations or capital requirements (but not including the deferred portion of any Restricted Investment in an Excluded Entity if such amount is to be paid from available cash flow from operations of the Borrower and its Subsidiaries and also not including trade payables and accrued expenses incurred in the ordinary course of business which are not represented by a promissory note, instrument or other evidence of indebtedness and which are not more than ninety (90) days past due (unless such past due indebtedness is being disputed in good faith and an appropriate reserve has been established with respect to such indebtedness in accordance with GAAP)), provided that, for purposes of this clause (iv) the phrase "other evidence of indebtedness" shall not include any ordinary course evidence of trade accounts payable of the Borrower or any Subsidiary such as purchase orders or invoices, or (v) any Guaranty of Indebtedness for borrowed money. Indenture shall mean that certain Indenture dated April 4, 1996, --------- between the Borrower and State Street Bank and Trust Company, as trustee, in respect of the Subordinated Notes, as the same may be amended, modified, supplemented or restated from time to time in accordance with this Agreement. Indemnity shall mean the Indemnity Agreement substantially in --------- the form of Exhibit 1.01(I) among the Banks, the Collateral Agent, certain of --------------- the Loan Parties, certain of the Revolving Credit Loan Parties and the Revolving Credit Banks relating to possible environmental liabilities associated with any of the Property. 11 Insolvency Proceedings shall mean, with respect to any Person, ---------------------- (a) a case, action or proceeding with respect to such Person (i) before any court or any other Official Body under any bankruptcy, insolvency, reorganization or other, similar Law now or hereafter in effect, or (ii) for the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of any Loan Party or otherwise relating to the liquidation, dissolution, winding-up or relief of such Person, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of such Person's creditors generally or any substantial portion of its creditors; undertaken under any Law. Intellectual Property Collateral shall mean all of the property -------------------------------- described in the Patent, Trademark and Copyright Security Agreement. Intercreditor Agreements shall mean collectively, as of any date ------------------------ of determination, each Intercreditor Agreement entered into between the Collateral Agent and a Lessor Lender, each Intercreditor Agreement entered into between the Collateral Agent and an Owned Facility Lender, each Intercreditor Agreement entered into as required by Section 8.02(d)(iv), and each other Intercreditor Agreement entered into between the Collateral Agent and any other Person, as required pursuant to this Agreement, and Intercreditor Agreement ----------------------- shall mean, individually, any of the Intercreditor Agreements. Interest Payment Date shall mean each date specified for the --------------------- payment of interest in Section 5.03. Interest Period shall have the meaning assigned to such term in --------------- Section 4.02. Interest Rate Option shall mean any Euro-Rate Option or Base -------------------- Rate Option. Internal Revenue Code shall mean the Internal Revenue Code of --------------------- 1986, as the same may be amended or supplemented from time to time, and any successor statute of similar import, and the rules and regulations thereunder, as from time to time in effect. Labor Contractors shall have the meaning assigned to that term ----------------- in Section 6.01(u). Law shall mean any law (including common law), constitution, --- statute, treaty, regulation, rule, ordinance, opinion, release, ruling, order, injunction, writ, decree or award of any Official Body. Leased Facilities shall mean collectively all health care ----------------- facilities leased by a Subsidiary of Borrower, as lessee, and Leased Facility --------------- shall mean any of the Leased Facilities, individually. 12 Leasehold Mortgages shall mean collectively, as of any date of ------------------- determination, each Leasehold Mortgage granted by a Subsidiary Lessee in favor of the Collateral Agent for the benefit of the Banks with respect to the Leased Facility leased by such Subsidiary Lessee, and Leasehold Mortgage shall mean ------------------ individually any of the Leasehold Mortgages, all in form and substance satisfactory to the Administrative Agent, notwithstanding any provisions of this Agreement to the contrary. Lessor shall mean with respect to a Leased Facility, the person ------ which owns such facility and leases such facility to a Subsidiary Lessee. Lessor Indebtedness shall mean Indebtedness of a Lessor either ------------------- secured by the assets of or related to the Leased Facility owned by such Lessor or which includes restrictive covenants or other provisions related or applicable to such Leased Facility. Lessor Lender shall mean, with respect to any Lessor ------------- Indebtedness, the obligee thereof. Lien shall mean any mortgage, deed of trust, pledge, lien, ---- security interest, charge or other encumbrance or security arrangement of any nature whatsoever, whether voluntarily or involuntarily given, including but not limited to any conditional sale or title retention arrangement, and any assignment, deposit arrangement or capitalized lease intended as, or having the effect of, security and any filed financing statement or other notice of any of the foregoing (whether or not a lien or other encumbrance is created or exists at the time of the filing). Loan Documents shall mean this Agreement, the Collateral Sharing -------------- Agreement, the First Mortgages, the Notes, the Guaranty Agreements, the Pledge Agreements, the Mortgages, the Leasehold Mortgages, the Intercreditor Agreements, the Subordination Agreement (Intercompany), the Indemnity, the Patent, Trademark and Copyright Security Agreement, the Security Agreement and any other instruments, certificates or documents delivered or contemplated to be delivered hereunder or thereunder or in connection herewith or therewith, as the same may have previously been or in the future be supplemented or amended from time to time in accordance herewith or therewith, and Loan Document shall mean ------------- any of the Loan Documents. It is expressly agreed that: (i) any First Mortgage, Pledge Agreement, Mortgage, Leasehold Mortgage, Intercreditor Agreement, Security Agreement or Patent, Trademark and Copyright Security Agreement required to be entered into by a Loan Party as debtor, pledgor, or mortgagor on or after the Closing Date shall, unless otherwise required by the Administrative Agent, name the Collateral Agent, as secured party, mortgagee, grantee, pledgee or similar designation, as the case may be, for the ratable benefit of the Banks and (on a pari passu basis) the Revolving Credit Banks, and (ii) any Loan Party formed or acquired on or after the Closing Date shall execute and deliver a joinder to the Collateral Sharing Agreement in form and substance satisfactory to the Administrative Agent. Loan Parties shall mean the Borrower and its Subsidiaries, other ------------ than those Subsidiaries which are permitted Excluded Entities. 13 Loan Request shall mean a request to select, convert to or renew ------------ a Euro-Rate Option in accordance with Section 4.02 hereof. Loans shall mean collectively and Loan shall mean separately all ----- ---- Term Loans or any Term Loan. Mariner Maryland shall mean Mariner Health Care of Baltimore, ---------------- Inc., a corporation organized and existing under the laws of the Commonwealth of Massachusetts. Mariner Nashville shall mean Mariner Health Care of Nashville, ----------------- Inc., a Delaware corporation, a Subsidiary of the Borrower and the successor by merger to Convalescent Services Inc., a Georgia corporation. Material Adverse Change shall mean any set of circumstances or ----------------------- events which (a) has or could reasonably be expected to have any material adverse effect whatsoever upon the validity or enforceability of this Agreement or any other Loan Document, (b) is or could reasonably be expected to be material and adverse to the business, properties, assets, financial condition, results of operations or prospects of the Borrower and its Subsidiaries taken as a whole, (c) impairs materially or could reasonably be expected to impair materially the ability of the Borrower or any of its Subsidiaries to duly and punctually pay or perform its Indebtedness, or (d) impairs materially or could reasonably be expected to impair materially the ability of any Agent or any of the Banks, to the extent permitted, to enforce their legal remedies pursuant to this Agreement or any other Loan Document. Material Subsidiary shall mean any Subsidiary the revenue or net ------------------- income of which represented more than five percent (5%) of the Borrower's consolidated revenues or consolidated net income during the preceding four (4) fiscal quarters. Member Interests shall have the meaning assigned to that term in ---------------- Section 6.01(c). Month, with respect to an Interest Period under the Euro-Rate ----- Option, shall mean the interval between the days in consecutive calendar months numerically corresponding to the first day of such Interest Period. If any Interest Period with respect to Loans subject to a Euro-Rate Option begins on a day of a calendar month for which there is no numerically corresponding day in the month in which such Interest Period is to end, the final month of such Interest Period shall be deemed to end on the last Business Day of such final month. Mortgages shall mean collectively, as of any date of --------- determination, the second lien Mortgages granted by a Subsidiary Owner in favor of the Collateral Agent) for the benefit of the Banks with respect to the Owned Facility of such Subsidiary Owner, and Mortgage shall mean individually any of -------- the Mortgages, all in form and substance satisfactory to the Administrative Agent. 14 MPN shall mean Mariner Post-Acute Network, Inc., a corporation --- organized and existing under the laws of the State of Delaware and formerly known as Paragon Health Network, Inc., together with its successors and assigns. MPN Credit Agreement shall mean that certain Credit Agreement -------------------- dated as of November 4, 1997, by and among MPN, as borrower, the lenders party thereto as lenders, The Chase Manhattan Bank, as administrative agent, swing line lender and letter of credit bank, and NationsBank, N.A., as documentation agent, as the same may be amended, supplemented, restated or replaced from time to time. MPN Subsidiary shall mean any Subsidiary of MPN other than the -------------- Borrower or any Subsidiary of the Borrower. Multiemployer Plan shall mean any employee benefit plan which is ------------------ a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA and to which the Borrower or any member of the ERISA Group is then making or accruing an obligation to make contributions or, within the preceding five Plan years, has made or had an obligation to make such contributions. Multiple Employer Plan shall mean a Plan which has two or more ---------------------- contributing sponsors (including the borrower or any member of the ERISA Group) at least two of whom are not under common control, as such a plan is described in Sections 4063 and 4064 of ERISA. NBG shall mean NationsBank of Georgia, N.A. --- NBT shall mean NationsBank of Tennessee, N.A. --- Net Sale Proceeds shall mean, with respect to any transaction, ----------------- an amount equal to the cash proceeds received by the Borrower or any of its Subsidiaries from or in respect of such transaction (including, when received, any cash proceeds received as income or other cash proceeds of any non-cash proceeds of such transaction), less (x) any expenses or charges (including commissions, fees and taxes paid or payable) reasonably incurred by such Person in respect of such transaction, (y) any Indebtedness pertaining to the assets involved in such transaction which is required to be repaid or prepaid by the Borrower or any of its Subsidiaries from the proceeds of such transaction as a result of such transaction and (z) any amounts considered appropriate by the chief financial officer of the Borrower to provide reserves in accordance with GAAP for payment of indemnities or liabilities that may be incurred in connection with such sale or disposition. For purposes of this definition, if taxes or other expenses payable in connection with the sale or other disposition of any asset are not known as of the date of such sale or other disposition, then such fees, commissions, expenses or taxes shall be estimated in good faith by the chief financial officer of the Borrower and such estimated amounts shall be deducted. At such time as any reserved amount described in clause (y) above is no longer required to be held in reserve, the balance thereof, after payment of the related liabilities or indemnities, shall be used to make a mandatory prepayment of the Loans or the Revolving Credit Loans (as applicable) in accordance with Section 5.05. 15 Non-Disturbance Agreements shall mean collectively, as of any -------------------------- date of determination, the non-disturbance agreements executed by a Lessor Lender and the applicable Subsidiary Lessee, each providing in part that the Lessor Lender shall recognize the rights of the Subsidiary Lessee which is lessee of the Leased Facility so financed by such Lessor Lender should such Lessor Lender foreclose upon such Leased Facility. Notes shall mean the Term Notes. ----- Obligations shall mean all obligations from time to time of any ----------- Loan Party to any Bank, Agent or the Administrative Agent from time to time arising under or in connection with or related to or evidenced by or secured by this Agreement or any other Loan Document, whether such obligations are direct or indirect, otherwise secured or unsecured, joint or several, absolute or contingent, due or to become due, whether for payment or performance, now existing or hereafter arising (specifically including but not limited to obligations arising or accruing after the commencement of any bankruptcy, insolvency reorganization or similar proceedings with respect to any Loan Party, or which would have arisen or accrued but for the commencement of such proceeding, even if the claim for such obligation is not allowed in such proceeding under applicable Law). Without limitation of the foregoing, such obligations include (i) the principal amount of the Loans, interest, letter of credit reimbursement obligations, and fees, indemnities or expenses under or in connection with any Loan Document and all refinancings or refundings thereof; and (ii) all obligations arising from any extensions of credit under or in connection with the Loan Documents from time to time, regardless of whether any such extensions of credit are in excess of the amount committed under or contemplated by the Loan Documents or are made in circumstances in which any condition to extension of credit is not satisfied. Obligations shall remain such notwithstanding any assignment or transfer or any subsequent assignment or transfer of any of the Obligations or any interest therein. Official Body shall mean any national, federal, state, local or ------------- other government or political subdivision thereof or any agency, authority, board, bureau, central bank, commission, department or instrumentality of any government or political subdivision thereof, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. Owned Facilities shall mean all health care facilities acquired ---------------- by a Subsidiary of the Borrower (or the health care facilities which are owned by a person which is acquired by a Loan Party and such person thereby becomes a Subsidiary of the Borrower), which facilities (as of the date of acquisition by a Loan Party or the date the owner of such facility becomes a Subsidiary of the Borrower) have outstanding Indebtedness payable to a lender, other than Indebtedness payable to the Banks pursuant to the Loan Documents or payable to the lenders under the Revolving Credit Loan Documents, and Owned Facility shall -------------- mean any Owned Facilities, individually. Owned Facility Indebtedness shall mean with respect to an Owned --------------------------- Facility, the Indebtedness of the Subsidiary Owner thereof payable to a lender other than the Banks under this Agreement or other than the lenders under the Revolving Credit Agreement, which Indebtedness is secured by the assets of such Owned Facility. 16 Owned Facility Lender shall mean with respect to a Subsidiary --------------------- Owner, the obligee of the Owned Facility Indebtedness payable by such Subsidiary Owner. Paragon Acquisition shall mean the merger of Paragon Acquisition ------------------- Sub with and into the Borrower, with the Borrower being the surviving corporation, whereupon the shareholders of the Borrower received shares of MPN common stock in exchange for their outstanding shares of the Borrower's capital stock, and the Borrower became a wholly-owned subsidiary of MPN, all pursuant to the Paragon Merger Agreement. Paragon Acquisition Sub shall mean Paragon Acquisition Sub, ----------------------- Inc., a Delaware corporation and a wholly-owned Subsidiary of MPN. Paragon Merger Agreement shall mean the Agreement and Plan of ------------------------ Merger, dated as of April 13, 1998, among MPN, Paragon Acquisition Sub and the Borrower, as amended, supplemented, restated or otherwise modified from time to time. Paragon Senior Subordinated Note Indenture shall mean that ------------------------------------------ certain Indenture, dated November 4, 1997, with MPN as issuer and IBJ Schroder Bank & Trust Company as trustee, with respect to the issuance by MPN of its 9 1/2% Senior Subordinated Notes due 2007 and its 10 1/2% Senior Subordinated Discount Notes due 2007. Partnership Interest shall have the meaning given to such term -------------------- in Section 6.01(c). Partnership Subsidiaries shall mean collectively the ------------------------ Subsidiaries of Borrower which are general or limited partnerships and Partnership Subsidiary shall mean individually any of them. - ---------------------- Patent, Trademark and Copyright Security Agreement shall mean -------------------------------------------------- the Patent, Trademark and Copyright Security Agreement in substantially the form of Exhibit 1.01(P) executed and delivered by each of the Loan Parties to the --------------- Collateral Agent for the benefit of the Banks. PBGC shall mean the Pension Benefit Guaranty Corporation ---- established pursuant to Subtitle A of Title IV of ERISA or any successor. Permitted Acquisition shall mean any merger, consolidation or --------------------- acquisition after the Closing Date described in and permitted under clause (iii) or (iv) of Section 8.02(f). Permitted Distribution Amount shall mean: ----------------------------- (A) for any Subsidiary (the "Payor Subsidiary"), other than those Subsidiaries listed in (B) below, the permitted amount of distributions to be made by the Payor Subsidiary which shall equal the applicable amount so that the ratio of the following (x) to (y) shall be at least equal to or greater than 2.0 to 1.0: (x) the sum of (i) net income, plus (ii) to the extent deducted in determining net income for the applicable period of determination under 17 the preceding clause (i), interest expense, income tax expense, depreciation, amortization, operating lease expense, and expense in respect of capital leases of the Payor Subsidiary, plus (iii) capital expenditures, all for the Payor Subsidiary, as determined in accordance with GAAP, for the four fiscal quarters of the Payor Subsidiary immediately preceding the date of the proposed distribution, to (y) the sum of (i) all payments of principal and other amounts due in respect of Indebtedness (without limitation, prepayment fees, penalties or other amounts) of the Payor Subsidiary during the fiscal quarter when the proposed distribution shall be made and the following three fiscal quarters, plus (ii) the sum of the amounts in respect of income tax expense, operating lease expense, expense in respect of capital leases, and capital expenditures under clauses (x)(ii) and (iii) above for the Payor Subsidiary for the four fiscal quarters immediately preceding the date of the proposed distribution, plus (iii) the aggregate amount of the proposed distribution by the Payor Subsidiary; and (B) for each of Mariner Health of Forest Hills, LLC, Mariner Health of Bel Air, LLC, Tampa Health Properties, LTD (Bay-to-Bay), Westbury Associates, New Hanover/Mariner Health, LLC (Wilmington), and Global Healthcare Center -Bethesda, LLC, the permitted amount of distributions to be made by each of them shall equal the amount permitted to be made in accordance with the distribution provisions of their respective joint venture agreement, limited liability company agreement, partnership agreement or similar agreement in effect on the Sixteenth Amendment Effective Date (a copy of which has been delivered to the Administrative Agent), and no amendment shall be made to such provisions regarding distributions in such joint venture agreements, limited liability company agreements, partnership agreements or similar agreements following the Sixteenth Amendment Effective Date without the prior written approval of the Administrative Agent unless any distributions by such Subsidiary are permitted by the provisions of clause (A) above and distributions by such Subsidiary are otherwise in compliance with Section 8.02(e). Permitted General Intangibles shall mean licenses, permits, ----------------------------- certificates or Medicare/Medicaid reimbursement contracts. Permitted Investments shall mean: --------------------- (i) direct obligations of the United States of America or any agency or instrumentality thereof or obligations backed by the full faith and credit of the United States of America maturing in twelve months or less from the date of acquisition; (ii) commercial paper maturing in 180 days or less rated not lower than A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service on the date of acquisition; (iii) demand deposits, time deposits or certificates of deposit maturing within one year in commercial banks whose obligations are rated A-1, A or the equivalent or better by Standard & Poor's Corporation or Moody's Investors Service on the date of acquisition; 18 (iv) publicly traded debt securities or preferred stocks rated at least A or better by either Standard & Poor's Corporation or by Moody's Investors Service which in the aggregate do not have, at any time, a cost basis under GAAP in excess of $1,000,000; (v) common stocks, or mutual funds which invest in common stocks provided that (A) such stocks are of corporations organized and existing under the laws of the United States of America, (B) such stocks are traded publicly on a national securities exchange or the "over the counter market", (C) the Borrower or its Subsidiaries do not have a cost basis in excess of $15,000,000 in the aggregate in such stocks and mutual funds, (D) the Borrower or its Subsidiaries invest in such stocks or mutual funds using funds obtained from sources other than, directly or indirectly, proceeds of Loans hereunder and (E) the cost basis of the Borrower or its Subsidiaries in such stocks and mutual funds does not exceed at any time the amount of cash invested in investments described in clauses (i) through (iv) and (vi) of this definition of Permitted Investments; and (vi) investments in money market funds rated AA or AAm-G or higher by Standard & Poor's Corporation (or equivalent rating) whose net asset value remains a constant $1.00 per share. Permitted Investors shall mean Apollo Management L.P., a ------------------- Delaware limited partnership and its Control Investment Affiliates. Permitted Leased Facility Liens shall mean, with respect to a ------------------------------- Subsidiary Lessee, Liens, meeting all of the criteria specified below, solely on certain of the Permitted General Intangibles of such Subsidiary Lessee, granted in favor of the Lessor Lender providing financing to the Lessor which is the lessor of such Subsidiary Lessee's Leased Facility, and such Liens secure the Lessor Indebtedness provided by such Lessor Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Leased Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Lessor Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness which such Lien secures; (ii) Such Subsidiary Lessee shall have granted to the Collateral Agent (or the Revolving Agent, if granted prior to the Closing Date) perfected security interests in each of the assets of such Subsidiary Lessee encumbered by such Liens, and the (or the Revolving Agent, if granted prior to the Closing Date) Collateral Agent's security interests shall have priority over all other Liens on such assets, except that they shall be subordinate to the Liens in favor of the Lessor Lender unless the Lessor Lender is listed on Schedule 6.01(aa) hereto and such Schedule states that such Lessor Lender has - ----------------- refused to consent to the grant to Collateral Agent of such second Liens; 19 (iii) The amount of Lessor Indebtedness secured by such Liens may not be increased after the date such Subsidiary Lessee becomes a Subsidiary of the Borrower, and any reductions in the amount of such Lessor Indebtedness after such date shall be permanent; and (iv) Any termination by such Lessor Lender of such Liens in an asset after the date such Subsidiary Lessee becomes a Subsidiary of the Borrower shall be permanent, and no Loan Party shall thereafter grant any new Lien on assets of any Loan Party in favor of such Lessor Lender. Permitted Liens shall mean: --------------- (i) Liens for taxes, assessments, or similar charges, incurred in the ordinary course of business and which are not yet due and payable; (ii) Pledges or deposits made in the ordinary course of business to secure payment of workers' compensation, or to participate in any fund in connection with workers' compensation, unemployment insurance, old-age pensions or other social security programs; (iii) Liens of mechanics, materialmen, warehousemen, carriers, or other like Liens, securing obligations incurred in the ordinary course of business that are not yet due and payable and Liens of landlords securing obligations to pay lease payments that are not yet due and payable or in default; (iv) Good faith pledges or deposits made in the ordinary course of business to secure performance of bids, tenders, progress or advance payments, contracts (other than for the repayment of borrowed money) or leases, not in excess of the aggregate amount due thereunder, or to secure statutory obligations, or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (v) Encumbrances consisting of zoning restrictions, easements, reservations, rights of way or other restrictions on the use of real property, none of which materially impairs the use of such property as currently used or the value thereof, and none of which is violated in any material respect by existing or proposed structures or land use; (vi) Liens in favor of the Collateral Agent for the benefit of the Banks and Liens (which are on a pari passu basis with the Liens in favor of the Banks, or which are subject to the terms of the Collateral Sharing Agreement) in favor of the Collateral Agent for the benefit of the Revolving Credit Banks; (vii) Liens in respect of capital leases as and to the extent permitted in Section 8.02(p) and Liens in respect of operating leases; (viii) Any Lien existing on the Closing Date and described on Schedule 1.01(P) hereto (excluding Permitted Leased Facility Liens and ---------------- Permitted Owned 20 Facility Liens which are addressed in clauses (xi) and (xiii) below) provided that the principal amount secured thereby is not hereafter increased and no additional assets become subject to such Lien (other than through after-acquired property clauses in effect on the date hereof); (ix) Purchase Money Security Interests or other Liens, provided that the aggregate amount of loans and deferred payments secured by such Purchase Money Security Interests or other Liens shall not exceed $15,000,000 (excluding for the purpose of this computation any loans or deferred payments secured by Liens described on Schedule 1.01(P) hereto); ---------------- (x) The following, (A) if the validity or amount thereof is being contested in good faith by appropriate and lawful proceedings diligently conducted so long as levy and execution thereon have been stayed and continue to be stayed or (B) if a final judgment is entered and such judgment is discharged within thirty (30) days of entry, and in either case they do not materially affect the Collateral or, in the aggregate, materially impair the ability of any Loan Party to perform its obligations hereunder or under the other Loan Documents: (1) Claims or Liens for taxes, assessments or charges due and payable and subject to interest or penalty, provided that such Loan Party maintains such reserves or other appropriate provisions as shall be required by GAAP and pays all such taxes, assessments or charges forthwith upon the commencement of proceedings to foreclose any such Lien; (2) Claims, Liens or encumbrances upon, and defects of title to, real or personal property other than a material portion of the Collateral, including any attachment of personal or real property or other legal process prior to adjudication of a dispute on the merits; or (3) Claims or Liens of mechanics, materialmen, warehousemen, carriers, or other statutory nonconsensual Liens; (xi) Permitted Leased Facility Liens existing as of the Closing Date which are described on Schedule 6.01(aa) as of such date, and, ----------------- thereafter subject to the approval of the Required Banks (including without limitation satisfaction of all applicable conditions set forth on Exhibit ------- 1.01(C)), additional Permitted Leased Facility Liens; - ------- (xii) Permitted Owned Facility Liens existing as of the Closing Date which are described on Schedule 6.01(aa) as of such date, and, ----------------- thereafter subject to the approval of the Required Banks (including without limitation, satisfaction of all applicable conditions set forth on Exhibit ------- 1.01(C)), additional Permitted Owned Facility Liens; - ------- (xiii) With respect to an Unrestricted Subsidiary which is an Excluded Entity, Liens securing Indebtedness incurred by such Unrestricted Subsidiary, provided that the sole assets subject to such Lien are assets of such Unrestricted Subsidiary or assets of a person other than any Loan Party or other Unrestricted Subsidiary; and 21 (xiv) With respect to Facilities subject to First Mortgages, all matters of record other than any mortgages, deeds of trust, deeds to secure debt, financing statements, judgment liens or tax liens, in favor of Persons other than the Collateral Agent, and all matters that would be shown by current survey of such Facility. Permitted Owned Facility Liens shall mean, with respect to a ------------------------------ Subsidiary Owner, Liens, meeting all of the criteria specified below, on real and personal property of such Subsidiary Owner relating to the Owned Facility of such Subsidiary Owner, granted in favor of the Owned Facility Lender providing financing with respect to such Owned Facility, and such Liens secure the Owned Facility Indebtedness provided by such Owned Facility Lender. Such Liens are permitted under this Agreement and shall be deemed to be "Permitted Owned Facility Liens" only if the following limitations are satisfied: (i) Such Liens must be terminated on or before the earlier of: (i) the maturity of the Owned Facility Indebtedness which such Liens secure (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless the extension of such maturity is otherwise permitted by and is in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of the Owned Facility Indebtedness which such Lien secures; (ii) The Subsidiary Owner shall have granted to the Collateral Agent (or the Revolving Agent if granted prior to the Closing Date) second priority mortgage liens and security interests in each of the assets which is encumbered by such Liens; (iii) The amount of Owned Facility Indebtedness secured by such liens may not be increased after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower and any reductions in the amount of such Owned Facility Indebtedness after such date shall be permanent; and (iv) Any termination by an Owned Facility Lender of such Liens in an asset after the earlier of the date such Owned Facility was acquired by a Loan Party or the person owning such facility becomes a Subsidiary of the Borrower shall be permanent and the Subsidiaries of Borrower may not thereafter grant any new Lien on assets of any Loan Party in favor of such Owned Facility Lender. Permitted Subordinated Indebtedness shall mean Indebtedness of ----------------------------------- the Borrower in an amount and on terms and conditions (including provisions subordinating such Indebtedness to the Indebtedness and all other obligations of the Loan Parties to the Agents and the Banks under the Loan Documents) satisfactory to the Agents (whose approval will not be unreasonably withheld), designated by the Agents as "Permitted Subordinated Indebtedness" and which refinances, in whole or in part, the Subordinated Notes; provided however that, in addition to the approval of the Agents, the prior written approval of the Required Banks (which shall not be unreasonably withheld) shall be required for the Borrower to incur Indebtedness which refinances, in whole or in part, the Subordinated Notes, if and only if the terms of such new Indebtedness include any of the following: (x) a provision that amortizes any principal of such 22 new Indebtedness prior to the Expiration Date, (y) a principal amount of such Indebtedness in excess of $151.5 million, or (z) any financial covenant which is more restrictive than any financial covenant contained in this Agreement. Person shall mean any individual, corporation, partnership, ------ association, joint-stock company, trust, unincorporated organization, joint venture, government or political subdivision or agency thereof, or any other entity. Pinnacle shall mean Pinnacle Care Corporation, a corporation -------- organized and existing under the laws of the State of Delaware. Plan shall mean at any time an employee pension benefit plan ---- (including a Multiple Employer Plan but not a Multiemployer Plan) which is covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained by any entity which was at such time a member of the ERISA Group for employees of any entity which was at such time a member of the ERISA Group. Pledge Agreements shall mean collectively the Pledge Agreements ----------------- in executed and delivered by the Borrower to the Collateral Agent for the benefit of the Banks and executed and delivered by any Subsidiary which owns any equity ownership interest in another Subsidiary to the Collateral Agent for the benefit of the Banks all in form and substance satisfactory to the Collateral Agent and the Administrative Agent, as any such Pledge Agreement may hereinafter be modified, amended, restated or replaced from time to time, and Pledge ------ Agreement shall mean separately any Pledge Agreement. - --------- Pledged Collateral shall have the meaning assigned to that term ------------------ in the respective Pledge Agreements. PNC Bank shall mean PNC Bank, National Association, a national -------- banking association, its successors and assigns. Potential Default shall mean any event or condition which with ----------------- notice, passage of time or a determination by the Administrative Agent or the Required Banks, or any combination of the foregoing, would constitute an Event of Default. Principal Office shall mean the main banking office of the ---------------- Administrative Agent, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707. Prior Security Interest shall mean a valid and enforceable ----------------------- perfected first priority security interest under the Uniform Commercial Code in the UCC Collateral and the Pledged Collateral, which in the case of the UCC Collateral is subject only to Liens for taxes not yet due and payable to the extent such prospective tax payments are given priority by statute or Purchase Money Security Interests as permitted hereunder. 23 Prohibited Transaction shall mean any prohibited transaction as ---------------------- defined in Section 4975 of the Internal Revenue Code or Section 406 of ERISA for which neither an individual nor a class exemption has been issued by the United States Department of Labor. Property shall mean all real property, both owned and leased, of -------- any Loan Party. Purchase Money Security Interest shall mean Liens upon tangible -------------------------------- personal property securing loans to a Loan Party or deferred payments by a Loan Party in either case, for the purchase of such tangible personal property. Purchase Price shall mean, with respect to any Permitted Acquisition -------------- by the Loan Parties, the sum of (i) cash paid at closing, (ii) the amount of any deferred payments, which are not contingent on the financial performance of the business being acquired, (iii) the projected amount of any deferred payments which are contingent on the financial performance of the business being acquired following the acquisition, provided that it shall be assumed for purposes of such projection that the cash flow and other financial performance of the acquired business in each year after the acquisition date shall be the same as the financial performance of such business during the twelve (12) months preceding such date, (iv) the amount of any debt assumed or guaranteed by any Loan Party, (v) if the Loan Parties are acquiring stock of another person (whether by purchase, merger or otherwise) the amount of debt of such person outstanding after the acquisition, plus (vi) the value of any stock, securities or other consideration given by any of the Loan Parties in connection therewith. If the consideration to be paid in connection with a Permitted Acquisition includes deferred payments which are contingent on the financial performance of the acquired business after the acquisition, the Loan Parties shall compare the amount of deferred payments which the Loan Parties actually pay (or which become ascertainable if the Loan Parties can ascertain the amount of any deferred payments before paying them) with the amount which the Loan Parties projected they would pay pursuant to clause (iii) in the preceding sentence. The Purchase Price in connection with such acquisition shall be deemed to increase by the amount of such excess for purposes of determining the aggregate Purchase Price paid by the Loan Parties in connection with Permitted Acquisitions pursuant to Sections 8.02(f)(iii)(v) and 8.02(f)(iv)(x). Purchasing Bank shall mean a Bank which becomes a party to this --------------- Agreement by executing an Assignment and Assumption Agreement. Qualifying Asset Sale shall have the meaning set forth in Section --------------------- 5.05(a). Ratable Share shall mean the proportion that a Bank's Commitment ------------- bears to the Commitments of all of the Banks. Regulated Substances shall mean, without limitation, any substance, -------------------- material or waste, regardless of its form or nature, defined under Environmental Law as a "hazardous substance," "pollutant," "pollution," "contaminant," "extremely hazardous substance," "toxic chemical," "toxic substance," "toxic waste," "hazardous waste," "special handling waste," "industrial waste," "residual waste," "solid waste," "municipal waste," "mixed 24 waste," "infectious waste," "chemotherapeutic waste," "medical waste" or "regulated substance" or any other material, substance or waste, regardless of its form or nature, which otherwise is regulated by Environmental Law. Regulation U shall mean Regulation U, T or X as promulgated by the ------------ Board of Governors of the Federal Reserve System, as amended from time to time. Reimbursement Obligations shall have the meaning assigned to such ------------------------- term in Section 2.09(d). Reportable Event means a reportable event described in Section 4043 of ---------------- ERISA and regulations thereunder with respect to a Plan or Multiemployer Plan and for which the 30-day notice period has not been waived by regulation. Required Banks shall mean: (i) if there are no Loans, outstanding, -------------- Banks whose Commitments aggregate at least 51% of the Commitments of all of the Banks, or (ii) if there are Loans outstanding, any Bank or group of Banks if its Loans then outstanding aggregates at least 51% of the total principal amount of all of the Loans then outstanding. Required Environmental Permits shall mean all permits, licenses, ------------------------------ bonds, consents, programs, approvals or authorizations required under Environmental Law for the Borrower and/or each of its Subsidiaries to conduct its operations, maintain the Property or equipment thereon or construct, maintain, operate or occupy any improvements. Required Environmental Notices shall mean all notices, reports, plans, ------------------------------ forms or other filings which pursuant to Environmental Law, Required Environmental Permits or at the request or direction of an Official Body must be submitted to an Official Body or which otherwise must be maintained with respect to the Property, Contamination and the operations and activities of the Borrower and each of its Subsidiaries. Responsible Officer shall mean, with respect to any Loan Party, the ------------------- Chief Executive Officer, the Chief Financial Officer or the treasurer thereof. Restricted Indebtedness shall mean with respect to the Excluded ----------------------- Entities, Indebtedness secured by any Liens, other than Indebtedness not to exceed $250,000 in the aggregate for all Excluded Entities secured by Purchase Money Security Interests. Restricted Investments shall mean collectively the following with ---------------------- respect to the Excluded Entities: (i) investments or contributions by any of the Loan Parties directly or indirectly in or to the capital of or other payments to (except in connection with transactions for fair value in the ordinary course of business) an Excluded Entity, (ii) loans by any of the Loan Parties directly or indirectly to an Excluded Entity, (iii) guaranties by any of the Loan Parties directly or indirectly of the obligations of an Excluded Entity, or (iv) other obligations, contingent or otherwise, of any of the Loan Parties to or for the benefit of an Excluded Entity. If the nature of a Restricted Investment is tangible property then the amount of such Restricted Investment shall be determined by valuing such property at fair value in accordance with the past 25 practice of the Loan Parties and such fair values shall be satisfactory to the Agents, in their sole discretion. Restricted Subsidiaries shall mean all Subsidiaries of the Borrower ----------------------- other than the Unrestricted Subsidiaries of the Borrower which as of the date of determination are Excluded Entities. Revolving Agent shall mean the administrative agent, its successors --------------- and assigns, under the Revolving Credit Agreement. Revolving Credit Agreement shall mean that certain Loan Agreement, -------------------------- dated May 18, 1994 as amended, among the Revolving Credit Borrower, PNC Bank, National Association, as agent, First Union National Bank, as syndication agent and the Revolving Credit Banks, providing for a $250,000,000 revolving credit facility to the Revolving Credit Borrower, as such agreement may from time to time be amended, restated, modified, supplemented or replaced. Revolving Credit Banks shall mean the financial institutions signatory ---------------------- from time to time to the Revolving Credit Agreement as "banks" thereunder, together with their successors and permitted assigns. Revolving Credit Borrower shall mean Mariner Health Group, Inc., a ------------------------- Delaware corporation, in its capacity as the borrower under the Revolving Credit Agreement, together with its successors and permitted assigns in such capacity. Revolving Credit Commitment shall have the meaning set forth in --------------------------- the Revolving Credit Agreement. Revolving Credit Loan Documents shall mean the Revolving Credit Loan ------------------------------- --------------------- Agreement and all other documents, instruments and agreements now or hereafter - --------- executed and delivered in connection therewith (excluding the Loan Documents), as the same may be amended, restated, supplemented or replaced from time to time. Revolving Credit Loan Parties shall mean, collectively, the Revolving ----------------------------- Credit Borrower and all guarantors, from time to time, of Indebtedness and other obligations, under the Revolving Credit Loan Documents. Security Agreement shall mean the Security Agreement in substantially ------------------ the form of Exhibit 1.01(s)(1) executed and delivered by each of the Loan ------------------ Parties to the Collateral Agent for the benefit of the Banks. Seventeenth Amendment Effective Date shall mean July 31, 1998. ------------------------------------ Sixteenth Amendment Effective Date shall mean January 2, 1998. ---------------------------------- Solvent shall mean, with respect to any person on a particular date, ------- that on such date (i) the fair value of the property of such person is greater than the total amount of 26 liabilities, including, without limitation, contingent liabilities, of such person, (ii) the present fair saleable value of the assets of such person is not less than the amount that will be required to pay the probable liability of such person on its debts as they become absolute and matured, (iii) such person is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (iv) such person does not intend to, and does not believe that it will, incur debts or liabilities beyond such person's ability to pay as such debts and liabilities mature, and (v) such person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such person's property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which such person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. Specified Change of Control shall mean a "Change of Control" as --------------------------- defined in the Paragon Senior Subordinated Note Indenture, as in effect on the Seventeenth Amendment Effective Date, without regard to any amendments to such definition subsequent to such date. Subordinated Indebtedness Incurrence Date shall mean March 28, 1996, ----------------------------------------- the date of issuance by the Borrower of the Subordinated Notes pursuant to and in accordance with the Indenture. Subordinated Notes shall mean the $150 million in original principal ------------------ amount of Subordinated Notes due 2006 issued by the Borrower pursuant to the Indenture. It is acknowledged that prior to the Exchange Offer, the Subordinated Notes shall consist of the Series A Securities, and following the Exchange Offer, the Subordinated Notes shall consist of the Series B Securities and any Series A Securities which are not exchanged in the Exchange Offer, as such terms are defined in the Indenture. Subordination Agreement (Intercompany) shall mean that certain -------------------------------------- Subordination Agreement (Intercompany) in the form of Exhibit 1.01(S) hereto --------------- executed and delivered by each Loan Party to the Administrative Agent for the benefit of the Banks. Subsidiary of any person at any time shall mean (i) any corporation, ---------- limited liability company or trust of which more than 50% (by number of shares or number of votes) of the outstanding capital stock, member interests or shares of beneficial interest normally entitled to vote for the election of one or more directors or trustees (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries, and (ii) any corporation, trust, limited liability company, partnership or other entity which is controlled or capable of being controlled by such Person or one or more of such Person's Subsidiaries. 27 Subsidiary Lessee shall mean each Subsidiary of Borrower which is ----------------- the lessee of a Leased Facility. Subsidiary Owner shall mean, with respect to an Owned Facility, ---------------- the Subsidiary of Borrower which is the owner thereof. Supermajority Required Banks shall mean: (i) if there are no Loans, ---------------------------- outstanding, Banks whose Commitments aggregate at least 66 and 2/3% of the Commitments of all of the Banks, or (ii) if there are Loans, outstanding, any Bank or group of Banks if its Loans, then outstanding aggregates at least 66 and 2/3% of the total principal amount of all of the Loans then outstanding. Term Loan Base Rate Option shall have the meaning assigned to -------------------------- that term in Section 4.01(a)(i). Term Loan Commitment shall mean as to any Bank at any time, the amount -------------------- initially set forth opposite its name on Schedule 1.01(C) hereto in the column ---------------- labeled "Amount of Commitment for Term Loans," and thereafter to give effect to the most recent Assignment and Assumption Agreement, as such amount shall be reduced from time to time pursuant to Sections 2.01 and 2.10 hereof, and Term ---- Loan Commitments shall mean the aggregate Term Loan Commitments of all of the - ---------------- Banks. Term Loan Euro-Rate Option shall have the meaning assigned to -------------------------- that term in Section 4.01(a)(ii). Term Loans shall mean collectively and Term Loan shall mean separately ---------- --------- all Term Loans or any Term Loan made by the Banks or one of the Banks to the Borrower pursuant to Section 2.01 hereof. Term Notes shall mean collectively all the Term Notes of the Borrower ---------- in the form of Exhibit 1.01(T) hereto evidencing the Term Loans together with --------------- all amendments, extensions, renewals, replacements, refinancings or refundings thereof in whole or in part and Term Note shall mean separately any Term Note. --------- Total Indebtedness shall mean as of any date of determination, without ------------------ duplication, the total Indebtedness of the Borrower and its Subsidiaries. Transferor Bank shall mean the selling Bank pursuant to an --------------- Assignment and Assumption Agreement. Tri-State shall mean Tri-State Health Care, Inc., a West Virginia --------- corporation, which is a Subsidiary of Pinnacle and the sole general partner of Seventeenth Street Partnership. Trustee Agreement shall mean, as of any date of determination, ----------------- collectively (i) that certain Paying Agency Agreement executed by Mariner Nashville, PNC 28 Bank, National Association, and certain of the Lessors listed on Schedule 6.01(aa), in the form of Exhibit 1.01(T) to the Revolving Credit Loan - ----------------- --------------- Agreement providing for the payment by Mariner Nashville to PNC Bank, National Association, as trustee for Mariner Nashville and such Lessors, of monies due to such Lessors under the leases between such Lessors and Mariner Nashville, and the subsequent payment of such monies by PNC Bank to the Lessors; and (ii) in accordance with the requirements of this Agreement, each other similar agreement, in form and substance satisfactory to the Administrative Agent relating to certain Subsidiaries of the Borrower and certain Lessors. UCC Collateral shall mean the Pledged Collateral, the property of the -------------- Loan Parties in which security interests are granted under the Security Agreement, and that portion of the Collateral under the Mortgages, First Mortgages, and the Leasehold Mortgages which consists of personal property in which a security interest may be granted under the Uniform Commercial Code. Uniform Commercial Code shall have the meaning assigned to that ----------------------- term in Section 6.01(p). Unrestricted Subsidiary of any person at any time shall mean any ----------------------- corporation or limited liability company of which more than 50% but less than 80% (by number of shares or number of votes) of the outstanding capital stock or member interests normally entitled to vote for the election of one or more directors (regardless of any contingency which does or may suspend or dilute the voting rights) is at such time owned directly or indirectly by such Person or one or more of such Person's Subsidiaries, or any partnership of which such Person is a general partner or of which more than 50% but less than 80% of the general or voting partnership interests is at the time directly or indirectly owned by such Person or one or more of such Person's Subsidiaries. Voting Stock shall mean, with respect to any Person, any class or ------------ series of Capital Stock of such Person that is ordinarily entitled to vote in the election of directors thereof at a meeting of stockholders called for such purpose, without the occurrence of any additional event or contingency. 1.02 Construction. Unless the context of this Agreement otherwise ------------ clearly requires, references to the plural include the singular, the singular the plural and the part the whole, "or" has the inclusive meaning represented by the phrase "and/or," and "including" has the meaning represented by the phrase "including without limitation." References in this Agreement to "determination" of or by any Agent or the Banks shall be deemed to include good faith calculations by any Agent or the Banks (in the case of quantitative determinations) and good faith beliefs by any Agent or the Banks (in the case of qualitative determinations). Whenever any Agent or the Banks are granted the right herein to act in its or their sole discretion or to grant or withhold consent such right shall be exercised in good faith. The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement and the Table of Contents preceding this Agreement are for reference purposes 29 only and shall not control or affect the construction of this Agreement or the interpretation thereof in any respect. Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. 1.03 Accounting Principles. Except as otherwise provided in this --------------------- Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. In the event of: (i) any dissolution or liquidation of any Subsidiary pursuant to Section 8.02(f) of this Agreement, (ii) any consolidation or merger of any Subsidiary with or into any person (other than the Borrower or another Subsidiary)pursuant to Section 8.02(f) of this Agreement, or (iii) the sale, transfer, lease or disposition of assets of the Borrower or any Subsidiary permitted pursuant to Section 8.02(g)(v) of this Agreement, then, in the case of any of the foregoing clauses (i), (ii) or (iii), any financial covenant to be calculated thereunder (including, without limitation, those set forth in Section 4.01, and 8.02(q) through 8.02(u), inclusive) shall be calculated for the period during which such sale, transfer, lease or other disposition occurs, excluding all financial items (for example and without limitation, all cash flow, revenues, expenses, and income) attributable to the assets sold, transferred, leased or otherwise disposed of. It is expressly agreed that for all periods ending after the consummation of the Paragon Acquisition, all cash expenses (other than expenses directly related to the Paragon Acquisition) paid by MPN on behalf of or for the benefit of the Borrower or any Subsidiary of the Borrower and reimbursed by the Borrower pursuant to Section 8.02(e)(v) shall be treated as an expense of the Borrower or such Subsidiary of the Borrower (whether or not GAAP would require such amount to be included as an expense of the Borrower or such Subsidiary) for the purpose of determining "net income of the Borrower and its Subsidiaries in accordance with GAAP" under this Agreement in connection with the calculation of the applicable financial covenants under this Agreement (including without limitation in the determination of Consolidated Cash Flow from Operations, Consolidated Net Income, the numerator of the Fixed Charge Coverage Ratio in Section 8.02(q) and the calculations set forth in Section 8.02(e)), it being the express intent of the Borrower, the Agents and the Banks that notwithstanding payment of expenses by MPN on behalf of or for the benefit of the Borrower or Subsidiaries of the Borrower that consolidated net income of the Borrower and its Subsidiaries shall continue to be determined after the consummation of the Paragon Acquisition as if all expenses of the Borrower and its Subsidiaries are paid by them. ARTICLE II TERM LOAN FACILITY ------------------ 2.01 Term Loan Commitments. --------------------- (a) Term Loan Commitments. Subject to the terms and conditions --------------------- hereof and relying upon the representations and warranties herein set forth, each Bank severally agrees to make a term loan (the "Term Loan") to the Borrower on the Closing Date in such principal amount as the Borrower shall request up to, but not exceeding, such Bank's Term Loan Commitment. 30 2.02 Nature of Banks' Obligations With Respect to Term Loans. The ------------------------------------------------------- obligations of each Bank to make a Term Loan to the Borrower shall be in the proportion that such Bank's Term Loan Commitment bears to the Term Loan Commitments of all Banks to the Borrower, but each Bank's Term Loan to the Borrower shall never exceed its Term Loan Commitment. The failure of any Bank to make a Term Loan shall not relieve any other Bank of its obligations to make a Term Loan nor shall it impose any additional liability on any other Bank hereunder. The Banks shall have no obligation to make Term Loans hereunder after the Closing Date. The Term Loan Commitments are not revolving credit commitments, and the Borrower shall not have the right to borrow, repay and reborrow the Term Loans. 2.03 Loan Requests. Except as otherwise provided herein, the ------------- Borrower may from time to time prior to the Expiration Date request the Banks to renew or convert the Interest Rate Option applicable to existing Loans, by the delivery to the Administrative Agent, not later than 10:00 A.M. Pittsburgh time (i) three (3) Business Days prior to the proposed Borrowing Date with respect to the conversion to or the renewal of the Euro-Rate Option for any Loans; and (ii) on the Business Day which is the last day of the preceding Interest Period with respect to the conversion to the Base Rate Option for any Loan, of a duly completed request therefor substantially in the form of Exhibit 2.05 hereto or a ------------ request by telephone immediately confirmed in writing by letter, facsimile or telex in such form (each, a "Loan Request"), it being understood that the Administrative Agent may rely in good faith on the authority of any person making such telephonic request and purporting to be an Authorized officer. Each Loan Request shall be irrevocable and shall (i) specify the proposed Borrowing Date; (ii) specify the aggregate amount of the proposed Loans comprising the Borrowing Tranche, which shall be in integral multiples of $500,000 and not less than $5,000,000 for Loans to which the Euro-Rate Option applies and not less than the lesser of $500,000 or the maximum amount available for Loans to which the Base Rate Option applies; (iii) specify whether the Euro-Rate Option or Base Rate Option shall apply to the proposed Loans comprising the Borrowing Tranche; (iv) specify in the case of Loans to which the Euro-Rate Option applies, an appropriate Interest Period for the proposed Loans comprising the Borrowing Tranche; and (v) certify that no Event of Default or Potential Default has occurred and is continuing. 2.04 Term Note. The obligation of the Borrower to repay the --------- aggregate unpaid principal amount of the Term Loans made to it by each Bank, together with interest thereon, shall be evidenced by a promissory note of the Borrower dated the Closing Date in substantially the form attached hereto as Exhibit 1.01(T) payable to the order of each Bank in a face amount equal to the - --------------- Commitment of such Bank. 2.05 Use of Proceeds. The proceeds of the Term Loans shall be used --------------- for general corporate purpose 31 ARTICLE III [INTENTIONALLY OMITTED] ARTICLE IV INTEREST RATES -------------- 4.01 Interest Rate Options. The Borrower shall pay interest in --------------------- respect of the outstanding unpaid principal amount of the Loans as selected by it from the Base Rate Option or Euro-Rate Option set forth below applicable to the Loans (it being understood that, subject to the provisions of this Agreement, the Borrower may select different Interest Rate Options and different Interest Periods to apply simultaneously to the Loans comprising different Borrowing Tranches and may convert to or renew one or more Interest Rate Options with respect to all or any portion of the Loans comprising any Borrowing Tranche; provided that there shall not be at any one time outstanding more than five (5) Borrowing Tranches in the aggregate among all the Loans accruing interest at a Euro-Rate Option). The Administrative Agent's determination of a rate of interest and any change therein shall in the absence of manifest error be conclusive and binding upon all parties hereto. If at any time the designated rate applicable to any Loan made by any Bank exceeds such Bank's highest lawful rate, the rate of interest on such Bank's Loan shall be limited to such Bank's highest lawful rate. (a) Interest Rate Options. The Borrower shall have the right to --------------------- select from the following Interest Rate Options applicable to the Term Loans for the period commencing on the Closing Date and thereafter: (i) Base Rate Option: A fluctuating rate per annum (computed ---------------- on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) equal to the Base Rate plus the applicable percentage set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate.
Ratio of Total Indebtedness to Applicable Consolidated Cash Flow from Operations Interest Rate - ------------------------------------------- --------------------------- Greater than 5.25 to 1.0 Base Rate plus 1.25% Greater than 4.75 to 1.0 but less than or Base Rate plus 1.00% equal to 5.25 to 1.0 Greater than 4.25 to 1.0 but less than or Base Rate plus .75% equal to 4.75 to 1.0 Greater than 3.75 to 1.0 but less than or Base Rate plus .50% equal to 4.25 to 1.0 Less than or equal to 3.75 to 1.0 Base Rate plus .25%
(ii) Euro-Rate Option: A fluctuating rate per annum ---------------- (computed on the basis of a year of 360 days and actual days elapsed) equal to the Euro-Rate plus the 32 applicable percentage (such percentage is sometimes hereafter referred to as the "Applicable Percentage Over Euro-Rate") set forth below, based upon the ratio of (a) Total Indebtedness, to (b) Consolidated Cash Flow from Operations.
Ratio of Total Indebtedness to Applicable Consolidated Cash Flow from Operations Interest Rate - ------------------------------------------- ------------------------------------ Greater than 5.25 to 1.0 Euro-Rate plus 2.75% Greater than 4.75 to 1.0 but less than or Euro-Rate plus 2.50% equal to 5.25 to 1.0 Greater than 4.25 to 1.0 but less than or Euro-Rate plus 2.25% equal to 4.75 to 1.0 Greater than 3.75 to 1.0 but less than or Euro-Rate plus 2.00% equal to 4.25 to 1.0 Less than or equal to 3.75 to 1.0 Euro-Rate plus 1.75%
(b) The ratios pursuant to clause (a) above shall be computed on the date of each Acquisition Requiring Certification as more fully set forth in the third sentence of Section 8.01(m)(i) or the second sentence of Section 8.01(m)(ii), as applicable, and any interest rate adjustment attributable to such computation shall be effective on the date of such Acquisition Requiring Certification. If Borrower does not make any Acquisition Requiring Certification during any fiscal quarter, such ratio shall also be computed as of the end of such quarter with Consolidated Cash Flow from Operations computed for the four fiscal quarters then ended and Total Indebtedness computed as of the end of such fiscal quarter, but any interest adjustments attributable to a change in such ratio shall be effective (x) with respect to an increase of the applicable interest rate, as of the Delivery Date for the Borrower's consolidated financial statements for such quarter and (y) with respect to a decrease of the applicable interest rate, as of the later of the Delivery Date for such financial statements and the date on which such financial statements are actually delivered to the Agents and the Banks. (c) Rate Quotations. The Borrower may call the Administrative --------------- Agent on or before the date on which a Loan Request is to be delivered to receive an indication of the rates then in effect, but it is acknowledged that such indication shall not be binding on the Agents or the Banks nor affect the rate of interest which thereafter is actually in effect when the election is made. 4.02 Interest Periods. At any time when the Borrower shall select, ---------------- convert to or renew a Euro-Rate Option, the Borrower shall notify the Administrative Agent thereof at least three (3) Business Days prior to the effective date of such Euro-Rate Option by delivering a Loan Request. The notice shall specify an interest period (the "Interest Period") during which such Interest Rate Option shall apply, such periods to be one, two, three or six months, provided, that the following shall apply to any selection of, renewal of or conversion to a Euro-Rate Option: 33 (a) any Interest Period which would otherwise end on a date which is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; (b) any Interest Period which begins on the last day of a calendar month for which there is no numerically corresponding day in the subsequent calendar month during which such Interest Period is to end shall end on the last Business Day of such subsequent month; (c) each Borrowing Tranche of Loans subject to a Euro-Rate Option shall be in integral multiples of $500,000 and not less than $5,000,000; (d) the Borrower shall not select, convert to or renew an Interest Period for any portion of the Loans that would end after the Expiration Date; and (e) in the case of the renewal of a Euro-Rate Option at the end of an Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period, without duplication in payment of interest for such day. 4.03 Interest After Default. To the extent permitted by Law, upon ---------------------- the occurrence and during the continuation of an Event of Default, any principal, interest, fee or other amount payable hereunder shall bear interest for each day thereafter until paid in full (before and after judgment) at a rate per annum which shall be equal to two hundred (200) basis points (2% per annum) above the rate of interest otherwise applicable with respect to such amount or two hundred (200) basis points (2% per annum) above the Base Rate if no rate of interest is otherwise applicable, but in no event in excess of the highest rate permitted under applicable law. The Borrower acknowledges that such increased interest rate reflects, among other things, the fact that such Loans or other amounts have become a substantially greater risk given their default status and that the Banks are entitled to additional compensation for such risk. If an Event of Default shall occur and be continuing, the Administrative Agent may in its discretion limit the Borrower to the Base Rate Option. 4.04 Euro-Rate Unascertainable. ------------------------- (a) If on any date on which a Euro-Rate would otherwise be determined, the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that: (i) adequate and reasonable means do not exist for ascertaining such Euro-Rate, or (ii) a contingency has occurred which materially and adversely affects the London interbank market relating to the Euro-Rate, or 34 (b) if at any time any Bank shall have determined (which determination shall be conclusive absent manifest error) that: (i) the making, maintenance or funding of any Loan to which a Euro-Rate Option applies has been made impracticable or unlawful by compliance by such Bank in good faith with any Law or any interpretation or application thereof by any Official Body or with any request or directive of any such Official Body (whether or not have the force of Law), or (ii) such Euro-Rate Option will not adequately and fairly reflect the cost to such Bank of the establishment or maintenance of any such Loan, or (iii) after making all reasonable efforts that deposits of the relevant amount in Dollars for the relevant Interest Period for a Loan to which a Euro-Rate Option applies, respectively, are not available to such Bank with respect to a proposed Euro-Rate Loan in the London interbank market, in the case of any event specified in subsection (a) above, then the Administrative Agent shall promptly so notify the Banks and the Borrower thereof and in the case of any event specified in subsection (b) above, such Bank shall promptly so notify the Administrative Agent and endorse a certificate to such notice as to the specific circumstances of such notice and the Administrative Agent shall promptly send copies of such notice and certificate to the other Banks and the Borrower. Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) the obligation of (A) the Banks in the case of such notice given by the Administrative Agent or (B) such Bank in the case of such notice given by such Bank to allow the Borrower to select, convert to or renew a Euro-Rate Option shall be suspended until the Administrative Agent shall have later notified the Borrower or such Bank shall have later notified the Administrative Agent, of the Administrative Agent's or such Bank's, as the case may be, determination (which determination shall be conclusive absent manifest error) that the circumstances giving rise to such previous determination no longer exist. If at any time the Administrative Agent makes a determination under subsection (a) or (b) of this Section 4.04 and the Borrower has previously notified the Administrative Agent of its selection of, conversion to or renewal of a Euro-Rate Option and such Interest Rate Option has not yet gone into effect, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option otherwise available with respect to such Loans. If any Bank notifies the Administrative Agent of a determination under subsection (b) of this Section 4.04, the Borrower shall, subject to the Borrower's indemnification obligations under Section 5.06(b), as to any Loan of the Bank to which a Euro-Rate Option applies, on the date specified in such notice either convert such Loan to the Base Rate Option otherwise available with respect to such Loan or prepay such Loan in accordance with Section 5.04 hereof. Absent due notice from the Borrower of conversion or prepayment such Loan shall automatically be converted to the Base Rate Option otherwise available with respect to such Loan upon such specified date. 4.05 Selection of Interest Rate Options. If the Borrower fails to ---------------------------------- select a new Interest Period to apply to any Borrowing Tranche of Loans under the Euro-Rate Option at the expiration of an existing Interest Period applicable to such Borrowing Tranche in accordance 35 with the provisions of Section 4.02, the Borrower shall be deemed to have converted such Loan or portion thereof to the Base Rate Option otherwise available with respect to such Loans, commencing upon the last day of the existing Interest Period. If an Event of Default shall occur and be continuing, the Administrative Agent may in its discretion limit the Borrower to the Base Rate Option hereunder. ARTICLE V PAYMENTS -------- 5.01 Payments. All payments and prepayments to be made in respect of -------- principal, interest, Administrative Agent's Fee or other fees or amounts due from the Borrower hereunder shall be payable prior to 11:00 A.M. (Pittsburgh time) on the date when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by the Borrower, and without setoff, counterclaim or other deduction of any nature, and an action therefor shall immediately accrue. Such payments shall be made to the Administrative Agent at the Principal Office for the ratable accounts of the Banks with respect to the Loans in U.S. Dollars and in immediately available funds, and the Administrative Agent shall promptly distribute such amounts to the Banks in immediately available funds, provided that in the event payments are received by 11:00 A.M. (Pittsburgh time) by the Administrative Agent with respect to the Loans and such payments are not distributed to the Banks on the same day received by the Administrative Agent, the Administrative Agent shall pay the Banks the Federal Funds Effective Rate with respect to the amount of such payments for each day held by the Administrative Agent and not distributed to the Banks. The Administrative Agent's and each Bank's statement of account, ledger or other relevant record shall, in the absence of manifest error, be conclusive as the statement of the amount of principal of and interest on the Loans and other amounts owing under this Agreement and shall be deemed an "account stated." 5.02 Pro Rata Treatment of Banks. Each borrowing, and each selection --------------------------- of, conversion to or renewal of any Interest Rate Option and each payment or prepayment by the Borrower with respect to principal, interest or other fees or amounts due from the Borrower hereunder to the Banks with respect to the Loans, shall (except as provided in Section 4.04(b) [Euro-Rate Unascertainable], 5.04(b) [Voluntary Prepayments] or 5.06(a) [Additional Compensation in Certain Circumstances] hereof) be made in proportion to the Loans outstanding from each Bank. 5.03 Interest Payment Dates. Interest on Loans to which the Base ---------------------- Rate Option applies shall be due and payable in arrears on the first Business Day of each April, July, October and January after the date hereof and on the Expiration Date or upon acceleration of the Notes. Interest on Loans to which a Euro-Rate Option applies shall be due and payable on the last day of each Interest Period for those Loans, and if any such Interest Period is longer than three months, also on the last day of every third month during such period. 5.04 Voluntary Prepayments. --------------------- 36 (a) The Borrower shall have the right at its option from time to time to prepay the Loans in whole or part without premium or penalty (except as provided in subsection (b) below or in Section 5.06 hereof): (i) at any time with respect to any Loan to which the Base Rate Option applies, (ii) on the last day of the applicable Interest Period with respect to Loans to which a Euro-Rate Option applies, (iii) on the date specified in a notice by any Bank pursuant to Section 4.04(b) [Euro-Rate Unascertainable] hereof with respect to any Loan to which a Euro-Rate Option applies. Whenever the Borrower desires to prepay any part of the Loans, it shall provide a prepayment notice to the Administrative Agent at least one (1) Business Day prior to the date of prepayment of Loans setting forth the following information: (y) the date, which shall be a Business Day, on which the proposed prepayment is to be made; and (z) the total principal amount of such prepayment, which shall not be less than $5,000,000. All prepayment notices shall be irrevocable. The principal amount of the Loans for which a prepayment notice is given, together with interest on such principal amount except with respect to Loans to which the Base Rate Option applies, shall be due and payable on the date specified in such prepayment notice as the date on which the proposed prepayment is to be made. Except as provided in Section 4.04(b), if the Borrower prepays a Loan but fails to specify the applicable Borrowing Tranche which the Borrower is prepaying, the prepayment shall be applied first to Loans to which the Base Rate Option applies, and then to Loans to which the Euro-Rate Option applies. Any prepayment hereunder shall be subject to the Borrower's obligation to indemnify the Banks under Section 5.06(b). (b) In the event any Bank gives notice under Section 4.04(b) [Euro-Rate Unascertainable] or Section 5.06(a) [Additional Compensation in Certain Circumstances] hereof, the Borrower shall have the right, with the consent of the Administrative Agent, which shall not be unreasonably withheld, to: (y) prepay the Loans of such Bank, in whole together with all interest accrued thereon and thereby permanently and irrevocably terminate the Commitment of such Bank, or (z) replace such Bank, so long as, in the case of (y) or (z), such replacement or prepayment occurs within ninety (90) days after receipt of such Bank's notice under Section 4.04(b) or 5.06(a), provided the Borrower shall also pay to such Bank in the case of either the foregoing (y) or (z) at the time of such prepayment or replacement any amounts required under Section 5.06 and accrued Commitment Fees due on such amount and all other costs, fees and any amounts due to such Bank being prepaid or replaced. 37 5.05 Mandatory Prepayments. --------------------- (a) Sale of Assets. It is understood and acknowledged that, -------------- within five (5) Business Days of either any dissolution or winding up in a transaction or series of related transactions authorized by Section 8.02(f)(ii) or of any sale of assets or related sales of assets authorized by Section 8.02(g) hereof with Net Sale Proceeds in excess of $1,000,000 (in either case a "Qualifying Asset Sale"), the Borrower shall make a mandatory prepayment of principal on the Revolving Credit Loans, together with accrued interest thereon plus any amounts required under Section 5.06. At such time as the aggregate Net Sale Proceeds from all Qualifying Asset Sales pursuant to Section 8.02(f)(ii) or Section 8.02(g) exceed $15,000,000 during the period from and after the Closing Date through and including the date of determination, then any Net Sale Proceeds from Qualifying Asset Sales in excess of such amount shall be used 50% to repay the outstanding Loans and 50% to repay outstanding Indebtedness under the Revolving Credit Loan Agreement. In addition to the foregoing mandatory prepayment provisions, in the event that any sale of assets will result in the Borrower or any Subsidiary receiving "Net Cash Proceeds" which would otherwise become "Excess Proceeds" (as each of those terms are defined in the Indenture), then at least sixty (60) days prior to the date any Net Cash Proceeds would become Excess Proceeds under the Indenture, the Borrower shall give written notice to the Administrative Agent thereof setting forth the amount of Net Cash Proceeds at issue. Upon the direction of the Administrative Agent with the consent of the Required Banks, the Borrower shall make a permanent payment of principal on the Loans in the amount of said Net Cash Proceeds. To the extent the aggregate principal amount of Loans then outstanding which bear interest at the Base Rate Option is less than the principal amount required to be prepaid, the Borrower may elect to defer the prepayment until the next Interest Payment Date on its Loans that bear interest at a Euro-Rate Option, by giving written notice to the Administrative Agent of such election not later than four (4) Business Days after the asset disposition in question, whereupon the due date of such prepayment shall automatically be changed to such Interest Payment Date; provided, however, that Net Cash Proceeds shall, notwithstanding the foregoing, be required to make the prepayment specified in the prior sentence at least five days prior to the date such Net Cash Proceeds would become Excess Proceeds under the Indenture. (b) Application Among Interest Rate Options. All prepayments --------------------------------------- required pursuant to Section 5.05 shall first be applied among the Interest Rate Options to the principal amount of the Loans subject to a Base Rate Option, then to Loans subject to Euro-Rate Option. In accordance with Section 5.06(b), the Borrower shall indemnify the Banks for any loss or expense including loss of margin incurred with respect to any such prepayments applied against Loans subject to a Euro-Rate Option on any day other than the last day of the applicable Interest Period. 5.06 Additional Compensation in Certain Circumstances. ------------------------------------------------ (a) Increased Costs or Reduced Return Resulting From Taxes, ------------------------------------------------------- Reserves, Capital Adequacy Requirements, Expenses, Etc. If any Law, guideline or - ------------------------------------------------------- interpretation or any change in any Law, guideline or interpretation or application thereof by any Official Body 38 charged with the interpretation or administration thereof or compliance with any request or directive (whether or not having the force of Law) of any central bank or other Official Body: (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by the Borrower of principal, interest, or other amounts due from the Borrower hereunder or under the Notes (except for taxes on the overall net income of such Bank), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, or assets (funded or contingent) of, deposits with or for the account of, or other acquisitions of funds by, any Bank, or (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or letters of credit, other credits or commitments to extend credit extended by, any Bank, or (B) otherwise applicable to the obligations of any Bank under this Agreement, and the result under any of the foregoing clauses (i), (ii) or (iii) is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank with respect to this Agreement, the Notes or the making, maintenance or funding of any part of the Loans (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on any Bank's capital, taking into consideration such Bank's customary policies with respect to capital adequacy) by an amount which such Bank in its sole discretion deems to be material, such Bank shall from time to time notify the Borrower and the Administrative Agent of the amount determined in good faith (using any averaging and attribution methods employed in good faith) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank for such increase in cost, reduction of income or additional expense. Such notice shall set forth in reasonable detail the basis for such determination. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. (b) Indemnity. In addition to the compensation required by --------- subsection (a) of this Section 5.06, the Borrower shall indemnify each Bank against all liabilities, losses or expenses (including loss of margin, any loss or expense incurred in liquidating or employing deposits from third parties and any loss or expense incurred in connection with funds acquired by a Bank to fund or maintain Loans subject to the Euro-Rate Option) which such Bank sustains or incurs as a consequence of any: (i) payment, prepayment, conversion or renewal of any Loan to which the Euro-Rate Option applies on a day other than the last day of the corresponding Euro-Rate Interest Period (whether or not such payment or prepayment is mandatory, voluntary or automatic and whether or not such payment or prepayment is then due), 39 (ii) attempt by the Borrower to revoke (expressly, by later inconsistent notices or otherwise) in whole or part any notice relating to Loan Requests under Section 2.03 or Section 4.02 or prepayments under Section 5.04, or (iii) Event of Default by the Borrower in the performance or observance of any covenant or condition contained in this Agreement or any other Loan Document, including without limitation any failure of the Borrower to pay when due (by acceleration or otherwise) any principal, interest, or any other amount due hereunder. If any Bank sustains or incurs any such loss or expense it shall from time to time notify the Borrower of the amount determined in good faith by such Bank (which determination shall be conclusive absent manifest error and may include such assumptions, allocations of costs and expenses and averaging or attribution methods as such Bank shall deem reasonable) to be necessary to indemnify such Bank for such loss or expense. Such notice shall set forth in reasonable detail the basis for such determination. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of the applicable Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans, subject to the Euro-Rate Option provided for herein (excluding, however, the Applicable Percentage Over Euro- Rate included therein, if any) over (ii) the amount of interest (as reasonably determined by such Bank) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank Eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. Such amount shall be due and payable by the Borrower to such Bank ten (10) Business Days after such notice is given. ARTICLE VI REPRESENTATIONS AND WARRANTIES ------------------------------ 6.01 Representations and Warranties. The Borrower represents and ------------------------------ warrants to the Agents and each of the Banks as follows: (a) Organization and Qualification. The Borrower, each ------------------------------ Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made are duly organized, validly existing and in good standing under the laws of their respective jurisdiction of organization; the Borrower, each Restricted Subsidiary of the Borrower and each Excluded Entity in which a Restricted Investment has been made have the power to own or lease their properties and to engage in the business they presently conduct or propose to conduct; and the Borrower and each Subsidiary of the Borrower are duly qualified as a foreign corporation, limited liability company or partnership and in good standing in each jurisdiction listed on Schedule 6.01(a) ---------------- hereto and in all other jurisdictions where the property owned or leased by them or the nature of the business transacted by them or both makes such qualification necessary, 40 except where the failure to so qualify would not have a material adverse effect on the Borrower or any Subsidiary. (b) [Intentionally Omitted]. --------------------- (c) Excluded Entities; Subsidiaries. Schedule 6.01(c) attached ------------------------------- ---------------- hereto states (i) the name of each of the Borrower's Restricted Subsidiaries and each Excluded Entity in which a Restricted Investment has been made, (ii) in the case of each Corporate Subsidiary or Excluded Entity which is a corporation, its jurisdiction of incorporation, its authorized capital stock, the issued and outstanding shares (referred to herein as the "Corporate Shares") and the owners thereof, (iii) in the case of each Partnership Subsidiary or Excluded Entity which is a partnership, the jurisdiction in which it is organized, the type of organization (limited or general partnership) and the owners of its partnership interests (the "Partnership Interests"), and (iv) in the case of each Subsidiary or Excluded Entity which is a limited liability company, the jurisdiction in which it is organized, its authorized member interests, the issued and outstanding member interests (the "Member Interests") and the owners thereof. The Borrower and each Subsidiary have good and valid title to all of the Corporate Shares, Partnership Interests or Member Interests they purport to own, free and clear in each case of any Lien other than under the Loan Documents. All Corporate Shares, Partnership Interests and Member Interests have been validly issued. All Corporate Shares are fully paid and nonassessable. There are no options, warrants or other rights outstanding to purchase any Member Interests, Corporate Shares or Partnership Interests except as indicated on Schedule -------- 6.01(c). - ------- (d) Power and Authority. Each Loan Party has full power to enter ------------------- into, execute, delivery and carry out this Agreement, the other Loan Documents to which it is a party, to incur the Indebtedness contemplated by the Loan Documents and to perform its obligations under the Loan Documents to which it is a party and all such actions have been duly authorized by all necessary proceedings on its part. (e) Validity and Binding Effect. This Agreement has been duly --------------------------- executed and delivered by each Loan Party that is a party hereto, and each other Loan Document, when duly executed and delivered by each Loan Party which is a party thereto, will have been duly executed and delivered by such Loan Party. This Agreement and each other Loan Document delivered by the Loan Parties pursuant to the provisions hereof will constitute legal, valid and binding obligations of the Loan Parties thereto, enforceable against such Loan Party in accordance with their respective terms, except to the extent that (i) enforceability of any of the foregoing Loan Documents may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles and (ii) the exercise by the Banks of their rights with respect to the Collateral would be subject to the prior approval of health care regulatory authorities. (f) No Conflict. Neither the execution and delivery of this ----------- Agreement or the other Loan Documents by the Loan Parties nor the consummation of the transactions herein or therein contemplated or compliance with the terms and provisions hereof or thereof by 41 them will conflict with, constitute a default under or result in any breach of (i) the terms and conditions of the certificate of incorporation, by-laws or other organizational documents of any Loan Party or (ii) of any Law or of any material agreement or instrument or order, writ, judgment, injunction or decree to which any Loan Party is a party or by which it is bound or to which it is subject, or result in the creation of enforcement of any Lien, charge or encumbrance whatsoever upon any property (now or hereafter acquired) of any Loan Party (other than Liens granted under the Loan Documents). (g) Litigation. Except as previously disclosed to the ---------- Administrative Agent in that certain letter dated January 2, 1996 there are no actions, suits, proceedings or investigations pending or, to the knowledge of the Borrower, threatened against the Borrower or any Subsidiary of the Borrower at law or equity before any Official Body which individually or in the aggregate would constitute a Material Adverse Change. Neither the Borrower nor any Subsidiary of the Borrower is in violation of any order, writ, injunction or any decree of any Official Body which would constitute a Material Adverse Change. (h) Title to Properties. The Borrower and each Subsidiary of the ------------------- Borrower have good and marketable title to or valid leasehold interest in all material properties, assets and other rights which they purport to own or lease or which are reflected as owned or leased on their respective books and records, free and clear of all Liens and encumbrances except Permitted Liens, and subject to the term and conditions of the applicable leases. All material leases of real property are in full force and effect without the necessity for any consent which has not previously been obtained for the consummation of the transaction contemplated hereby. (i) Financial Statements. -------------------- (i) Historical Statements. --------------------- The Borrower has delivered to the Administrative Agent copies of its audited consolidated year-end financial statements for and as of the end of the fiscal years ended December 31, 1996, 1997 and the unaudited consolidated statements for the fiscal quarters ending on March 31, 1998, June 30, 1998 and September 30, 1998 (collectively the "Historical Statements"). The Historical Statements were compiled from the books and records maintained by the Borrower's management, fairly present the consolidated financial condition of the Loan Parties (which were Loan Parties as of the date of the respective Historical Statements) as of their dates and the results of operations for the fiscal periods then ended and have been prepared in accordance with GAAP consistently applied, subject (in the case of the interim statements) to normal year-end audit adjustments. (ii) Accuracy of Financial Statements. Neither the Borrower -------------------------------- nor any Subsidiary of Borrower has any liabilities, contingent or otherwise, or material forward or long-term commitments that are not disclosed in the Historical Statements or in the notes thereto or that are required to be disclosed under GAAP, and except as disclosed therein there are no unrealized or anticipated losses from any commitments of the Borrower or any Subsidiary which may cause a Material Adverse Change. Since December 31, 1997, no Material Adverse Change has occurred; provided, however, that with the written approval of the Required Banks, 42 express disclosures to the Banks by the Borrower in the reports provided by the Borrower to the Banks, pursuant to Section 8.03 hereof, shall be deemed to be an update and an exception to the representation made in the foregoing portion of this sentence. (iii) Projections. The Borrower has delivered to the ----------- Administrative Agent financial projections of the Borrower and its Subsidiaries prepared on a combined pro-forma basis for the two fiscal years ending September 30, 1998 and September 30, 1999 and for the fiscal quarter of October 1 through December 31, 1999 (the "Financial Projections") derived from various assumptions of the Borrower's management. The Financial Projections represent a reasonable range of possible results in light of the history of the business, present and foreseeable conditions and the intentions of the management of the Borrower. The Financial Projections accurately reflect the liabilities of the Borrower and its Subsidiaries upon consummation of the transactions contemplated hereby as of the Closing Date. (j) Margin Stock. Neither the Borrower nor any Subsidiary ------------ engages or intends to engage principally, or as one of its important activities, in the business of extending credit for the purpose, immediately, incidentally or ultimately, of purchasing or carrying margin stock (within the meaning of Regulation U). No part of the proceeds of any Loan has been or will be used, immediately, incidentally or ultimately, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or to refund Indebtedness originally incurred for such purpose, or for any purpose which entails a violation of or which is inconsistent with the provisions of the regulations of the Board of Governors of the Federal Reserve System. (k) Full Disclosure. Neither this Agreement nor any other Loan --------------- Document contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading considered as a whole; provided that any information provided after the date hereof shall be deemed to supersede any prior inconsistent information. There is no fact known to the Borrower or any Subsidiary which materially adversely affects the business, property, assets, financial condition, results of operations or prospects of the Borrower or any Material Subsidiary, which: (i) prior to or at the date hereof, has not been set forth in the Agreement or in the certificates, statements, agreements or other documents furnished in writing to the Administrative Agent and the Banks in connection with the transactions contemplated hereby or in the Borrower's public filings with the Securities and Exchange Commission, or (ii) following the date hereof and with the written approval of the Required Banks, has not been set forth in other documents furnished in writing to the Administrative Agent and the Banks. (l) Taxes. All material federal, state, local and other tax ----- returns required to have been filed with respect to the Borrower or any Subsidiary have been filed and payment or adequate provision has been made for the payment of all taxes, fees, assessments and other governmental charges which have or may become due pursuant to said returns or to assessments received except to the extent that such taxes, fees, assessments and other charges are being contested in good faith by appropriate proceedings diligently conducted and for which 43 such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made. As of the date hereof, there are no agreements or waivers extending the statutory period of limitations applicable to any federal income tax return of the Borrower or any Subsidiary for any period. (m) Consents and Approvals. Except as may be disclosed by the ---------------------- Borrower to the Administrative Agent pursuant to Section 8.01(p), no consent, approval, exemption, order or authorization of, or a registration or filing with any Official Body or any other person is required by any Law or any agreement in connection with the execution, delivery and carrying out of this Agreement, or the other Loan Documents by any Loan Party, all of which have been obtained or made; provided, however, that it is acknowledged that consent of health care regulatory authorities issuing any licenses or regulating any health care facilities may be required if the Administrative Agent on behalf of the Banks exercises the rights and remedies in respect of the Pledged Collateral and such exercise of remedies results in or constitutes an assignment of any health care license issued by a health care regulatory authority or constitutes a change of control with respect to the ownership of a health care facility. (n) Compliance With Instruments. Neither the Borrower nor any --------------------------- Subsidiary is in violation of (i) any term of its certificate of incorporation, by-laws, or other organizational documents or (ii) any material agreement or instrument to which it is a party or by which it or any of its properties may be subject or bound where such violation would constitute a Material Adverse Change. (o) Patents, Trademarks, Copyrights, Etc. The Borrower and each ------------------------------------ Subsidiary owns or possesses all the material patents, trademarks, service marks, trade names, copyrights and other intellectual property rights necessary to own and operate its properties and to carry on its business as presently conducted and planned to be conducted by the Borrower and each Subsidiary, without known conflict with the rights of others. (p) Security Interests in the Collateral. The Liens and security ------------------------------------ interests granted to the Collateral Agent for the benefit of the Banks pursuant to the Pledge Agreements, the Patent, Trademark and Copyright Security Agreement, the Security Agreement, the First Mortgages, the Mortgages and Leasehold Mortgages in the UCC Collateral constitute, and will continue to constitute, Prior Security Interests under the Uniform Commercial Code as in effect in each applicable jurisdiction (the "Uniform Commercial Code") or valid first priority Liens under other applicable Law entitled to all the rights, benefits and priorities provided by the Uniform Commercial Code or such Law to the fullest extent permitted by applicable law, except that the security interests in the Collateral under the Mortgages and Leasehold Mortgages may be subordinated to the security interests granted to certain of the Lessor Lenders or Owned Facility Lenders, as indicated on Schedule 6.01(aa) and, except in the case of the Collateral other than Pledged Collateral, subject to Permitted Liens. Upon the filing of financing statements relating to said security interests in each office and in each jurisdiction where required in order to perfect the security interests described above, recordation of the Patent, Trademark and Copyright Security Agreement in the United States Patent and Trademark Office (and, to the extent of any Collateral consisting of copyrights, in the United States Copyright Office), and taking possession 44 of the stock certificates or certificates of ownership of member interests in a limited liability company, as the case may be, evidencing the Pledged Collateral which constitutes stock of a corporation or certificated member interests of a limited liability company, as the case may be, all such action as is necessary or advisable to establish such rights of the Collateral Agent will have been taken, and there will be upon execution and delivery of the Patent, Trademark and Copyright Security Agreement, the Security Agreement, the First Mortgages, the Pledge Agreements, Mortgages and Leasehold Mortgages, such filings, and such taking of possession no necessity for any further action in order to preserve, protect and continue such rights, except for maintaining possession of such certificates and filing continuation statements with respect to such financing statements within six (6) months prior to each five-year anniversary of the filing of such financing statements. Any expenses in connection with each such action have been or will be paid by the Borrower. It is acknowledged that the exercise by the Banks of their rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license issued by a health care regulatory authority or any change of control with respect to a health care facility may be subject to the prior approval of such health care regulatory authorities. (q) First Mortgage Liens. The Liens granted to the Collateral -------------------- Agent for the benefit of the Banks pursuant to the First Mortgages constitute a valid first priority Lien under applicable law, subject only to Permitted Liens. All such action as will be necessary or advisable to establish such Lien of the Collateral Agent and its priority as described in the preceding sentence will be taken at or prior to the time required for such purpose, and there will be as of the date of execution and delivery of the First Mortgages not necessity for any further action in order to protect, preserve and continue such Lien and such priority. (r) Status of the Pledged Collateral. All the shares of capital -------------------------------- stock, partnership interests, or member interests in a limited liability company, as the case may be, included in the Pledged Collateral to be pledged pursuant to the Pledge Agreements are or will be upon issuance duly authorized and validly issued. All shares of capital stock included in the Pledged Collateral are or will be upon issuance fully paid and nonassessable. All of the Pledged Collateral is owned beneficially and of record by the pledgor free and clear of any Lien or restriction on transfer, except as otherwise provided in the Pledge Agreements and except as the right of the Collateral Agent and the Banks to dispose of the Pledged Collateral may be limited by the Securities Act of 1933, as amended, and the regulations promulgated by the Securities and Exchange Commission thereunder and by applicable state securities laws. Except as otherwise disclosed to the Banks, in writing, there are no shareholder or other agreements or understandings with respect to the Pledged Collateral. (s) Insurance. The insurance policies and bonds to which the --------- Borrower or any Subsidiary is a party provide adequate coverage from reputable and financially sound insurers in amounts sufficient to insure the assets and risks of the Borrower and its Subsidiaries in accordance with prudent business practice in the industry of the Borrower and its Subsidiaries, including self- insurance to the extent customary, and such policies and bonds are valid and in full force and effect. 45 (t) Compliance with Laws. The Borrower and its Subsidiaries are -------------------- in compliance in all material respects with all applicable Laws (other than Environmental Laws which are specifically addressed in subsection (y)) in all jurisdictions in which the Borrower or any Subsidiary is presently or will be doing business except where the failure to do so would not constitute a Material Adverse Change. (u) Material Contracts, Licenses, Permits and Approvals. --------------------------------------------------- (A) As of the date hereof, Schedule 6.01(u) hereto ---------------- lists the following contracts relating to the business operations of the Borrower and its Subsidiaries: (i) all employee benefit plans, employment agreements where the compensation paid by the Borrower or any Subsidiary exceeds $250,000 in any fiscal year, collective bargaining agreements and labor contracts (the "Labor Contracts"), (ii) all written provider or similar agreements (the "Provider Agreements") pursuant to which the Borrower and its Subsidiaries have received or may claim any entitlement to receive reimbursement from or as a result of (1) Medicaid, Medicare or Blue Cross programs, or (2) any other public or private reimbursement programs where the payments received by the Borrower or any Subsidiary exceeded or are expected to exceed $6,000,000 in the current fiscal year, (iii) all leases of real property where the payments made by the Borrower or any Subsidiary in the current fiscal year exceed or are expected to exceed $250,000, (iv) any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, where the payments made by the Borrower or any Subsidiary exceeded or are expected to exceed $1,000,000 in the aggregate in the current fiscal year; (v) all management contracts pursuant to which the Borrower or a Subsidiary provides management services to any other person where the payments received or expected to be received by the Borrower or any Subsidiary exceed $500,000 in the current fiscal year; and (vi) all other material contracts filed as exhibits to any report filed by the Borrower with the SEC during the past twelve months. All contracts listed on Schedule 6.01(u) and any Provider Agreements which provide ---------------- for annual payments in excess of $6,000,000 which are not listed on Schedule -------- 6.01(u) are valid, binding and enforceable upon the Borrower or its - ------- Subsidiaries, as the case may be, and, to the best knowledge of the Borrower, each of the other parties thereto in accordance with their respective terms and there is no default thereunder, to the knowledge of the Borrower and of its Subsidiaries, with respect to parties other than the Borrower or any of its Subsidiaries. There are no patient care agreements with patients or any other person or organization which deviate in such a material respect from the standard patient care forms used by the Borrower or any of its Subsidiaries as to constitute a Material Adverse Change. (B) Except as set forth on Schedule 6.01(u), the ---------------- Borrower and each of its Subsidiaries has all material accreditations, authorizations, approvals, certificates of need, consents, licenses, permits and qualifications (collectively, "Approvals") required (i) for them to construct, acquire, own, manage, lease and/or operate their facilities and services, (ii) for them to receive payment and reimbursement from any patient or third party payor, to the extent in the case of (i) and (ii) such Approvals are presently required. The Borrower and each of its Subsidiaries have all other material Approvals required for the lawful operation of their businesses. All material Approvals of the Borrower and each of its 46 Subsidiaries are in full force and effect and have not been amended or otherwise modified (except for modifications which would not have a material adverse effect upon the Borrower or any Subsidiary) rescinded, revoked or assigned, and no notice has been received of any violation of applicable Laws or any refusal to renew any Approval which could reasonably be expected to cause any of such Approvals to be modified, rescinded or revoked (except for modifications, rescissions or revocations which would not have a material adverse effect upon the Borrower and its Subsidiaries taken as a whole). The continuation, validity and effectiveness of all such Approvals will be in no way be adversely affected by the transactions contemplated by this Agreement. Neither the Borrower nor any of its Subsidiaries knows of any reason why any of them will not be able to maintain all material Approvals necessary or appropriate to construct, own, lease, manage and operate all of their facilities and to otherwise conduct their businesses as now conducted and presently proposed to be conducted. There are no deficiencies to the conditions for participation by the Borrower or any Subsidiary in any Medicare, Medicaid or other reimbursement programs which would preclude such participation. (v) Investment Companies; Public Utility Holding Company. The ---------------------------------------------------- Borrower is not an "investment company" registered or required to be registered under the Investment Company Act of 1940 or under the "control" of an "investment company" as such terms are defined in the Investment Company Act of 1940 and shall not become such an "investment company" or under such "control." The Borrower is not a "holding company" nor a "subsidiary" or "affiliate" of any Person that is a "holding company" as those terms are defined in the Public Utility Holding Company Act of 1935. (w) Plans and Benefit Arrangements. ------------------------------ (i) The Borrower and each member of the ERISA Group are in compliance in all material respects with any applicable provisions of ERISA with respect to all Benefit Arrangements, Plans and Multiemployer Plans. There has been no Prohibited Transaction with respect to any Benefit Arrangement or any Plan or, to the best knowledge of the Borrower, with respect to any Multiemployer Plan or Multiple Employer Plan, which could result in any material liability of the Borrower or any other member of the ERISA Group. The Borrower and all members of the ERISA Group have made when due any and all payments required to be made under any agreement relating to a Multiemployer Plan or a Multiple Employer Plan or any law pertaining thereto. With respect to each Plan and Multiemployer Plan, the Borrower and each member of the ERISA Group (i) have fulfilled in all material respects their obligations under the minimum funding standards of ERISA, (ii) have not incurred any liability to the PBGC and (iii) have not had asserted against them any penalty for failure to fulfill the minimum funding requirements of ERISA. (ii) To the best of the Borrower's knowledge, each Multiemployer Plan and Multiple Employer Plan is able to pay benefits thereunder when due. (iii) Neither the Borrower nor any other member of the ERISA Group has instituted or intends to institute proceedings to terminate any Plan. 47 (iv) No event requiring notice to the PBGC under Section 302(f)(4)(A) of ERISA has occurred or is reasonably expected to occur with respect to any Plan, and no amendment with respect to which security is required under Section 307 of ERISA has been made or is reasonably expected to be made to any Plan. (v) The aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as disclosed in, and as of the date of, the most recent actuarial report for such Plan, does not exceed the aggregate fair market value of the assets of such Plan by an amount in excess of $250,000. (vi) Neither the Borrower nor any other member of the ERISA Group has incurred or reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan or Multiple Employer Plan. Neither the Borrower nor any other member of the ERISA Group has been notified by any Multiemployer Plan or Multiple Employer Plan that such Multiemployer Plan or Multiple Employer Plan has been terminated within the meaning of Title IV of ERISA and, to the best knowledge of the Borrower, no Multiemployer Plan or Multiple Employer Plan is reasonably expected to be reorganized or terminated, within the meaning of Title IV of ERISA. (vii) To the extent that any Benefit Arrangement is insured, the Borrower and all members of the ERISA Group have paid when due all premiums required to be paid for all periods. To the extent that any Benefit Arrangement is funded other than with insurance, the Borrower and all members of the ERISA Group have made when due all contributions required to be paid for all periods. (x) Employment Matters. The Borrower and each of its ------------------ Subsidiaries are in compliance with the Labor Contracts and all applicable federal, state and local labor and employment Laws including, but not limited to, those related to equal employment opportunity and affirmative action, labor relations, minimum wage, overtime, child labor, medical insurance continuation, worker adjustment and relocation notices, immigration controls and worker and unemployment compensation, where the failure to comply would constitute a Material Adverse Change. There are no outstanding grievances, arbitration awards or appeals therefrom arising out of the Labor Contracts or current or threatened strikes, picketing, handbilling or other work stoppages or slowdowns at facilities of the Borrower or any of its Subsidiaries which in any case would constitute a Material Adverse Change. The Borrower has delivered to the Administrative Agent true and correct copies of each of the Labor Contracts in effect as of the date hereof. (y) Environmental Matters. Except as disclosed on Schedule --------------------- 6.01(y) hereto and except for matters which would not exceed $5,000,000 in the aggregate: (i) Neither Borrower nor any of its Subsidiaries has received any Environmental Complaint, whether directed or issued to Borrower or any of its Subsidiaries or relating or pertaining to any prior owner, operator or occupant of the Property. (ii) To the knowledge of Borrower and each of its Subsidiaries, no activity of the Borrower or any of its Subsidiaries at the Property is being or has been 48 conducted in violation of any Environmental Law or Required Environmental Permit and to the knowledge of Borrower and each of its Subsidiaries no activity of any prior owner, operator or occupant of the Property was conducted in violation of any Environmental Law. (iii) To the knowledge of Borrower and each of its Subsidiaries, there are no Regulated Substances present on, in, under or emanating from, or emanating to, the Property or any portion thereof which result in Contamination. (iv) To the knowledge of Borrower and each of its Subsidiaries, Borrower and each of its Subsidiaries have all Required Environmental Permits and all such Required Environmental Permits are in full force and effect. (v) To the knowledge of Borrower and each of its Subsidiaries, Borrower and each of its Subsidiaries have submitted all Required Environmental Notices which they are required to submit to an Official Body and Borrower and each of its Subsidiaries maintain all Required Environmental Notices which they are required to maintain. (vi) To the knowledge of Borrower and each of its Subsidiaries, no structures, improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks located on the Property contain or use, except in compliance with Environmental Law and Required Environmental Permits, Regulated Substances or otherwise are operated or maintained except in compliance with Environmental Law and Required Environmental Permits. To the knowledge of Borrower and each of its Subsidiaries, no structures improvements, equipment, fixtures, impoundments, pits, lagoons or aboveground or underground storage tanks of prior owners, operators or occupants of the Property contained or used, except in compliance with Environmental Law, Regulated Substances or otherwise were operated or maintained by any such prior owner, operator or occupant except in compliance with Environmental Law. (vii) To the knowledge of Borrower and each of its Subsidiaries, no facility or site to which Borrower or any of its Subsidiaries, either directly or indirectly by a third party, has sent Regulated Substances for storage, treatment, disposal or other management has been or is being operated in violation of Environmental Law or pursuant to Environmental Law is identified or proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Law are the subject of an investigation, cleanup, removal, remediation or other response action by an Official Body. (viii) To the knowledge of Borrower and each of its Subsidiaries, no portion of the Property is identified or proposed to be identified on any list of contaminated properties or other properties which pursuant to Environmental Law are the subject of an investigation or remediation action by an Official Body, nor to Borrower's or any of its Subsidiary's knowledge is any property adjoining or in the proximity of the Property identified or proposed to be identified on any such lists. (ix) To the knowledge of Borrower and each of its Subsidiaries, no portion of the Property constitutes an Environmentally Sensitive Area. 49 (x) No lien or other encumbrance authorized by Environmental Law exists against the Property and neither Borrower nor any of its Subsidiaries has reason to believe that such a lien or encumbrance may be imposed. (xi) To the knowledge of Borrower and each of its Subsidiaries, there has been no material change in the environmental condition (including but not limited to the presence of Contamination or the presence of Regulated Substances in violation of Environmental Law) of any Property as described in any Phase I Environmental Site Assessment report or similar report regarding the environmental condition of such Property or the Borrower's or its Subsidiaries' compliance with Environmental Law a copy of which Borrower has provided to Agent, except for such changes which would result in the improvement of the environmental condition of any such Property or the Borrower's or its Subsidiaries compliance with Environmental Law. (z) Senior Debt Status. The obligations of the Borrower under ------------------ this Agreement and the Notes and the obligations of the Subsidiaries of Borrower under the Guaranties do rank and will rank at least pari passu in priority of ---------- payment with all other Indebtedness of the Borrower or such Subsidiaries, as the case may be, except Indebtedness of the Borrower or its Subsidiaries to the extent secured by Permitted Liens. The obligations of the Borrower under this Agreement and the Notes do not conflict with or violate the terms of the Indenture and the Loans made under this Agreement to the Borrower constitute "Designated Senior Indebtedness" as such term is defined in the Indenture. There is no Lien upon or with respect to any of the properties or income of the Borrower or any of its Subsidiaries which secures Indebtedness or other obligations of any person except for Permitted Liens. (aa) Matters Regarding Leased Facilities and Certain ----------------------------------------------- Indebtedness of Subsidiaries. - ---------------------------- (i) Indebtedness Related to Leased Facilities. Schedule ----------------------------------------- -------- 6.01(aa) describes each Leased Facility and with respect thereto: (1) the - -------- Subsidiary Lessee which is the lessee thereof; (2) the Lessor thereof; (3) the amount of Lessor Indebtedness secured by any assets of such Leased Facility; (4) the Lessor Lender which is the obligee under such Lessor Indebtedness; (5) any assets of the Subsidiary Lessee leasing such Leased Facility which relate to such facility in which such Subsidiary Lessee has granted Liens in favor of the Lessor (it is acknowledged that the Lessor has assigned such Liens to the Lessor Lender) or Lessor Lender and confirmation that such Liens are Permitted Leased Facility Liens and Permitted Liens; (6) the original maturity date of such Lessor Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (7) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Collateral Agent and the Lessor Lender with respect to such Leased Facility; (8) whether the Lessor Lender and Lessor have consented to the grant by the Subsidiary Lessee of a Leasehold Mortgage, in favor of the Collateral Agent for the benefit of the Banks and Liens on the assets of such Subsidiary Lessee (such Liens to be second in priority to the Liens granted by such Subsidiary Lessee to such Lessor Lender in such assets if such Subsidiary granted Liens in such assets to such Lessor Lender) with respect to such Leased Facility; (9) whether the applicable Lessor Lender has 50 agreed to release its liens in the assets of the applicable Subsidiary Lessee leasing such Leased Facility related to such facility; (10) whether the applicable Lessor Lender has entered into a Non-Disturbance Agreement; (11) whether the applicable Lessor Lender has entered into an Intercreditor Agreement with the Collateral Agent; and (12) whether the applicable Lessor Lender has entered into a Trustee Agreement with the Collateral Agent. (ii) Indebtedness Related to Subsidiary Owned Facilities. --------------------------------------------------- Schedule 6.01(aa) describes each Owned Facility and with respect thereto: (1) - ----------------- the Subsidiary Owner; (2) the amount of the Owned Facility Indebtedness, secured by any assets of such Owned Facility; (3) the Owned Facility lender which is the obligee under such Owned Facility Indebtedness; (4) the assets of the Subsidiary Owner relating to such Owned Facility in which the Subsidiary Owner has granted Liens in favor of such Owned Facility Lender and confirmation that such Liens are Permitted Owned Facility Liens and Permitted Liens; (5) the original maturity date of such Owned Facility Indebtedness, without giving effect to subsequent amendments unless permitted by this Agreement; (6) whether a Facility Purchase Option has been granted as part of an Intercreditor Agreement between the Collateral Agent and the Owned Facility Lender with respect to such Owned Facility; (7) whether the Owned Facility Lender has consented to the grant by the Subsidiary Owner of a Mortgage, in favor of the Collateral Agent for the benefit of the Banks and Liens on the assets of such Subsidiary Owner (such Liens to be second in priority to the Liens granted by such Subsidiary Owner to such Owned Facility Lender in such assets if such Subsidiary Owner granted Liens in such assets to such Owned Facility Lender) with respect to such Owned Facility; and (8) whether the applicable Owned Facility Lender entered into an Intercreditor Agreement with the Collateral Agent. (iii) Other matters regarding Owned and Leased Real --------------------------------------------- Property. In addition to the Owned Facilities and the Leased Facilities, - -------- Schedule 6.01(aa) sets forth a true and complete list of all other Property of - ---------------- the Borrower and all other Property of each Subsidiary of the Borrower. (bb) Mortgage and Leasehold Mortgage Liens. The Liens granted to ------------------------------------- the Collateral Agent for the benefit of the Banks pursuant to the Mortgages and the Leasehold Mortgages constitute valid Liens under applicable law having priority over all other Liens except that if otherwise permitted by this Agreement they may be subordinate to Liens in favor of the Owned Facility Lenders and Lessor Lenders, as the case may be, and Schedule 6.01(aa) ----------------- indicates if such Liens are subordinated. All such action as will be necessary or advisable to establish such Liens of the Collateral Agent and its priority as described in the preceding sentence will be taken at or prior to the time required for such purpose, and there will be as of the date of execution and delivery of the Mortgages and Leasehold Mortgages no necessity for any further action in order to protect, preserve and continue such Liens and such priority. Notwithstanding any provision of this Agreement to the contrary, to the extent a Loan Party is required to execute and deliver an Intercreditor Agreement, Leasehold Mortgage or Mortgage, as required by this Agreement, on or after the Closing Date, such agreement shall be entered into by such Loan Party with the Collateral Agent for the ratable benefit of the Banks and on a pari passu basis, the Revolving Credit Loan Banks unless otherwise required by the Administrative Agent. 51 (cc) Affiliate Transactions. Schedule 6.01(cc) hereto sets forth ---------------------- ----------------- a true and complete list of all transactions between the Borrower or any Subsidiary of the Borrower and MPN or any Affiliate of MPN. (dd) Year 2000. The Borrower and its Subsidiaries have reviewed --------- the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the risk that certain computer applications used by the Borrower or its Subsidiaries (or any of their respective material suppliers, customers or vendors) may be unable to recognize and perform properly date-sensitive functions involving dates prior to and after December 31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not result in any Material Adverse Change. (ee) Solvency. The Borrower and each other Loan Party is -------- Solvent. As of the Closing Date and after giving effect to the transactions contemplated by the Loan Documents and the Term Loan Documents, including all Loans made under the Loan Documents and the Term Loan Documents, the Liens granted by the Borrower and each other Loan Party in connection therewith and the payment of all fees related thereto, the Borrower and each other Loan Party will be Solvent. 6.02 Updates to Schedules. Should any of the information or -------------------- disclosures provided on any of the Schedules attached hereto (other than Schedules relating solely to representations and warranties made solely as of the date expressly specified therein, which representations and warranties shall be true and correct as of such specified date) become outdated or incorrect in any material respect, the Borrower shall promptly provide the Administrative Agent in writing with such revisions or updates to such Schedule as may be necessary or appropriate to update or correct the same; provided, however that no Schedule shall be deemed to have been amended, modified or superseded by any such correction or update that would disclose the occurrence of an event or condition which constitutes a Potential Default or Event of Default, nor shall any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule be deemed to have been cured thereby, unless and until the Required Banks, in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule. ARTICLE VII CONDITIONS OF LENDING --------------------- The obligation of each Bank to make the Term Loans hereunder is subject to the performance by the Borrower of its obligations to be performed hereunder at or prior to the making of the Term Loans to the satisfaction of the following conditions: 7.01 Loans. ----- On the Closing Date: (a) Officer's Certificate. The representations and warranties of --------------------- each of the Borrower contained in Article VI and in each of the other Loan Documents shall be true and 52 accurate on and as of the Closing Date with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which relate solely to an earlier date or time, which representations and warranties shall be true and correct on and as of the specific dates or times referred to therein), and all conditions precedent herein and therein to the making of the Term Loans shall have been satisfied, no Event of Default or Potential Default shall have occurred and be continuing or shall exist; and there shall be delivered to the Administrative Agent for the benefit of each Bank a certificate of each of the Loan Parties, dated the Closing Date and signed by a Responsible Officer of each of the Loan Parties, to each such effect. (b) Secretary's Certificate. There shall be delivered to the ----------------------- Administrative Agent for the benefit of each Bank a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of each of the Loan Parties, certifying as appropriate as to: (i) all action taken by each Loan Party in connection with this Agreement and the other Loan Documents; (i) the names of the officer or officers authorized to sign this Agreement and the other Loan Documents and the true signatures of such officer or officers and specifying the Authorized Officers permitted to act on behalf of each Loan Party for purposes of this Agreement and the true signatures of such officers, on which the Administrative Agent and each Bank may conclusively rely; and (ii) copies of its organizational documents, including its certificate of incorporation, bylaws, certificate of limited partnership, partnership agreement, certificate of formation, and limited liability company agreement as in effect on the Closing Date certified by the appropriate state official where such documents are filed in a state office together with certificates from the appropriate state officials as to the continued existence and good standing of each Loan Party in each state where organized or qualified to do business; provided that each of the Loan Parties other than the Borrower may, in lieu of delivering copies of the foregoing organizational documents and good standing certificates, certify that such Loan Party is in good standing as of the date hereof and that the organizational documents previously delivered by the Loan Parties to the Administrative Agent remain in effect and have not been amended. (c) Delivery of Loan Documents. The Collateral Sharing -------------------------- Agreement, Guaranty Agreement, Indemnity, First Mortgages, Notes, Patent, Trademark and Security Agreement, Pledge Agreements, Intercompany Subordination Agreement and Security Agreement shall have been duly executed and delivered to the Collateral Agent for the benefit of the Banks, together with all appropriate financing statements and (to the extent not previously delivered to the Collateral Agent) appropriate stock powers and certificates evidencing the Shares, the Partnership Interests and the LLC Interests. (d) Opinion of Counsel. There shall be delivered to the ------------------ Administrative Agent for the benefit of each Bank a written opinion of Powell, Goldstein, Frazer & Murphy 53 LLP, counsel for the Loan Parties (who may rely on the opinions of such other counsel as may be acceptable to the Agent), dated the Closing Date and in form and substance satisfactory to the Agent and its counsel: (i) as to the matters set forth in Exhibit 7.1.4; and ------------- (ii) as to such other matters incident to the transactions contemplated herein as the Administrative Agent may reasonably request. (e) Legal Details. All legal details and proceedings in ------------- connection with the transactions contemplated by this Agreement and the other Loan Documents shall be in form and substance satisfactory to the Agents and counsel for the Administrative Agent, 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 and said counsel, as the Agents or said counsel may reasonably request. (f) Payment of Fees. The Borrower shall have paid or caused to --------------- be paid to the Administrative Agent for itself and for the account of the Banks to the extent not previously paid all fees accrued through the Closing Date and the costs and expenses for which the Agents and the Banks are entitled to be reimbursed. (g) Environmental Audit. The Loan Parties shall cause to be ------------------- delivered to the Administrative Agent a copy of all existing environmental audit reports with respect to the skilled nursing facilities subject to the First Mortgages. The environmental condition of the Loan Parties' and their Subsidiaries' assets, as substantiated by such audit, shall be reasonably satisfactory to the Administrative Agent in all respects. (h) Consents. All material consents required to effectuate the -------- transactions contemplated hereby as set forth on Schedule 6.01(m)(2) shall have ------------------- been obtained. (i) Officer's Certificate Regarding MACs. Since September 30, ------------------------------------ 1998, no Material Adverse Change in the Borrower, or any of its Subsidiaries shall have occurred; prior to the Closing Date, there shall have been no material change in the management of any Loan Party or Subsidiary of any Loan Party not previously disclosed to the Agents; and there shall have been delivered to the Administrative Agent for the benefit of each Bank a certificate dated the Closing Date and signed by a Responsible Officer of each Loan Party to each such effect. (j) No Violation of Laws. The making of the Loans and the -------------------- issuance of the Letters of Credit shall not contravene any Law applicable to any Loan Party or any of the Banks. (k) No Actions or Proceedings. No action, proceeding, ------------------------- investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, this Agreement, the other Loan Documents or the consummation of the transactions 54 contemplated hereby or thereby or which, in the Administrative Agent's reasonable discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the other Loan Documents. (l) Insurance Policies; Certificates of Insurance; Endorsements. ----------------------------------------------------------- The Loan Parties shall have delivered evidence acceptable to the Administrative Agent that adequate insurance in compliance with Section 8.01(c) [Maintenance of Insurance] is in full force and effect and that all premiums then due thereon have been paid, together with a certified copy of each Loan Party's casualty insurance policy or policies evidencing coverage satisfactory to the Administrative Agent, with additional insured, mortgagee and lender loss payable special endorsements attached thereto in form and substance satisfactory to the Administrative Agent and its counsel naming the Administrative Agent as additional insured, mortgagee and lender loss payee. (m) Title Certificate. The Loan Parties shall deliver title ----------------- insurance certificates to the Collateral Agent for the benefit of the Banks, issued by a title insurance company acceptable to the Administrative Agent and certifying the name of the record owner, all existing mortgages, judgment liens and tax liens encumbering the skilled nursing facilities subject to the First Mortgages and a true and correct and complete legal description of the applicable Loan Parties' fee simple title to all such owned real property of the Loan Parties, as the case may be, and all improvements and all appurtenances thereto. (n) Filing. The Administrative Agent shall have received (1) a ------ deposit sufficient for payment of all taxes, filing fees, recording fees or similar charges required by any governmental authority for recordation or filing necessary to perfect the Lien of the Collateral Agent for the benefit of the Banks on the Collateral (or other arrangements with respect to such taxes, fees and charges shall have been made by the Borrower to the satisfaction of the Administrative Agent); and (2) evidence in a form acceptable to the Administrative Agent that upon such recordation or filing and payment of such taxes, filing fees, recording fees or similar charges, such Liens will constitute a Prior Security Interest in favor of the Collateral Agent for the benefit of the Banks in the case of the UCC Collateral, in the case of the First Mortgages a valid and perfected first priority Lien. (o) Amendment No. 18 to the Revolving Credit Agreement. -------------------------------------------------- Simultaneously with the closing and effectiveness of this Agreement, the closing of Amendment No. 18 to the Revolving Credit Agreement shall have occurred, and the documentation of the revolving credit facility shall be satisfactory in form and substance to the Agents. (p) Lien and Judgment Searches. Borrower shall have delivered to -------------------------- the Administrative Agent the results of a lien and judgment search satisfactory in scope, form and substance to the Administrative Agent evidencing that no Liens exist on the assets of the Borrower or any Subsidiary of the Borrower, except for Permitted Liens. (q) UCC Financing Statements. The Loan Parties shall have ------------------------ delivered to the Administrative Agent all UCC-1 financing statements necessary to perfect the Collateral Agent's Prior Security Interest in the Collateral. 55 (r) Closing Certificate. There shall be delivered to the ------------------- Administrative Agent for the benefit of each Bank a certificate, dated as of the date hereof and signed by a Responsible Officer of the Borrower, certifying as to compliance with all financial covenants in the Credit Agreement and containing calculations in sufficient detail to demonstrate such compliance. Calculation of such pro-forma compliance shall be based upon the consolidated balance sheet and income statement of the Borrower and its Subsidiaries as of September 30, 1998 for the four quarters then ended and shall give effect to all outstanding Indebtedness of the Loan Parties after giving effect to the closing of this Agreement, the Revolving Credit Loan outstanding on the date hereof and the making of the Loans hereunder. Such pro-forma covenants shall establish the levels of interest rates and other fees hereunder, effective as of the date hereof provided that, notwithstanding the above, until the next Delivery Date following the Closing Date, for the purpose of establishing the levels of interest rates, the applicable interest rate shall be deemed to be Euro-Rate plus 2.25% and Base Rate plus .75%. (s) Projections. The Borrower shall have delivered to the ----------- Administrative Agent financial projections of the Borrower and its Subsidiaries prepared on a combined pro-forma basis for the two fiscal years ending September 30, 1998 and September 30, 1999 and for the fiscal quarter of October 1 through December 31, 1999 (the "Financial Projections") derived from various assumptions of the Borrower's management. The Borrower represents and warrants, by execution of this Agreement, that: (i) the Financial Projections represent a reasonable range of possible results in light of the history of the business, present and foreseeable conditions and the intentions of the management of the Borrower, and (ii) the Financial Projections accurately reflect the liabilities of the Borrower and its Subsidiaries upon consummation of the transactions contemplated by this Agreement, all outstanding loans under the Revolving Credit Agreement and Indebtedness of the Borrower hereunder as of the Closing Date. (t) Indenture Certificate. There shall be delivered to the --------------------- Administrative Agent for the benefit of each Bank a certificate, dated as of the date hereof and signed by a Responsible Officer of the Borrower, (i) certifying as to compliance with Section 1008 of the Indenture after giving effect to the amount of loans outstanding under the Revolving Credit Agreement on the date hereof and the $210,000,000 Term Loan hereunder to be made on the date hereof and (ii) representing and warranting to the Agents and each of the Banks that the Term Loans made on the date hereof or hereafter made to the Borrower under the Revolving Credit Agreement will constitute "Designated Senior Indebtedness" as such term is defined in the Indenture. ARTICLE VIII COVENANTS --------- 8.01 Affirmative Covenants. The Borrower covenants and agrees that --------------------- until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower shall comply at all times with the following affirmative covenants: 56 (a) Preservation of Existence, Etc. The Borrower shall, and ------------------------------ shall cause each of its Subsidiaries to, maintain its corporate existence and its qualification to do business as a foreign corporation and good standing in each jurisdiction in which its ownership or lease of property or the nature of its business makes such qualification necessary, except where the failure to be so qualified or in such good standing would not constitute a Material Adverse Change. (b) Payment of Liabilities, Including Taxes, Etc. The Borrower -------------------------------------------- shall, and shall cause each of its Subsidiaries to, duly pay and discharge all liabilities to which it is subject or which are asserted against it, promptly as and when the same shall become due and payable, including all taxes, assessments and governmental charges upon it or any of its properties, assets, income or profits, prior to the date on which penalties attach thereto, except to the extent that such liabilities, including taxes, assessments or charges, are being contested in good faith and by appropriate and lawful proceedings diligently conducted and for which such reserve or other appropriate provisions, if any, as shall be required by GAAP shall have been made, but only to the extent that failure to discharge any such liabilities would not result in any additional liability which would adversely affect to a material extent the financial condition of the Borrower and its Subsidiaries taken as a whole and which would affect the Collateral. (c) Maintenance of Insurance. The Borrower shall, and shall ------------------------ cause each of its Subsidiaries to, insure its properties and assets against loss or damage by fire and such other insurable hazards as such assets are commonly insured (including fire, extended coverage, property damage, worker's compensation, public liability and business interruption insurance) and against other risks (including errors and omissions) in such amounts as similar properties and assets are insured by prudent companies in similar circumstances carrying on similar businesses, and with reputable and financially sound insurers, including self-insurance to the extent customary. At the request of the Administrative Agent, the Borrower shall deliver to the Administrative Agent certificates of insurance signed by the Borrower's independent insurance broker describing and certifying as to the existence of the insurance on the Collateral required to be maintained by this Agreement and other Loan Documents and a summary schedule indicating all insurance then in force with respect to the Borrower. Such policies of insurance shall contain special endorsements, which shall (i) specify the Collateral Agent as additional insured, mortgagee and lender loss payee as its interests may appear, regardless of any breach or violation by the Borrower or its applicable subsidiary of any warranties, declarations or conditions contained in such policies, (ii) provide, except in the case of public liability insurance and workmen's compensation insurance, that all insurance proceeds shall be adjusted and payable in accordance with the terms of the applicable Mortgage or First Mortgage, and (iii) provide that no cancellation of such policies shall be effective until at least thirty (30) days after receipt by the Administrative Agent of written notice of such cancellation or change. Any monies received by the Administrative Agent or Collateral Agent constituting insurance proceeds or condemnation proceeds (pursuant to the Mortgage or First Mortgage) shall be applied in accordance with the terms of the applicable Mortgage or First Mortgage. The insurance requirements set forth herein may be satisfied through blanket insurance obtained and maintained by MPN. 57 (d) Maintenance of Properties and Leases. The Borrower shall, ------------------------------------ and shall cause each of its Subsidiaries to, maintain in good repair, working order and condition (ordinary wear and tear excepted) in accordance with the general practice of other businesses of similar character and size, all of those properties useful or necessary to its business, and from time to time, the Borrower will make or cause to be made all appropriate repairs, renewals or replacements thereof. (e) Maintenance of Patents, Trademarks, Etc. The Borrower shall, --------------------------------------- and shall cause each of its Subsidiaries to, maintain in full force and effect all patents, trademarks, trade names, copyrights, licenses, franchises, permits and other authorizations necessary for the ownership and operation of its properties and business if the failure so to maintain the same would constitute a Material Adverse Change. (f) Visitation Rights. The Borrower shall, and shall cause each ----------------- of its Subsidiaries to, permit any of the officers or authorized employees or representatives of any Agent or any of the Banks to visit and inspect any of its properties and to examine and make excerpts from its books and records and discuss its business affairs, finances and accounts with its officers, all in such detail and at such times during normal business hours and as often as any of the Banks may reasonably request, provided that each Bank shall provide the Borrower and the Administrative Agent with reasonable notice prior to any visit or inspection. In the event any Bank desires to conduct an audit of the Borrower, such Bank shall make a reasonable effort to conduct such audit contemporaneously with any audit to be performed by the Administrative Agent. (g) Keeping of Records and Books of Account. The Borrower shall, --------------------------------------- and shall cause each of its Subsidiaries to, maintain and keep proper books of record and account which enable the Borrower and its Subsidiaries to issue financial statements in accordance with GAAP and as otherwise required by applicable Laws of any Official Body having jurisdiction over the Borrower or any of its Subsidiaries, and which accurately and fairly reflect the transactions and dispositions of assets of the Borrower or such Subsidiary. (h) Plans and Benefit Arrangements. The Borrower shall, and ------------------------------ shall cause each member of the ERISA Group to, comply with ERISA, the Internal Revenue Code and other applicable Laws applicable to Plans and Benefit Arrangements except where such failure, alone or in conjunction with any other failure, would not result in a Material Adverse Change. Without limiting the generality of the foregoing, the Borrower shall cause all of its Plans and all Plans maintained by any member of the ERISA Group to be funded in accordance with the minimum funding requirements of ERISA and shall make, and cause each member of the ERISA Group to make, in a timely manner, all contributions due to Plans, Benefit Arrangements and Multiemployer Plans. (i) Compliance With Laws. The Borrower shall, and shall cause -------------------- each of its Subsidiaries to, comply with all applicable Laws, including all Environmental Laws, in all respects provided that it shall not be deemed to be a violation of this Section 8.01(i) if any failure to comply with any Law would not result in fines, penalties, other similar liabilities or injunctive 58 relief which in the aggregate would constitute a Material Adverse Change. Upon the reasonable request of the Required Banks, the Borrower shall deliver to the Agents and the Banks such opinions of counsel regarding the Loan Parties' compliance with the representations set forth in Sections 6.01(m) and 6.01(u)(B) hereof and other customary matters regarding the compliance of the Loan Parties with applicable healthcare regulatory Laws. (j) Use of Proceeds. The Borrower will use the proceeds of the --------------- Loans only for lawful purposes in accordance with Section 2.05 hereof as applicable and such uses shall not contravene any applicable Law or any other provision hereof. (k) [Intentionally Omitted]. ----------------------- (l) Subordination of Intercompany Loans, Other Loans and ---------------------------------------------------- Advances to the Borrower. Except for Indebtedness described on Schedule 8.01(l), - ------------------------ ---------------- the Borrower shall cause any intercompany Indebtedness, and shall cause any other Indebtedness, loans or advances owed by any Loan Party to any other person (other than a Loan Party) to be subordinated to the Loan Parties' obligations under the Loan Documents on the terms set forth in Exhibit 8.01(l), with such --------------- revisions thereto as are reasonably satisfactory to the Agents. (m) Approval of Financial Statements in Permitted Acquisitions; ----------------------------------------------------------- Notice of Permitted Acquisition. - ------------------------------- (i) Approval of Financial Statements. The Borrower shall -------------------------------- deliver to the Banks a certificate in the form of Exhibit 8.01(m)(i) hereof (the ------------------ "Acquisition Approval Certificate") before making a Permitted Acquisition if they desire that the cash flow of the business to be acquired during periods prior to the acquisition shall be included when they compute Cash Flow from Operations under this Agreement. The Borrower shall attach to such Acquisition Approval Certificate copies of the historical financial statements of the business to be acquired including the annual and interim balance sheets and income statements for at least three (3) fiscal years prior to the Permitted Acquisition and pro forma statements which shall include a combined balance sheet as of the acquisition date and cash flow statements for the preceding year. The pro forma statements shall set forth: (1) Consolidated Cash Flow from Operations of the Loan Parties and the acquired business, adjusted in accordance with clause (A) of the definition of Consolidated Cash Flow from Operations, for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and all outstanding Indebtedness on such date, and (3) the ratio of the amount in clause (2) to the amount in clause (1), which ratio shall not exceed (A) 5.75 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. The Acquisition Approval Certificate shall confirm the accuracy of the foregoing computations and that, after giving effect to the Permitted Acquisition and all outstanding Indebtedness on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such 59 Permitted Acquisition. The Loan Parties may make the Permitted Acquisition prior to receiving the Required Banks' approval of Borrower's Acquisition Approval Certificate with respect thereto; provided that the Loan Parties may not, until they have received such approval, include the cash flow of the business to be acquired for periods prior to the acquisition in their net income when they compute Consolidated Cash Flow from Operations. The Banks shall use their best efforts to respond to the Borrower's request for approval of each Acquisition Approval Certificate within two (2) Business Days following the Banks' receipt of such certificate and shall not unreasonably withhold or delay such approval. (ii) Notice. The Borrower shall deliver to the Banks a notice in ------ the form of Exhibit 8.01(m)(ii) (the "Acquisition Notice Certificate") at least ------------------- two (2) Business Days before making any Permitted Acquisition except for: (1) a Permitted Acquisition described in Section 8.01(m)(i) with respect to which the Borrower is delivering an Acquisition Approval Certificate, or (2) a Permitted Acquisition if the Purchase Price in connection therewith is less than $2,500,000. The Acquisition Notice Certificate shall set forth the ratio of (1) Consolidated Cash Flow From Operations (excluding the cash flow of the acquired business) for the Acquisition Income Reporting Period in connection with such Permitted Acquisition, and (2) Total Indebtedness on the date of the Permitted Acquisition after giving effect to the acquisition and all outstanding Indebtedness on such date, which ratio shall not exceed (A) 5.75 to 1.0 from the Eighteenth Amendment Effective Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. The Acquisition Notice Certificate also shall confirm that, after giving effect to the Permitted Acquisition and all outstanding Indebtedness on the date thereof, no Event of Default shall exist and the Loan Parties shall be in compliance with all of their covenants hereunder, assuming, for purposes of Borrower's financial covenants, that all items of income, expense and cash flow are reported for the Acquisition Income Reporting Period and that all balance sheet items (such as Indebtedness) are measured on the date of such Permitted Acquisition. (iii) Additional Information. With respect to any ---------------------- Acquisition Approval Certificate or Acquisition Notice Certificate, the Borrower shall provide to the Banks, as the Banks may reasonably request detailed calculations and information supporting the financial calculations therein and the financial statements attached thereto. (n) [Intentionally Omitted]. ----------------------- (o) [Intentionally Omitted]. ----------------------- (p) Further Assurances. Each Loan Party shall, from time to ------------------ time, at its expense, faithfully preserve and protect the Collateral Agent's Lien on or perfected security interest in the Collateral as a continuing first priority perfected Lien, subject only to Permitted Liens, and shall do such other acts and things as the Administrative Agent or the Collateral Agent, as the case may be, in its sole discretion may deem necessary or advisable from time to time in order to preserve, perfect and protect the Liens granted under the Loan Documents and to exercise and enforce its respective rights and remedies thereunder with respect to the Collateral. The Loan Parties shall (i) provide to the Administrative Agent and the Collateral Agent within 60 thirty (30) days of the Closing Date a list of all material contracts or agreements which by their terms do not permit the grant of a security interest therein; (ii) use commercial resonable best efforts to obtain within ninety (90) days of the Closing Date any consents or approvals of security interests in any such contract or agreement granted to the Administrative Agent or the Collateral Agent; (iii) to the extent any such consent or approval is obtained and upon receipt thereof, promptly deliver to the Administrative Agent and the Collateral Agent any original of such consent or approval obtained or such other evidence in a form satisfactory to the Administrative Agent and the Collateral Agent of any such consent or approval obtained. (q) Certain Owned Facilities - Termination of Liens; ------------------------------------------------ Intercreditor Agreements. - ------------------------ The Borrower shall: (i) Cause any Lien securing any Owned Facility Indebtedness to be terminated on or before the earlier of: the maturity of such Owned Facility Indebtedness (without giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date, unless such extension of maturity is otherwise approved in accordance with this Agreement) or any refinancing, replacement or substitution of such Owned Facility Indebtedness, unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Owned Facility Indebtedness secured by Liens in favor of an Owned Facility Lender to exceed the amount of such Owned Facility Indebtedness existing on the Sixteenth Amendment Effective Date; (iii) Cause each Subsidiary Owner to not grant a Lien on any asset of such Subsidiary Owner if the Owned Facility Lender has previously terminated its Liens or has never obtained a Lien on such asset; and (iv) Cause each Owned Facility Lender and any other person which loans money to any Subsidiary Owner, or otherwise obtains a Lien on any of the assets of any Subsidiary Owner relating to any of the Owned Facilities (whether by assignment of the Owned Facility Indebtedness or otherwise), on the date of such loan or lien to execute and deliver to the Collateral Agent an Intercreditor Agreement and Borrower shall deliver or cause to be delivered to Administrative Agent a true and correct copy of the original of each Intercreditor Agreement within one (1) Business Day after such agreement has been executed. The Borrower shall use its best efforts to obtain an Intercreditor Agreement. (r) Certain Leased Facilities - Termination of Liens; ------------------------------------------------- Intercreditor Agreements; Trustee Agreements. - -------------------------------------------- The Borrower shall: (i) Cause any Lien securing any Lessor Indebtedness to be terminated on or before the earlier of: (i) the maturity of such Lessor Indebtedness (without 61 giving effect to any extension of such maturity after the Sixteenth Amendment Effective Date unless such extension of maturity is otherwise approved in accordance with this Agreement) or (ii) any refinancing, replacement or substitution of such Lessor Indebtedness unless, in the case of a refinancing, such refinancing is otherwise approved in accordance with this Agreement; (ii) Not permit the amount of Lessor Indebtedness secured by Liens in favor of the Lessor Lenders to exceed the amount of such Indebtedness existing on the Sixteenth Amendment Effective Date; and (iii) Cause each Subsidiary Lessee not to grant a Lien on any asset of such Subsidiary Lessee if the applicable Lessor or Lessor Lender has previously terminated its Liens or has never obtained a Lien on such asset; (iv) Deliver to the Administrative Agent for the benefit of the Banks an Intercreditor Agreement with respect each Lessor Lender and, if reasonably requested by the Administrative Agent, a Non-Disturbance Agreement. Each Non-Disturbance Agreement shall be satisfactory, in form and substance to the Agents. Borrower shall deliver or cause to be delivered to Administrative Agent a true and correct copy of each Non-Disturbance Agreement and the original of each Intercreditor Agreement within one (1) Business Day after such agreement has been executed pursuant to the preceding sentence. The Borrower shall use its best efforts to obtain each Intercreditor Agreement as is reasonably satisfactory, in form and substance, to the Administrative Agent; and (v) Cause if reasonably requested by the Administrative Agent, each Lessor listed on Schedule 6.01(aa) to execute and deliver to the ----------------- Administrative Agent a Trustee Agreement; provided, however, that if, with respect to Leased Facilities leased by Loan Parties prior to the Closing Date, following the Closing Date the Loan Parties are otherwise in compliance with all requirements under this Agreement relating to Lessor Indebtedness, Leased Facilities and Permitted Leased Facility Liens, then no additional Trustee Agreements will be required with respect to such Leased Facilities so long as the lease of such facility continues following the Closing Date on terms and conditions identical to those in effect prior to the Closing Date. Each Trustee Agreement shall be satisfactory, in form and substance to the Administrative Agent. 8.02 Negative Covenants. The Borrower covenants and agrees that ------------------ until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower shall comply with the following negative covenants: (a) Indebtedness. Subject to Section 8.02(v), the Borrower shall ------------ not, and shall not permit any of its Restricted Subsidiaries to, at any time create, incur, assume or suffer to exist any Indebtedness, except: (i) Indebtedness under the Loan Documents; 62 (ii) Existing Indebtedness as of the Closing Date as set forth on Schedule 8.02(a) hereto (including, subject to the other provisions of ---------------- this Agreement, any extensions or renewals thereof provided there is no increase in the amount thereof or other significant change in the terms thereof adverse to any Loan Party or to any Bank unless otherwise specified on Schedule -------- 8.02(a)); provided further that the Owned Facility Indebtedness and Lessor - -------- Indebtedness are also subject to the covenants and limitations described in Sections 8.01(q) and (r) and any refinancing, extension or renewal of any Owned Facility Indebtedness or Lessor Indebtedness is also subject to satisfaction of the conditions set forth in Exhibit 1.01(C) hereto; --------------- (iii) Capitalized leases existing as of September 30, 1998 and as and to the extent permitted under Section 8.02(w); (iv) Indebtedness which is subordinated in accordance with the provisions of Section 8.01(1); (v) Indebtedness secured by Purchase Money Security Interests permitted under Section 8.02(b); (vi) Indebtedness of a Loan Party to the Borrower or to a wholly-owned Subsidiary of the Borrower; (vii) the Subordinated Notes, provided that neither the subordination provisions contained in the Indenture nor Section 1008 [Limitation on Indebtedness] of the Indenture shall be amended after the Subordinated Indebtedness Incurrence Date and provided further that the Indenture is not otherwise amended after the Subordinated Indebtedness Incurrence Date if the effect thereof would (i) accelerate the due date or increase the amount of any payment due from the Borrower thereunder, (ii) change the rate at which interest is charged thereunder, or (iii) impose material restrictions or obligations on the Borrower or the other Loan Parties which are not imposed thereunder on the Closing Date or add any term thereto which is less favorable in any material respect to the Loan Parties than the terms of the Indenture on the Subordinated Indebtedness Incurrence Date or which is more restrictive to any of the Loan Parties than the terms of the Credit Agreement; (viii) Guaranties which constitute Indebtedness as permitted pursuant to Section 8.02(c); (ix) Indebtedness not exceeding $500,000 of the Borrower to First Union National Bank (f.k.a. CoreStates Bank, N.A.) in respect of an overnight unsecured overdraft facility at any time; (x) Owned Facility Indebtedness incurred after the Closing Date, if the principal amount of and other terms and conditions with respect to such Owned Facility Indebtedness are acceptable to the Required Banks, (including, without limitation, satisfaction of all conditions set forth on Exhibit 1.01(C)); provided, that all Owned Facility Indebtedness is subject - ---------------- to the covenants and limitations set forth in Section 8.01(q); 63 (xi) the Permitted Subordinated Indebtedness; (xii) Indebtedness under the Revolving Credit Loan Agreement; and (xiii) Indebtedness not otherwise permitted under clauses (i) through (xii) of this Section 8.02(a), provided that the aggregate amount of Indebtedness outstanding pursuant to this paragraph and Indebtedness outstanding pursuant to Section 8.02(a)(v) shall not at any time exceed $15,000,000. (b) Liens. The Borrower shall not, and shall not permit any of ----- the other Loan Parties or Unrestricted Subsidiary which is an Excluded Entity with respect to which Restricted Investments have been made as permitted pursuant to Section 8.02(d)(iv) to, at any time create, incur, assume or suffer to exist any Lien on any of its or their property or assets, tangible or intangible, now owned or hereafter acquired, or agree or become liable to do so, except Permitted Liens. (c) Guaranties. Except as described in Schedule 8.02(c), the ---------- ---------------- Borrower shall not, and shall not permit any of the other Loan Parties to, at any time, directly or indirectly, become or be liable in respect of any Guaranty except: (i) Guaranties of any obligation or liability of another Loan Party that is permitted under the other provisions of this Agreement, (ii) Guaranties which are not required by GAAP to be disclosed in the Borrower's audited consolidated financial statements (including the footnotes thereto), (iii) Guaranties of Indebtedness incurred as part of a permitted Restricted Investment pursuant to Section 8.02(d)(iv), (iv) Guaranties which are subordinated on terms reasonably acceptable to the Administrative Agent, and (v) Guaranties of Indebtedness under the Revolving Credit Loan Agreement. (d) Loans and Investments. The Borrower shall not, and shall not --------------------- permit any of the other Loan Parties, to, at any time make or suffer to remain outstanding any loan or advance to, or purchase, acquire or own any stock, bonds, notes or securities of, or any partnership interest (whether general or limited) in, or any other investment or interest in, or make any capital contribution to, any other person, or agree, become or remain liable to do any of the foregoing, except: (i) trade credit extended on usual and customary terms in the ordinary course of business; (ii) advances to employees to meet expenses incurred by such employees in the ordinary course of business; (iii) Permitted Investments; (iv) Restricted Investments made prior to the Closing Date as set forth on Schedule 8.02(d) and, subject to Section 8.02(w), Restricted ---------------- Investments made on or after the Closing Date; provided that with respect to any Restricted Investment, the Borrower is 64 in compliance with all of the following: (i) the Excluded Entity in which a Restricted Investment is or has been made is engaged in a business which is ancillary and related to the business of the Loan Parties; (ii) the Loan Party that makes or made the Restricted Investment is either a shareholder, member or partner of the Excluded Entity in which the Restricted Investment was made; (iii) the stock, equity interests in a limited liability company or partnership interests owned by a Loan Party in the Excluded Entity in which the Restricted Investment is or has been made are pledged to the Collateral Agent on a first priority basis for the benefit of the Banks; (iv) to the extent that any Excluded Entity incurs Indebtedness payable to any person other than a Loan Party (the "Third Party Lender") in excess of $5,000,000, prior to incurring such Indebtedness, the Borrower shall cause the Third Party Lender to enter into an intercreditor agreement with the Collateral Agent on behalf of the Banks, in form and substance satisfactory to the Administrative Agent and the Collateral Agent in its sole discretion with respect to the Indebtedness of such Excluded Entity payable to the Third Party Lender and any Indebtedness of such Excluded Entity payable to either the Banks or any Loan Party; and (v) to the extent that any individual Restricted Investment exceeds $7,500,000 or any series of related Restricted Investments in the aggregate exceeds $7,500,000 prior to making any such Restricted Investment, the Borrower obtained the written approval of the Required Banks; (v) loans, advances and investments in Restricted Subsidiaries; and (vi) loans and advances in the aggregate not to exceed $8,000,000 at any time outstanding to officers and senior management of the Loan Parties, so long as each such advance is on terms and conditions reasonably satisfactory to the Agents and so long as the Borrower gives five (5) Business Days' prior notice to the Administrative Agent of each loan or advance and the recipient of each loan or advance is reasonably satisfactory to the Agents. (e) Amounts Paid by the Borrower to MPN; Dividends and Related ---------------------------------------------------------- Distributions. The Borrower shall not, and shall not permit any of its - ------------- Subsidiaries to, make or pay, or agree to become or remain liable to make or pay, any dividend or other distribution of any nature (whether in cash, property, securities or otherwise) on account of or in respect of their respective shares of capital stock or partnership interests, as the case may be, or on account of the purchase, redemption, retirement or acquisition of their respective shares of capital stock (or warrants, options or rights therefor) or partnership interests, as the case may be, except (i) dividends or distributions in respect of a partnership interest or capital stock payable by any Subsidiary to the Borrower or any other Restricted Subsidiary, (ii) dividends payable by the Borrower solely in shares of capital stock of the Borrower, (iii) up to the Permitted Distribution Amount of distributions per year payable in the aggregate by any Subsidiary of the Borrower which is a limited liability company or partnership to non-Affiliate members of such limited liability company or non- Affiliate limited partners of such partnership, so long as after giving effect thereto no Event of Default or Potential Default has occurred and is continuing and so long as at least five (5) Business Days prior to the making of any such distribution the Borrower provides written notice to the Administrative Agent, together with a detailed calculation, certified by the Chief Financial Officer of Borrower, setting forth in detail the relevant Subsidiary's 65 compliance with the ratio set forth in clause (A) of the definition of Permitted Distribution Amount or, as the case may be, such Subsidiary's compliance with clause (B) of the definition of Permitted Distribution Amount, in either case with respect to the proposed distribution as of the date of the making thereof, (iv) so long as no Event of Default or Potential Default exists and is continuing after giving effect thereto, a one-time dividend by the Borrower to MPN payable on such date as the Borrower elects (so long as at least seven (7) days prior to such payment, the Borrower has delivered to the Administrative Agent a certification that after giving effect to such dividend or distribution no Event of Default or Potential Default exists and is continuing and that the Borrower is in pro-forma compliance with the financial covenants set forth in Section 8.02(r) [Maximum Leverage Ratio] and Section 8.02(u) [Senior Indebtedness to Cash Flow from Operations Ratio], with such certification setting forth a detailed calculation of the Borrower's pro-forma compliance with such financial covenants), in an amount not exceeding, as of the date of payment, the Adjusted Net Income of the Borrower and its Subsidiaries determined in accordance with GAAP for the most recent twelve fiscal calendar months prior to such date of payment; (v) amounts payable by the Borrower to MPN as reimbursement of ordinary course business expenses of the Borrower paid by MPN on behalf of the Borrower; and (vi) during periods prior to the effectiveness of the Eighteenth Amendment , dividends or distributions by the Borrower to MPN not to exceed in the aggregate $25 million to reimburse MPN for costs and expenses incurred in connection with the Paragon Acquisition. For purposes of this Section 8.02(e) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02, (r), and (u): (i) Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination (after giving effect, without duplication, to each dividend or distribution and each purchase or redemption of the Borrower's stock, as applicable); and (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination (after giving effect to each dividend or distribution and each purchase or redemption of the Borrower's stock) based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent. (iii) (f) Liquidations, Mergers, Consolidations, Acquisitions. The --------------------------------------------------- Borrower shall not, and shall not permit any of the other Loan Parties to, dissolve, liquidate or wind-up its affairs, or become a party to any merger or consolidation, or acquire by purchase, lease or otherwise all or substantially all of the assets or capital stock of any other person, provided that: (i) any wholly owned Subsidiary of the Borrower may consolidate or merge into the Borrower (so long as the Borrower is the survivor) or any other wholly owned Subsidiary of the Borrower; 66 (ii) a Subsidiary of the Borrower that is not a Material Subsidiary may be dissolved, liquidated or wound up provided that from the date of this Agreement through the Expiration Date, the total assets of the non- Material Subsidiaries which so dissolve, liquidate or wind up shall not exceed $25,000,000 in the aggregate; (iii) subject to Section 8.02(w), the Borrower or a Restricted Subsidiary of the Borrower may acquire all of the capital stock of another corporation so long as (u) the assets of such acquired corporation are pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Security Agreement, First Mortgage and other Loan Documents, as applicable and such acquired corporation, simultaneous with the acquisition thereof by a Loan Party, executes and delivers to the Administrative Agent for the benefit of the Banks a Guaranty Agreement and to the Collateral Agent for the benefit of the Banks a Pledge Agreement in form and substance satisfactory to the Administrative Agent, and also delivers to the Administrative Agent such opinions of counsel and other documents in connection therewith as the Administrative Agent may reasonably request, (v) all of the issued and outstanding capital stock of such acquired corporation owned by a Loan Party is pledged to the Collateral Agent for the benefit of the Banks pursuant to a Pledge Agreement in form and substance satisfactory to the Administrative Agent, (w) after giving effect to such proposed acquisition, no Event of Default shall have occurred and be continuing, (x) after giving effect to such proposed acquisition (and without limiting the generality of the preceding clause (iii)(w)), the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance), and (y) in the case of a merger involving the Borrower, the Borrower shall be the survivor of such merger, and in the case of a merger involving any Restricted Subsidiary the survivor of such merger shall be either such Restricted Subsidiary or a person which, effective upon consummation of such merger shall have become a Restricted Subsidiary of the Borrower, shall have joined this Agreement and the other Loan Documents as a Loan Party (including, without limitation, execution and delivery of a Guaranty Agreement substantially in the form of Exhibit 1.01(G)), shall have delivered such --------------- opinions of counsel and other documents as the Administrative Agent may reasonably request, whose equity interests shall have been pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Pledge Agreement and whose assets shall have been pledged to the Collateral Agent for the benefit of the Banks on a first priority perfected basis pursuant to a Security Agreement, First Mortgage and other Loan Documents, as applicable; and (iv) subject to Section 8.02(w), the Borrower or any Restricted Subsidiary may merge or consolidate with, or acquire all or substantially all of the assets of another person so long as (y) after giving effect to such proposed acquisition, merger or consolidation the Borrower or a Restricted Subsidiary of the Borrower is the survivor entity, all of the assets acquired pursuant to such merger are pledged pursuant to a Security Agreement, First Mortgage and other Loan Documents on a first priority perfected basis, and no Event of Default shall have occurred and be continuing; and (z) after giving effect to such proposed acquisition, merger or consolidation, the Borrower is in compliance with the Leverage Ratio set forth in Section 8.02(r) and the Borrower demonstrates such compliance pursuant to Section 8.01(m) (if Section 8.01(m) requires such demonstration of compliance). 67 For purposes of the preceding clauses (iii)(y) and (iv)(z), the Leverage Ratio set forth in Section 8.02(r) shall be calculated as follows: (i) Total Indebtedness shall be determined as of the date of the proposed acquisition, after giving effect thereto, and (ii) Consolidated Cash Flow from Operations shall be calculated for the twelve-month period ending on the last day of the fiscal quarter of the Borrower which precedes such date of acquisition. (g) Dispositions of Assets or Subsidiaries. The Borrower shall -------------------------------------- not, and shall not permit any of the other Loan Parties to, sell, convey, assign, lease, abandon or otherwise transfer or dispose of, voluntarily or involuntarily, any of its properties or assets, tangible or intangible (including but not limited to sale, assignment, discount or other disposition of accounts, contract rights, chattel paper, equipment or general intangibles with or without recourse or of capital stock, shares of beneficial interest or partnership interests of a Subsidiary of the Borrower), except: (i) any sale, transfer or lease of assets in the ordinary course of business which are no longer necessary or required in, or which are not material to, the conduct of the Borrower's or such Subsidiary's business, provided that such sales, transfers or leases of assets shall not exceed in the aggregate for the Borrower and its Subsidiaries $10,000,000 (based upon fair market value at the time of the sale) for the period from and after the Eighteenth Amendment Effective Date; (ii) any sale, transfer or lease of assets by any wholly- owned Loan Party to the Borrower or any other wholly owned Loan Party (or by the Borrower to a wholly owned Loan Party); (iii) any sale, transfer or lease of assets in the ordinary course of business which are replaced by substitute assets acquired or leased within the parameters of Section 8.02(w) provided such substitute assets are subject to the Banks' Prior Security Interest; (iv) any sale or transfer of assets which are obsolete or no longer used or useful in the business of the Borrower or its Subsidiaries; provided that such sales, transfers or dispositions shall not exceed, in any fiscal year, $1,000,000 in the aggregate for the Borrower and its Subsidiaries; (v) any sale, transfer or lease of assets, other than those specifically excepted pursuant to clauses (i) through (iv) above, which either: (A) has aggregate Net Sale Proceeds for the Borrower and its Subsidiaries for the period from and after the Closing Date which do not exceed $35,000,000 or (B) is approved by the Required Banks so long as in the case of a transaction under clause (A) or (B), the Borrower complies with all of the following: (w) the proceeds received by the applicable Loan Party shall equal the fair market value of the asset sold, transferred or leased, (x) the proceeds of such sale, transfer or lease are applied as a mandatory prepayment of the Loans in accordance with the provisions of Section 5.05 of this Agreement, (y) after giving effect to such proposed disposition, no Event of Default or Potential Default shall have occurred and be continuing, and (z) after giving effect to such proposed disposition (and without limiting the generality of the foregoing clause (y)), the 68 Borrower is in compliance (and with respect to sales, transfers or leases of assets which individually or in a series of related transactions equal or exceed $5,000,000, the Borrower demonstrates such compliance to the Administrative Agent in detail reasonably satisfactory to the Administrative Agent by the delivery to the Administrative Agent, at least five (5) days prior to such transaction of a compliance certificate,) on a proforma basis, after giving effect to such sale, transfer or lease, with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u); and (vi) any distribution or dividend permitted under Section 8.02 (e) (iv), (v), or (vi). For purposes of this Section 8.02(g) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u): (i) Consolidated Net Worth, Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination (after giving effect to the proposed sale, transfer or lease of assets); (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent, but excluding therefrom all amounts attributable to the assets sold, transferred or leased; and (iii) the denominator (set forth in clause (y) of Section 8.02(q)) of the Fixed Charge Coverage Ratio shall be determined after giving effect to the proposed sale, transfer or lease of assets for purposes of the pro forma determination of interest expense and of current maturities of long-term Indebtedness. (h) Affiliate Transactions. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into or carry out any transaction with any Affiliate (including, without limitation, purchasing property or services from or selling property or services) unless such transaction is entered into in the ordinary course of business upon terms and conditions that are no less favorable to the Borrower or such Subsidiary than those that would be available in comparable transactions in arms-length dealings with unrelated third parties or unless such transaction is not otherwise prohibited by this Agreement. (i) Subsidiary, Partnerships and Joint Ventures. The Borrower shall not, and shall not permit any Subsidiary to, own or create directly or indirectly any Subsidiaries other than those listed in Schedule 6.01(c); ---------------- provided, however, that the Borrower or a Restricted Subsidiary may acquire a Subsidiary pursuant to Section 8.02(f) or form a new Subsidiary so long as (A) if such Subsidiary is a Restricted Subsidiary it executes and delivers to the Administrative Agent for the benefit of the Banks a Guaranty Agreement substantially in the form of Exhibit 1.01(G), and also delivers to the --------------- Administrative Agent such opinions of counsel and other documents as the Administrative Agent may reasonably request; and (B) all of the issued and outstanding capital stock or other equity interests of such Subsidiary owned by a Loan 69 Party are pledged to the Collateral Agent for the benefit of the Banks, such pledge to be a first priority perfected pledge pursuant to a Pledge Agreement and all of the assets of such Subsidiary are pledged on a first priority perfected basis to the Collateral Agent for the benefit of the Banks pursuant to a Security Agreement, First Mortgage, Leasehold Mortgage and the other applicable Loan Documents. If Borrower is forming a new Subsidiary (as opposed to acquiring a Subsidiary) the obligations set forth in clauses (A) and (B) of the preceding sentence shall arise only at such time as such new Subsidiary either commences construction of a health care facility or related health care business, acquires a health care facility or makes another acquisition permitted under this Agreement or has a net book value, as determined under GAAP, of at least $250,000. Except for investments permitted under Section 8.02(d)(iv), neither the Borrower nor any Subsidiary shall become or agree to become a general or limited partner in any general or limited partnership or a joint venturer in any joint venture. (j) Continuation of or Change in Business. The Borrower shall ------------------------------------- not, and shall not permit any Subsidiary to, engage in any business other than (i) its existing business, substantially as conducted and operated as of the Closing Date and (ii) related health care businesses. (k) Plans and Benefit Arrangements. The Borrower shall not, and ------------------------------ shall not permit any of its Subsidiaries to: (i) fail to satisfy the minimum funding requirements of ERISA and the Internal Revenue Code with respect to any Plan; (ii) request a minimum funding waiver from the Internal Revenue Service with respect to any Plan; (iii) engage in a Prohibited Transaction with any Plan, Benefit Arrangement or Multiemployer Plan which, alone or in conjunction with any other circumstances or set of circumstances resulting in liability under ERISA, would constitute a Material Adverse Change; (iv) permit the aggregate actuarial present value of all benefit liabilities (whether or not vested) under each Plan, determined on a plan termination basis, as disclosed in the most recent actuarial report completed with respect to such Plan, to exceed, as of any actuarial valuation date, the fair market value of the assets of such Plan by an amount in excess of $250,000; (v) fail to make when due any contribution to any Multiemployer Plan that the Borrower or any member of the ERISA Group may be required to make under any agreement relating to such Multiemployer Plan, or any Law pertaining thereto; (vi) withdraw (completely or partially) from any Multiemployer Plan or withdraw (or be deemed under Section 4062(e) of ERISA to withdraw) from any Multiple Employer Plan, where any such withdrawal is likely to result in a material liability of Borrower or any member of the ERISA Group; 70 (vii) terminate, or institute proceedings to terminate, any Plan, where such termination is likely to result in a material liability to the Borrower or any member of the ERISA Group; (viii) make any amendment to any Plan with respect to which security is required under Section 307 of ERISA; or (ix) fail to give any and all notices and make all disclosures and governmental filings required under ERISA or the Internal Revenue Code, where such failure is likely to result in a Material Adverse Change. (l) Fiscal Year. The Borrower shall not, and shall not permit ----------- any of its Subsidiaries to, change its fiscal year from the twelve-month period beginning January 1 and ending December 31. (m) Issuance of Stock. The Borrower shall not permit any of its ----------------- Subsidiaries to issue any additional shares of capital stock, partnership interests or member interests in a limited liability company or any options, warrants or other rights in respect thereof; provided, however, than an Unrestricted Subsidiary which is an Excluded Entity may issue additional capital stock, partnership interests or member interests in a limited liability company so long as all such capital stock, partnership interests or member interests in a limited liability company which are owned, beneficially, of record, or otherwise, by any Loan Party are pledged to the Banks as a first priority perfected pledge pursuant to a Pledge Agreement, and provided further that any Restricted Subsidiary may issue additional capital stock, partnership interests or member interests in a limited liability company so long as such capital stock, partnership interests or member interests in a limited liability company are pledged to the Collateral Agent for the benefit of the Banks (subject only to any pari passu pledge to the Revolving Credit Banks and the Collateral Sharing Agreement) as a first priority perfected pledge pursuant to a Pledge Agreement. (n) [Intentionally Omitted]. ----------------------- (o) [Intentionally Omitted]. ----------------------- (p) [Intentionally Omitted]. ----------------------- (q) Minimum Fixed Charge Coverage Ratio. The Borrower shall not ----------------------------------- at any time permit the ratio (the "Fixed Charge Coverage Ratio") of (x) the sum of Consolidated Cash Flow from Operations and operating lease expense to (y) the sum of its interest expense, operating lease expense and current maturities of long-term Indebtedness (other than the sum of (i) current maturities of obligations in respect of capital leases, (ii) for fiscal quarters ending on and after March 31, 1999, current maturities of the Loans; and (iii) for fiscal quarters ending on and after March 31, 1999 current maturities of Indebtedness under the Revolving Credit Loan Agreement) in each case determined and consolidated in accordance with GAAP to be less than 1.85 to 1.0. Such ratio shall be calculated as of the end of each fiscal quarter. Calculations as of the end of each fiscal quarter shall be for the four fiscal quarters then ended. 71 (r) Maximum Leverage Ratio. The Borrower shall not at any time ---------------------- permit the ratio of Total Indebtedness to Consolidated Cash Flow from Operations to exceed (A) 5.75 to 1.0 from the Closing Date through and including June 30, 1999; and (B) 5.50 to 1.0 from July 1, 1999 and thereafter. For purposes of this Section 8.02(r), Total Indebtedness shall be calculated as of each date of determination and Consolidated Cash Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (s) Minimum Consolidated Cash Flow from Operations. The Borrower ---------------------------------------------- shall not at any time permit Consolidated Cash Flow from Operations as of the end of any fiscal quarter for the four fiscal quarters then ended to be less than $116,000,000. (t) Minimum Net Worth. The Borrower shall not at any time permit ----------------- Consolidated Net Worth to be less than the amount under the following clause (A) reduced by the amount under the following clause (B): (A) The sum of (i) $323,789,000 plus (ii) fifty percent (50%) of Consolidated Net Income of the Borrower and its Subsidiaries for each fiscal quarter in which net income was earned (as opposed to a net loss) during the period from October 1, 1998 through (and including) the date of determination, plus (iii) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances for cash of equity securities and other equity capital investments on or after October 1, 1998, plus (iv) one hundred percent (100%) of all increases in capital stock and additional paid-in capital from issuances of equity securities in connection with the acquisition of any Subsidiary on or after October 1, 1998 (so long as the fair market value at the time of acquisition of the Subsidiary so acquired is at least equal to the value of the capital stock or other equity securities so issued), reduced by (B) The sum of (i) the amount of any dividend or other distribution actually paid by the Borrower to MPN on or after October 1, 1998 pursuant to Section 8.02(e)(iv), plus (ii) the amount of any dividend or other distribution actually paid by the Borrower to MPN on or after October 1, 1998 pursuant to Section 8.02(e)(vi) in respect of costs or expenses incurred by MPN in connection with the Paragon Acquisition to the extent that the reimbursed item is not deducted as an expense in the determination of Consolidated Net Income of the Borrower and its Subsidiaries, plus (iii) the amount of any net losses (determined on a consolidated basis for the Borrower and its Restricted Subsidiaries in accordance with GAAP) arising solely as a result of charges described in clauses (i), (ii) or (iii) of the definition of Approved Charges, plus (iv) subject to the prior written approval of the Required Banks, the amount of any non-cash charges to write-down goodwill in accordance with FAS 121. (u) Senior Indebtedness to Cash Flow From Operations Ratio. The ------------------------------------------------------ Borrower shall not at any time permit the ratio of (i) Adjusted Total Indebtedness to (ii) Consolidated Cash Flow from Operations to exceed (A) 4.50 to 1.0 from the Closing Date through and including June 30, 1999; and (B) 4.25 to 1.0 from July 1, 1999 and thereafter. For purposes of this Section 8.02(u), Adjusted Total Indebtedness shall be calculated as of each date 72 of determination and Consolidated Cash Flow from Operations shall be calculated as of each date of determination for the four fiscal quarters then ended. (v) Incurrence of Indebtedness Permitted by the Indenture. So ----------------------------------------------------- long as any Indebtedness or other obligations (monetary or otherwise) are outstanding under the Indenture the Borrower shall not, and shall not permit any of its Subsidiaries to, at any time create, incur, assume or suffer to exist any Indebtedness unless the incurrence thereof complies with the provisions of Section 1008. [Limitation on Indebtedness] of the Indenture as in effect on the Ninth Amendment Effective Date without giving any effect to any grace period under the Indenture or waiver under the Indenture of any default of such covenant. (w) Maximum Amount of Certain Expenditures of the Borrower. The ------------------------------------------------------ Borrower shall not and shall not permit any of its Subsidiaries, during the period commencing on the Closing Date through and including the Expiration Date, to make aggregate expenditures in excess of $61,700,000 (the "Designated Amount") in respect of the following: (i) acquisitions permitted by clauses (iii) or (iv) of Section 8.02(f); (ii) maintenance and replacement capital expenditures and other capital expenditures; (iii) amounts expended for construction of facilities which are not considered capital expenditures under GAAP and therefore would not be included under clause (ii) above; and (iv) Restricted Investments made on or after the Closing Date as permitted by Section 8.02(d)(iv); At least seven (7) days prior to making any expenditure specified in clauses (i) or (iv), above, the Borrower shall deliver to the Administrative Agent, for the benefit of the Banks a detailed certificate showing Borrower's pro-forma compliance with the financial covenants set forth in Sections 8.02(q), 8.02(r), 8.02(s), 8.02(t) and 8.02(u), after giving effect to the proposed expenditure, including, without limitation, the effect of any cash to be expended or Indebtedness to be incurred in connection therewith. The Borrower expressly agrees that, notwithstanding the foregoing, at least $20,000,000 of the Designated Amount shall be designated for expenditures by the Borrower and its Subsidiaries in the nature of maintenance capital expenditures. For purposes of this Section 8.02(w) and the demonstration of pro forma compliance with the financial covenants set forth in Sections 8.02(q), (r), (s), (t) and (u): (i) Consolidated Net Worth, Adjusted Total Indebtedness and Total Indebtedness shall be calculated as of each date of determination after giving effect to the proposed transaction under items (i) through (v) above (including any Indebtedness incurred in connection therewith); 73 (ii) Consolidated Cash Flow from Operations and Consolidated Net Income shall be calculated as of each date of determination based upon the four fiscal quarters most recently then ended for which a Compliance Certificate has been delivered to the Administrative Agent and shall be adjusted to give effect to any transaction under items (ii) through (v) above but shall only be adjusted to give effect to any acquisition under clause (i) above only if permitted by Section 8.01(m); and (iii) the denominator (set forth in clause (y) of Section 8.02(q)) of the Fixed Charge Coverage Ratio shall be determined after giving effect to the proposed transaction under items (i) through (v) above (including any Indebtedness incurred in connection therewith) for purposes, without limitation, of the pro forma determination of interest expense and of current maturities of long-term Indebtedness. (x) Negative Pledges. Except as set forth on Schedule 8.02(x), ---------------- ---------------- Borrower shall not and shall not permit any of its Subsidiaries to enter into any agreement with any person which prohibits the Loan Parties from granting Liens to the Collateral Agent, the Agents or the Banks. (y) Prohibition of Defeasance of Subordinated Notes. The ----------------------------------------------- Borrower shall not and shall not permit any of its Subsidiaries to make any payments to the trustee under the Indenture or to any holders of Subordinated Notes in payment of the defeasance or covenant defeasance of the Subordinated Notes pursuant to Section 402 or 403 of the Indenture or any similar provision in any supplement to the Indenture. Nothing in this subsection (y) shall prohibit the purchase by the Borrower of Subordinated Notes pursuant to Section 8.02(d)(vii) or the refinancing of the Subordinated Notes with Permitted Subordinated Indebtedness. 8.03 Reporting Requirements. The Borrower covenants and agrees ---------------------- that until payment in full of the Loans and interest thereon, satisfaction of all of the Borrower's other obligations hereunder and termination of the Commitments, the Borrower will furnish or cause to be furnished to the Administrative Agent and each of the Banks: (a) [Intentionally Omitted]. ----------------------- (b) Quarterly Financial Statements. As soon as available and in ------------------------------ any event within forty-five (45) calendar days after the end of each fiscal quarter in each fiscal year, financial statements of the Borrower, consisting of a consolidated balance sheet as of the end of such fiscal quarter and related consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and the fiscal year through that date, all in reasonable detail and certified by a Responsible Officer of the Borrower as having been prepared in accordance with GAAP, consistently applied (subject to normal year-end audit adjustments), and setting forth in comparative form the respective financial statements for the corresponding date and period in the previous fiscal year. (c) Annual Financial Statements. As soon as available and in any --------------------------- event within ninety (90) days after the end of each fiscal year of the Borrower, financial statements of the Borrower consisting of a consolidated balance sheet as of the end of such fiscal 74 year, and related consolidated statements of income, retained earnings and cash flows for the fiscal year then ended, all in reasonable detail and setting forth in comparative form the financial statements as of the end of and for the preceding fiscal year, and certified by independent certified public accountants of nationally recognized standing satisfactory to the Administrative Agent. The certificate or report of accountants shall be free of qualifications (other than any consistency qualification that may result from a change in the method used to prepare the financial statements as to which such accountants concur) and shall not include a statement which indicates the occurrence or existence of any event, condition or contingency which would materially impair the prospect of payment or performance of any covenant, agreement or duty of the Borrower or any of its Subsidiaries under any of the Loan Documents, together with a letter of such accountants substantially to the effect that, based upon their ordinary and customary examination of the affairs of the Borrower and its Subsidiaries, performed in connection with the preparation of such consolidated financial statements, and in accordance with generally accepted auditing standards, they are not aware of the existence of any condition or event with constitutes an Event of Default or Potential Default or, if they are aware of such condition or event, stating the nature thereof. (d) Certificate of the Borrower. Concurrent with the financial --------------------------- statements of the Borrower furnished to the Administrative Agent and to the Banks pursuant to Sections 8.03(b) and 8.03(c) hereof, a certificate of the Borrower signed by a Responsible Officer in the form of Exhibit 8.03(d) hereto --------------- (the "Compliance Certificate"), to the effect that, except as described pursuant to Section 8.03(e) below, (i) the representations and warranties of the Borrower contained in Article VI hereof are true on and as of the date of such certificate with the same effect as though such representations and warranties had been made on and as of such date (except representations and warranties which expressly relate solely to an earlier date or time) and the Borrower has performed and complied with all covenants and conditions hereof, (ii) no Event of Default or Potential Default exists and is continuing on the date of such certificate, (iii) containing calculations in sufficient detail to demonstrate compliance as of the date of the financial statements with all financial covenants contained in Section 8.02 hereof and with the covenant contained in Section 1008 [Limitation on Indebtedness] of the Indenture with respect to indebtedness incurred during the period applicable to such compliance certificate and (iv) setting forth a list of payments summarized by category only made by the Borrower to MPN as reimbursement of ordinary course business expenses paid by MPN on behalf of the Borrower during the period applicable to such certificate and also setting forth all other dividends and distributions to MPN during such period. (e) Notice of Default. Promptly after any officer of the ----------------- Borrower has learned of the occurrence of an Event of Default or Potential Default, a certificate signed by a Responsible Officer of the Borrower, setting forth the details of such Event of Default or Potential Default and the action which the Borrower proposes to take with respect thereto. (f) Notice of Litigation. Promptly after the commencement -------------------- thereof, notice of all actions, suits, proceedings or investigations before or by any Official Body or any other person against the Borrower which relate to the Collateral, involve a claim or series of 75 related claims in excess of $1,000,000 or which if adversely determined would constitute a Material Adverse Change. (g) Certain Events. Written notice to the Administrative Agent -------------- (and upon the Agent's receipt of such notice, the Administrative Agent shall provide a copy thereof to each Bank) at least thirty (30) calendar days prior thereto, with respect to any proposed sale or transfer of assets pursuant to Section 8.02(g)(iii) or (iv). (h) Budgets, Forecasts, Other Reports and Information. Promptly ------------------------------------------------- upon their becoming available to the Borrower: (i) [Intentionally Omitted] (ii) any reports including management letters submitted to the Borrower by independent accountants in connection with any annual, interim or special audit, (iii) any reports, notices or proxy statements generally distributed by the Borrower to its stockholders on a date no later than the date supplied to the stockholders, (iv) any regular or periodic reports, including Forms 10-K, 10-Q and 8-K, registration statements and prospectuses, filed by the Borrower with the Securities and Exchange Commission, (v) a copy of any material order in any proceeding to which the Borrower or any of its Subsidiaries is a party issued by any Official Body, (vi) regular, periodic utilization reports including in detail reasonably satisfactory to the Administrative Agent for the period of such reports the patient census, the number of occupied beds, the payment source (Medicare, Medicaid, private pay or otherwise) for each patient, (vii) such other reports and information as the Banks may from time to time reasonably request. The Borrower shall also notify the Banks promptly of the enactment or adoption of any Law or the occurrence of any other event which may result in a Material Adverse Change with respect to the Borrower after the Borrower becomes aware or should reasonably have become aware thereof, and (viii) annual reports in detail satisfactory to the Administrative Agent setting forth the real property owned, leased or managed by the Borrower or any Subsidiary, to be supplied not later than March 31, 1999 with respect to the fiscal year ended December 31, 1998 and thereafter not later than ninety (90) days after the commencement of the fiscal year to which any of the foregoing may be applicable. (i) Notices Regarding Plans and Benefit Arrangements. (i) ------------------------------------------------ Promptly upon becoming aware of the occurrence thereof, notice (including the nature of the event and, 76 when known, any action taken or threatened by the Internal Revenue Service or the PBGC with respect thereto) of: (A) any Reportable Event with respect to the Borrower or any member of the ERISA Group, (B) any Prohibited Transaction which could be subject the Borrower or any member of the ERISA Group to a material civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Internal Revenue Code in connection with any Plan, Benefit Arrangement or any trust created thereunder, (C) any assertion of material withdrawal liability with respect to any Multiemployer Plan, (D) any partial or complete withdrawal from a Multiemployer Plan by the Borrower or any member of the ERISA Group under Title IV of ERISA (or assertion thereof), where such withdrawal is likely to result in material withdrawal liability, (E) any cessation of operations (by the Borrower or any member of the ERISA Group) at a facility in the circumstances described in Section 4062(e) of ERISA, (F) withdrawal by the Borrower or any member of the ERISA Group from a Multiple Employer Plan to which Section 4063 of ERISA applies, (G) a failure by the Borrower or any member of the ERISA Group to make a payment to a Plan required to avoid imposition of a lien under Section 302(f) of ERISA, (H) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA, or (I) any change in the actuarial assumptions or funding methods used for any Plan, where the effect of such change is to materially increase the unfunded benefit liability or obligation to make periodic contributions. (ii) Promptly after receipt thereof, copies of (a) all notices received by the Borrower or any member of the ERISA Group of the PBGC's intent to terminate any Plan administered or maintained by the Borrower or any member of the ERISA Group, or to have a trustee appointed to administer any such Plan; and (b) at the request of the Administrative Agent or any Bank each annual report (IRS Form 5500 series) and all accompanying schedules, the most recent actuarial reports, the most recent financial information concerning the financial status of each Plan administered or maintained by the Borrower or any member of the ERISA Group, and schedules showing the amounts contributed to each such Plan by or on behalf of the Borrower or any member of the ERISA Group in which any of their personnel participate or 77 from which such personnel may derive a benefit, and each Schedule B (Actuarial ---------- Information) to the annual report filed by the Borrower or any member of the ERISA Group with the Internal Revenue Service with respect to each such Plan. (iii) Promptly upon the filing thereof, copies of Form 5310, or any successor or equivalent form to Form 5310, filed with the PBGC in connection with the termination of any Plan. (j) Notices With Respect to Indenture. Written notice to the --------------------------------- Administrative Agent (and upon the Administrative Agent's receipt of each such notice, the Administrative Agent shall provide a copy thereof to each Bank): (i) immediately upon the occurrence of a "Default" or an "Event of Default," as such terms are defined in the Indenture; (ii) immediately upon a "Change of Control," as such term is defined in the Indenture; (iii) immediately upon receipt of a "notice of acceleration" from either the trustee for the Subordinated Notes or the holders of the Subordinated Notes pursuant to Section 502 of the Indenture or any similar provision in any supplement to the Indenture; (iv) simultaneous with the sending thereof, all notices required to be sent to the trustee or holders of the Subordinated Notes under the Indenture; and (v) immediately upon the receipt thereof, all notices received from the trustee under the Indenture. ARTICLE IX DEFAULT ------- 9.01 Events of Default. An Event of Default shall mean the ----------------- occurrence or existence of any one or more of the following events or conditions (whatever the reason therefor and whether voluntary, involuntary or effected by operation of Law): (a) The Borrower shall fail to pay any principal of any Loan (including scheduled or mandatory prepayments or the payment due at maturity) or shall fail to pay any interest on any Loan or any other amount owing hereunder or under the other Loan Documents after such principal or within three (3) Business Days after such interest or other amount becomes due in accordance with the terms hereof or thereof; (b) Any representation and warranty made at any time by the Borrower herein or by the Borrower or any of its Subsidiaries in any other Loan Document, or in any certificate, other instrument or statement furnished pursuant to the provisions hereof or thereof, shall prove to have been false or misleading in any material respect as of the time it was made or 78 furnished regardless of whether such representation and warranty was qualified as to Borrower's knowledge or best knowledge; (c) The Borrower shall default in the observance or performance of any covenant contained in Section 8.01(f) or Section 8.02 hereof; (d) The Borrower or any of its Subsidiaries shall default in the observance or performance of any other covenant, condition or provision hereof or of any other Loan Document and such default shall continue unremedied for a period of thirty (30) Business Days after any officer of the Borrower or any Subsidiary becomes aware of the occurrence thereof (such grace period to be applicable only in the event such default can be remedied by corrective action of the Borrower or such Subsidiary as determined by the Administrative Agent in its sole discretion); (e) A default or event of default shall occur at any time under the terms of any agreement involving borrowed money or the extension of credit or any other Indebtedness under which the Borrower or any of its Subsidiaries may be obligated as borrower or guarantor in excess of $10,000,000 in aggregate principal amount, and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any indebtedness when due (whether at stated maturity, by acceleration or otherwise) or if such breach or default permits or causes the acceleration of any indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend; (f) Any final judgment or orders for the payment of money in excess of $1,000,000 in the aggregate (not paid or fully covered by insurance) shall be entered against the Borrower or any of its Subsidiaries by a court having jurisdiction in the premises which judgment is not discharged, vacated, bonded or stayed pending appeal within a period of thirty (30) days from the date of entry; (g) Any of the Loan Documents shall cease to be legal, valid and binding agreements enforceable against the party executing the same or such party's successors and assigns (as permitted under the Loan Documents) in accordance with the respective terms thereof or shall in any way be terminated (except in accordance with its terms) or shall in any way be challenged or contested or cease to give or provide the respective Liens, security interests, rights, titles, interests, remedies, powers or privileges intended to be created thereby; (h) The Collateral or any other of the Borrower's or any of its Subsidiaries' assets are attached, seized, levied upon or subject to a writ or distress warrant; or such come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not cured within thirty (30) days thereafter; (i) A notice of lien or assessment in excess of $1,000,000 is filed of record with respect to all or any part of the Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipal or other governmental agency, including, without limitation, the Pension Benefit 79 Guaranty Corporation, or if any taxes or debts owing at any time or times hereafter to any one of these becomes payable and the same is not paid within thirty (30) days after the same becomes payable unless the same is being contested in good faith in accordance with Section 8.01(b); (j) The Borrower or any of its Material Subsidiaries ceases to be solvent or admits in writing its inability to pay its debts of as they mature; (k) Any of the following occurs: the Administrative Agent determines in good faith that the amount of Borrower's liability is likely to exceed 10% of its Consolidated Net Worth upon the occurrence of (i), (ii), (iii) or (iv) below: (i) any Reportable Event constitutes grounds for the termination of any Plan by the PBGC or the appointment of a trustee to administer or liquidate any Plan, shall have occurred and be continuing; (ii) proceedings shall have been instituted or other action taken to terminate any Plan or a termination notice shall have been filed with respect to any Plan; (iii) a trustee shall be appointed to administer or liquidate any Plan; or (iv) the PBGC shall give notice of its intent to institute proceedings to terminate any Plan or Plans or to appoint a trustee to administer or liquidate any Plan; or, with respect to any of the events specified in (v), (vi), (vii), (viii) or (ix) below, the Administrative Agent determines in good faith that any such occurrence could be reasonably likely to materially and adversely affect the total enterprise represented by the Borrower and the other members of the ERISA Group; (v) the Borrower or any member of the ERISA Group shall fail to make any contributions when due to a Plan or a Multiemployer Plan; (vi) the Borrower or any member of the ERISA Group shall make any amendment to a Plan with respect to which security is required under Section 307 of ERISA; (vii) the Borrower or any member of the ERISA Group shall withdraw completely or partially from a Multiemployer Plan; (viii) the Borrower or any member of the ERISA Group shall withdraw (or shall be deemed under Section 4062(e) of ERISA to withdraw) from a Multiple Employer Plan; or (ix) any applicable law is adopted, changed or interpreted by any Official Body with respect to or otherwise affecting one or more Plans, Multiemployer Plans or Benefit Arrangements; (l) The Borrower ceases to conduct its business as contemplated or the Borrower or any of its Material Subsidiaries is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business and such injunction, restraint or other preventative order is not dismissed within thirty (30) days after the entry thereof; (m) A Change of Ownership occurs; (n) An event of default shall occur at any time under the terms of the MPN Credit Agreement which causes the acceleration of any indebtedness thereunder, or an event of default shall occur at any time under the terms of the Paragon Senior Subordinated Note Indenture which causes the acceleration of any indebtedness thereunder; (o) A default or event of default shall occur at any time under the terms of the Revolving Credit Loan Agreement, and such breach, default or event of default consists of the failure to pay (beyond any period of grace permitted with respect thereto, whether waived or not) any indebtedness when due (whether at stated maturity, by acceleration or 80 otherwise) or if such breach or default permits or causes the acceleration of any indebtedness (whether or not such right shall have been waived) or the termination of any commitment to lend; (p) A proceeding shall have been instituted in a court having jurisdiction in the premises seeking a decree or order for relief in respect of MPN, the Borrower or any Subsidiary of the Borrower in an involuntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, or a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or similar official) of MPN, the Borrower, or any Subsidiary of the Borrower for any substantial part of its property, or for the winding-up or liquidation of its affairs, and such proceeding shall remain undismissed or unstayed and in effect for a period of sixty (60) consecutive days or such court shall enter a decree or order granting any of the relief sought in such proceeding; or (q) MPN, the Borrower, or any Subsidiary of the Borrower shall commence a voluntary case under any applicable bankruptcy, insolvency, reorganization or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator, conservator (or other similar official) of itself or for any substantial part of its property or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any action in furtherance of any of the foregoing. [PAZ: DO NOT CHANGE # OF (P) OR (Q) - CROSS REF. MTG] 9.02 Consequences of Event of Default. -------------------------------- (a) If an Event of Default specified under subsections (a) through (o) of Section 9.01 hereof shall occur and be continuing, the Banks shall be under no further obligation to make Loans hereunder and the Administrative Agent upon the request of the Required Banks, shall by written notice to the Borrower, declare the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder to be forthwith due and payable, and the same shall thereupon become and be immediately due and payable to the Administrative Agent for the benefit of each Bank without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived; and (b) If an Event of Default specified under subsections (p) or (q) of Section 9.01 hereof shall occur, the Banks shall be under no further obligations to make Loans hereunder and the unpaid principal amount of the Notes then outstanding and all interest accrued thereon, any unpaid fees and all other Indebtedness of the Borrower to the Banks hereunder and thereunder shall be immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and (c) If an Event of Default shall occur and be continuing, any Bank to whom any obligation is owed by any Loan Party hereunder or under any other Loan Document or any participant of such Bank which has agreed in writing to be bound by the provisions of 81 Section 10.13 hereof and any branch, subsidiary or affiliate of such Bank or participant anywhere in the world shall have the right, in addition to all other rights and remedies available to it, without notice to such Loan party, to set- off against and apply to the then unpaid balance of all the Loans and all other obligations of such Loan party hereunder or under any other Loan Document any debt owing to, and any other fund held in any manner for the account of, such Loan Party by such Bank or participant or by such branch, subsidiary or affiliate, including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally credited or finally credited, or otherwise) now or hereafter maintained by such Loan Party for its own account (but not including funds held in custodian or trust accounts) with such Bank or participant or such branch, subsidiary or affiliate. Such right shall exist whether or not any Bank or the Administrative Agent shall have made any demand under this Agreement or any other Loan Document, whether or not such debt owing to or funds held for the account of such Loan Party is or are matured or unmatured and regardless of the existence or adequacy of any Collateral, Guaranty or any other security, right or remedy available to any Bank or the Administrative Agent; and (d) If an Event of Default shall occur and be continuing, and whether or not the Administrative Agent shall have accelerated the maturity of Loans of the Borrower pursuant to any of the foregoing provisions of this Section 9.02, the Agents or any Bank, if owed any amount with respect to the Notes, may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Agreement or the Notes, including as permitted by applicable Law the obtaining of the ex parte appointment of a -- ----- receiver, and, if such amount shall have become due, by declaration or otherwise, proceed to enforce the payment thereof or any other legal or equitable right of the agent or such Bank; and (e) From and after the date on which the Administrative Agent has taken any action pursuant to this Section 9.02 and until all obligations of the Loan Parties have been paid in full, any and all proceeds received by the Administrative Agent from any sale or other disposition of the Collateral, or any part thereof, or the exercise of any other remedy by the Administrative Agent, shall be applied as follows: (i) first, to reimburse the Administrative Agent and the Banks for reasonable out-of-pocket costs, expenses and disbursements, including without limitation reasonable attorneys' fees and legal expenses, incurred by the Administrative Agent or the Banks in connection with realizing on the Collateral or collection of any obligations of the Loan Parties under any of the Loan Documents, including advances made by the Banks or any one of them or the Administrative Agent for the reasonable maintenance, preservation, protection or enforcement of, or realization upon, the Collateral, including without limitation, advances for taxes, insurance, repairs and the like and reasonable expenses incurred to sell or otherwise realize on, or prepare for sale or other realization on, any of the Collateral; (ii) second, to the prepayment of all Indebtedness then due and unpaid of the Loan Parties to the Banks incurred under this Agreement or any of the Loan Documents, whether of principal, interest, fees, expenses or otherwise, in such manner as the 82 Administrative Agent may reasonably determine in its discretion and with respect to principal, interest, and fees, shall be made in proportion to the Ratable Share of each Bank; and (iii) the balance, if any, as required by Law. (f) In addition to all of the rights and remedies contained in this Agreement or in any of the other Loan Documents, the Administrative Agent and the Collateral Agent shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code or other applicable Law, all of which rights and remedies shall be cumulative and non- exclusive, to the extent permitted by Law. The Administrative Agent may, and upon the request of the Required Banks shall (or shall, if applicable cause the Collateral Agent to), exercise all post-default rights granted to the Administrative Agent (or Collateral Agent, as the case may be) and the Banks under the Loan Documents or applicable Law. (g) Following the occurrence and continuance of an Event of Default, the Borrower, at its cost and expense (including the cost and expense of obtaining any of the following referenced consents, approvals, etc.) will promptly execute and deliver or cause the execution and delivery of all applications, certificates, instruments, registration statements, and all other documents and papers the Administrative Agent may request in connection with the obtaining of any consent, approval, registration, qualification, permit, license, accreditation, or authorization of any other Official Body or other person necessary or appropriate for the effective exercise of any rights hereunder or under the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees that in the event the Administrative Agent or the Collateral Agent on behalf of the Banks shall exercise its rights, hereunder or pursuant to the other Loan Documents, to sell, transfer, or otherwise dispose of, or vote, consent, operate, or take any other action in connection with any of the Collateral, the Borrower shall execute and deliver (or cause to be executed and delivered) all applications, certificates, assignments, and other documents that the Administrative Agent requests to facilitate such actions and shall otherwise promptly, fully, and diligently cooperate with the Administrative Agent and the Collateral Agent and any other necessary persons in making any application for the prior consent or approval of any Official Body or any other person to the exercise by the Administrative Agent or the Collateral Agent on behalf of the Banks of any of such rights relating to all or any of the Collateral. Furthermore, because the Borrower agrees that the remedies at law, of the agent on behalf of the Banks, for failure of the Borrower to comply with the provisions of Section 8.01(f) and of this Section 9.02(g) would be inadequate and that any such failure would not be adequately compensable in damages, the Borrower agrees that the covenants of Sections 8.01(f) and 9.02(g) may be specifically enforced. (h) Upon the occurrence and continuance of an Event of Default, the Administrative Agent may request, without limiting the rights and remedies of the Administrative Agent on behalf of the Banks otherwise provided hereunder and under the other Loan Documents, that the Borrower do any of the following: (i) give the Collateral Agent on behalf of the Banks specific assignments of the accounts receivable of the Borrower and each Subsidiary after such accounts receivable come into existence, and schedules of such accounts 83 receivable, the form and content of such assignment and schedules to be satisfactory to the Collateral Agent and the Administrative Agent, (ii) immediately notify the Administrative Agent if any of such accounts receivable arise out of contracts with the U.S. Government or any department, agency or instrumentality thereof, and execute any instruments and take any steps required by the Administrative Agent in order that all moneys due and to become due under such contract shall be assigned (to the extent permitted by law) to the Collateral Agent on behalf of the Banks and notice thereof given to the government under the Federal Assignment of Claims Act, if applicable, or any other applicable law or regulation; and in order to better secure the Collateral Agent on behalf of the Banks, in relation to such accounts receivable, and (iii) to the extent permitted by Law, enter into such lockbox agreements and establish such lockbox accounts as the Administrative Agent may require, with the local banks in areas in which the Borrower and its Subsidiaries may be operating (in such cases, all local lockbox accounts shall be depository transfer accounts entitled "In trust for PNC Bank, National Association, as Collateral Agent") which shall have agreed in writing to the Collateral Agent's requirements for the handling of such accounts and the transfer of account funds to the Collateral Agent on behalf of the Banks, all at the Borrower's sole expense, and shall direct all payments from Medicare, Medicaid, Blue Cross and Blue Shield, private payors, health maintenance organizations, all commercial payors and all other payors due to the Borrower or any Subsidiary, to such lockbox accounts. 9.03 Notice of Sale. Any notice required to be given by the -------------- Administrative Agent or Collateral Agent of a sale, lease, or other disposition of the Collateral or any other intended action by the Administrative Agent or Collateral Agent, if given ten (10) days prior to such proposed action, shall constitute commercially reasonable and fair notice thereof to the relevant Loan Party. ARTICLE X THE AGENT --------- 10.01 Appointment. Each Bank hereby irrevocably designates, ----------- appoints and authorizes PNC Bank to act as Administrative Agent for such Bank under this Agreement to execute and deliver or accept on behalf of each of the Banks the other Loan Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Administrative Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to herein, and to exercise such powers and to perform such duties hereunder as are specifically delegated to or required of the Agents, the Administrative Agent or any of them by the terms hereof, together with such powers as are reasonably incidental thereto. PNC Bank agrees to act as the Administrative Agent on behalf of the Banks to the extent provided in this Agreement, and each of PNC Bank and First Union National Bank agrees to act as Agent on behalf of the Banks to the extent provided in this Agreement. 10.02 Delegation of Duties. The Agents and the Administrative Agent -------------------- may perform any of its duties hereunder by or through agents or employees (provided such delegation does not constitute a relinquishment of its duties as Agents and the Administrative Agent) and, 84 subject to Sections 10.05 and 10.06 hereof, shall be entitled to engage and pay for the advice or services of any attorneys, accountants or other experts concerning all matters pertaining to its duties hereunder and to rely upon any advice so obtained. 10.03 Nature of Duties; Independent Credit Investigation. Neither -------------------------------------------------- the Agents nor the Administrative Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and no implied covenants, functions, responsibilities, duties, obligations, or liabilities shall be read into this Agreement or otherwise exist. The duties of the Administrative Agent and of the Agents shall be mechanical and administrative in nature; neither the Administrative Agent nor the Agents shall have by reason of this Agreement a fiduciary or trust relationship in respect of any Bank; and nothing in this Agreement, expressed or implied, is intended to or shall be so construed as to impose upon the Administrative Agent or any Agent any obligation in respect of this Agreement except as expressly set forth herein. Without limiting the generality of the foregoing, the use of the term "Agents" in this Agreement with reference to the Agents or Administrative Agent, as the case may be, 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. Each Bank expressly acknowledges (i) neither the Administrative Agent nor any Agent has made any representations and warranties to it and that no act by the Administrative Agent or any Agent hereafter taken, including any review of the affairs of the Loan Parties, shall be deemed to constitute any representation or warranty by the Administrative Agent or any Agent to any Bank; (ii) that it has made and will continue to make, without reliance upon the Administrative Agent or any Agent, its own independent investigation of the financial condition and affairs and its own appraisal of the creditworthiness of the Loan Parties in connection with this Agreement and the making and continuance of the Loans hereunder; and (iii) except as expressly provided herein, that neither the Administrative Agent nor any Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of any Loan or at any time or times thereafter. 10.04 Actions in Discretion of Agents; Instructions From the Banks. ------------------------------------------------------------ The Administrative Agent and each Agent agrees, upon the written request of the Required Banks, to take or refrain from taking any action of the type specified as being within the Administrative Agent's or such Agent's rights, powers or discretion herein, provided that neither the Administrative Agent nor any Agent -------- shall be required to take any action which exposes the Administrative Agent or any Agent to personal liability or which is contrary to this Agreement or any other Loan Document or applicable Law. In the absence of a request by the Required Banks, the Administrative Agent and each Agent shall have authority, in its sole discretion, to take or not to take any such action, unless this Agreement specifically requires the consent of the Required Banks or all of the Banks. Any action taken or failure to act pursuant to such instructions or discretion shall be binding on the Banks, subject to Section 10.06 hereof. Subject to the provisions of Section 10.06, no Bank shall have any right of action whatsoever against the Administrative Agent or any Agent as a result of the Administrative Agent or any Agent acting or refraining from acting hereunder in accordance with the instructions of the Required Banks, or 85 in the absence of such instructions, in the absolute discretion of the Administrative Agent or the Agents so long as the Administrative Agent or such Agent is otherwise authorized to act within its rights and powers as provided in this Agreement. 10.05 Reimbursement and Indemnification of Agents by the Borrower. ----------------------------------------------------------- The Borrower unconditionally agrees to pay or reimburse the Administrative Agent and each Agent and save the Administrative Agent and each Agent harmless against (a) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements, including but not limited to reasonable fees and expenses of counsel, appraisers and environmental consultants, incurred by the Administrative Agent or any Agent (i) in connection with the development, negotiation, preparation, execution, performance by a Loan Party or an Excluded Entity and interpretation of this Agreement and the other Loan Documents, (ii) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (iii) in connection with the enforcement of this Agreement or any other Loan Document or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (iv) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, and (b) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including, without limitation, all documentary stamp tax, non-recurring intangible personal property tax, recording or transfer taxes due to any Official Body together with all interest, fines, penalties, costs or other charges thereon which may be imposed on, incurred by or asserted against the Administrative Agent or any Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Administrative Agent or any Agent hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Administrative Agent's or any Agent's gross negligence or willful misconduct, or if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. In addition, upon the occurrence of an Event of Default, the Borrower agrees to reimburse and pay all reasonable out-of-pocket expenses of the Administrative Agent's or any Agent's regular employees and agents engaged periodically to perform audits of the Borrower's books, records and business properties. 10.06 Exculpatory Provisions. Neither the Administrative Agent, any ---------------------- Agent nor any of their respective directors, officers, employees, agents, attorneys or affiliates shall (a) be liable to any Bank for any action taken or omitted to be taken by it or them hereunder, or in connection herewith including without limitation pursuant to any Loan Document, unless caused by its or their own gross negligence or willful misconduct, (b) be responsible in any manner to any of the Banks for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement or any other Loan Documents or for any recital, representation, warranty, document, certificate, report or statement herein or made or furnished under or in connection 86 with this Agreement or any other Loan Documents, unless caused by its or their own gross negligence or willful misconduct, or (c) be under any obligation to any of the Banks to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Loan Parties or any Excluded Entity, or the financial condition of the Loan Parties or any Excluded Entity, or the existence or possible existence of any Event of Default or Potential Default, unless caused by its or their own gross negligence or willful misconduct. Neither the Agent nor any Bank nor any of their respective directors, officers, employees, agents, attorneys or affiliates shall be liable to the Loan Parties or any Excluded Entity for consequential damages resulting from any breach of contract, tort or other wrong in connection with the negotiation, documentation, administration or collection of the Loans or any of the Loan Documents. 10.07 Reimbursement and Indemnification of Agents by Banks. Each ---------------------------------------------------- Bank agrees to reimburse and indemnify the Administrative Agent and each Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion of its Ratable Share from and against all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent, the Agents, or any of them, in their respective capacities as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by the Administrative Agent or any Agent hereunder or thereunder, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (a) if the same results from the Administrative Agent's or any Agent's gross negligence or willful misconduct, or (b) if such Bank was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (c) if the same results from a compromise and settlement agreement entered into without the consent of such Bank. In addition, each Bank agrees promptly to reimburse the Administrative Agent and each Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) in proportion to its Ratable Share for all amounts due and payable by the Borrower to the Administrative Agent or the Agents in connection with the periodic audit of the Borrower's books, records and business properties by the Administrative Agent or the Agents. In the event the Banks reimburse or indemnify the Administrative Agent or any Agent pursuant to this Section 10.07 and subsequent thereto the Administrative Agent or such Agent is reimbursed or indemnified by the Borrower with respect to the same matter for which indemnification or reimbursement was previously made by the Banks, such Administrative Agent or Agent will promptly refund to the Banks, in accordance with each Bank's Ratable Share, the duplicative amount. 10.08 Reliance by Agents. The Administrative Agent and each Agent ------------------ shall be entitled to rely upon any writing, telegram, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, order or other document or conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by the proper person or persons, and upon the advice and opinions of counsel and other professional advisers selected by the Administrative Agent or any Agent. The Administrative Agent and each Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall 87 first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.09 Notice of Default. Neither the Administrative Agent nor any ----------------- Agent shall be deemed to have knowledge or notice of the occurrence of any Potential Default or Event of Default unless such person has received written notice from a Bank or the Borrower referring to this Agreement, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." 10.10 Notices. Each of the Administrative Agent and each Agent shall ------- promptly send to each Bank a copy of all notices received from any Loan Party pursuant to the provisions of this Agreement or the other Loan Documents promptly upon receipt thereof. The Administrative Agent shall promptly notify the Borrower and the other Banks of each change in the Base Rate and the effective date thereof. 10.11 Banks in Their Individual Capacities. With respect to its ------------------------------------ Commitments and the Loans made by it, the Administrative Agent and each Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not the Administrative Agent or an Agent, and the term "Banks" shall, unless the context otherwise indicates, include the Administrative Agent and each Agent in its individual capacity. PNC Bank and its affiliates, First Union National Bank and its affiliates and each of the Banks and their respective affiliates may, without liability to account, except as prohibited herein, make Loans to, accept deposits from, discount drafts for, act as trustee under indentures of, and generally engage in any kind of banking or trust business with, the Borrower and its affiliates, in the case of the Administrative Agent or any Agent, as though it were not acting as Administrative Agent or Agent hereunder and in the case of each Bank, as though such Bank were not a Bank hereunder. 10.12 Holders of Notes. The Administrative Agent and each Agent may ---------------- deem and treat any payee of any Note as the owner thereof for all purposes hereof unless and until written notice of the assignment or transfer thereof shall have been filed with the Administrative Agent and the Agents. Any request, authority or consent of any person who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 10.13 Equalization of Banks. The Banks and the holders of any --------------------- participations in any Notes agree among themselves that, with respect to all amounts received by any Bank or any such holder for application on any obligation hereunder or under any Note or under any such participation, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or by any other non-pro rata source, equitable adjustment will be made in the manner stated in the following sentence so that, in effect, all such excess amounts shall be shared ratably among the Banks and such holders in proportion to their interests in payments under the Notes, except as otherwise provided in Sections [4.04(b), 5.04(b) or 5.06(a)] hereof. The Banks or any such holder receiving any such 88 amount shall purchase for cash from each of the other Banks an interest in such Bank's Loans in such amount as shall result in a ratable participation by the Banks and each such holder in the aggregate unpaid amount under the Notes, provided that if all or any portion of such excess amount is thereafter recovered from the Bank or the holder making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by law (including court order) to be paid by the Bank or the holder making such purchase. 10.14 Successor Agents. Any Agent or the Administrative Agent (i) ---------------- may resign as Agent or Administrative Agent, as the case may be, or (ii) shall resign if such resignation is requested by the Required Banks, in the case of either (i) or (ii) upon not less than thirty (30) days' prior written notice to the Borrower and the Banks. If any Agent or the Administrative Agent shall resign under this Agreement, then either (a) the Required Banks shall appoint from among the Banks a successor Agent or Administrative Agent, as the case may be, for the Banks, or (b) if a successor Agent shall not be so appointed and approved within the thirty (30) day period following the Agent's or the Administrative Agent's notice to the Banks of its resignation, then the resigning Administrative Agent or resigning Agent, as the case may be, shall appoint, with the consent of the Borrower, such consent not to be unreasonably withheld, a successor Agent who shall serve as Agent, or Administrative Agent, as the case may be, until such time as the Required Banks appoint a successor agent. Upon its appointment pursuant to either clause (a) or (b) above, such successor agent shall succeed to the rights, powers and duties of the agent and the terms "Agent" and "Administrative Agent" shall mean such successor Agent or Administrative Agent, as the case may be, effective upon its appointment, and the former Administrative Agent's or Agent's rights, powers and duties as Agent or Administrative Agent shall be terminated without any other or further act or deed on the part of such former Agent or Administrative Agent or any of the parties to this Agreement. After the resignation of any Administrative Agent or Agent hereunder, the provisions of this Article X shall inure to the benefit of such former Agent and former Administrative Agent, and such former Agent and former Administrative Agent shall not by reason of such resignation be deemed to be released from liability for any actions taken or not taken by it while it was the Administrative Agent or an Agent under this Agreement. 10.15 Administrative Agent's Fee. The Borrower shall pay to the -------------------------- Administrative Agent a non refundable, annual fee (the "Administrative Agent's Fee") as set forth in the agreement dated December 3, 1998, between the Borrower and the Administrative Agent, such fee to be payable in the manner and on the dates set forth in such letter agreement. 10.16 Availability of Funds. Unless the Administrative Agent shall --------------------- have been notified by a Bank prior to the date upon which a Loan is to be made that such Bank does not intend to make available to the Administrative Agent such Bank's portion of such Loan, the Administrative Agent may assume that such Bank has made or will make such proceeds available to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption (but shall not be required to), make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Bank, the Administrative Agent shall be entitled to recover such 89 amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand from the Borrower) together with interest thereon, in respect of each day during the period commencing on the date such amount was made available to the Borrower and ending on the date the Administrative Agent recovers such amount, at a rate per annum equal to the Federal Funds Effective Rate in respect of the Loan. 10.17 Calculations. In the absence of gross negligence or willful ------------ misconduct, the Administrative Agent shall not be liable for any error in computing the amount payable to any Bank whether in respect of the Loans, fees or any other amounts due to the Banks under this Agreement. In the event an error in computing any amount payable to any Bank is made, the Administrative Agent, the Borrower and each affected Bank shall, forthwith upon discovery of such error, make such adjustments as shall be required to correct such error, and any compensation therefor will be calculated at the Federal Funds Effective Rate. 10.18 Beneficiaries. Except as expressly provided herein, the ------------- provisions of this Article X are solely for the benefit of the Administrative Agent, each Agent and the Banks, and the Borrower shall not have any rights to rely on or enforce any of the provisions hereof. In performing its functions and duties under this Agreement, the Administrative Agent and each Agent shall act solely as agent of the Banks and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for the Borrower. 10.19 Holding of Loan Documents. Administrative Agent agrees that all ------------------------- original Loan Documents retained by it shall be retained for the benefit of the Banks, and the Administrative Agent shall make available copies of such documents retained by it upon the reasonable request of any of the Banks. ARTICLE XI MISCELLANEOUS ------------- 11.01 Modifications, Amendments or Waivers. With the written consent ------------------------------------ of the Required Banks, the Administrative Agent, acting on behalf of the Banks, and the Borrower or the other applicable Loan Party may from time to time enter into written agreements amending or changing any provision of this Agreement or any other Loan Document or the rights of the Banks or the Borrower or such Loan Party hereunder or thereunder, or may grant written waivers or consents to a departure from the due performance of the obligations of the Borrower or such Loan Party hereunder or thereunder. Any such agreement, waiver or consent made with such written consent shall be effective to bind all the Loan Parties and all of the Banks; provided that, no such agreement, waiver or consent may be made which will: (a) without the written consent of all Banks, reduce the amount of the Commitment Fee or any other fees payable to any Bank hereunder, or amend Sections 5.02 [Pro Rata Treatment of Banks], 10.06 [Exculpatory Provisions] or 10.13 [Equalization of Banks] hereof; 90 (b) without the written consent of all Banks, whether or not any Loans are outstanding, extend the time for payment of principal or interest of any Loan, or reduce the principal amount of or the rate of interest borne by any Loan; (c) without the written consent of all Banks, release any Collateral or other security, if any, for the Borrower's obligations hereunder (provided that, upon the request by the Borrower and so long as no Potential Default or Event of Default exists or is continuing as certified by the Borrower to the Agents and the Banks, with respect to any disposition or sale of assets which is permitted by Section 8.02(f) or (g), the Administrative Agent is hereby authorized to release liens on the assets so disposed of or sold and to release the Guaranty of any Subsidiary sold or disposed of without the consent of any Bank); (d) without the written consent of all Banks, release or terminate any Guaranty Agreement of any Loan Party; (e) without the written consent of the Supermajority Required Banks and each Bank whose Combined Commitment equals $25,000,000 or more, amend Sections 4.01(a) or 8.02(r), or change the definitions or the method of computing the ratios contained within such foregoing sections; (f) without the written consent of all Banks, amend Section 11.01 or change the definition of Supermajority Required Banks or the definition of Required Banks, or change any requirement providing for the Banks, the Supermajority Required Banks or the Required Banks to authorize the taking of any action hereunder; or (g) without the written consent of all Banks, extend the Expiration Date or increase the amount of Commitment of any Bank hereunder. 11.02 No Implied Waivers; Cumulative Remedies; Writing Required. No --------------------------------------------------------- course of dealing and no delay or failure of the Administrative Agent, any Agent or any Bank in exercising any right, power or remedy or privilege under this Agreement or any other Loan Document shall affect any other or future exercise thereof or operate as a waiver thereof; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power, remedy or privilege preclude any further exercise thereof or of any other right, power, remedy or privilege. The rights and remedies of the Administrative Agent, each Agent and the Banks under this Agreement and any other Loan Documents are cumulative and not exclusive of any rights or remedies which they would otherwise have. Any waiver, permit, consent or approval of any kind or character on the part of any Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. 11.03 Reimbursement and Indemnification of Banks by the Borrower; ----------------------------------------------------------- Taxes. The Borrower agrees unconditionally upon demand to pay or reimburse to - ----- each Bank (other than the Administrative Agents and the Agents, as to which the Borrower's obligations are set forth in Section 9.05) and to save such Bank harmless against (i) liability for the payment of all reasonable out-of-pocket costs, expenses and disbursements (including reasonable fees and 91 expenses of counsel for each Bank except with respect to (a) and (b) below), incurred by such Bank (a) in connection with the interpretation of this Agreement, and other instruments and documents to be delivered hereunder, (b) relating to any requested amendments, waivers or consents pursuant to the provisions hereof, (c) in connection with the enforcement of this Agreement or any other Loan Document, or collection of amounts due hereunder or thereunder or the proof and allowability of any claim arising under this Agreement or any other Loan Document, whether in bankruptcy or receivership proceedings or otherwise, and (d) in any workout, restructuring or in connection with the protection, preservation, exercise or enforcement of any of the terms hereof or of any rights hereunder or under any other Loan Document or in connection with any foreclosure, collection or bankruptcy proceedings, or (ii) all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever including, without limitation, all documentary stamp tax, non-recurring intangible personal property tax, recording or transfer taxes due to any Official Body together with all interest, fines, penalties, costs or other charges thereon which may be imposed on, incurred by or asserted against such Bank, in its capacity as such, in any way relating to or arising out of this Agreement or any other Loan Documents or any action taken or omitted by such Bank hereunder or thereunder, provided that the Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (A) if the same results from such Bank's gross negligence or willful misconduct, or (B) if the Borrower was not given notice of the subject claim and the opportunity to participate in the defense thereof, at its expense, or (C) if the same results from a compromise or settlement agreement entered into without the consent of the Borrower. The Banks will attempt to minimize the fees and expenses of legal counsel for the Banks which are subject to reimbursement by the Borrower hereunder by considering the usage of one law firm to represent the Banks and the Administrative Agents, and the Agents if appropriate under the circumstances. The Borrower agrees unconditionally to pay all stamp, document, transfer, recording or filing taxes or fees and similar impositions now or hereafter determined by the Administrative Agent, any Agent or any Bank to be payable in connection with this Agreement or any other Loan Document, and the Borrower agrees unconditionally to save the Administrative Agent, each Agent and the Banks harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such taxes, fees or impositions. 11.04 Holidays. Whenever any payment or action to be made or taken -------- hereunder shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day (except as provided in Sections 4.02(a) and (b) with respect to Interest Periods for Loans subject to a Euro-Rate Option), and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 11.05 Funding by Branch, Subsidiary or Affiliate. ------------------------------------------ (a) Notional Funding. Each Bank shall have the right from time ---------------- to time, without notice to the Borrower, to deem any branch, subsidiary or affiliate (which for the purposes of this Section 11.05 shall mean any corporation or association which is directly or 92 indirectly controlled by or is under direct or indirect common control with any corporation or association which directly or indirectly controls such Bank) of such Bank to have made, maintained or funded any Loan to which the Euro-Rate Option applies at any time, provided that immediately following (on the assumption that a payment were then due from the Borrower to such other office) and as a result of such change the Borrower would not be under any greater financial obligation pursuant to Section 5.06 hereof than it would have been in the absence of such change. Notional funding offices may be selected by each Bank without regard to the Bank's actual methods of making, maintaining or funding the Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to -------------- time, to make or maintain any Loan by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such Loan subject to the last sentence of this Section 11.05(b). If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder, all terms and conditions of this Agreement shall, except where the context clearly requires otherwise, be applicable to such part of the Loans to the same extent as if such Loans were made or maintained by such Banks but in no event shall any Bank's use of a branch, subsidiary or affiliate to make or maintain any part of the Loans hereunder cause such Bank or such branch, subsidiary or affiliate to incur any cost or expenses payable by the Borrower hereunder or require the Borrower to pay any other compensation to any Bank (including, without limitation, any expenses incurred or payable pursuant to Section 5.06 hereof) which would otherwise not be incurred). 11.06 Notices. All notices, requests, demands, directions and other ------- communications (collectively "notices") given to or made upon any party hereto under the provisions of this Agreement shall be by telephone or in writing (including telex or facsimile communication) unless otherwise expressly permitted hereunder and shall be delivered or sent by telex or facsimile to the respective parties at the addresses and numbers set forth under their respective names on the signature pages hereof or in accordance with any subsequent unrevoked written direction from any party to the others. All notices shall, except as otherwise expressly herein provided, be effective (a) in the case of telex or facsimile, when received, (b) in the case of hand-delivered notice, when hand delivered, (c) in the case of telephone, when telephoned, provided, however, that in order to be effective, telephonic notices must be confirmed in writing no later than the next day by letter, facsimile or telex, (d) if given by mail, four (4) days after such communication is deposited in the mails with first class postage prepaid, return receipt requested, and (e) if given by any other means (including by air courier), when delivered; provided, that notices to the Administrative Agent shall not be effective until received. Any Bank giving any notice to the Borrower shall simultaneously send a copy thereof to the Administrative Agent, and the Administrative Agent shall promptly notify the other Banks of the receipt by it of any such notice. 11.07 Severability. The provisions of this Agreement are intended to ------------ be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity and unenforceability without in any manner affecting the validity or 93 enforceability thereof in any other jurisdiction or the remaining provisions hereof in any jurisdiction. 11.08 Governing Law. This Agreement shall be deemed to be a contract ------------- under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without regard to its conflict of laws principles. 11.09 Prior Understanding. This Agreement supersedes all prior ------------------- understandings and agreements, whether written or oral, between the parties hereto and thereto relating to the transactions provided for herein and therein, including any prior confidentiality agreements and commitments. 11.10 Duration; Survival. All representations and warranties of the ------------------ Borrower contained herein or made in connection herewith shall survive the making of Loans and shall not be waived by the execution and delivery of this Agreement, any investigation by the Administrative Agent, any Agent or the Banks, the making of Loans, or payment in full of the Loans. All covenants and agreements of the Borrower contained in Sections 8.01, 8.02 and 8.03 herein shall continue in full force and effect from and after the date hereof so long as the Borrower may borrow hereunder and until termination of the Commitments and payment in full of the Loans. All covenants and agreements of the Borrower contained herein relating to the payment of principal, interest, premiums, additional compensation or expenses and indemnification, including those set forth in the Notes, Article V and Sections 10.05, 10.07 and 11.03 hereof, shall survive payment in full of the Loans and termination of the Commitments. 11.11 Successors and Assigns. ---------------------- (i) This Agreement shall be binding upon and shall inure to the benefit of the Banks, the Agents, the Administrative Agent, the Borrower and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights and obligations hereunder or any interest herein. Each Bank may, at its own cost, make assignments of or sell participations in all or any part of its Commitment and the Loans made by it to one or more banks or other entities, subject in the case of assignments to the consent of the Borrower (which consent shall not be required (A) during any period in which an Event of Default exists or (B) in the case of an assignment by a Bank to an Affiliate of such Bank) and the Administrative Agent with respect to any assignee, such consent not to be unreasonably withheld, and provided that assignments may not be made in amounts less than $1,000,000. It is expressly agreed that upon and after the occurrence and during the continuation of an Event of Default the consent of the Administrative Agent shall be required, however the consent of the Borrower shall not be required for a Bank to make an assignment of all or any part of its Commitment. In order for a Bank, at any time to sell a participation in all or any part of its Commitment, the consent of the Administrative Agent shall be required, however the consent of the Borrower shall not be required. In the case of an assignment, upon receipt by the Administrative Agent of the Assignment and Assumption Agreement and payment to the Administrative Agent of a fee in the amount of $3,500, the assignee shall have, to the extent of such assignment (unless otherwise 94 provided therein), the same rights, benefits and obligations as it would have if it had been a signatory Bank hereunder, the Commitments in Section 2.01 shall be adjusted accordingly, and upon surrender of any Note subject to such assignment, the Borrower shall execute and deliver a new Note to the assignee in an amount equal to the amount of the Commitment or Loan assumed by it and a new Note to the assigning Bank in an amount equal to the Commitment or Loan retained by it hereunder. In the case of a participation, the participant shall only have the rights specified in Section 9.02(c) (the participant's rights against such Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto and not to include any voting rights except with respect to changes of the type referenced in clauses (a), (b) or (c) under Section 11.01 hereof), all of such Bank's obligations under this Agreement or any other Loan Document shall remain unchanged and all amounts payable by any Loan party hereunder or thereunder shall be determined as if such Bank had not sold such participation. Each Bank may furnish any publicly available information concerning any Loan Party and any other information concerning any Loan Party in the possession of such Bank from time to time to assignees and participants (including prospective assignees or participants) provided such assignees and participants agree to be bound by the provisions of Section 11.2 hereof. (ii) Notwithstanding any other provision of this Agreement, any Bank may at any time pledge or grant a security interest in all or any portion of its rights under this Agreement, its Note and the other Loan Documents to any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Relegation 31 CFR Section 203.14 without notice to or consent of the Borrower or the Administrative Agent. No such pledge or grant of a security interest shall release the transferor Bank of its obligations hereunder or under any other Loan Document. 11.12 Confidentiality. The Agents, the Administrative Agent and the --------------- Banks each agree to keep confidential all information obtained from any Loan Party which is nonpublic and confidential or proprietary in nature (including any information any Loan Party specifically designates as confidential), except as provided below, and to use such information only in connection with their respective capacities under this Agreement and for the purposes contemplated hereby. The Agents, the Administrative Agent and the Banks shall be permitted to disclose such information (i) to outside legal counsel, accountants and other professional advisors who need to know such information in connection with the administration and enforcement of this Agreement, subject to agreement of such persons to maintain the confidentiality, (ii) assignees and participants as contemplated by Section 11.11, (iii) to the extent requested by any bank regulatory authority or, with notice to the Borrower, as otherwise required by applicable Law or by any subpoena or similar legal process, or in connection with any investigation or proceeding arising out of the transactions contemplated by this Agreement, (iv) if it becomes publicly available other than as a result of a breach of this Agreement or becomes available from a source not subject to confidentiality restrictions, or (v) the Borrower shall have consented to such disclosure. 95 11.13 Counterparts. This Agreement may be executed by different ------------ parties hereto on any number of separate counterparts, each of which, when so executed and delivered, shall be an original, and all such counterparts shall together constitute one and the same instrument. 11.14 Agent's or Bank's Consent. Whenever the Administrative ------------------------- Agent's, any Agent's or any Bank's consent is required to be obtained under this Agreement or any of the other Loan Documents as a condition to any action, inaction, condition or event, the Administrative Agent, each Agent and each Bank shall be authorized to give or withhold such consent in its sole and absolute discretion and to condition its consent upon the giving of additional collateral, the payment of money or any other matter. 11.15 Exceptions. The representations, warranties and covenants ---------- contained herein shall be independent of each other and no exception to any representation, warranty or covenant shall be deemed to be an exception to any other representation, warranty or covenant contained herein unless expressly provided, nor shall any such exceptions be deemed to permit any action or omission that would be in contravention of applicable Law. 11.16 CONSENT TO FORUM; WAIVER OF JURY TRIAL. THE BORROWER HEREBY -------------------------------------- IRREVOCABLY CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF THE COURT OF COMMON PLEAS OF ALLEGHENY COUNTY AND UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA, AND WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY CERTIFIED OR REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESSES PROVIDED FOR IN SECTION 11.06 HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF. THE BORROWER WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED AGAINST IT AS PROVIDED HEREIN AND AGREES NOT TO ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE. THE BORROWER, THE ADMINISTRATIVE AGENT, THE AGENTS AND THE BANKS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE COLLATERAL TO THE FULL EXTENT PERMITTED BY LAW. 11.17 Tax Withholding Clause. At least five (5) Business Days prior ---------------------- to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or state thereof agrees that it will deliver to each of the Borrower and the Administrative Agent two (2) duly completed copies of (i) Internal Revenue Service Form W-9, 4224 or 1001, or other applicable form prescribed by the Internal Revenue Service, certifying in either case that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes, or is subject to such tax at a reduced rate under an applicable tax treaty, or (ii) Form W-8 or other applicable form or a certificate of the Bank indicating that no such exemption or reduced rate is allowable with respect to such payments. 96 Each Bank which so delivers a Form W-8, W-9, 4224 or 1001 further undertakes to deliver to each of the Borrower and the Administrative Agent two (2) additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Administrative Agent, either certifying that such Bank is entitled to receive payments under this Agreement and the other Loan Documents without deduction or withholding of any United States federal income taxes or is subject to such tax at a reduced rate under an applicable tax treaty or stating that no such exemption or reduced rate is allowable. The Administrative Agent shall be entitled to withhold United States federal income taxes at the full withholding rate unless the Bank establishes an exemption or at the applicable reduced rate as established pursuant to the above provisions. 11.18 Appointment of Collateral Agent. Each Agent and each Bank has ------------------------------- reviewed a copy of the Collateral Sharing Agreement and hereby consents to: (a) the Collateral Sharing Agreement and the appointment of PNC Bank as Collateral Agent under the Collateral Sharing Agreement, the First Mortgages, Pledge Agreements, Security Agreement, Patent, Trademark and Copyright Security Agreement and other Loan Documents and (b) the execution of the Collateral Sharing Agreement by the Administrative Agent on behalf of each Agent and each Bank. 97 EXHIBIT 1 AMENDED AND RESTATED RECITALS AND ARTICLES I THROUGH XI OF THE REVOLVING CREDIT AGREEMENT (Cover Page, table of contents and first paragraph are also attached for convenience) 98 EX-10.69 30 1ST AMD-EMPLOYEE STOCK PURCHASE PLAN (MARINER) EXHIBIT 10.69 AMENDED AND RESTATED PLEDGE AGREEMENT (BORROWER PLEDGING STOCK) THIS AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement"), dated as of December 23, 1998, is made and entered into by and between MARINER HEALTH GROUP, INC., a Delaware corporation (the "Debtor"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association in its capacity as Collateral Agent, as hereinafter defined (the "Secured Party"). WITNESSETH THAT: WHEREAS, Debtor, as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks"), are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Debtor upon the terms and subject to the conditions set forth therein; WHEREAS, Mariner Health Group, Inc. (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks"), are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Debtor, the Term Loan Borrower, the other Loan Parties (as defined therein), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, the Debtor and the Administrative Agent (as defined in the Revolving Credit Agreement) are currently parties to that certain Pledge Agreement (Subsidiaries Pledging Stock) dated May 18, 1994, as amended (the "Original Pledge Agreement"), pursuant to which certain collateral is pledged to secure the Revolving Credit Obligations (as defined in the Collateral Sharing Agreement); 1 WHEREAS, Debtor owns the outstanding capital stock of each Subsidiary of the Debtor as set forth on Schedule A attached hereto and made a part hereof; ---------- and WHEREAS, the parties to the Original Pledge Agreement now wish to amend and restate the Original Pledge Agreement as provided herein, and as so amended, this Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement). NOW, THEREFORE, intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Amendment and Restatement; No Novation. - -- -------------------------------------- The Original Pledge Agreement is hereby amended and restated as provided herein. No novation, suspension of continuity, satisfaction, discharge of prior duties, or termination of the Obligations, or the collateral therefore (including, without limitation, the Pledged Collateral), is intended or consented to by the parties hereto. The Debtor and the Secured Party acknowledge and agree that the Original Pledge Agreement has continued to secure the Revolving Credit Obligations since the day of the execution of the Original Pledge Agreement; that this Agreement is entitled to all rights and benefits originally pertaining to the Original Pledge Agreement; and that in the event a court or other authority shall determine that a novation has occurred as a result of the execution of this Agreement or any other Loan Documents (as defined in the Collateral Sharing Agreement), or otherwise, and the Secured Party's security interest in the Pledged Collateral created under the Original Pledge Agreement is avoided or the Secured Party's priority with respect thereto is materially and adversely affected, then the rights, privileges, obligations and remedies of the parities hereto shall be governed as if this Agreement had not been executed by any party hereto, and the parties hereto agree to negotiate in good faith to achieve the objectives of this Agreement. 2. Defined Terms. - -- ------------- (a) Except as otherwise expressly provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Credit Agreements. Where applicable and except as otherwise expressly provided herein, terms used herein (whether or not capitalized) shall have the respective meanings assigned to them in the Uniform Commercial Code as enacted in each applicable jurisdiction and as may be amended from time to time (the "Code"). (b) "Pledged Collateral" shall mean and include the following: (i) all of the securities owned by Debtor listed on Schedule A attached hereto and made a ---------- part hereof, together with all related rights, including without limitation, all securities and additional securities receivable in respect of or in exchange for any such securities, all rights to subscribe for securities incident to or arising from ownership of any such securities, all cash, interest, stock and other cash and non-cash dividends and distributions (including, without limitation, stock dividends) paid or payable on any such securities, and all books, records, and documents concerning any of the items described above including, without limitation, all stock record and 2 transfer books, both that which Debtor now owns and that which Debtor acquires hereafter; (ii) any and all other securities hereafter pledged to the Secured Party to secure the Secured Obligations (as hereinafter defined) of Debtor or Debtor's Subsidiaries, and all rights and privileges pertaining thereto, including, without limitation, all securities and additional securities receivable in respect of or in exchange for any such securities, all rights to subscribe for securities incident to or arising from ownership of any such securities, all cash, interest, stock and other cash and non-cash dividends and distributions paid or payable on such securities and all books and records pertaining to the foregoing including, without limitation, all stock record and transfer books, and (iii) all substitutions therefor, additions thereto, and proceeds thereof with respect to any of the foregoing. 3. Grant of Security Interests. - -- --------------------------- (a) Debtor, as security for the payment and performance of Debtor's Obligations and of all other indebtedness and obligations of every nature it owes under the Loan Documents (all of the foregoing indebtedness and obligations being referred to herein as the "Secured Obligations"), hereby grants to the Secured Party a first priority security interest in all of Debtor's now existing and hereafter acquired and/or arising right, title and interest in, to and under the Pledged Collateral owned by Debtor, whether now existing or hereafter acquired and wherever located, subject to Permitted Liens. (b) Prior to or concurrently with the execution and delivery of this Agreement, Debtor has delivered to and deposited with the Secured Party in pledge, stock certificates and any other instruments evidencing the Pledged Collateral, together with updated Stock Powers signed in blank by Debtor. 4. Further Assurances. - -- ------------------ Prior to or concurrently with the execution of this Agreement, and thereafter at any time and from time to time upon reasonable request of the Secured Party, Debtor shall execute and deliver to the Secured Party all financing statements, continuation or amendment financing statements, termination statements, assignments, certificates and documents of title, affidavits, reports, notices, schedules of account, letters of authority, further pledges, powers of attorney and all other documents (collectively, the "Security Documents") which the Secured Party may reasonably request, in form reasonably satisfactory to the Secured Party, and take such other action which the Secured Party may request, to perfect and continue perfected and to create and maintain the first priority status (object only to Permitted Liens) of the Secured Party's security interest in the Pledged Collateral and to fully consummate the transactions contemplated under the Credit Agreements, the other Loan Documents and this Agreement. Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any of the Secured Party's officers or employees or agents designated by the Secured Party) as Debtor's true and lawful attorney with power to sign the name of Debtor on all or any of the Security Documents which the Secured Party reasonably determines must be executed, filed, recorded or sent in order to perfect or continue perfected the Secured Party's security interest in the Pledged Collateral. Such power, being coupled 3 with an interest, is irrevocable until all of the Secured Obligations have been indefeasibly paid in full and the Commitments have terminated. 5. Representations, Warranties and Certain Covenants. - -- ------------------------------------------------- In addition to the representations and warranties of Debtor set forth in the Loan Documents (which representations and warranties are hereby incorporated herein by reference), Debtor hereby represents, warrants and covenants to the Secured Party as follows: (a) Debtor has, and will continue to have (or, in the case of after- acquired Pledged Collateral, at the time Debtor acquires rights in such Pledged Collateral, will have), title to the Pledged Collateral, free and clear of all Liens other than Permitted Liens. (b) The shares of capital stock constituting the Pledged Collateral have been duly authorized and validly issued to the Debtor, are fully paid and nonassessable, have no outstanding assessments, and constitute all of the issued and outstanding shares of capital stock of the issuer thereof owned by Debtor. (c) Except for Permitted Liens, the security interests in the Pledged Collateral granted hereunder are valid, perfected and of first priority. (d) There are no restrictions upon the transfer of the Pledged Collateral and Debtor has the power and authority and right to transfer the Pledged Collateral free of any encumbrances and without obtaining the consent of any other Person except to the extent that a transfer upon the exercise of Secured Party's rights and remedies under this Agreement and the other Loan Documents would result in or constitute an assignment of any license relating to a health care facility or a change of control with respect to the ownership of a health care facility which is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. It is acknowledged that a transfer of the Pledged Collateral by Secured Party following foreclosure may require compliance with federal and state securities laws. (e) Debtor has all necessary power to execute, deliver and perform this Agreement and all necessary action to authorize the execution, delivery and performance of this Agreement has been properly taken. (f) There are no actions, suits, or proceedings pending or, to Debtor's best knowledge after due inquiry, threatened against or affecting Debtor with respect to the Pledged Collateral, at law or in equity or before or by any commissions, board, bureau, agency, department or instrumentality, and Debtor is not in default with respect to any judgment, writ, injunction, decree, rule or regulation which would adversely affect Debtor's performance hereunder. (g) This Agreement has been duly executed and delivered and constitutes the valid and legally binding obligation of Debtor, enforceable in accordance with its 4 terms, except to the extent that (i) enforceability of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles; and (ii) the exercise by Secured Party of its rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license relating to a health care facility or any change of control with respect to the ownership of a health care facility is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. (h) Neither the execution and delivery by the Debtor of this Agreement, nor the compliance with the terms and provisions hereof, will violate any provision of the Articles of Incorporation or Bylaws of the Debtor or any Law or conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree or ruling of any court or arbitration tribunal or any governmental authority to which Debtor is subject or any provision of any material agreement, understanding or arrangement to which Debtor is a party or by which Debtor is bound. (i) The Debtor's principal place of business and chief executive office is as set forth on the signature page hereto. 6. General Covenants. - -- ----------------- In addition to any covenants and agreements of the Debtor set forth in the other Loan Documents, which are incorporated herein by this reference, Debtor hereby covenants and agrees as follows: (a) Debtor shall do all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Pledged Collateral; Debtor shall be responsible for the risk of loss of, damage to, or destruction of the Pledged Collateral owned by Debtor, unless such loss is the result of the gross negligence or willful misconduct of the Secured Party. Debtor shall notify the Secured Party in writing ten (10) Business Days prior to any change in the Debtor's name, the address and location of Debtor's chief executive office or the address and location of Debtor's principal place of business. (b) Debtor shall pay promptly when due all taxes, assessments, charges and obligations secured by encumbrances and liens now or hereafter imposed upon or affecting any of the Pledged Collateral, except as otherwise expressly permitted under the Credit Agreements. (c) Debtor shall appear in and defend any action or proceeding of which Debtor is aware which could reasonably be expected to affect Debtor's title to, or the Secured Party's interest in, the Pledged Collateral owned by Debtor and the proceeds thereof; provided, however, that Debtor may settle such actions or -------- ------- proceedings with respect to the 5 Pledged Collateral Debtor owns with the consent of the Secured Party, which consent shall not be unreasonably withheld or delayed. (d) Debtor shall keep separate, accurate and complete records of the Pledged Collateral owned by Debtor, disclosing the Secured Party's security interest hereunder. (e) Debtor shall permit the Secured Party, its officers, employees and agents at reasonable times and on reasonable prior notice to inspect all books and records related to the Pledged Collateral. (f) To the extent, following the date hereof, Debtor acquires capital stock of a Subsidiary of Debtor or any of the interests, rights, property or securities described in the definition of Pledged Collateral with respect to Debtor's Subsidiaries, such interests stocks, rights, property or securities shall be, upon such acquisition, pledged to the Secured Party, and Debtor shall deliver the original certificates for such securities, stock powers executed in blank, and an updated Schedule A hereto to the Secured Party. ---------- (g) During the term of this Agreement, Debtor shall not sell, assign, transfer, pledge, grant a security interest in, place a lien on or otherwise dispose of the Pledged Collateral except as permitted under the Credit Agreements. 7. Other Rights With Respect to Pledged Collateral. - -- ----------------------------------------------- In addition to the other rights with respect to the Pledged Collateral granted to the Secured Party hereunder, at any time and from time to time, after and during the continuation of an Event of Default, the Secured Party, at its option and at the expense of the Debtor, may (a) transfer into its own name, or into the name of its nominee, all or any part of the Pledged Collateral, thereafter receiving all dividends, income or other distributions upon the Pledged Collateral; (b) take control of and manage all or any of the Pledged Collateral; (c) apply to the payment of any of the Secured Obligations, whether any be due and payable or not, any moneys, including cash dividends and income from any Pledged Collateral, now or hereafter in the hands of the Secured Party or any Affiliate of the Secured Party, on deposit or otherwise, belonging to Debtor, as the Secured Party, in its sole discretion, shall determine; and (d) do anything which Debtor is required but fails to do hereunder. The exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral is subject to the licensing power of health care regulatory authorities. The proceeds of any collection, sale or other disposition of the Pledged Collateral of Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 6 8. Additional Remedies Upon Event of Default. - -- ----------------------------------------- Upon the occurrence of any Event of Default and while such Event of Default shall be continuing, the Secured Party shall have, in addition to all rights and remedies of a secured party under the Code or other applicable Law, and in addition to its rights under Section 7 above and under the other Loan Documents, the following rights and remedies: (a) The Secured Party may, after ten (10) days' advance notice to the Debtor, sell, assign, give an option or options to purchase or otherwise dispose of the Pledged Collateral or any part thereof at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable. Debtor agrees that ten (10) days' advance notice 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 Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party 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. Debtor recognizes that the Secured Party may be compelled to resort to one or more private sales of the Pledged Collateral to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay sale of any of the Pledged Collateral for the period of time necessary to permit Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if Debtor would agree to do so. (b) The proceeds of any collection, sale or other disposition of the Pledged Collateral of Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 9. Secured Party's Duties. - -- ---------------------- The powers conferred on the Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Pledged Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Pledged Collateral. Further, the exercise by the Secured Party 7 of its rights and remedies with respect to the Pledged Collateral or as otherwise provided under this Agreement shall only be an exercise of rights with respect to the Pledged Collateral and shall not in any manner constitute an assumption of any liabilities with respect to the Pledged Collateral. 10. No Waiver; Cumulative Remedies. - --- ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided under the other Loan Documents or by Law. Debtor waives any right to require the Secured Party to proceed against any other Person or to exhaust any of the Pledged Collateral or other security for the Secured Obligations or to pursue any remedy in the Secured Party's power. 11. Assignment. - --- ---------- All rights of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All obligations of Debtor shall bind its successors and assigns; provided, however, Debtor may not assign or transfer -------- ------- any of its rights and obligations hereunder or any interest herein. 12. Severability. - --- ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 13. Governing Law. - --- ------------- This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles, except to the extent the validity or perfection of the security interests or the remedies hereunder in respect of any Pledged Collateral are governed by the law of a jurisdiction other than the Commonwealth of Pennsylvania. 14. Notices. - --- ------- Debtor agree that all notices, statements, requests, demands and other communications under this Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtor at the address set forth below the Debtor's name on the signature page of this Agreement, and (b) to the Secured Party at the address set forth below the Secured Party's name on the signature page of this Agreement. 8 15. Specific Performance. - --- -------------------- Debtor acknowledges and agrees that, in addition to the other rights of the Secured Party hereunder and under the other Loan Documents, because the Secured Party's remedies at law for failure of the Debtor to comply with the provisions hereof relating to the Secured Party's rights (i) to inspect the books and records related to the Pledged Collateral, (ii) to receive the various notifications the Debtor are required to deliver hereunder, (iii) to obtain copies of agreements and documents as provided herein with respect to the Pledged Collateral, (iv) to enforce the provisions hereof pursuant to which the Debtor has appointed the Secured Party its attorney-in-fact, and (v) to enforce the Secured Party's remedies hereunder, would be inadequate and that any such failure would not be adequately compensable in damages, Debtor agrees that each such provision hereof may be specifically enforced. 16. Dividends; Voting Rights in Respect of the Pledged Collateral. - --- ------------------------------------------------------------- So long as no Event of Default shall occur and be continuing under any of the Loan Documents, Debtor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral owned by Debtor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents; provided, however, that Debtor will not exercise -------- ------- or will refrain from exercising any such right, as the case may be, if such action would be inconsistent with the covenants and obligations of Debtor under the Credit Agreements and the other Loan Documents or would have a material adverse effect on the value of any Pledged Collateral. So long as no Event of Default has occurred and is continuing, any lawful dividends paid in cash to a Debtor in respect of the Pledged Collateral may be used or applied by Debtor for any purpose permitted by the Credit Agreements. 17. Entire Agreement; Amendments. - --- ---------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a grant of a security interest in the Pledged Collateral by the Debtor. This Agreement may not be amended or supplemented except by a writing signed by the Secured Party and the Debtor. 18. Counterparts. - --- ------------ This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Descriptive Headings. - --- -------------------- The descriptive headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. 9 [SIGNATURE PAGE 1 OF 1 TO THE AMENDED AND RESTATED PLEDGE AGREEMENT (BORROWER PLEDGING STOCK)] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By:_________________________________ Title:________________________________ Address for Notices for Secured Party: One PNC Plaza 249 Fifth Avenue Pittsburgh, PA 15222-2707 DEBTOR: MARINER HEALTH GROUP, INC., a Delaware corporation By: _________________________________ Title: ________________________________ Address for Notices for Debtor: Mariner Health Group, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 10 SCHEDULE A ---------- PLEDGE AGREEMENT (BORROWER PLEDGING STOCK) Description of Securities Owned by Debtor ----------------------------------------- 11 EX-10.70 31 AMENDED AND RESTATED (PLEDGING STOCK) EXHIBIT 10.70 AMENDED AND RESTATED PLEDGE AGREEMENT (PLEDGING STOCK) THIS AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement"), dated as of December 23, 1998, is made and entered into by and among the undersigned debtors (each a "Debtor" and collectively, the "Debtors"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association in its capacity as Collateral Agent (as hereinafter defined) for the benefit of the Facility Parties (as hereinafter defined)(the "Secured Party"). WITNESSETH THAT: WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks"), are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, Mariner Health Group, Inc. (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks"), are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Borrower, the Term Loan Borrower, the other Loan Parties (as defined therein), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, the Debtors and the Administrative Agent (as defined in the Revolving Credit Agreement) are currently parties to that certain Pledge Agreement (Subsidiaries Pledging Stock) dated May 18, 1994, as amended (the "Original Pledge Agreement"), pursuant to which certain collateral is pledged to secure the Revolving Credit Obligations (as defined in the Collateral Sharing Agreement); WHEREAS, each Debtor owns the outstanding capital stock of each Subsidiary or of each Excluded Entity as set forth on Schedule A attached hereto and made a ---------- part hereof; and WHEREAS, the parties to the Original Pledge Agreement now wish to amend and restate the Original Pledge Agreement as provided herein, and as so amended, this Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement). NOW, THEREFORE, intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Amendment and Restatement; No Novation. - -- -------------------------------------- The Original Pledge Agreement is hereby amended and restated as provided herein. No novation, suspension of continuity, satisfaction, discharge of prior duties, or termination of the Obligations, or the collateral therefore (including, without limitation, the Pledged Collateral), is intended or consented to by the parties hereto. The Debtors and the Secured Party acknowledge and agree that the Original Pledge Agreement has continued to secure the Revolving Credit Obligations since the day of the execution of the Original Pledge Agreement; that this Agreement is entitled to all rights and benefits originally pertaining to the Original Pledge Agreement; and that in the event a court or other authority shall determine that a novation has occurred as a result of the execution of this Agreement or any other Loan Documents (as defined in the Collateral Sharing Agreement), or otherwise, and the Secured Party's security interest in the Pledged Collateral created under the Original Pledge Agreement is avoided or the Secured Party's priority with respect thereto is materially and adversely affected, then the rights, privileges, obligations and remedies of the parities hereto shall be governed as if this Agreement had not been executed by any party hereto, and the parties hereto agree to negotiate in good faith to achieve the objectives of this Agreement. 2. Defined Terms. - -- ------------- (a) Except as otherwise expressly provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Credit Agreements. Where applicable and except as otherwise expressly provided herein, terms used herein (whether or not capitalized) shall have the respective meanings assigned to them in the Uniform Commercial Code as enacted in each applicable jurisdiction and as may be amended from time to time (the "Code"). (b) "Pledged Collateral" shall mean and include the following: (i) all of the securities owned by each Debtor listed on Schedule A attached hereto and ---------- made a part hereof, together with all related rights, including without limitation, all securities and additional securities receivable in respect of or in exchange for any such securities, all rights to subscribe for securities incident to or arising from ownership of any such securities, all cash, interest, stock and other cash and non-cash dividends and distributions (including, without limitation, stock dividends) paid or payable on any such securities, and all books, records, and documents concerning any of the items described above including, without limitation, all stock record and 2 transfer books, both that which any Debtor now owns and that which any Debtor acquires hereafter; (ii) any and all other securities hereafter pledged to the Secured Party to secure the Secured Obligations (as hereinafter defined) of any Debtor or any Debtor's Subsidiaries, and all rights and privileges pertaining thereto, including, without limitation, all securities and additional securities receivable in respect of or in exchange for any such securities, all rights to subscribe for securities incident to or arising from ownership of any such securities, all cash, interest, stock and other cash and non-cash dividends and distributions paid or payable on such securities and all books and records pertaining to the foregoing including, without limitation, all stock record and transfer books, and (iii) all substitutions therefor, additions thereto, and proceeds thereof with respect to any of the foregoing. 3. Grant of Security Interests. - -- --------------------------- (a) Each Debtor, as security for the payment and performance of such Debtor's Obligations and of all other indebtedness and obligations of every nature it owes under the Loan Documents (all of the foregoing indebtedness and obligations being referred to herein as the "Secured Obligations"), hereby grants to the Secured Party a first priority security interest in all of such Debtor's now existing and hereafter acquired and/or arising right, title and interest in, to and under the Pledged Collateral owned by such Debtor, whether now existing or hereafter acquired and wherever located, subject only to Permitted Liens. (b) Prior to or concurrently with the execution and delivery of this Agreement, each Debtor has delivered to and deposited with the Secured Party in pledge, stock certificates and any other instruments evidencing the Pledged Collateral, together with updated Stock Powers signed in blank by each such Debtor. 4. Further Assurances. - -- ------------------ Prior to or concurrently with the execution of this Agreement, and thereafter at any time and from time to time upon reasonable request of the Secured Party, each Debtor shall execute and deliver to the Secured Party all financing statements, continuation or amendment financing statements, termination statements, assignments, certificates and documents of title, affidavits, reports, notices, schedules of account, letters of authority, further pledges, powers of attorney and all other documents (collectively, the "Security Documents") which the Secured Party may reasonably request, in form reasonably satisfactory to the Secured Party, and take such other action which the Secured Party may request, to perfect and continue perfected and to create and maintain the first priority status (object only to Permitted Liens) of the Secured Party's security interest in the Pledged Collateral and to fully consummate the transactions contemplated under the Credit Agreements, the other Loan Documents and this Agreement. Each Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any of the Secured Party's officers or employees or agents designated by the Secured Party) as such Debtor's true and lawful attorney with power to sign the name of such Debtor on all or any of the Security Documents which the Secured Party reasonably determines must be executed, filed, recorded or sent in order to perfect or continue perfected the Secured Party's security interest in the Pledged Collateral. Such 3 power, being coupled with an interest, is irrevocable until all of the Secured Obligations have been indefeasibly paid in full and the Commitments have terminated. 5. Representations, Warranties and Certain Covenants. - -- ------------------------------------------------- In addition to the representations and warranties of Debtors set forth in the Loan Documents (which representations and warranties are hereby incorporated herein by reference), each of the Debtors hereby represents, warrants and covenants to the Secured Party as follows: (a) Debtor has, and will continue to have (or, in the case of after- acquired Pledged Collateral, at the time Debtor acquires rights in such Pledged Collateral, will have), title to the Pledged Collateral, free and clear of all Liens other than Permitted Liens. (b) The shares of capital stock constituting the Pledged Collateral have been duly authorized and validly issued to the Debtor, are fully paid and nonassessable, have no outstanding assessments, and constitute all of the issued and outstanding shares of capital stock of the issuer thereof owned by Debtor. (c) Except for Permitted Liens, the security interests in the Pledged Collateral granted hereunder are valid, perfected and of first priority. (d) There are no restrictions upon the transfer of the Pledged Collateral and Debtor has the power and authority and right to transfer the Pledged Collateral free of any encumbrances and without obtaining the consent of any other Person except to the extent that a transfer upon the exercise of Secured Party's rights and remedies under this Agreement and the other Loan Documents would result in or constitute an assignment of any license relating to a health care facility or a change of control with respect to the ownership of a health care facility which is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. It is acknowledged that a transfer of the Pledged Collateral by Secured Party following foreclosure may require compliance with federal and state securities laws. (e) Debtor has all necessary power to execute, deliver and perform this Agreement and all necessary action to authorize the execution, delivery and performance of this Agreement has been properly taken. (f) There are no actions, suits, or proceedings pending or, to Debtor's best knowledge after due inquiry, threatened against or affecting Debtor with respect to the Pledged Collateral, at law or in equity or before or by any commissions, board, bureau, agency, department or instrumentality, and Debtor is not in default with respect to any judgment, writ, injunction, decree, rule or regulation which would adversely affect Debtor's performance hereunder. 4 (g) This Agreement has been duly executed and delivered and constitutes the valid and legally binding obligation of Debtor, enforceable in accordance with its terms, except to the extent that (i) enforceability of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles; and (ii) the exercise by Secured Party of its rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license relating to a health care facility or any change of control with respect to the ownership of a health care facility is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. (h) Neither the execution and delivery by the Debtor of this Agreement, nor the compliance with the terms and provisions hereof, will violate any provision of the Articles of Incorporation or Bylaws of the Debtor or any Law or conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree or ruling of any court or arbitration tribunal or any governmental authority to which Debtor is subject or any provision of any material agreement, understanding or arrangement to which Debtor is a party or by which Debtor is bound. (i) The Debtor's principal place of business and chief executive office is as set forth on the signature page hereto. 6. General Covenants. - -- ----------------- In addition to any covenants and agreements of the Debtors set forth in the other Loan Documents, which are incorporated herein by this reference, each Debtor hereby covenants and agrees as follows: (a) Debtor shall do all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Pledged Collateral; Debtor shall be responsible for the risk of loss of, damage to, or destruction of the Pledged Collateral owned by Debtor, unless such loss is the result of the gross negligence or willful misconduct of the Secured Party. Debtor shall notify the Secured Party in writing ten (10) Business Days prior to any change in the Debtor's name, the address and location of Debtor's chief executive office or the address and location of Debtor's principal place of business. (b) Debtor shall pay promptly when due all taxes, assessments, charges and obligations secured by encumbrances and liens now or hereafter imposed upon or affecting any of the Pledged Collateral, except as otherwise expressly permitted under the Credit Agreements. (c) Debtor shall appear in and defend any action or proceeding of which Debtor is aware which could reasonably be expected to affect Debtor's title to, or the Secured Party's interest in, the Pledged Collateral owned by Debtor and the proceeds thereof; provided, however, that Debtor may settle such actions or -------- ------- proceedings with respect to the 5 Pledged Collateral Debtor owns with the consent of the Secured Party, which consent shall not be unreasonably withheld or delayed. (d) Debtor shall keep separate, accurate and complete records of the Pledged Collateral owned by Debtor, disclosing the Secured Party's security interest hereunder. (e) Debtor shall permit the Secured Party, its officers, employees and agents at reasonable times and on reasonable prior notice to inspect all books and records related to the Pledged Collateral. (f) To the extent, following the date hereof, Debtor acquires capital stock of a Subsidiary of such Debtor or any of the interests, rights, property or securities described in the definition of Pledged Collateral with respect to Debtor's Subsidiaries, such interests stocks, rights, property or securities shall be, upon such acquisition, pledged to the Secured Party, and Debtor shall deliver the original certificates for such securities, stock powers executed in blank, and an updated Schedule A hereto to the Secured Party. ---------- (g) During the term of this Agreement, Debtor shall not sell, assign, transfer, pledge, grant a security interest in, place a lien on or otherwise dispose of the Pledged Collateral except as permitted under the Credit Agreements. 7. Other Rights With Respect to Pledged Collateral. - -- ----------------------------------------------- 6 In addition to the other rights with respect to the Pledged Collateral granted to the Secured Party hereunder, at any time and from time to time, after and during the continuation of an Event of Default, the Secured Party, at its option and at the expense of the Debtors, may (a) transfer into its own name, or into the name of its nominee, all or any part of the Pledged Collateral, thereafter receiving all dividends, income or other distributions upon the Pledged Collateral; (b) take control of and manage all or any of the Pledged Collateral; (c) apply to the payment of any of the Secured Obligations, whether any be due and payable or not, any moneys, including cash dividends and income from any Pledged Collateral, now or hereafter in the hands of the Secured Party or any Affiliate of the Secured Party, on deposit or otherwise, belonging to any Debtor, as the Secured Party, in its sole discretion, shall determine; and (d) do anything which any Debtor is required but fails to do hereunder. The exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral is subject to the licensing power of health care regulatory authorities. The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 8. Additional Remedies Upon Event of Default. - -- ----------------------------------------- Upon the occurrence of any Event of Default and while such Event of Default shall be continuing, the Secured Party shall have, in addition to all rights and remedies of a secured party under the Code or other applicable Law, and in addition to its rights under Section 7 above and under the other Loan Documents, the following rights and remedies: (a) The Secured Party may, after ten (10) days' advance notice to the Debtors, sell, assign, give an option or options to purchase or otherwise dispose of the Pledged Collateral or any part thereof at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable. Each Debtor agrees that ten (10) days' advance notice 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 Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party 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. Each Debtor recognizes that the Secured Party may be compelled to resort to one or more private sales of the Pledged Collateral to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Each Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such 7 private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay sale of any of the Pledged Collateral for the period of time necessary to permit any Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if such Debtor would agree to do so. (b) The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 9. Secured Party's Duties. - -- ---------------------- The powers conferred on the Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Pledged Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Pledged Collateral. Further, the exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral or as otherwise provided under this Agreement shall only be an exercise of rights with respect to the Pledged Collateral and shall not in any manner constitute an assumption of any liabilities with respect to the Pledged Collateral. 10. No Waiver; Cumulative Remedies. - --- ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided under the other Loan Documents or by Law. Each Debtor waives any right to require the Secured Party to proceed against any other Person or to exhaust any of the Pledged Collateral or other security for the Secured Obligations or to pursue any remedy in the Secured Party's power. 11. Assignment. - --- ---------- All rights of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All obligations of each Debtor shall bind its successors and assigns; provided, however, no Debtor may assign or -------- ------- transfer any of its rights and obligations hereunder or any interest herein. 8 12. Severability. - --- ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 13. Governing Law. - --- ------------- This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles, except to the extent the validity or perfection of the security interests or the remedies hereunder in respect of any Pledged Collateral are governed by the law of a jurisdiction other than the Commonwealth of Pennsylvania. 14. Notices. - --- ------- Debtors agree that all notices, statements, requests, demands and other communications under this Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtors at the address set forth below the Debtors' names on the signature pages of this Agreement, and (b) to the Secured Party at the address set forth below the Secured Party's name on the signature pages of this Agreement. 9 15. Specific Performance. - --- -------------------- Each Debtor acknowledges and agrees that, in addition to the other rights of the Secured Party hereunder and under the other Loan Documents, because the Secured Party's remedies at law for failure of the Debtors to comply with the provisions hereof relating to the Secured Party's rights (i) to inspect the books and records related to the Pledged Collateral, (ii) to receive the various notifications the Debtors are required to deliver hereunder, (iii) to obtain copies of agreements and documents as provided herein with respect to the Pledged Collateral, (iv) to enforce the provisions hereof pursuant to which the Debtors have appointed the Secured Party their attorney-in-fact, and (v) to enforce the Secured Party's remedies hereunder, would be inadequate and that any such failure would not be adequately compensable in damages, each Debtor agrees that each such provision hereof may be specifically enforced. 16. Dividends; Voting Rights in Respect of the Pledged Collateral. - --- ------------------------------------------------------------- So long as no Event of Default shall occur and be continuing under any of the Loan Documents, each Debtor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral owned by such Debtor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents; provided, however, that such Debtor will -------- ------- not exercise or will refrain from exercising any such right, as the case may be, if such action would be inconsistent with the covenants and obligations of Debtors under the Credit Agreements and the other Loan Documents or would have a material adverse effect on the value of any Pledged Collateral. So long as no Event of Default has occurred and is continuing, any lawful dividends paid in cash to a Debtor in respect of the Pledged Collateral may be used or applied by such Debtor for any purpose permitted by the Credit Agreements. 17. Entire Agreement; Amendments. - --- ---------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a grant of a security interest in the Pledged Collateral by the Debtors. This Agreement may not be amended or supplemented except by a writing signed by the Secured Party and the Debtors. 18. Counterparts. - --- ------------ This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Descriptive Headings. - --- -------------------- 10 The descriptive headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. 20. Additional Debtors. - --- ------------------ Each Loan Party which pursuant to a Credit Agreement hereafter is required to pledge securities of another Subsidiary or Excluded Entity shall execute a Joinder to this Agreement in form and substance satisfactory to the Collateral Agent. INTENTIONALLY LEFT BLANK 11 [SIGNATURE PAGE 1 OF 1 TO THE AMENDED AND RESTATED PLEDGE AGREEMENT PLEDGING STOCK] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By:_________________________________ Title:______________________________ Address for Notices for Secured Party: One PNC Plaza 249 Fifth Avenue Pittsburgh, PA 15222-2707 DEBTORS: Address for Notices for Debtors: c/o Mariner Health Group, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA 30346 12 SCHEDULE A ---------- PLEDGE AGREEMENT (PLEDGING STOCK) Debtor Description of Securities Owned by Debtor ------ ----------------------------------------- 13 EX-10.71 32 AMENDED AND RESTATED - PLEDGE PARTNERSHIP EXHIBIT 10.71 BIPC DRAFT - 12/22/98 AMENDED AND RESTATED PLEDGE AGREEMENT (PLEDGING PARTNERSHIP INTERESTS) THIS AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement"), dated as of December 23, 1998, is made and entered into by and among the undersigned debtors (each a "Debtor" and collectively, the "Debtors"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association, in its capacity as Collateral Agent (as hereinafter defined) for the benefit of the Facility Parties (as hereinafter defined) (the "Secured Party"). WITNESSETH THAT: WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks"), are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS Mariner Health Group, Inc., a Delaware corporation (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks"), are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Borrower, the Term Loan Borrower, the other Loan Parties (as defined therein), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, the Debtors and the Administrative Agent (as defined in the Revolving Credit Agreement) are currently parties to that certain Amended and Restated Pledge Agreement (Subsidiaries Pledging Partnership Interests) dated April 30, 1996, as amended (the "Original Pledge Agreement"), pursuant to which certain collateral is pledged to secure the Revolving Credit Obligations (as defined in the Collateral Sharing Agreement); WHEREAS, each Debtor owns the outstanding partnership interests of each Subsidiary or of each Excluded Entity as set forth on Schedule A attached hereto ---------- and made a part hereof; and WHEREAS, the parties to the Original Pledge Agreement now wish to amend and restate the Original Pledge Agreement as provided herein, and as so amended, this Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement). NOW, THEREFORE, intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Amendment and Restatement; No Novation. - -- -------------------------------------- The Original Pledge Agreement is hereby amended and restated as provided herein. No novation, suspension of continuity, satisfaction, discharge of prior duties, or termination of the Obligations, or the collateral therefore (including, without limitation, the Pledged Collateral), is intended or consented to by the parties hereto. The Debtors and the Secured Party acknowledge and agree that the Original Pledge Agreement has continued to secure the Revolving Credit Obligations since the day of the execution of the Original Pledge Agreement; that this Agreement is entitled to all rights and benefits originally pertaining to the Original Pledge Agreement; and that in the event a court or other authority shall determine that a novation has occurred as a result of the execution of this Agreement or any other Loan Documents (as defined in the Collateral Sharing Agreement), or otherwise, and the Secured Party's security interest in the Pledged Collateral created under the Original Pledge Agreement is avoided or the Secured Party's priority with respect thereto is materially and adversely affected, then the rights, privileges, obligations and remedies of the parities hereto shall be governed as if this Agreement had not been executed by any party hereto, and the parties hereto agree to negotiate in good faith to achieve the objectives of this Agreement. 2. Defined Terms. - -- ------------- (a) Except as otherwise expressly provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Credit Agreements. Where applicable and except as otherwise expressly provided herein, terms used herein (whether or not capitalized) shall have the respective meanings assigned to them in the Uniform Commercial Code as enacted in each applicable jurisdiction and as may be amended from time to time (the "Code"). (b) "Pledged Collateral" shall mean and include the following: (i) all of the partnership interests owned by each Debtor listed on Schedule A attached ---------- hereto and made a part hereof, together with all related rights, including without limitation, all partnership interests and additional partnership interests receivable in respect of or in exchange for any such partnership interests, all rights to subscribe for partnership interests incident to or arising from ownership of 2 any such partnership interests, all cash, interest, and other cash and non-cash distributions paid or payable on any such partnership interests, and all books, records, and documents concerning any of the items described above, both that which any Debtor now owns and that which any Debtor acquires hereafter; (ii) any and all other partnership interests hereafter pledged to the Secured Party to secure the Secured Obligations (as hereinafter defined) of any Debtor or any Debtor's Subsidiaries, and all rights and privileges pertaining thereto, including, without limitation, all partnership interests and additional partnership interests receivable in respect of or in exchange for any such partnership interests, all rights to subscribe for partnership interests incident to or arising from ownership of any such partnership interests, all cash, interest, and other cash and non-cash distributions paid or payable on such partnership interests and all books and records pertaining to the foregoing, and (iii) all substitutions therefor, additions thereto, and proceeds thereof with respect to any of the foregoing. 3. Grant of Security Interests. - -- --------------------------- Each Debtor, as security for the payment and performance of such Debtor's Obligations and of all other indebtedness and obligations of every nature it owes under the Loan Documents (as defined in the Collateral Sharing Agreement) (all of the foregoing indebtedness and obligations being referred to herein as the "Secured Obligations"), hereby grants to the Secured Party a first priority security interest in all of such Debtor's now existing and hereafter acquired and/or arising right, title and interest in, to and under the Pledged Collateral owned by such Debtor, whether now existing or hereafter acquired and wherever located, subject only to Permitted Liens. 4. Further Assurances. - -- ------------------ Prior to or concurrently with the execution of this Agreement, and thereafter at any time and from time to time upon reasonable request of the Secured Party, each Debtor shall (a) execute and deliver to the Secured Party all financing statements, continuation or amendment financing statements, termination statements, assignments, certificates and documents of title, affidavits, reports, notices, schedules of account, letters of authority, further pledges, powers of attorney and all other documents (collectively, the "Security Documents") which the Secured Party may reasonably request, in form reasonably satisfactory to the Secured Party, (b) provide each partnership that has issued or shall issue Pledged Collateral with a copy of this Agreement and direct the Custodian of the books and records of each such partnership to register the pledge of the applicable Pledged Collateral on such partnership's books and records, (c) cause each partnership that has issued or shall issue Pledged Collateral to execute and deliver to the Secured Party an Agreement and Acknowledgment, in form and substance acceptable to the Secured Party (which shall, among other things, provide that the Custodian of the books and records of the partnership represents, acknowledges, warrants and confirms that it is holding of record the partnership interests of the Debtors which constitute part of the Pledged Collateral in its capacity as authorized custodial agent, bailee, representative and nominee for the Secured Party, it has noted this fact by means of appropriate entries made on the books and records of the partnership, and except as contemplated by this Agreement, the Custodian will not cause or permit to occur any change, alteration or modification of any kind in the form of the Pledged Collateral, 3 including, without limitation, any conversion of the Pledged Collateral or any part thereof to certificated, bearer or any other form, without the prior written consent of the Secured Party), and (d) take such other action which the Secured Party may request, to perfect and continue perfected and to create and maintain the first priority status (subject only to Permitted Liens) of the Secured Party's security interest in the Pledged Collateral and to fully consummate the transactions contemplated under the Credit Agreements, the other Loan Documents and this Agreement. Each Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any of the Secured Party's officers or employees or agents designated by the Secured Party) as such Debtor's true and lawful attorney with power to sign the name of such Debtor on all or any of the Security Documents which the Secured Party reasonably determines must be executed, filed, recorded or sent in order to perfect or continue perfected the Secured Party's security interest in the Pledged Collateral. Such power, being coupled with an interest, is irrevocable until all of the Secured Obligations have been indefeasibly paid in full and the Commitments have terminated. 5. Representations, Warranties and Certain Covenants. - -- ------------------------------------------------- In addition to the representations and warranties of Debtors set forth in the Loan Documents (which representations and warranties are hereby incorporated herein by reference), each of the Debtors hereby represents, warrants and covenants to the Secured Party as follows: (a) Debtor has, and will continue to have (or, in the case of after- acquired Pledged Collateral, at the time Debtor acquires rights in such Pledged Collateral, will have), title to the Pledged Collateral, free and clear of all Liens other than Permitted Liens. (b) The partnership interests constituting the Pledged Collateral have been duly authorized and validly issued to the Debtor, are fully paid and nonassessable, have no outstanding assessments, and constitute all of the issued and outstanding partnership interests of the issuer thereof owned by Debtor. (c) Except for Permitted Liens the security interests in the Pledged Collateral granted hereunder are valid, perfected and of first priority. (d) There are no restrictions upon the transfer of the Pledged Collateral and Debtor has the power and authority and right to transfer the Pledged Collateral free of any encumbrances and without obtaining the consent of any other Person except to the extent that a transfer upon the exercise of Secured Party's rights and remedies under this Agreement and the other Loan Documents would result in or constitute an assignment of any license relating to a health care facility or a change of control with respect to the ownership of a health care facility which is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. It is acknowledged that a transfer of the Pledged Collateral by Secured Party following foreclosure may require compliance with federal and state securities laws. 4 (e) Debtor has all necessary power to execute, deliver and perform this Agreement and all necessary action to authorize the execution, delivery and performance of this Agreement has been properly taken. (f) There are no actions, suits, or proceedings pending or, to Debtor's best knowledge after due inquiry, threatened against or affecting Debtor with respect to the Pledged Collateral, at law or in equity or before or by any commissions, board, bureau, agency, department or instrumentality, and Debtor is not in default with respect to any judgment, writ, injunction, decree, rule or regulation which would adversely affect Debtor's performance hereunder. (g) This Agreement has been duly executed and delivered and constitutes the valid and legally binding obligation of Debtor, enforceable in accordance with its terms, except to the extent that (i) enforceability of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles; and (ii) the exercise by Secured Party of its rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license relating to a health care facility or any change of control with respect to the ownership of a health care facility is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. (h) Neither the execution and delivery by the Debtor of this Agreement, nor the compliance with the terms and provisions hereof, will violate any provision of the Articles of Incorporation or Bylaws of the Debtor or any Law or conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree or ruling of any court or arbitration tribunal or any governmental authority to which Debtor is subject or any provision of any material agreement, understanding or arrangement to which Debtor is a party or by which Debtor is bound. (i) The Debtor's principal place of business and chief executive office is as set forth on the signature page hereto. (j) No certificate has been or, during the term hereof shall be issued, to evidence the Pledged Collateral, and no partnership interest which is Pledged Collateral constitutes a "certificated security" (as such term is defined in Section 8-102 of the Code). 6. General Covenants. - -- ----------------- In addition to any covenants and agreements of the Debtors set forth in the other Loan Documents, which are incorporated herein by this reference, each Debtor hereby covenants and agrees as follows: (a) Debtor shall do all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Pledged Collateral; Debtor shall be responsible for the risk of loss of, damage to, or destruction of the Pledged Collateral owned by Debtor, unless such loss is the result of the gross negligence or willful misconduct of the Secured Party. Debtor shall notify 5 the Secured Party in writing ten (10) Business Days prior to any change in the Debtor's name, the address and location of Debtor's chief executive office or the address and location of Debtor's principal place of business. (b) Debtor shall pay promptly when due all taxes, assessments, charges and obligations secured by encumbrances and liens now or hereafter imposed upon or affecting any of the Pledged Collateral, except as otherwise expressly permitted under the Credit Agreements. (c) Debtor shall appear in and defend any action or proceeding of which Debtor is aware which could reasonably be expected to affect Debtor's title to, or the Secured Party's interest in, the Pledged Collateral owned by Debtor and the proceeds thereof; provided, however, that Debtor may settle such actions or -------- ------- proceedings with respect to the Pledged Collateral Debtor owns with the consent of the Secured Party, which consent shall not be unreasonably withheld or delayed. (d) Debtor shall keep separate, accurate and complete records of the Pledged Collateral owned by Debtor, disclosing the Secured Party's security interest hereunder. (e) Debtor shall permit the Secured Party, its officers, employees and agents at reasonable times and on reasonable prior notice to inspect all books and records related to the Pledged Collateral. (f) To the extent, following the date hereof, Debtor acquires a partnership interest in Debtor's Subsidiaries or any of the interests, rights, property or securities described in the definition of Pledged Collateral with respect to Debtor's Subsidiaries, such interests stocks, rights, property or securities shall be, upon such acquisition, pledged to the Secured Party, and Debtor shall deliver an updated Schedule A hereto to the Secured Party. To the extent, ---------- following the date hereof, any of the Pledged Collateral constitutes a "certificated security," Debtor shall immediately upon receipt of any original certificates for such Pledged Collateral deliver such original certificates to the Secured Party. (g) During the term of this Agreement, Debtor shall not sell, assign, transfer, pledge, grant a security interest in, place a lien on or otherwise dispose of the Pledged Collateral except as permitted under the Credit Agreements. 7. Other Rights With Respect to Pledged Collateral. - -- ----------------------------------------------- In addition to the other rights with respect to the Pledged Collateral granted to the Secured Party hereunder, at any time and from time to time, after and during the continuation of an Event of Default, the Secured Party, at its option and at the expense of the Debtors, may (a) transfer into its own name, or into the name of its nominee, all or any part of the Pledged Collateral, thereafter receiving all income or other distributions upon the Pledged Collateral; (b) take control of and manage all or any of the Pledged Collateral; (c) apply to the payment of any of the Secured Obligations, whether any be due and payable or not, any moneys, including cash distributions and income from any Pledged Collateral, now or hereafter in the hands of the Secured Party or any Affiliate of the Secured Party, on deposit or otherwise, belonging to any 6 Debtor, as the Secured Party, in its sole discretion, shall determine; and (d) do anything which any Debtor is required but fails to do hereunder. The exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral is subject to the licensing power of health care regulatory authorities. The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 8. Additional Remedies Upon Event of Default. - -- ----------------------------------------- Upon the occurrence of any Event of Default and while such Event of Default shall be continuing, the Secured Party shall have, in addition to all rights and remedies of a secured party under the Code or other applicable Law, and in addition to its rights under Section 7 above and under the other Loan Documents, the following rights and remedies: (a) The Secured Party may, after ten (10) days' advance notice to the Debtors, sell, assign, give an option or options to purchase or otherwise dispose of the Pledged Collateral or any part thereof at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable. Each Debtor agrees that ten (10) days' advance notice 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 Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party 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. Each Debtor recognizes that the Secured Party may be compelled to resort to one or more private sales of the Pledged Collateral to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Each Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay sale of any of the Pledged Collateral for the period of time necessary to permit any Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if such Debtor would agree to do so. (b) The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in 7 connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 9. Secured Party's Duties. - -- ---------------------- The powers conferred on the Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Pledged Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Pledged Collateral. Further, the exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral or as otherwise provided under this Agreement shall only be an exercise of rights with respect to the Pledged Collateral and shall not in any manner constitute an assumption of any liabilities with respect to the Pledged Collateral. 10. No Waiver; Cumulative Remedies. - --- ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided under the other Loan Documents or by Law. Each Debtor waives any right to require the Secured Party to proceed against any other Person or to exhaust any of the Pledged Collateral or other security for the Secured Obligations or to pursue any remedy in the Secured Party's power. 11. Assignment. - --- ---------- All rights of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All obligations of each Debtor shall bind its successors and assigns; provided, however, no Debtor may assign or -------- ------- transfer any of its rights and obligations hereunder or any interest herein. 12. Severability. - --- ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 13. Governing Law. - --- ------------- This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles, except to the extent the validity or perfection of the security interests or the remedies hereunder in respect 8 of any Pledged Collateral are governed by the law of a jurisdiction other than the Commonwealth of Pennsylvania. 14. Notices. - --- ------- Debtors agree that all notices, statements, requests, demands and other communications under this Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtors at the address set forth below the Debtors' names on the signature pages of this Agreement, and (b) to the Secured Party at the address set forth below the Secured Party's name on the signature pages of this Agreement. 15. Specific Performance. - --- -------------------- Each Debtor acknowledges and agrees that, in addition to the other rights of the Secured Party hereunder and under the other Loan Documents, because the Secured Party's remedies at law for failure of the Debtors to comply with the provisions hereof relating to the Secured Party's rights (i) to inspect the books and records related to the Pledged Collateral, (ii) to receive the various notifications the Debtors are required to deliver hereunder, (iii) to obtain copies of agreements and documents as provided herein with respect to the Pledged Collateral, (iv) to enforce the provisions hereof pursuant to which the Debtors have appointed the Secured Party their attorney-in-fact, and (v) to enforce the Secured Party's remedies hereunder, would be inadequate and that any such failure would not be adequately compensable in damages, each Debtor agrees that each such provision hereof may be specifically enforced. 16. Voting Rights in Respect of the Pledged Collateral. - --- -------------------------------------------------- So long as no Event of Default shall occur and be continuing under any of the Loan Documents, each Debtor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral owned by such Debtor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents; provided, however, that such Debtor will -------- ------- not exercise or will refrain from exercising any such right, as the case may be, if such action would be inconsistent with the covenants and obligations of Debtors under the Credit Agreements and the other Loan Documents or would have a material adverse effect on the value of any Pledged Collateral. So long as no Event of Default has occurred and is continuing, any lawful distributions paid in cash to a Debtor in respect of the Pledged Collateral may be used or applied by such Debtor for any purpose permitted by the Credit Agreements. 17. Entire Agreement; Amendments. - --- ---------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a grant of a security interest in the Pledged Collateral by the Debtors. This Agreement may not be amended or supplemented except by a writing signed by the Secured Party and the Debtors. 18. Counterparts. - --- ------------ 9 This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Descriptive Headings. - --- -------------------- The descriptive headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. 20. Additional Debtors. - --- ------------------ Each Loan Party which pursuant to a Credit Agreement hereafter is required to pledge partnership interests of another Subsidiary or Excluded Entity shall execute a Joinder to this Agreement in form and substance satisfactory to the Collateral Agent. INTENTIONALLY LEFT BLANK 10 [SIGNATURE PAGE 1 OF 1 TO THE PLEDGE AGREEMENT PLEDGING PARTNERSHIP INTERESTS] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By: ____________________________________ Title: _________________________________ Address for Notices for Secured Party: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 DEBTORS: Address for Notices for Debtors: c/o Mariner Health Group, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 11 SCHEDULE A ---------- PLEDGE AGREEMENT (PLEDGING PARTNERSHIP INTERESTS) DESCRIPTION OF PARTNERSHIP DEBTOR INTERESTS OWNED BY DEBTOR 12 EX-10.72 33 EXECUTIVE DEFERRED COMPENSATION PLAN (GRANCARE) EXHIBIT 10.72 AMENDED AND RESTATED PLEDGE AGREEMENT (PLEDGING LIMITED LIABILITY COMPANY INTERESTS) THIS AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement"), dated as of December 23, 1998, is made and entered into by and among the undersigned debtors (each a "Debtor" and collectively, the "Debtors"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association, in its capacity as Collateral Agent (as hereinafter defined) for the benefit of the Facility Parties (as hereinafter defined) (the "Secured Party"). WITNESSETH THAT: WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks") are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks"), are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Borrower, the Term Loan Borrower, the other Loan Parties (as defined therein), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, the Debtors and the Administrative Agent (as defined in the Revolving Credit Agreement) are currently parties to that certain Pledge Agreement (Subsidiaries Pledging Limited Liability Company Interests) dated October 3, 1996, as amended (the "Original Pledge Agreement"), pursuant to which certain collateral is pledged to secure the Revolving Credit Obligations (as defined in the Collateral Sharing Agreement); WHEREAS, each Debtor owns the outstanding limited liability company interests of each Subsidiary or of each Excluded Entity as set forth on Schedule -------- A attached hereto and made a part hereof; and - - WHEREAS, the parties to the Original Pledge Agreement now wish to amend and restate the Original Pledge Agreement as provided herein, and as so amended, this Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement). NOW, THEREFORE, intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Amendment and Restatement; No Novation. - -- -------------------------------------- The Original Pledge Agreement is hereby amended and restated as provided herein. No novation, suspension of continuity, satisfaction, discharge of prior duties, or termination of the Obligations, or the collateral therefore (including, without limitation, the Pledged Collateral), is intended or consented to by the parties hereto. The Debtors and the Secured Party acknowledge and agree that the Original Pledge Agreement has continued to secure the Revolving Credit Obligations since the day of the execution of the Original Pledge Agreement; that this Agreement is entitled to all rights and benefits originally pertaining to the Original Pledge Agreement; and that in the event a court or other authority shall determine that a novation has occurred as a result of the execution of this Agreement or any other Loan Documents (as defined in the Collateral Sharing Agreement), or otherwise, and the Secured Party's security interest in the Pledged Collateral created under the Original Pledge Agreement is avoided or the Secured Party's priority with respect thereto is materially and adversely affected, then the rights, privileges, obligations and remedies of the parities hereto shall be governed as if this Agreement had not been executed by any party hereto, and the parties hereto agree to negotiate in good faith to achieve the objectives of this Agreement. 2. Defined Terms. - -- ------------- (a) Except as otherwise expressly provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Credit Agreements. Where applicable and except as otherwise expressly provided herein, terms used herein (whether or not capitalized) shall have the respective meanings assigned to them in the Uniform Commercial Code as enacted in each applicable jurisdiction and as may be amended from time to time (the "Code"). (b) "Pledged Collateral" shall mean and include the following: (i) all of the limited liability company interests owned by each Debtor listed on Schedule -------- A attached hereto and made a part hereof, together with all related rights, - - including without limitation, all limited liability company interests and additional limited liability company interests receivable in respect of or in exchange for any such limited liability company interests, all rights to subscribe for limited 2 liability company interests incident to or arising from ownership of any such limited liability company interests, all cash, interest, and other cash and non- cash distributions paid or payable on any such limited liability company interests, and all books, records, and documents concerning any of the items described above, both that which any Debtor now owns and that which any Debtor acquires hereafter; (ii) any and all other limited liability company interests hereafter pledged to the Secured Party to secure the Secured Obligations (as hereinafter defined) of any Debtor or any Debtor's Subsidiaries, and all rights and privileges pertaining thereto, including, without limitation, all limited liability company interests and additional limited liability company interests receivable in respect of or in exchange for any such limited liability company interests, all rights to subscribe for limited liability company interests incident to or arising from ownership of any such limited liability company interests, all cash, interest, and other cash and non-cash distributions paid or payable on such limited liability company interests and all books and records pertaining to the foregoing, and (iii) all substitutions therefor, additions thereto, and proceeds thereof with respect to any of the foregoing. 3. Grant of Security Interests. - -- --------------------------- Each Debtor, as security for the payment and performance of such Debtor's Obligations and of all other indebtedness and obligations of every nature it owes under the Loan Documents (all of the foregoing indebtedness and obligations being referred to herein as the "Secured Obligations"), hereby grants to the Secured Party a first priority security interest in all of such Debtor's now existing and hereafter acquired and/or arising right, title and interest in, to and under the Pledged Collateral owned by such Debtor, whether now existing or hereafter acquired and wherever located, subject only to Permitted Liens. 4. Further Assurances. - -- ------------------ Prior to or concurrently with the execution of this Agreement, and thereafter at any time and from time to time upon reasonable request of the Secured Party, each Debtor shall (a) execute and deliver to the Secured Party all financing statements, continuation or amendment financing statements, termination statements, assignments, certificates and documents of title, affidavits, reports, notices, schedules of account, letters of authority, further pledges, powers of attorney and all other documents (collectively, the "Security Documents") which the Secured Party may reasonably request, in form reasonably satisfactory to the Secured Party, (b) provide each limited liability company that has issued or shall issue Pledged Collateral with a copy of this Agreement and direct the Custodian of the books and records of each such limited liability company to register the pledge of the applicable Pledged Collateral on such limited liability company's books and records, (c) cause each limited liability company that has issued or shall issue Pledged Collateral to execute and deliver to the Secured Party an Agreement and Acknowledgment, in form and substance acceptable to the Secured Party (which shall, among other things, provide that the Custodian of the books and records of the limited liability company represents, acknowledges, warrants and confirms that it is holding of record the limited liability company interests of the Debtors which constitute part of the Pledged Collateral in its capacity as authorized custodial agent, bailee, representative and nominee for the Secured Party, it has noted this fact by means of appropriate entries made on the books and records of the limited liability 3 company, and except as contemplated by this Agreement, the Custodian will not cause or permit to occur any change, alteration or modification of any kind in the form of the Pledged Collateral, including, without limitation, any conversion of the Pledged Collateral or any part thereof to certificated, bearer or any other form, without the prior written consent of the Secured Party), and (d) take such other action which the Secured Party may request, to perfect and continue perfected and to create and maintain the first priority status of the Secured Party's security interest in the Pledged Collateral and to fully consummate the transactions contemplated under the Credit Agreements, the other Loan Documents and this Agreement. Each Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any of the Secured Party's officers or employees or agents designated by the Secured Party) as such Debtor's true and lawful attorney with power to sign the name of such Debtor on all or any of the Security Documents which the Secured Party reasonably determines must be executed, filed, recorded or sent in order to perfect or continue perfected the Secured Party's security interest in the Pledged Collateral. Such power, being coupled with an interest, is irrevocable until all of the Secured Obligations have been indefeasibly paid in full and the Commitments have terminated. 5. Representations, Warranties and Certain Covenants. - -- ------------------------------------------------- In addition to the representations and warranties of Debtors set forth in the Loan Documents (which representations and warranties are hereby incorporated herein by reference), each of the Debtors hereby represents, warrants and covenants to the Secured Party as follows: (a) Debtor has, and will continue to have (or, in the case of after- acquired Pledged Collateral, at the time Debtor acquires rights in such Pledged Collateral, will have), title to the Pledged Collateral, free and clear of all Liens. (b) The limited liability company interests constituting the Pledged Collateral have been duly authorized and validly issued to the Debtor, are fully paid and nonassessable, have no outstanding assessments, and constitute all of the issued and outstanding limited liability company interests of the issuer thereof owned by Debtor. (c) The security interests in the Pledged Collateral granted hereunder are valid, perfected and of first priority. (d) There are no restrictions upon the transfer of the Pledged Collateral and Debtor has the power and authority and right to transfer the Pledged Collateral free of any encumbrances and without obtaining the consent of any other Person except to the extent that a transfer upon the exercise of Secured Party's rights and remedies under this Agreement and the other Loan Documents would result in or constitute an assignment of any license relating to a health care facility or a change of control with respect to the ownership of a health care facility which is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. It is acknowledged that a transfer of the Pledged Collateral by Secured Party following foreclosure may require compliance with federal and state securities laws. 4 (e) Debtor has all necessary power to execute, deliver and perform this Agreement and all necessary action to authorize the execution, delivery and performance of this Agreement has been properly taken. (f) There are no actions, suits, or proceedings pending or, to Debtor's best knowledge after due inquiry, threatened against or affecting Debtor with respect to the Pledged Collateral, at law or in equity or before or by any commissions, board, bureau, agency, department or instrumentality, and Debtor is not in default with respect to any judgment, writ, injunction, decree, rule or regulation which would adversely affect Debtor's performance hereunder. (g) This Agreement has been duly executed and delivered and constitutes the valid and legally binding obligation of Debtor, enforceable in accordance with its terms, except to the extent that (i) enforceability of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles; and (ii) the exercise by Secured Party of its rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license relating to a health care facility or any change of control with respect to the ownership of a health care facility is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. (h) Neither the execution and delivery by the Debtor of this Agreement, nor the compliance with the terms and provisions hereof, will violate any provision of the Articles of Incorporation or Bylaws of the Debtor or any Law or conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree or ruling of any court or arbitration tribunal or any governmental authority to which Debtor is subject or any provision of any material agreement, understanding or arrangement to which Debtor is a party or by which Debtor is bound. (i) The Debtor's principal place of business and chief executive office is as set forth on the signature page hereto. (j) No certificate has been or, during the term hereof shall be issued, to evidence the Pledged Collateral, and no limited liability company interest which is Pledged Collateral constitutes a "certificated security" (as such term is defined in Section 8-102 of the Code). 6. General Covenants. - -- ----------------- In addition to any covenants and agreements of the Debtors set forth in the other Loan Documents, which are incorporated herein by this reference, each Debtor hereby covenants and agrees as follows: (a) Debtor shall do all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Pledged Collateral; Debtor shall be responsible for the risk of loss of, damage to, or destruction of the Pledged Collateral owned by Debtor, unless such loss is the result of the gross negligence or willful misconduct of the Secured Party. Debtor shall notify 5 the Secured Party in writing ten (10) Business Days prior to any change in the Debtor's name, the address and location of Debtor's chief executive office or the address and location of Debtor's principal place of business. (b) Debtor shall pay promptly when due all taxes, assessments, charges and obligations secured by encumbrances and liens now or hereafter imposed upon or affecting any of the Pledged Collateral, except as otherwise expressly permitted under the Credit Agreements. (c) Debtor shall appear in and defend any action or proceeding of which Debtor is aware which could reasonably be expected to affect Debtor's title to, or the Secured Party's interest in, the Pledged Collateral owned by Debtor and the proceeds thereof; provided, however, that Debtor may settle such actions or -------- ------- proceedings with respect to the Pledged Collateral Debtor owns with the consent of the Secured Party, which consent shall not be unreasonably withheld or delayed. (d) Debtor shall keep separate, accurate and complete records of the Pledged Collateral owned by Debtor, disclosing the Secured Party's security interest hereunder. (e) Debtor shall permit the Secured Party, its officers, employees and agents at reasonable times and on reasonable prior notice to inspect all books and records related to the Pledged Collateral. (f) To the extent, following the date hereof, Debtor acquires a limited liability company interest in Debtor's Subsidiaries or any of the interests, rights, property or securities described in the definition of Pledged Collateral with respect to Debtor's Subsidiaries, such interests stocks, rights, property or securities shall be, upon such acquisition, pledged to the Secured Party, and Debtor shall deliver an updated Schedule A hereto to the Secured Party. To the -------- - extent, following the date hereof, any of the Pledged Collateral constitutes a "certificated security," Debtor shall immediately upon receipt of any original certificates for such Pledged Collateral deliver such original certificates to the Secured Party. (g) During the term of this Agreement, Debtor shall not sell, assign, transfer, pledge, grant a security interest in, place a lien on or otherwise dispose of the Pledged Collateral except as permitted under the Credit Agreements. 7. Other Rights With Respect to Pledged Collateral. - -- ----------------------------------------------- In addition to the other rights with respect to the Pledged Collateral granted to the Secured Party hereunder, at any time and from time to time, after and during the continuation of an Event of Default, the Secured Party, at its option and at the expense of the Debtors, may (a) transfer into its own name, or into the name of its nominee, all or any part of the Pledged Collateral, thereafter receiving all income or other distributions upon the Pledged Collateral; (b) take control of and manage all or any of the Pledged Collateral; (c) apply to the payment of any of the Secured Obligations, whether any be due and payable or not, any moneys, including cash distributions and income from any Pledged Collateral, now or hereafter in the hands of the Secured Party or any Affiliate of the Secured Party, on deposit or otherwise, belonging to any 6 Debtor, as the Secured Party, in its sole discretion, shall determine; and (d) do anything which any Debtor is required but fails to do hereunder. The exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral is subject to the licensing power of health care regulatory authorities. The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 8. Additional Remedies Upon Event of Default. - -- ----------------------------------------- Upon the occurrence of any Event of Default and while such Event of Default shall be continuing, the Secured Party shall have, in addition to all rights and remedies of a secured party under the Code or other applicable Law, and in addition to its rights under Section 7 above and under the other Loan Documents, the following rights and remedies: (a) The Secured Party may, after ten (10) days' advance notice to the Debtors, sell, assign, give an option or options to purchase or otherwise dispose of the Pledged Collateral or any part thereof at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable. Each Debtor agrees that ten (10) days' advance notice 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 Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party 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. Each Debtor recognizes that the Secured Party may be compelled to resort to one or more private sales of the Pledged Collateral to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Each Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay sale of any of the Pledged Collateral for the period of time necessary to permit any Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if such Debtor would agree to do so. (b) The proceeds of any collection, sale or other disposition of the Pledged Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in 7 connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 9. Secured Party's Duties. - -- ---------------------- The powers conferred on the Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Pledged Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Pledged Collateral. Further, the exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral or as otherwise provided under this Agreement shall only be an exercise of rights with respect to the Pledged Collateral and shall not in any manner constitute an assumption of any liabilities with respect to the Pledged Collateral. 10. No Waiver; Cumulative Remedies. - --- ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided under the other Loan Documents or by Law. Each Debtor waives any right to require the Secured Party to proceed against any other Person or to exhaust any of the Pledged Collateral or other security for the Secured Obligations or to pursue any remedy in the Secured Party's power. 11. Assignment. - --- ---------- All rights of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All obligations of each Debtor shall bind its successors and assigns; provided, however, no Debtor may assign or -------- ------- transfer any of its rights and obligations hereunder or any interest herein. 12. Severability. - --- ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 13. Governing Law. - --- ------------- This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles, except to the extent the validity or perfection of the security interests or the remedies hereunder in respect 8 of any Pledged Collateral are governed by the law of a jurisdiction other than the Commonwealth of Pennsylvania. 14. Notices. - --- ------- Debtors agree that all notices, statements, requests, demands and other communications under this Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtors at the address set forth below the Debtors' names on the signature pages of this Agreement, and (b) to the Secured Party at the address set forth below the Secured Party's name on the signature pages of this Agreement. 15. Specific Performance. - --- -------------------- Each Debtor acknowledges and agrees that, in addition to the other rights of the Secured Party hereunder and under the other Loan Documents, because the Secured Party's remedies at law for failure of the Debtors to comply with the provisions hereof relating to the Secured Party's rights (i) to inspect the books and records related to the Pledged Collateral, (ii) to receive the various notifications the Debtors are required to deliver hereunder, (iii) to obtain copies of agreements and documents as provided herein with respect to the Pledged Collateral, (iv) to enforce the provisions hereof pursuant to which the Debtors have appointed the Secured Party their attorney-in-fact, and (v) to enforce the Secured Party's remedies hereunder, would be inadequate and that any such failure would not be adequately compensable in damages, each Debtor agrees that each such provision hereof may be specifically enforced. 16. Voting Rights in Respect of the Pledged Collateral. - --- -------------------------------------------------- So long as no Event of Default shall occur and be continuing under any of the Loan Documents, each Debtor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral owned by such Debtor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents; provided, however, that such Debtor will -------- ------- not exercise or will refrain from exercising any such right, as the case may be, if such action would be inconsistent with the covenants and obligations of Debtors under the Credit Agreements and the other Loan Documents or would have a material adverse effect on the value of any Pledged Collateral. So long as no Event of Default has occurred and is continuing, any lawful distributions paid in cash to a Debtor in respect of the Pledged Collateral may be used or applied by such Debtor for any purpose permitted by the Credit Agreements. 17. Entire Agreement; Amendments. - --- ---------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a grant of a security interest in the Pledged Collateral by the Debtors. This Agreement may not be amended or supplemented except by a writing signed by the Secured Party and the Debtors. 18. Counterparts. - --- ------------ 9 This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Descriptive Headings. - --- -------------------- The descriptive headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. 20. Additional Debtors. - --- ------------------ Each Loan Party which pursuant to a Credit Agreement hereafter is required to pledge limited liability company interests of another Subsidiary or Excluded Entity shall execute a Joinder to this Agreement in form and substance satisfactory to the Collateral Agent. INTENTIONALLY LEFT BLANK 10 [SIGNATURE PAGE 1 OF 1 TO THE AMENDED AND RESTATED PLEDGE AGREEMENT PLEDGING LIMITED LIABILITY COMPANY INTERESTS] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By:_____________________________________ Title:__________________________________ Address for Notices for Secured Party: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 DEBTORS: Address for Notices for Debtors: c/o Mariner Health Group, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 11 SCHEDULE A ---------- PLEDGE AGREEMENT (PLEDGING LIMITED LIABILITY COMPANY INTERESTS) DESCRIPTION OF LIMITED LIABILITY Debtor COMPANY INTERESTS OWNED BY DEBTOR ------ --------------------------------- 12 EX-10.73 34 1ST AMD-EXECUTIVE DEFERRED COMPEN. PLAN (GRANCARE) EXHIBIT 10.73 BIPC DRAFT - 12/22/98 AMENDED AND RESTATED PLEDGE AGREEMENT (TRI-STATE PLEDGING PARTNERSHIP INTERESTS) THIS AMENDED AND RESTATED PLEDGE AGREEMENT (the "Agreement"), dated as of December 23, 1998, is made and entered into by and between TRI-STATE HEALTH CARE, INC., a West Virginia corporation (the "Debtor"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association, in its capacity as Collateral Agent (as hereinafter defined) for the benefit of the Facility Parties (as hereinafter defined) (the "Secured Party"). WITNESSETH THAT: WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks"), are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks") are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Borrower, the Term Loan Borrower, the other Loan Parties (as defined therein), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, the Debtor and the Administrative Agent (as defined in the Revolving Credit Agreement) are currently parties to that certain Pledge Agreement (Subsidiaries Pledging Partnership Interests) (Tri-State Health Care, Inc.) dated May 18, 1994, as amended (the "Original Pledge Agreement"), pursuant to which certain collateral is pledged to secure the Revolving Credit Obligations (as defined in the Collateral Sharing Agreement); WHEREAS, Debtor owns the outstanding partnership interests of its Subsidiary as set forth on Schedule A attached hereto and made a part hereof; ---------- and WHEREAS, the parties to the Original Pledge Agreement now wish to amend and restate the Original Pledge Agreement as provided herein, and as so amended, this Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement). NOW, THEREFORE, intending to be legally bound hereby, the parties hereto hereby agree as follows: 1. Amendment and Restatement; No Novation. - -- -------------------------------------- The Original Pledge Agreement is hereby amended and restated as provided herein. No novation, suspension of continuity, satisfaction, discharge of prior duties, or termination of the Obligations, or the collateral therefore (including, without limitation, the Pledged Collateral), is intended or consented to by the parties hereto. The Debtor and the Secured Party acknowledge and agree that the Original Pledge Agreement has continued to secure the Revolving Credit Obligations since the day of the execution of the Original Pledge Agreement; that this Agreement is entitled to all rights and benefits originally pertaining to the Original Pledge Agreement; and that in the event a court or other authority shall determine that a novation has occurred as a result of the execution of this Agreement or any other Loan Documents (as defined in the Collateral Sharing Agreement), or otherwise, and the Secured Party's security interest in the Pledged Collateral created under the Original Pledge Agreement is avoided or the Secured Party's priority with respect thereto is materially and adversely affected, then the rights, privileges, obligations and remedies of the parities hereto shall be governed as if this Agreement had not been executed by any party hereto, and the parties hereto agree to negotiate in good faith to achieve the objectives of this Agreement. 2. Defined Terms. - -- ------------- (a) Except as otherwise expressly provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Credit Agreements. Where applicable and except as otherwise expressly provided herein, terms used herein (whether or not capitalized) shall have the respective meanings assigned to them in the Uniform Commercial Code as enacted in each applicable jurisdiction and as may be amended from time to time (the "Code"). (b) "Pledged Collateral" shall mean and include the following: (i) all of the partnership interests owned by Debtor listed on Schedule A attached hereto ---------- and made a part hereof, together with all related rights, including without limitation, all partnership interests and additional partnership interests receivable in respect of or in exchange for any such partnership interests, all rights to subscribe for partnership interests incident to or arising from ownership of any such partnership interests, all cash, interest, and other cash and non-cash distributions paid or 2 payable on any such partnership interests, and all books, records, and documents concerning any of the items described above, both that which Debtor now owns and that which Debtor acquires hereafter; (ii) any and all other partnership interests hereafter pledged to the Secured Party to secure the Secured Obligations (as hereinafter defined) of Debtor or Debtor's Subsidiaries, and all rights and privileges pertaining thereto, including, without limitation, all partnership interests and additional partnership interests receivable in respect of or in exchange for any such partnership interests, all rights to subscribe for partnership interests incident to or arising from ownership of any such partnership interests, all cash, interest, and other cash and non-cash distributions paid or payable on such partnership interests and all books and records pertaining to the foregoing, and (iii) all substitutions therefor, additions thereto, and proceeds thereof with respect to any of the foregoing. 3. Grant of Security Interests. - -- --------------------------- Debtor, as security for the payment and performance of Debtor's Obligations and of all other indebtedness and obligations of every nature it owes under the Loan Documents (as defined in the Collateral Sharing Agreement) (all of the foregoing indebtedness and obligations being referred to herein as the "Secured Obligations"), hereby grants to the Secured Party a first priority security interest in all of Debtor's now existing and hereafter acquired and/or arising right, title and interest in, to and under the Pledged Collateral owned by Debtor, whether now existing or hereafter acquired and wherever located, subject only to Permitted Liens. 4. Further Assurances. - -- ------------------ Prior to or concurrently with the execution of this Agreement, and thereafter at any time and from time to time upon reasonable request of the Secured Party, Debtor shall (a) execute and deliver to the Secured Party all financing statements, continuation or amendment financing statements, termination statements, assignments, certificates and documents of title, affidavits, reports, notices, schedules of account, letters of authority, further pledges, powers of attorney and all other documents (collectively, the "Security Documents") which the Secured Party may reasonably request, in form reasonably satisfactory to the Secured Party, (b) provide each partnership that has issued or shall issue Pledged Collateral with a copy of this Agreement and direct the Custodian of the books and records of each such partnership to register the pledge of the applicable Pledged Collateral on such partnership's books and records, (c) cause each partnership that has issued or shall issue Pledged Collateral to execute and deliver to the Secured Party an Agreement and Acknowledgment, in form and substance acceptable to the Secured Party (which shall, among other things, provide that the Custodian of the books and records of the partnership represents, acknowledges, warrants and confirms that it is holding of record the partnership interests of the Debtor which constitute part of the Pledged Collateral in its capacity as authorized custodial agent, bailee, representative and nominee for the Secured Party, it has noted this fact by means of appropriate entries made on the books and records of the partnership, and except as contemplated by this Agreement, the Custodian will not cause or permit to occur any change, alteration or modification of any kind in the form of the Pledged Collateral, including, without limitation, any conversion of the Pledged Collateral or any part thereof to certificated, bearer or any other form, without the prior written consent of the Secured Party), and 3 (d) take such other action which the Secured Party may request, to perfect and continue perfected and to create and maintain the first priority status (subject only to Permitted Liens) of the Secured Party's security interest in the Pledged Collateral and to fully consummate the transactions contemplated under the Credit Agreements, the other Loan Documents and this Agreement. Debtor hereby irrevocably makes, constitutes and appoints the Secured Party (and any of the Secured Party's officers or employees or agents designated by the Secured Party) as Debtor's true and lawful attorney with power to sign the name of Debtor on all or any of the Security Documents which the Secured Party reasonably determines must be executed, filed, recorded or sent in order to perfect or continue perfected the Secured Party's security interest in the Pledged Collateral. Such power, being coupled with an interest, is irrevocable until all of the Secured Obligations have been indefeasibly paid in full and the Commitments have terminated. 5. Representations, Warranties and Certain Covenants. - -- ------------------------------------------------- In addition to the representations and warranties of Debtor set forth in the Loan Documents (which representations and warranties are hereby incorporated herein by reference), Debtor hereby represents, warrants and covenants to the Secured Party as follows: (a) Debtor has, and will continue to have (or, in the case of after- acquired Pledged Collateral, at the time Debtor acquires rights in such Pledged Collateral, will have), title to the Pledged Collateral, free and clear of all Liens other than Permitted Liens. (b) The partnership interests constituting the Pledged Collateral have been duly authorized and validly issued to the Debtor, are fully paid and nonassessable, have no outstanding assessments, and constitute all of the issued and outstanding partnership interests of the issuer thereof owned by Debtor. (c) Except for Permitted Liens the security interests in the Pledged Collateral granted hereunder are valid, perfected and of first priority. (d) There are no restrictions upon the transfer of the Pledged Collateral and Debtor has the power and authority and right to transfer the Pledged Collateral free of any encumbrances and without obtaining the consent of any other Person except to the extent that a transfer upon the exercise of Secured Party's rights and remedies under this Agreement and the other Loan Documents would result in or constitute an assignment of any license relating to a health care facility or a change of control with respect to the ownership of a health care facility which is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. It is acknowledged that a transfer of the Pledged Collateral by Secured Party following foreclosure may require compliance with federal and state securities laws. (e) Debtor has all necessary power to execute, deliver and perform this Agreement and all necessary action to authorize the execution, delivery and performance of this Agreement has been properly taken. 4 (f) There are no actions, suits, or proceedings pending or, to Debtor's best knowledge after due inquiry, threatened against or affecting Debtor with respect to the Pledged Collateral, at law or in equity or before or by any commissions, board, bureau, agency, department or instrumentality, and Debtor is not in default with respect to any judgment, writ, injunction, decree, rule or regulation which would adversely affect Debtor's performance hereunder. (g) This Agreement has been duly executed and delivered and constitutes the valid and legally binding obligation of Debtor, enforceable in accordance with its terms, except to the extent that (i) enforceability of this Agreement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance or by general equitable principles; and (ii) the exercise by Secured Party of its rights and remedies in respect of the Pledged Collateral which would result in or constitute any assignment of any license relating to a health care facility or any change of control with respect to the ownership of a health care facility is subject to the prior approval of health care regulatory authorities issuing such license or regulating such health care facility. (h) Neither the execution and delivery by the Debtor of this Agreement, nor the compliance with the terms and provisions hereof, will violate any provision of the Articles of Incorporation or Bylaws of the Debtor or any Law or conflict with or result in a breach of any of the terms, conditions or provisions of any judgment, order, injunction, decree or ruling of any court or arbitration tribunal or any governmental authority to which Debtor is subject or any provision of any material agreement, understanding or arrangement to which Debtor is a party or by which Debtor is bound. (i) The Debtor's principal place of business and chief executive office is as set forth on the signature page hereto. (j) No certificate has been or, during the term hereof shall be issued, to evidence the Pledged Collateral, and no partnership interest which is Pledged Collateral constitutes a "certificated security" (as such term is defined in Section 8-102 of the Code). 6. General Covenants. - -- ----------------- In addition to any covenants and agreements of the Debtor set forth in the other Loan Documents, which are incorporated herein by this reference, Debtor hereby covenants and agrees as follows: (a) Debtor shall do all reasonable acts that may be necessary and appropriate to maintain, preserve and protect the Pledged Collateral; Debtor shall be responsible for the risk of loss of, damage to, or destruction of the Pledged Collateral owned by Debtor, unless such loss is the result of the gross negligence or willful misconduct of the Secured Party. Debtor shall notify the Secured Party in writing ten (10) Business Days prior to any change in the Debtor's name, the address and location of Debtor's chief executive office or the address and location of Debtor's principal place of business. 5 (b) Debtor shall pay promptly when due all taxes, assessments, charges and obligations secured by encumbrances and liens now or hereafter imposed upon or affecting any of the Pledged Collateral, except as otherwise expressly permitted under the Credit Agreements. (c) Debtor shall appear in and defend any action or proceeding of which Debtor is aware which could reasonably be expected to affect Debtor's title to, or the Secured Party's interest in, the Pledged Collateral owned by Debtor and the proceeds thereof; provided, however, that Debtor may settle such actions or -------- ------- proceedings with respect to the Pledged Collateral Debtor owns with the consent of the Secured Party, which consent shall not be unreasonably withheld or delayed. (d) Debtor shall keep separate, accurate and complete records of the Pledged Collateral owned by Debtor, disclosing the Secured Party's security interest hereunder. (e) Debtor shall permit the Secured Party, its officers, employees and agents at reasonable times and on reasonable prior notice to inspect all books and records related to the Pledged Collateral. (f) To the extent, following the date hereof, Debtor acquires a partnership interest in Debtor's Subsidiaries or any of the interests, rights, property or securities described in the definition of Pledged Collateral with respect to Debtor's Subsidiaries, such interests stocks, rights, property or securities shall be, upon such acquisition, pledged to the Secured Party, and Debtor shall deliver an updated Schedule A hereto to the Secured Party. To the extent, ---------- following the date hereof, any of the Pledged Collateral constitutes a "certificated security," Debtor shall immediately upon receipt of any original certificates for such Pledged Collateral deliver such original certificates to the Secured Party. (g) During the term of this Agreement, Debtor shall not sell, assign, transfer, pledge, grant a security interest in, place a lien on or otherwise dispose of the Pledged Collateral except as permitted under the Credit Agreements. 7. Other Rights With Respect to Pledged Collateral. - -- ----------------------------------------------- In addition to the other rights with respect to the Pledged Collateral granted to the Secured Party hereunder, at any time and from time to time, after and during the continuation of an Event of Default, the Secured Party, at its option and at the expense of the Debtor, may (a) transfer into its own name, or into the name of its nominee, all or any part of the Pledged Collateral, thereafter receiving all income or other distributions upon the Pledged Collateral; (b) take control of and manage all or any of the Pledged Collateral; (c) apply to the payment of any of the Secured Obligations, whether any be due and payable or not, any moneys, including cash distributions and income from any Pledged Collateral, now or hereafter in the hands of the Secured Party or any Affiliate of the Secured Party, on deposit or otherwise, belonging to Debtor, as the Secured Party, in its sole discretion, shall determine; and (d) do anything which Debtor is required but fails to do hereunder. The exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral is subject to the licensing power of health care regulatory authorities. The proceeds of any collection, sale or other disposition of the Pledged Collateral of 6 Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 8. Additional Remedies Upon Event of Default. - -- ----------------------------------------- Upon the occurrence of any Event of Default and while such Event of Default shall be continuing, the Secured Party shall have, in addition to all rights and remedies of a secured party under the Code or other applicable Law, and in addition to its rights under Section 7 above and under the other Loan Documents, the following rights and remedies: (a) The Secured Party may, after ten (10) days' advance notice to the Debtor, sell, assign, give an option or options to purchase or otherwise dispose of the Pledged Collateral or any part thereof at public or private sale, at any of the Secured Party's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Secured Party may deem commercially reasonable. Debtor agrees that ten (10) days' advance notice 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 Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Secured Party 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. Debtor recognizes that the Secured Party may be compelled to resort to one or more private sales of the Pledged Collateral to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for its own account for investment and not with a view to the distribution or resale thereof. Debtor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Secured Party shall be under no obligation to delay sale of any of the Pledged Collateral for the period of time necessary to permit Debtor to register such securities for public sale under the Securities Act of 1933, as amended, or under applicable state securities laws, even if Debtor would agree to do so. (b) The proceeds of any collection, sale or other disposition of the Pledged Collateral of Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses incurred in connection with repossession, collection, sale or disposition of such Pledged Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Pledged Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Obligations, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. 7 9. Secured Party's Duties. - -- ---------------------- The powers conferred on the Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, the Secured Party shall have no duty as to any Pledged Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Pledged Collateral. Further, the exercise by the Secured Party of its rights and remedies with respect to the Pledged Collateral or as otherwise provided under this Agreement shall only be an exercise of rights with respect to the Pledged Collateral and shall not in any manner constitute an assumption of any liabilities with respect to the Pledged Collateral. 10. No Waiver; Cumulative Remedies. - --- ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided under the other Loan Documents or by Law. Debtor waives any right to require the Secured Party to proceed against any other Person or to exhaust any of the Pledged Collateral or other security for the Secured Obligations or to pursue any remedy in the Secured Party's power. 11. Assignment. - --- ---------- All rights of the Secured Party under this Agreement shall inure to the benefit of its successors and assigns. All obligations of Debtor shall bind its successors and assigns; provided, however, Debtor may not assign or transfer any -------- ------- of its rights and obligations hereunder or any interest herein. 12. Severability. - --- ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 13. Governing Law. - --- ------------- This Agreement shall be construed in accordance with and governed by the internal laws of the Commonwealth of Pennsylvania without regard to its conflicts of law principles, except to the extent the validity or perfection of the security interests or the remedies hereunder in respect of any Pledged Collateral are governed by the law of a jurisdiction other than the Commonwealth of Pennsylvania. 14. Notices. - --- ------- 8 Debtor agrees that all notices, statements, requests, demands and other communications under this Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtor at the address set forth below the Debtor's name on the signature page of this Agreement, and (b) to the Secured Party at the address set forth below the Secured Party's name on the signature page of this Agreement. 15. Specific Performance. - --- -------------------- Debtor acknowledges and agrees that, in addition to the other rights of the Secured Party hereunder and under the other Loan Documents, because the Secured Party's remedies at law for failure of the Debtor to comply with the provisions hereof relating to the Secured Party's rights (i) to inspect the books and records related to the Pledged Collateral, (ii) to receive the various notifications the Debtor is required to deliver hereunder, (iii) to obtain copies of agreements and documents as provided herein with respect to the Pledged Collateral, (iv) to enforce the provisions hereof pursuant to which the Debtor has appointed the Secured Party its attorney-in-fact, and (v) to enforce the Secured Party's remedies hereunder, would be inadequate and that any such failure would not be adequately compensable in damages, Debtor agrees that each such provision hereof may be specifically enforced. 16. Voting Rights in Respect of the Pledged Collateral. - --- -------------------------------------------------- So long as no Event of Default shall occur and be continuing under any of the Loan Documents, Debtor may exercise any and all voting and other consensual rights pertaining to the Pledged Collateral owned by Debtor or any part thereof for any purpose not inconsistent with the terms of this Agreement or the other Loan Documents; provided, however, that Debtor will not exercise or will -------- ------- refrain from exercising any such right, as the case may be, if such action would be inconsistent with the covenants and obligations of Debtor under the Credit Agreements and the other Loan Documents or would have a material adverse effect on the value of any Pledged Collateral. So long as no Event of Default has occurred and is continuing, any lawful distributions paid in cash to Debtor in respect of the Pledged Collateral may be used or applied by Debtor for any purpose permitted by the Credit Agreements. 17. Entire Agreement; Amendments. - --- ---------------------------- This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements relating to a grant of a security interest in the Pledged Collateral by the Debtor. This Agreement may not be amended or supplemented except by a writing signed by the Secured Party and the Debtor. 18. Counterparts. - --- ------------ This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Descriptive Headings. - --- -------------------- 9 The descriptive headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. INTENTIONALLY LEFT BLANK 10 [SIGNATURE PAGE 1 OF 1 TO THE PLEDGE AGREEMENT - TRI-STATE PLEDGING PARTNERSHIP INTERESTS] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By: ___________________________________ Title: ________________________________ Address for Notices for Secured Party: One PNC Plaza 249 Fifth Avenue Pittsburgh, Pennsylvania 15222-2707 DEBTOR: TRI-STATE HEALTH CARE, INC., a West Virginia corporation By: ________________________________ Title: _____________________________ Address for Notices for Debtor: c/o Mariner Health Group, Inc. One Ravinia Drive, Suite 1500 Atlanta, Georgia 30346 11 SCHEDULE A ---------- PLEDGE AGREEMENT (TRI-STATE PLEDGING PARTNERSHIP INTERESTS) DESCRIPTION OF PARTNERSHIP INTERESTS OWNED BY DEBTOR - ---------------------------------------------------- 12 EX-10.74 35 SECURITY AGMT EXHIBIT 10.74 SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of December 23, 1998, is made and entered into by and among the undersigned debtors (each a "Debtor" and collectively, the "Debtors"), and PNC BANK, NATIONAL ASSOCIATION, a national banking association in its capacity as Collateral Agent (as hereinafter defined) for the benefit of the Facility Parties (as hereinafter defined) (the "Secured Party"). WITNESSETH THAT: WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Banks"), are parties to that certain Credit Agreement dated as of May 18, 1994, as amended (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Revolving Credit Agreement"), pursuant to which the Banks have agreed to make certain revolving credit loans to the Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, Mariner Health Group, Inc., a Delaware corporation (the "Term Loan Borrower"), as borrower, PNC Bank, National Association, as administrative agent, First Union National Bank, as syndication agent, and the lenders party thereto (the "Term Loan Banks"), are parties to that certain Term Loan Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement"; the Revolving Credit Agreement and the Term Loan Agreement are hereinafter collectively referred to as the "Credit Agreements"), pursuant to which the Term Loan Banks have agreed to make certain term loans to the Term Loan Borrower upon the terms and subject to the conditions set forth therein; WHEREAS, pursuant to that certain Collateral Agency and Sharing Agreement dated of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Collateral Sharing Agreement"), among the Borrower, the Term Loan Borrower, the other Loan Parties (as defined in the Collateral Sharing Agreement), the Revolving Credit Agent and the Term Loan Agent (as such terms are defined in the Collateral Sharing Agreement), and PNC Bank, National Association, as Collateral Agent (together with its successors and assigns, the "Collateral Agent"), the Facility Parties (as defined in the Collateral Sharing Agreement), in order to secure the Obligations (as defined in the Collateral Sharing Agreement), have agreed to share certain collateral as provided in the Collateral Sharing Agreement; WHEREAS, this Security Agreement shall be a Shared Security Document (as defined in the Collateral Sharing Agreement); and WHEREAS, each Debtor is (or will be with respect to after-acquired property) the legal and beneficial owner and holder of its respective Collateral (as defined in Section 1 hereof), and has agreed to grant a security interest in such Collateral to the Secured Party on the terms and conditions set forth herein. NOW, THEREFORE, intending to be legally bound hereby and for value received, the parties hereto covenant and agree as follows: 1. Definitions. Except as otherwise expressly provided herein, ----------- capitalized terms used in this Security Agreement shall have the respective meanings assigned to them in the Credit Agreements. In addition to the words and terms defined elsewhere in this Security Agreement, the following words and terms shall have the following meanings, respectively, unless the context otherwise clearly requires: (a) "Code" shall mean the Uniform Commercial Code of each state as enacted and in effect on the date hereof in each applicable jurisdiction, and as the same may subsequently be amended from time to time. (b) "Collateral" shall mean, in the case of each Debtor, all of its right, title and interest in, to and under the following described property, whether now owned or hereafter acquired (words and terms defined in the Code shall have the same meanings when used herein): (i) all general intangibles of the Debtor, including general intangibles now in existence and those that shall hereafter arise; (ii) all accounts of the Debtor, including accounts now in existence and those that shall hereafter arise; (iii) all inventory of the Debtor, including inventory which it now owns and that which it shall hereafter acquire; (iv) all chattel paper of the Debtor, including chattel paper which it now owns and that which it shall hereafter acquire; (v) all investment property of the Debtor, including investment property which it now owns and that which it shall hereafter acquire; (vi) all equipment (including fixtures) of the Debtor, including equipment which it now owns and that which it shall hereafter acquire; (vii) all documents of the Debtor, including documents which it now owns and those which it shall hereafter acquire; (viii) all instruments, letters of credit and advices of credit of the Debtor, including those which it now owns and those which it shall hereafter acquire; 2 (ix) all cash, depository accounts (including, without limitation, any deposits in any lockbox accounts created pursuant to the provisions of Section 9.02(h) of the Credit Agreements) or other property of the Debtor at any time delivered to, in the possession of, or under the control of the Secured Party; (x) any property the Debtor has given or may give in the future to the Secured Party to secure the Secured Indebtedness; and (xi) all additions to and substitutions for, and products and proceeds (including insurance proceeds whether or not the Secured Party is the loss payee thereof) of, any of the properties mentioned in clauses (i) through (x) above, or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to any of such properties. Without limiting the generality of the foregoing, the term "Collateral" shall expressly include all royalty, licensing and know-how agreements, all patents, copyrights, trademarks, tradenames, service marks, trade secrets, know-how, goodwill, computer software, computer programs, licensed computer software (to the extent assignable), licensed computer programs (to the extent assignable), tapes, discs and other documents or transcribed information of any type, whether expressed in ordinary or machine readable language. (c) "Secured Indebtedness" shall mean, collectively, (i) all indebtedness and obligations, including, without limitation, all Obligations (as defined in the Collateral Sharing Agreement), whether of principal, interest, fees, expenses or otherwise, of any of the Loan Parties (as defined in the Collateral Sharing Agreement) to any of the Facility Parties (as defined in the Collateral Sharing Agreement), whether now existing or hereafter incurred under the Credit Agreements or any of the Loan Documents (as defined in the Collateral Sharing Agreement), as any of the same may from time to time be amended, modified or supplemented, together with any and all extensions, renewals, refinancings or refundings thereof in whole or in part by the Facility Parties, (ii) all out-of-pocket costs, expenses and disbursements, including reasonable attorneys' fees and legal expenses, incurred by the Facility Parties or any one of them, or the Secured Party, in the collection of any of the obligations referred to in clause (i) above; and (iii) any advances made, subsequent to an Event of Default, by the Facility Parties or any one of them, or the Secured Party, for the reasonable maintenance, preservation, protection or enforcement of, or realization upon, the Collateral, including advances for taxes, insurance, repairs and the like and reasonable expenses incurred to sell or otherwise realize on, or prepare for sale or other realization on, any of the Collateral. 2. Assignment and Grant of Security Interests. As security for the due ------------------------------------------ and punctual payment and performance in full of the Secured Indebtedness, each Debtor hereby agrees that the Secured Party shall have, and each Debtor hereby grants to and creates in favor of the Secured Party, for the benefit of the Secured Party and the Facility Parties, a continuing first priority security interest in and to each Debtor's respective Collateral subject only to Permitted Liens. 3 Without limiting the generality of Section 4 below, each Debtor further agrees that with respect to each item of Collateral as to which (i) the creation of a valid and enforceable security interest is not governed exclusively by the Code or (ii) the perfection of a valid and enforceable security interest therein under the Code cannot be accomplished by the Secured Party or any other Facility Party taking possession thereof or by the filing in appropriate locations of appropriate Code financing statements executed by the Debtor, such Debtor will at its expense execute and deliver to the Secured Party such documents, agreements, notices, assignments and instruments and take such further actions as may be requested by the Secured Party from time to time for the purpose of creating a valid and perfected first priority Lien on such item, subject only to Permitted Liens, enforceable against the Debtor and all third parties to secure the Secured Indebtedness; provided, however that Debtor shall not be required to -------- take any actions required under Sections 9.02(g) and 9.02(h) of the Credit Agreements until an Event of Default has occurred under the Credit Agreements. To the extent the granting of any of the foregoing security interest is subject to any material contracts or agreements which by their terms prohibit the granting by the applicable Debtor of a security interest therein such Debtor shall: (i) provide to the Collateral Agent within thirty (30) days of the Closing Date a list of all such material contracts and agreements; (ii) use its commercially reasonable best efforts to obtain within ninety (90) days of the Closing Date any consent or approval of a security interest in any such contract or agreement granted to the Collateral Agent; and (iii) to the extent any such consent or approval is obtained and upon receipt thereof, promptly deliver to the Collateral Agent any original of such consent or approval obtained or such other evidence in a form satisfactory to the Collateral Agent of any such consent or approval obtained. 3. Representations and Warranties. Each Debtor jointly and severally ------------------------------ represents, warrants and covenants to the Secured Party (with respect to itself only) that: (a) Such Debtor is the legal and beneficial owner and holder of its respective Collateral and such Debtor has and will continue to have good and marketable title to the Collateral which such Debtor purports to own or which is reflected as owned in its books and records. (b) Each Debtor has received value from each of the Facility Parties for such Debtor's grant of a security interest hereunder and, except for the security interest granted to and created in favor of the Secured Party hereunder and any Permitted Liens, all of such Collateral is and will continue to be free and clear of all Liens. (c) Such Debtor has full power to enter into, execute, deliver and carry out this Security Agreement and to perform its obligations hereunder and all such actions have been duly authorized by all necessary proceedings on its part. This Security Agreement has been duly and validly executed and delivered by such Debtor. This Security Agreement constitutes the legal, valid and binding obligation of such Debtor, enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforceability of creditors' rights generally or limiting the right of specific performance. 4 (d) Neither the execution and delivery of this Security Agreement nor compliance with the terms and provisions hereof (i) will conflict with or result in any breach of the terms and conditions of the declaration of trust, articles or certificates of incorporation, by-laws, partnership agreement, limited liability company agreement, management or operating agreement or equivalent documents of such Debtor or of any Law or of any material agreement or instrument to which such Debtor is a party or by which it is bound or to which it is subject, (ii) will constitute a default thereunder or (iii) will result in the creation or enforcement of any Lien whatsoever upon any property (now or hereafter acquired) of such Debtor (other than Liens granted to the Secured Party on behalf of the Facility Parties under the Loan Documents). (e) As of the date hereof, all information contained on Schedule 1 is ---------- accurate and complete and contains no omission or misrepresentation of any material fact necessary for the creation and/or perfection of a security interest in the Collateral. The Debtors shall promptly notify the Secured Party of any changes in the information set forth thereon. (f) During the past five (5) years no Debtor has operated under any other legal name, trade name or fictitious name other than such Debtor's current legal name as specified on the signature pages to this Security Agreement or as otherwise disclosed on Schedule 1. ---------- 4. Further Assurances. Each Debtor will, from time to time, at its ------------------ expense, faithfully preserve and protect the Secured Party's security interest in such Debtor's Collateral as a continuing first priority perfected security interest, subject only to Permitted Liens, and will do all such other acts and things and will, upon request therefor by the Secured Party, execute, deliver, file and record all such other documents and instruments, including financing statements, continuation or amendment financing statements, security agreements, pledges, assignments, documents and powers of attorney with respect to such Debtor's Collateral, and pay all filing fees and taxes related thereto, as the Secured Party in its sole discretion may deem necessary or advisable from time to time in order to attach, preserve, protect, perfect or continue perfected any security interest granted or purported to be granted hereby or to enable the Secured Party to exercise and enforce its rights and remedies hereunder with respect to any of the Collateral. Without limiting the generality of the foregoing, to the extent Article 9 of the Code does not govern the creation and/or perfection of the security interests intended to be created hereunder, each Debtor agrees to execute and deliver such further documents and instruments and do such further acts as the Secured Party may from time to time require. 5. Covenants. Each Debtor jointly and severally covenants and agrees that --------- (a) it will defend the Secured Party's right, title and security interest in and to the Collateral and the proceeds thereof against the claims and demands of all Persons whomsoever, (b) it will not suffer or permit to exist on any Collateral any Lien except for Liens granted herein or in the other Loan Documents and Permitted Liens, (c) it will maintain in good condition and repair and shall protect and preserve its Collateral, as and to the extent required in the Credit Agreements, and such Collateral will be insured in accordance with the provisions of the Credit Agreements; (d) it 5 will not sell, assign or otherwise dispose of any portion of its Collateral except sales or dispositions expressly permitted under the terms of the Credit Agreements; (e) it will obtain and maintain sole and exclusive possession of its Collateral; (f) it will maintain and keep its chief executive office, the location of the Collateral and the location of the records pertaining thereto, at the location(s) specified on Schedule 1 attached hereto, or at such other ---------- location as it may reasonably designate from time to time by not less than thirty (30) Business Days' prior written notice to the Secured Party; (g) it will keep materially accurate and complete books and records concerning its Collateral and such other books and records as may be required under the Credit Agreements; (h) it will promptly furnish to the Secured Party such information and documents relating to its Collateral as the Secured Party may reasonably request in order to confirm the status of the Secured Party's security interest in such Collateral; (i) it will not take or omit to take any actions, the taking or the omission of which might result in a material adverse alteration or impairment of its Collateral or in a violation of this Security Agreement; (j) it will not, without the prior written consent of the Secured Party, waive or release any material obligation of any party to any material part of its Collateral, except in the ordinary course of Debtor's business or in connection with the disposition of assets permitted under the Credit Agreements; (k) it will execute and deliver to the Secured Party and record such amendments and supplements to this Security Agreement and other Loan Documents and additional assignments as the Secured Party reasonably may request to evidence and confirm the security interest herein contained; (l) it will, from and after the occurrence of any Event of Default, comply with all default and remedy provisions contained in the Credit Agreements (including, without limitation, the provisions of Sections 9.02(g) and 9.02(h) of the Credit Agreements); and (m) to the extent required by Section 8.02(i) of the Credit Agreements it will cause each of its Subsidiaries which may hereafter be created or acquired to enter into and become a party and signatory to this Security Agreement and do all such acts and things and execute, deliver and file all such documents and instruments as the Secured Party may deem necessary and desirable to attach, create, protect, perfect and continue perfected a first priority security interest in the Collateral of such Subsidiary. 6. Preservation of Security Interests. Each Debtor assumes full ---------------------------------- responsibility for taking and hereby agrees to take any and all necessary steps to preserve and defend the Secured Party's right, title and security interest in and to such Debtor's Collateral against the claims and demands of all Persons (other than those holding Permitted Liens). The Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of a Debtor's Collateral in the Secured Party's possession if, prior to the existence of an Event of Default or Potential Default, the Secured Party takes such action for that purpose as such Debtor shall reasonably request in writing, provided that -------- such requested action will not, in the judgment of the Secured Party, impair the security interest in such Debtor's Collateral created hereby or the Secured Party's rights in, or the value of, such Collateral, and provided further that -------- ------- such written request is received by the Secured Party in sufficient time to permit the Secured Party to take the requested action. 7. Secured Party's Rights with Respect to the Collateral. At any time and ----------------------------------------------------- from time to time, whether or not an Event of Default shall have occurred, and without notice to or consent of the Debtors, the Secured Party may, at its option, do any or all of the following: (a) take any 6 actions the Secured Party deems appropriate to attach, perfect, continue perfected, preserve and protect the Secured Party's security interest in the Collateral; (b) do anything which the Debtors are required but fail to do hereunder, and in particular the Secured Party may, if any of the Debtors fail to do so, (i) insure or take any reasonable steps to maintain, repair and protect the Collateral of any Debtor, (ii) pay any or all taxes, levies, expenses and costs arising with respect to the Collateral of any Debtor, or (iii) pay any or all premiums payable on any policy of insurance required to be obtained or maintained hereunder, and add any amounts paid under this Section 7 to the principal amount of any of the Secured Indebtedness and other indebtedness and liabilities secured by this Security Agreement; and (c) inspect, audit and verify the Collateral of any Debtor at any time upon on Event of Default or otherwise at any reasonable time and upon reasonable prior notice to Debtor, including reviewing all of Debtors' books and records and copying and making excerpts therefrom, in accordance with the terms of the Credit Agreements. 8. Remedies on Default. If there shall have occurred and be continuing an ------------------- Event of Default under the terms of the Credit Agreements or the other Loan Documents: (a) The Secured Party shall have such rights and remedies with respect to the Collateral or any part thereof and the proceeds thereof as are provided by the Code and such other rights and remedies with respect thereto which it may have at Law or in equity or under this Security Agreement and the Other Loan Documents, including to the extent not inconsistent with the provisions of the Code, the right to take over and collect all or any of Debtor's accounts and all or any of the other Collateral which consists of amounts owing to any Debtor, and to this end, the Debtor hereby appoints the Secured Party, its officers, employees and agents, as its irrevocable, true and lawful attorneys-in-fact with all necessary power and authority to (i) take possession immediately, with or without notice, demand, or legal process, of any of or all of the Collateral wherever found, and for such purposes, enter upon any premises upon which the Collateral may be found and remove the Collateral therefrom, (ii) require the Debtors to assemble the Collateral and deliver it to the Secured Party or to any place designated by the Secured Party at the Debtors' expense, (iii) receive, open and dispose of all mail addressed to the Debtors (or any of them), (iv) demand payment of the Debtors' accounts receivable, (v) enforce payment of the Debtors' accounts receivable by legal proceedings or otherwise, (vi) exercise all of the Debtors' rights and remedies with respect to the collection of the Debtors' accounts receivable, (vii) to the extent permitted by applicable Law, settle, adjust, compromise, extend or renew the Debtors' accounts receivable, (viii) settle, adjust or compromise any legal proceedings brought to collect the Debtors' accounts receivable, (ix) to the extent permitted by applicable Law, sell or assign the Debtors' accounts receivable upon such terms, for such amounts and at such time or times as the Secured Party deems advisable, (x) discharge and release the Debtors' accounts receivable, (xi) take control, in any manner, of any item of payment or proceeds from any account debtor, (xii) prepare, file and sign the Debtor's name on any Proof of Claim in Bankruptcy or similar document against any account debtor, (xiii) prepare, file and sign the Debtor's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with the Debtors' accounts receivable, (xiv) do all acts and things necessary, in the Secured Party's sole discretion, to fulfill the Debtor's obligations 7 under the Credit Agreements and other Loan Documents, (xv) endorse the name of the Debtor upon any check, chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Debtors' accounts receivable or inventory; (xvi) use the Debtors' stationery and sign the Debtors' name to verifications of the Debtors' accounts receivable and notices thereof to account debtors; (xvii) access and use the information recorded on or contained in any data processing equipment or computer hardware or software relating to the Debtors' accounts receivable, inventory, or other Collateral or proceeds thereof to which the Debtor has access, (xviii) demand, sue for, collect, compromise and give acquittances for any and all Collateral, (xix) prosecute, defend or compromise any action, claim or proceeding with respect to any of the Collateral, (xx) direct payments to, and take all necessary actions with respect to, lockbox agreements and lockbox accounts created pursuant to the provisions of Section 9.02(h) of the Credit Agreements, and (xxi) take such other action as the Secured Party may deem appropriate, including extending or modifying the terms of payment of the Debtors' debtors. This power of attorney, being coupled with an interest, shall be irrevocable for the life of this Security Agreement. To the extent permitted by Law, the Debtor hereby waives all claims of damages due to or arising from or connected with any of the rights or remedies exercised by the Secured Party pursuant to this Security Agreement, except claims for damage to the Collateral arising from gross negligence or willful misconduct by the Secured Party. (b) The Secured Party shall have the right to lease, sell or otherwise dispose of all or any of the Collateral at public or private sale or sales for cash, credit or any combination thereof, with such notice as may be required by Law (it being agreed by the Debtor that, in the absence of any contrary requirement of Law, ten (10) days' prior notice of a public or private sale of Collateral shall be deemed reasonable notice), in lots or in bulk, for cash or on credit, all as the Secured Party, in its sole and absolute discretion, may deem advisable. Such sales may be adjourned from time to time with or without notice. The Secured Party shall have the right to conduct such sales on the Debtors' premises or elsewhere and shall have the right to use the Debtors' premises without charge for such sales for such time or times as the Secured Party may see fit. The Secured Party and the Facility Parties may purchase all or any part of the Collateral at public or, if permitted by Law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Secured Indebtedness. (c) In the event of a breach by any of the Debtors in the performance of any of the terms of this Security Agreement, the Secured Party may demand specific performance of this Security Agreement and seek injunctive relief and may exercise any other remedy, available at law or in equity, it being recognized that the remedies of the Secured Party at Law may not fully compensate the Secured Party for the damages the Secured Party or any of the Facility Parties may suffer in the event of a breach hereof. 9. Application of Proceeds. The proceeds of any collection, sale or other ----------------------- disposition of the Collateral of any Debtor, or any part thereof, shall, after the Secured Party has made all deductions of expenses, including but not limited to reasonable attorneys' fees and other expenses 8 incurred in connection with repossession, collection, sale or disposition of such Collateral or in connection with the enforcement of the Secured Party's rights with respect to the Collateral in any insolvency, bankruptcy or reorganization proceedings, be applied against the Secured Indebtedness, whether or not all the same be then due and payable, in such manner and order as set forth in the Collateral Sharing Agreement. The Debtors shall be liable for any deficiency if the proceeds of any sale, assignment, giving of an option or options to purchase or other disposition of the Collateral is insufficient to pay all of the Secured Indebtedness. 10. Attorneys-in-Fact. Each of the Debtors hereby irrevocably appoints the ----------------- Secured Party, its officers, employees and agents, or any of them, as attorneys- in-fact, with full power of substitution, for such Debtor for the purpose of carrying out the provisions of this Security Agreement and the Other Loan Documents, and taking any action and executing, delivering, filing and recording any instruments which the Secured Party may deem necessary or advisable to accomplish the purposes hereof and thereof, which power of attorney being given for security is coupled with an interest and irrevocable. Each Debtor hereby ratifies and confirms and agrees to ratify and confirm all action taken by the Secured Party, its officers, employees or agents pursuant to the foregoing power of attorney. 11. Indemnity and Expenses. ---------------------- (a) The Debtors unconditionally and jointly and severally agree to indemnify the Secured Party from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including enforcement of this Security Agreement), except claims, losses or liabilities resulting from the gross negligence or willful misconduct of the Secured Party or any of the Facility Parties. (b) The Debtors unconditionally and jointly and severally agree upon demand to pay to the Secured Party the amount of any and all reasonable and necessary out-of-pocket costs, expenses and disbursements for which reimbursement is customarily obtained, including reasonable fees and expenses of their counsel actually incurred, which the Secured Party may incur in connection with (i) the administration of this Security 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 Secured Party hereunder or (iv) the failure by the Debtors to perform or observe any of the provisions hereof. 12. Security Interest Absolute; Waiver of Notices. All rights of the --------------------------------------------- Secured Party hereunder, all security interests hereunder, and all obligations of the Debtors hereunder shall be absolute and unconditional, irrespective of: (a) any lack of validity or enforceability of the Credit Agreements, the promissory notes or guaranties evidencing the Secured Indebtedness, or any of the other Loan Documents; (b) any change in the time, manner or place or payment of, or in any other term of, all or any of the Secured Indebtedness or any other amendment or waiver of or any consent to any departure from the Credit Agreements or any of the other Loan Documents; (c) any exchange, release or non- perfection of any other Collateral, or any release or amendment or waiver of or consent to departure from any guaranty, for all or any of the Secured 9 Indebtedness; or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, any Debtor or any third party mortgagors, pledgors or Debtors of security interests. Each Debtor (other than the Borrower and the Term Loan Borrower with respect to notices otherwise provided for in the Credit Agreements and the other Loan Documents) waives any and all notice with respect to acceptance by the Secured Party of this Security Agreement, the provisions of the Credit Agreements, or any of the other Loan Documents or any other promissory note, guaranty, instrument or agreement relating to the Secured Indebtedness, and any default in connection with the Secured Indebtedness. Each Debtor waives any presentment, demand, notice of dishonor or nonpayment, protest, notice of protest and any other notice of any kind in connection with the Secured Indebtedness, except for notices expressly required under the Loan Documents. Until the indefeasible payment in full in cash of the Obligations and so long as any Obligations remain outstanding or any commitment to extend credit to the Borrower pursuant to the Revolving Credit Agreement remains in effect each Debtor waives and agrees not to enforce any of the rights of such Debtor against the Borrower, the Term Loan Borrower or any other Debtor, including: (i) any right of such Debtor to be subrogated in whole or in part to any right or claim with respect to any Secured Indebtedness or any portion thereof to the Secured Party which might otherwise arise from payment by any Debtor to the Secured Party or any other Facility Party on the account of the Secured Indebtedness or any portion thereof; and (ii) any right of any Debtor to require the marshalling of assets of the Borrower, the Term Loan Borrower or any other Debtor which might otherwise arise from payment by any Debtor to the Secured Party or any other Facility Party on account of the Secured Indebtedness or any portion thereof. If any amount shall be paid to any Debtor in violation of the preceding sentence, such amount shall be deemed to have been paid to such Debtor for the benefit of, and held in trust for the benefit of, the Secured Party and shall forthwith be paid to the Secured Party to be credited and applied upon the Secured Indebtedness, whether matured or unmatured in accordance with the terms of the Collateral Sharing Agreement. Each Debtor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Credit Agreements and that the waivers set forth in this Section are knowingly made in contemplation of such benefits. 13. Termination. Upon payment in full of the Secured Indebtedness and ----------- termination of the Credit Agreements and the Commitments, this Security Agreement shall terminate and be of no further force and effect, and the Secured Party, at the Debtors' expense, shall thereupon promptly return to each Debtor such of its Collateral and such other documents delivered by each Debtor hereunder as may then be in the Secured Party's possession. Upon any such termination, the Secured Party will, at the Debtor's expense, execute and deliver to each Debtor such documents as that Debtor shall reasonably request to evidence such termination. The Secured Party, upon request of any Debtor, shall release the Secured Party's security interest in any of such Debtor's Collateral which is sold prior to the occurrence of an Event of Default (but not the proceeds thereof), provided such sale is permitted by, and made in accordance -------- with, the provisions of the Credit Agreements. 14. Modifications, Amendments and Waivers. Any and all agreements amending ------------------------------------- or changing any provision of this Security Agreement or the rights of the Secured Party or the 10 Debtors hereunder, and any and all waivers or consents to Events of Default or other departures from the due performance of the Debtors hereunder shall be made only pursuant to the provisions of the Credit Agreements, except that any amendment or change that affects less than all of the Debtors shall be effective with the written consent of the affected Debtors. 15. No Implied Waivers; Cumulative Remedies. No course of dealing and no --------------------------------------- failure or delay on the part of the Secured Party in exercising any right, remedy, power or privilege hereunder shall operate as a waiver thereof or of any other right, remedy, power or privilege of the Secured Party hereunder; and no single or partial exercise of any such right, remedy, power or privilege shall preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies of the Secured Party under this Security Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. 16. Notices. All notices, statements, requests, demands and other ------- communications under this Security Agreement shall be given in the manner provided in Section 11.06 of the Credit Agreements, and shall be addressed (a) to the Debtors at the Borrower's chief executive office as set forth on Schedule 1, and (b) to the Secured Party at the address set forth in the Credit - ---------- Agreements. 17. Severability. ------------ (a) Each Debtor agrees that the provisions of this Security Agreement are severable, and in an action or proceeding involving any state or federal bankruptcy, insolvency or other law affecting the rights of creditors generally: (i) if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Security Agreement in any jurisdiction; and (ii) if this Security Agreement would be held or determined to be void, invalid or unenforceable on account of the amount of the aggregate liability of a Debtor (other than the Borrower or the Term Loan Borrower) under this Security Agreement, then, notwithstanding any other provision of this Security Agreement to the contrary, the aggregate amount of such liability shall, without any further action by the Secured Party, such Debtor or any other person, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. (b) If the grant of a security interest hereunder by any one or more Debtors is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect: 11 (i) the validity and enforceability of the security interest granted hereunder by any other Debtor, which shall continue in full force and effect in accordance with its terms; or (ii) the validity and enforceability of any clause or provision not so held to be void, invalid or unenforceable. 18. Governing Law. This Security Agreement shall be deemed to be a ------------- contract under the laws of the Commonwealth of Pennsylvania and for all purposes shall be governed by and construed in accordance with the internal laws of said Commonwealth, without reference to its conflicts of law principles, except as required by mandatory provisions of law and except to the extent that the validity or perfection of security interests hereunder, or remedies hereunder with respect to any particular Collateral, is governed by the laws of a jurisdiction other than the law of the Commonwealth of Pennsylvania. 19. Successors and Assigns. This Security Agreement shall be freely ---------------------- assignable and transferable by the Secured Party in connection with the assignment or transfer of the Secured Indebtedness; provided, however, the -------- ------- duties and obligations of the Debtors may not be delegated or transferred by the Debtors, except to the extent specifically permitted in the Credit Agreements. The rights and privileges of the Secured Party shall inure to the benefit of its successors and assigns, and the duties and obligations of the Debtors shall bind the Debtors and their respective successors and permitted assigns. Except to the extent otherwise required by the context of this Security Agreement, the word "Facility Parties" where used in this Security Agreement shall include, without limitation, any holder of a promissory note, or assignee of an interest therein, originally issued to a Facility Party under the Credit Agreements, and each such holder of a promissory note, or assignee of an interest therein, shall be bound by and have the benefits of this Security Agreement to the same extent as if such holder had been a signatory hereto. 20. Election. Each Debtor acknowledges that the Secured Party may, in its -------- sole discretion, elect to exercise its rights under this Security Agreement against any one or more of the Debtors, or the Collateral of any one or more of the Debtors, without any duty or responsibility to pursue any other Debtor, and that such an election by the Secured Party shall not be a defense to any action the Secured Party may elect to take against any one or more of the Debtors. 21. Counterparts. This Security Agreement may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 22. Consent to Jurisdiction; Waiver of Jury Trial. Each of the Debtors --------------------------------------------- hereby irrevocably consents to the non-exclusive jurisdiction of the Court of Common Pleas of Allegheny County and the United States District Court for the Western District of Pennsylvania, and waives personal service of any and all process upon it and consents that all such service of process be made by certified or registered mail directed to the Debtors at the addresses set forth 12 or referred to in Section 16 hereof and service so made shall be deemed to be completed upon actual receipt thereof. Each of the Debtors waives any objection to jurisdiction and venue of any action instituted against it as provided herein and agrees not to assert any defense based on lack of jurisdiction or venue, AND THE SECURED PARTY AND EACH OF THE DEBTORS WAIVE TRIAL BY JURY IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM WITH RESPECT TO THIS SECURITY AGREEMENT TO THE FULL EXTENT PERMITTED BY LAW. [SIGNATURES BEGIN ON NEXT PAGE] 13 [SIGNATURE PAGE 1 OF 1 TO SECURITY AGREEMENT] WITNESS the due execution hereof as of the day and year first above written. SECURED PARTY: PNC BANK, NATIONAL ASSOCIATION, as Collateral Agent By: ------------------------------------- Title: ---------------------------------- DEBTORS: MARINER HEALTH GROUP, INC. EACH SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A CORPORATION AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT BOTH FOR ITSELF AND, IF APPLICABLE: (i) AS GENERAL PARTNER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A PARTNERSHIP AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT, AND (ii) AS A MEMBER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A LIMITED LIABILITY COMPANY AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT By: ------------------------------------- Name: Boyd P. Gentry Title: Vice President/Treasurer of each of the foregoing corporations SCHEDULE 1 TO SECURITY AGREEMENT SECURITY INTEREST DATA SUMMARY ------------------------------ 1. The chief executive office of each Debtor is located as follows: Borrower: Term Loan Borrower: Other Debtors: 2. Each Debtor's true, full and current corporate name is as set forth on the signature pages to this Security Agreement. No Debtor has used or currently uses any legal name, trade names or fictitious names, other than its current legal name or as follows: Debtor Name Other Legal, Trade or Fictitious Names ----------- -------------------------------------- 3. All of each Debtor's personal property which has not been delivered to the Secured Party pursuant to the terms of this Agreement or the Credit Agreement is now, and will be at all future times, located at the Debtor's chief executive office as described in Paragraph 1 above, or at the following locations: Debtor Name Collateral Locations ----------- -------------------- EX-10.75 36 CONTINUING AGMT - 12/23/98 EXHIBIT 10.75 CONTINUING AGREEMENT OF GUARANTY AND SURETYSHIP This Continuing Agreement of Guaranty and Suretyship (the "Guarantee") is made and entered into as of this 23rd day of December, 1998, by and between the Guarantors, each a Subsidiary of Mariner Health Group, Inc., a Delaware corporation, listed on Schedule I hereto (collectively the "Guarantors" and each individually a "Guarantor") in favor of PNC BANK, NATIONAL ASSOCIATION, a national banking association, in its capacity as administrative agent ("Agent") for the benefit of the Banks (as hereinafter defined and hereinafter referred to collectively as the "Bank" or "Banks"). BACKGROUND In order to induce the Agent and the Banks to make loans to MARINER HEALTH GROUP, INC., a Delaware corporation (the "Borrower"), in accordance with that certain Term Loan Agreement of even date herewith (as it may hereafter from time to time be amended, restated, modified or supplemented, the "Term Loan Agreement") by and between the Borrower, the Agent, First Union National Bank, as syndication agent and the banks party thereto (the "Banks"), each Guarantor hereby unconditionally and irrevocably guarantees and becomes surety as though he was a primary obligor for the full and timely payment when due, whether at maturity, by declaration, acceleration or otherwise, of the principal of and interest and fees on all Loans (as defined in the Term Loan Agreement), both those now in existence and those that shall hereafter be made, of the Bank to the Borrower under the Term Loan Agreement and the Notes issued by the Borrower in connection therewith and any extensions, renewals, replacements or refundings thereof, and each and every other obligation or liability (both those now in existence and those that shall hereafter arise and including, without limitation, all costs and expenses of enforcement and collection, including reasonable attorney's fees) of the Borrower to the Bank under the Term Loan Agreement and the other Loan Documents (as defined in the Term Loan Agreement) except this Agreement, and any extensions, renewals, replacements or refundings thereof (hereinafter referred to as the "Guaranteed Indebtedness"), whether or not such Guaranteed Indebtedness or any portion thereof shall hereafter be released or discharged or is for any reason invalid or unenforceable. 1. Capitalized terms used herein and not otherwise defined herein shall have such meanings given to them in the Term Loan Agreement. 2. Each Guarantor agrees to make such full payment forthwith upon demand of the Bank when the Guaranteed Indebtedness or any portion thereof is due to be paid by the Borrower to the Agent and the Banks, whether at stated maturity, by declaration, acceleration or otherwise. Each Guarantor agrees to make such full payment irrespective of whether or not any one or more of the following events has occurred: (i) the Agent and the Banks, or any of them, have made any demand on the Borrower or the other Guarantor; (ii) the Agent and the Banks, or any of them, have taken any action of any nature against the Borrower or the other Guarantor; (iii) the Agent and the Banks, or any of them, have pursued any rights which it has against any other Person who may be liable for the Guaranteed Indebtedness; (iv) the Agent and the Banks, or any of them, holds or has resorted to any security for the Guaranteed Indebtedness; or (v) the Bank has invoked any other remedy or right it has available with respect to the Guaranteed Indebtedness. Each Guarantor further agrees to make full payment to the Agent and the Banks even if circumstances exist which otherwise constitute a legal or equitable discharge of such Guarantor as surety or guarantor. 3. Each Guarantor warrants to the Agent and the Banks that: (i) no other agreement, representation or special condition exists between such Guarantor and the Agent or any of the Banks regarding the liability of such Guarantor hereunder, nor does any understanding exist between such Guarantor and the Agent or any of the Banks that the obligations of such Guarantor hereunder are or will be other than as set forth herein; and (ii) as of the date hereof, such Guarantor has no defense whatsoever to any action or proceeding that may be brought to enforce this Guarantee. 4. Each Guarantor waives and agrees not to enforce any of the rights of such Guarantor against the Borrower or any other Guarantor, including, but not limited to: (i) any right of such Guarantor to be subrogated in whole or in part to any right or claim with respect to any Guaranteed Indebtedness or any portion thereof to the Agent and the Banks or any of them which might otherwise arise from payment by any Guarantor to the Agent and the Banks, or any of them, on the account of the Guaranteed Indebtedness or any portion thereof; and (ii) any right of any Guarantor to require the marshalling of assets of the Borrower or any other Guarantor which might otherwise arise from payment by any Guarantor to the Bank on account of the Guaranteed Indebtedness or any portion thereof. If any amount shall be paid to any Guarantor in violation of the preceding sentence, such amount shall be deemed to have been paid to such Guarantor for the benefit of, and held in trust for the benefit of, the Agent and the Banks and shall forthwith be paid to the Agent to be Term Loaned and applied upon the Guaranteed Indebtedness, whether matured or unmatured, in accordance with the terms of the Term Loan Agreement. Each Guarantor acknowledges that such Guarantor will receive direct and indirect benefits from the financing arrangements contemplated by the Term Loan Agreement and that the waivers set forth in this Section are knowingly made in contemplation of such benefits. 5. Each Guarantor waives promptness and diligence by the Agent and the Banks, or any of them, with respect to his rights under the Term Loan Agreement or any of the other Loan Documents, including, but not limited to, this Guarantee. 6. Each Guarantor waives any and all notice with respect to: (i) acceptance by the Agent and the Banks of this Guarantee; (ii) the provisions of any note, instrument or agreement relating to the Guaranteed Indebtedness; and (iii) any default in connection with the Guaranteed Indebtedness. 7. Each Guarantor waives any presentment, demand, notice of dishonor or nonpayment, protest, and notice of protest in connection with the Guaranteed Indebtedness. 8. Each Guarantor agrees that the Agent and the Banks, or any of them, may from time to time and as many times as such Agent or any Bank, in its sole discretion, deems 2 appropriate, do any of the following without notice to any Guarantor and without adversely affecting the validity or enforceability of this Guarantee: (i) release, surrender, exchange, compromise, or settle the Guaranteed Indebtedness or any portion thereof; (ii) change, renew, or waive the terms of the Guaranteed Indebtedness or any portion thereof; (iii) change, renew, or waive the terms, including without limitation, the rate of interest charged to the Borrower or any Guarantor, of any note, instrument, or agreement relating to the Guaranteed Indebtedness or any portion thereof; (iv) grant any extension or indulgence with respect to the payment to the Agent and the Banks, or any of them, of the Guaranteed Indebtedness or any portion thereof; (v) enter into any agreement of forbearance with respect to the Guaranteed Indebtedness or any portion thereof; (vi) release, surrender, exchange or compromise any security held by the Agent and the Banks, or any of them, for the Guaranteed Indebtedness; (vii) release any Person who is a guarantor or surety or who has agreed to purchase the Guaranteed Indebtedness or any portion thereof; and (viii) release, surrender, exchange or compromise any security or Lien held by the Agent and the Banks, or any of them, for the liabilities of any Person who is a guarantor or surety for the Guaranteed Indebtedness or any portion thereof. Each Guarantor agrees that the Agent and the Banks may do any of the above as it deems necessary or advisable, in its sole discretion, without giving any notice to any Guarantor, and that each Guarantor will remain liable for full payment to the Agent and the Banks of the Guaranteed Indebtedness. 9. Each Guarantor agrees to be jointly and severally bound by the terms of this Guarantee and jointly and severally liable under this Guarantee. As a result of such liability, each Guarantor acknowledges that the Agent and the Banks may, in their sole discretion, elect to enforce this Guarantee for the total Guaranteed Indebtedness against any Guarantor without any duty or responsibility to pursue any other Guarantor and that such an election by the Agent and the Banks, or any of them, shall not be a defense to any action the Agent and the Banks, or any of them, may elect to take against any Guarantor. 10. If any amount owing hereunder shall have become due and payable (by acceleration or otherwise), the Agent or any Bank and any branch, subsidiary or affiliate of the Agent or any of the Banks anywhere in the world shall each have the right, at any time and from time to time to the fullest extent permitted by Law, in addition to all other rights and remedies available to it, without prior notice to any Guarantor, to set-off against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of any Guarantor by the Agent or any Bank or any such branch, subsidiary or affiliate including, without limitation, all funds in all deposit accounts (whether time or demand, general or special, provisionally Term Loaned or finally Term Loaned, or otherwise) now or hereafter maintained by any Guarantor with the Agent or any of the Banks or such branch, subsidiary or affiliate. Such right shall exist whether or not the Agent or any of the Banks shall have given notice or made any demand hereunder or under any of the Notes or Loan Documents, whether or not such debt owing to or funds held for the account of any Guarantor is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guarantee or any other security, right or remedy available to the Bank. Each Guarantor hereby consents to and confirms the foregoing arrangements, and confirms the Agents and each of the Banks' rights and each such branch's, subsidiary's and affiliate's rights of banker's lien and set-off. 3 11. Each Guarantor recognizes and agrees that the Borrower, after the date hereof, may incur additional Indebtedness or other obligations, fees and expenses to the Agent and the Banks under the Term Loan Agreement, refinance existing Guaranteed Indebtedness or pay existing Guaranteed Indebtedness and subsequently incur additional Indebtedness to the Agent and the Banks under the Term Loan Agreement, and that in any such transaction, even if such transaction is not now contemplated, the Agent and the Banks will rely in any such case upon this Guarantee and the enforceability thereof against each Guarantor and that this Guarantee shall remain in full force and effect with respect to such future Indebtedness of the Borrower to the Agent and the Banks and such Indebtedness shall for all purposes constitute Guaranteed Indebtedness. 12. Each Guarantor further agrees that, if at any time all or any part of any payment, from whomever received, theretofore applied by the Agent and the Banks, or any of them, to any of the Guaranteed Indebtedness is or must be rescinded or returned by such Agent or Bank for any reason whatsoever including, without limitation, the insolvency, bankruptcy or reorganization of any Guarantor, such liability shall, for the purposes of this Guarantee, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Agent and the Banks, or any of them, and this Guarantee shall continue to be effective or be reinstated, as the case may be, as to such liabilities, all as though such application by the Agent and the Banks, or any of them, had not been made. 13. Each Guarantor agrees that no failure or delay on the part of the Agent and the Banks, or any of them, to exercise any of their rights, powers or privileges under this Guarantee shall be a wavier of such rights, powers or privileges or a waiver of any default, nor shall any single or partial exercise of any of the Agent's or any Bank's rights, powers or privileges preclude other or further exercise thereof or the exercise of any other right, power or privilege or be construed as a waiver of any default. Each Guarantor further agrees that no waiver or modification of any rights of the Agent and the Banks under this Guarantee shall be effective unless in writing and signed by the Agent and the Banks. Each Guarantor further agrees that each written waiver shall extend only to the specific instance actually recited in such written waiver and shall not impair the rights of the Agent and the Banks in any other respect. 14. Each Guarantor unconditionally agrees to pay all costs and expenses, including attorney's fees, incurred by the Agent and the Banks, or any of them, in enforcing this Guarantee against any Guarantor. 15. Each Guarantor agrees that this Guarantee and the rights and obligations of the parties hereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the Commonwealth of Pennsylvania without giving effect to its principles of conflict of laws. 16. Each Guarantor recognizes that this Guarantee when executed constitutes a sealed instrument and as a result the instrument will be enforceable as such without regard to any statute of limitations which might otherwise be applicable and without any consideration. 4 17. Each Guarantor acknowledges that in addition to binding itself to this Guarantee, at the time of execution of this Guarantee the Agent offered to such Guarantor a copy of this Guarantee in the form in which it was executed and that by acknowledging this fact such Guarantor may not later be able to claim that a copy of the Guarantee was not received by it. 18. Each Guarantor agrees that this Guarantee shall be binding upon each Guarantor, its successors and assigns; provided, however, that no Guarantor may -------- ------- assign or transfer any of its rights and obligations hereunder or any interest herein. Each Guarantor further agrees that (i) this Guarantee is freely assignable and transferable by the Agent or any Bank in connection with any assignment or transfer of the Guaranteed Indebtedness and (ii) this Guarantee shall inure to the benefit of the Agent and the Banks, their successors and assigns. 19. Each Guarantor hereby acknowledges that it has a received a copy of the Term Loan Agreement and the other Loan Documents and each Guarantor certifies that the representations and warranties made therein with respect to such Guarantor are true and correct. Further, each Guarantor acknowledges and agrees to perform, comply with and be bound by all of the provisions of the Term Loan Agreement and the other Loan Documents including, without limitation, those covenants contained in Sections 8.01 and 8.02 of the Term Loan Agreement. 20. Each Guarantor agrees that if any Guarantor fails to perform any covenant or agreement hereunder or if there occurs an Event of Default under the Term Loan Agreement, all or any part of the Guaranteed Indebtedness may be declared to be forthwith due and payable and, in the case of an Event of Default described in Sections 9.01(p) and 9.01(q) of the Term Loan Agreement, the Guaranteed Indebtedness shall be immediately due and payable, in any case without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. 21. Each Guarantor agrees that the enumeration of the Agents and the Banks' rights and remedies set forth in this Guarantee is not intended to be exhaustive and the exercise by the Agent and the Banks, or any of them, of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative and shall be in addition to any other right or remedy given hereunder or under any other agreement among the parties to the Loan Documents or which may now or hereafter exist at law or in equity or by suit or otherwise. 22. Each Guarantor agrees that all notices, statements, requests, demands and other communications under this Guarantee shall be given to each of the Guarantors at its Chief Executive Office at c/o Mariner Health Group, Inc., One Raviania Drive, Suite 1500, Atlanta, GA 30346, or at such other office or offices as the Guarantors may advise, in writing, the Agent. 23. (a) Each Guarantor agrees that the provisions of this Guarantee are severable, and in an action or proceeding involving any state or federal bankruptcy, insolvency or other law affecting the rights of Term Loanors generally: (i) if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or 5 provision in any other jurisdiction, or any other clause or provision in this Guarantee in any jurisdiction. (ii) if this Guarantee would be held or determined to be void, invalid or unenforceable on account of the amount of a Guarantor's aggregate liability under this Guarantee, then, notwithstanding any other provision of this Guarantee to the contrary, the aggregate amount of such liability shall, without any further action by the Agent or any of the Banks, such Guarantor or any other Person, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding, which (without limiting the generality of the foregoing) may be an amount which is not greater than the greater of: (A) the fair consideration actually received by such Guarantor under the terms of and as a result of the Loan Documents, including, without limiting the generality of the foregoing, and to the extent not inconsistent with applicable federal and state laws affecting the enforceability of guarantees, distributions or advances made to such Guarantor with the proceeds of any Term Loan extended under the Loan Documents in exchange for its guaranty of the Guaranteed Indebtedness, or (B) the excess of (1) the amount of the fair saleable value of the assets of such Guarantor as of the date of this Guarantee as determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors as in effect on the date thereof over (2) the amount of all liabilities of such Guarantor as of the date of this Guarantee, also as determined on the basis of applicable federal and state laws governing the insolvency of debtors as in effect on the date thereof. (b) If the guarantee by any one or more Guarantors of the Guaranteed Indebtedness is held or determined to be void, invalid or unenforceable, in whole or in part, such holding or determination shall not impair or affect: (i) the validity and enforceability of the guarantee hereunder by any other Guarantor, which shall continue in full force and effect in accordance with its terms; or (ii) the validity and enforceability of any clause or provision not so held to be void, invalid or unenforceable. 24. EACH GUARANTOR AGREES UPON THE OCCURRENCE OF AN EVENT OF DEFAULT (AS DEFINED IN THE TERM LOAN AGREEMENT) OR A DEFAULT HEREUNDER, ANY ATTORNEY OF ANY COURT OF RECORD IS EMPOWERED WITHIN THE UNITED STATES OF AMERICA, OR ELSEWHERE, TO APPEAR FOR EACH GUARANTOR AND, WITH OR WITHOUT A DECLARATION FILED, TO CONFESS JUDGMENT OR A SERIES OF JUDGMENTS AGAINST EACH GUARANTOR IN FAVOR OF THE AGENT AND THE BANKS, OR ANY OF THEM, AS OF ANY TERM OR TERMS, FOR ANY AND ALL SUMS THEN PAYABLE UNDER THE TERMS OF THE LOAN DOCUMENTS FOR WHICH JUDGMENT HAS NOT THERETOFORE BEEN ENTERED, TOGETHER WITH COSTS OF SUIT AND A REASONABLE ATTORNEY'S COMMISSION FOR COLLECTION, AND EACH 6 GUARANTOR HEREBY FOREVER WAIVES AND RELEASES ANY AND ALL ERRORS IN SAID PROCEEDINGS, WAIVES STAY OF EXECUTION, STAY, CONTINUANCE OR ADJOURNMENT OF SALE ON EXECUTION, THE RIGHT TO PETITION TO SET ASIDE SALE OR ORDER A RESALE, THE RIGHT TO EXCEPT TO THE SHERIFF'S SCHEDULE OF PROPOSED DISTRIBUTION, THE RIGHT OF INQUISITION AND EXTENSION OF TIME OF PAYMENT, AND AGREES TO CONDEMNATION OF ANY PROPERTY LEVIED UPON BY VIRTUE OF ANY EXECUTION ISSUED ON ANY SUCH JUDGMENT, AND EACH GUARANTOR SPECIFICALLY WAIVES ALL EXEMPTIONS FROM LEVY AND SALE OF ANY PROPERTY THAT NOW IS OR MAY HEREAFTER BE EXEMPT UNDER THE EXISTING OR FUTURE LAWS OF THE UNITED STATES OF AMERICA, OR OF THE COMMONWEALTH OF PENNSYLVANIA OR OF ANY OTHER JURISDICTION. 25. EACH GUARANTOR HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTEE. EACH GUARANTOR (I) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE AGENT AND THE BANKS, OR ANY OF THEM, HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND EXECUTION AND DELIVERY HEREOF BY EACH GUARANTOR, AND (II) ACKNOWLEDGES THAT THE ENTERING INTO OF THE TERM LOAN AGREEMENT BY THE AGENT AND THE BANKS HAS BEEN INDUCED BY, AMONG OTHER THINGS, THE WAIVERS AND CERTIFICATIONS SET FORTH IN THIS SECTION. 26. Each Guarantor (i) hereby irrevocably submits to the nonexclusive jurisdiction of the Court of Common Pleas of Allegheny County, Commonwealth of Pennsylvania, or any successor to said court, and to the nonexclusive jurisdiction of the United States District Court for the Western District of Pennsylvania, or any successor to said court (hereinafter referred to as the "Pennsylvania Courts") for purposes of any suit, action or other proceeding which relates to this Guarantee or any other Loan Document, (ii) to the extent permitted by applicable Law, hereby waives and agrees not to assert by way of motion, as a defense or otherwise in any such suit, action or proceeding, any claim that such Guarantor is not personally subject to the jurisdiction of the Pennsylvania Courts; that such suit, action or proceeding is brought in an inconvenient forum; that the venue of such suit, action or proceeding is improper; or that this Guarantee or any Loan Document may not be enforced in or by the Pennsylvania Courts, (iii) hereby agrees not to seek, and hereby waives, any collateral review by any other court, which may be called upon to enforce the judgment of any of the Pennsylvania Courts, of the merits of any such suit, action or proceeding or the jurisdiction of the Pennsylvania Courts, and (iv) waives personal service of any and all process upon it and consents that all such service of process by made by certified or registered mail addressed as provided in Section 22 hereof and service so made shall be deemed to be completed upon actual receipt thereof. Nothing herein 7 shall limit the Agent or any Banks' right to bring any suit, action or other proceeding against any Guarantor or any of Guarantor's assets or to serve process on any Guarantor by any means authorized by Law. 8 [SIGNATURE PAGE 1 OF 1 TO GUARANTY AND SURETYSHIP AGREEMENT] IN WITNESS WHEREOF, each Guarantor intending to be legally bound, has executed this Guarantee as of the date first above written with the intention that this Guarantee shall constitute a sealed instrument. GUARANTORS: ATTEST: EACH SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A CORPORATION AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT BOTH FOR ITSELF AND, IF APPLICABLE: (i) AS GENERAL PARTNER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A PARTNERSHIP AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT, AND (ii) AS A MEMBER OF EACH OTHER SUBSIDIARY OF MARINER HEALTH GROUP, INC. WHICH IS A LIMITED LIABILITY COMPANY AND WHICH IS LISTED AS A "COMPANY" ON SCHEDULE 6.01(c) OF THE CREDIT AGREEMENT. By:____________________________ By: _____________________________ Name: Stefano M. Miele Name: Boyd P. Gentry Title: Secretary of each of the Title: Vice President/Treasurer of foregoing corporations each of the foregoing corporations [SEAL] 9 SCHEDULE I List of Guarantors: See Schedule 6.01(c) to the Credit Agreement 10 EX-10.76 37 CONFIRMATION FOR US DOLLAR TOTAL RETURN SWAP EXHIBIT 10.76 CONFIRMATION FOR U.S. DOLLAR TOTAL RETURN SWAP TRANSACTION TO BE SUBJECT TO 1992 MASTER AGREEMENT To: Mariner Post-Acute Network, Inc. ("Party B") Suite 1500, One Ravinia Drive Atlanta, GA 30346 Attn: Boyd P. Gentry, Treasurer Fax: (678) 443-6874 Phone: (678) 443-6872 FROM: NationsBank, N.A. ("Party A") 233 S. Wacker Drive Chicago, Illinois 60606 ATTN: Rick Briggs/Dan Caldwell Date: September 21, 1998 Our Reference No. __________ The purpose of this letter agreement is to confirm the terms and conditions of the Swap Transaction entered into between us on the Trade Date specified below (the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the Master Agreement specified below. 1. The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc. (the "Definitions") are incorporated into this Confirmation. In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern. Each party represents and warrants to the other that (i) it is duly authorized to enter into this Swap Transaction and to perform its obligations hereunder, (ii) the Swap Transaction and the performance of its obligations hereunder do not violate any material obligation of such party, and (iii) the person executing this Confirmation is duly authorized to execute and deliver it. 2. This Confirmation supplements, forms part of, and is subject to, the 1992 ISDA Master Agreement between Party B (formerly known as Paragon Health Network, Inc.) and Party A, dated as of October 31, 1997 (the "Agreement"). This Confirmation shall supplement, form part of, and be subject to that Agreement, and all provisions contained or incorporated by reference in the Agreement shall govern this Confirmation except as expressly modified below. 3. The terms of the Swap Transaction to which this Confirmation relates are as follows: Calculation Agent: Party A Notional Amount: USD 40,661,000, subject to the Prepayment, Voluntary Early Termination and Current Notional Amount provisions below. Trade Date: September 21, 1998 Effective Date: September 21, 1998 Reference Asset: 9.500% Mariner Health Group, Inc. (the "Obligor") Senior Subordinated Notes due 2006 (the "Notes"). Initial Price: 101% Termination Date: The earlier of (i) April 5, 1999, (ii) the date on which the Party A Notional Amount is reduced to zero and (iii) the day on which the USD 990,000,000 Mariner Post-Acute Network, Inc. Credit Agreement dated as of November 4, 1997, as 1 amended (the "MPN Credit Agreement"), is amended, modified, renewed, refinanced or replaced in order to refinance the USD 460,000,000 Mariner Health Group, Inc. Revolving Credit Facility dated as of May 18, 1994, as amended (the "Mariner Credit Agreement"), unless designated sooner pursuant to the Early Termination provisions below. A. PAYMENTS BY PARTY A: Party A First Payment Amount ---------------------------- Party A Notional Amount: The Notional Amount. Party A First Payment Amount: Any interest and fees, if any, actually received by Party A in respect of the Party A Notional Amount of the Reference Asset for the relevant Calculation Period. Party A First Payment Amount Payment Dates: Two Business Days after Party A's receipt of the Party A First Payment Amount (if any), commencing on the first such date to occur after the Effective Date, and ending on the Termination Date subject to adjustment in accordance with the Modified Following Business Day Convention. Party A First Payment Amount Business Days: New York Party A Second Payment Amount ----------------------------- Party A Second Payment Amount: Capital Appreciation (as defined below), if any. Party A Second Payment Amount Payment Date: The Termination Date B. PAYMENTS BY PARTY B: Party B First Payment Amount ---------------------------- Party B First Payment Notional Amount: Notional Amount x Initial Price Party B First Payment Amount Payment Dates: Two Business Days following each Period End Date and, with respect to the Period End Date ending on the Termination Date, the Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Period End Dates October 1, 1998, April 1, 1999 and the Termination Date. Party B First Payment Amount Business Days: New York, London Party B First Payment Day Count Fraction: Actual/360 2 Floating Rate Option: USD-LIBOR-BBA Designated Maturity: One Month Spread: Initially plus 2.250%, subject to any corresponding adjustment with respect to the applicable margin for borrowing under the MPN Credit Agreement. Reset Date: The first Business Day of each month Initial Rate: 7.875% Averaging: Inapplicable Compounding: Applicable Rounding Factor: One-Hundred-Thousandth of One Percent Party B Second Payment Amount ----------------------------- Party B Second Payment Amount: Capital Depreciation (as defined below), if any. Party B Second Payment Amount Payment Date: The Termination Date 4. CAPITAL APPRECIATION/ CAPITAL DEPRECIATION: Capital Appreciation/Capital Depreciation is defined by the following formula: US Dollar Market Value - Current Notional Amount where, The US Dollar Market Value is the U.S. Dollar amount of the Reference Asset as determined immediately below (unless otherwise specified herein), and Current Notional Amount will be the Party B First Payment Notional Amount. If such amount is positive, such amount is the "Capital Appreciation" and if such amount is negative, the absolute value of such amount is the "Capital Depreciation." Unless otherwise specified herein, the US Dollar Market Value of the Reference Asset shall mean one of the following as the context requires at the Calculation Agent's discretion: (a) the price for the Reference Asset, expressed as a percentage, as determined by the Calculation Agent in a commercially reasonable manner as of 5:00 p.m. New York City time on the third New York Business Day prior to the Termination Date based on the weighted average sale price of the Reference Asset; (b) the Calculation Agent or its designee shall offer the Reference Asset for sale to Reference Investors (as defined below) no later than 12:00 noon, New York Time, four New York Business Days before the Termination Date. Firm Bids (as defined below) to purchase the Reference Asset will be due to the Calculation Agent or its designee no later than 12:00 noon, New York time, three New York Business Days before the Termination Date. A "Firm Bid" shall be a bid for value on the Termination Date to purchase all of the Reference Asset; such bids shall include accrued interest, if any, and shall be net of all taxes, duties, customary fees or commissions. The weighted average of the highest bid or bids for the Reference Asset shall be the "US Dollar Market Value" of the Reference Asset. The US Dollar Market Value shall be deemed 3 to be zero for purposes of calculating Capital Appreciation/Capital Depreciation for the Reference Asset if no such "Firm Bid" is provided; or, (c) the latest "bid" price for the Reference Asset as of any date and time selected by the Calculation Agent, as determined by the Calculation Agent in a commercially reasonable manner and taking into account (without limitation) the current bid price(s) for other debt of comparable term, structure and credit quality as the Reference Asset including, but not limited to, the Mariner Post-Acute Network, Inc. 9 1/2 % Senior Subordinated Notes due 2007. The Reference Investors will be high yield bond investors or dealers, mutually acceptable to both Party A and Party B, selected to bid on the Reference Asset. Party A and Party B, or their designees acceptable to both Party A and Party B, may submit bids. 5. PREPAYMENT: (1) Should the Obligor elect to redeem the Notes in full, for purposes of determining the Capital Appreciation or Capital Depreciation on the Termination Date, US Dollar Market Value shall be equal to the actual amount paid by the Obligor to holders of the Notes in a principal amount equal to the principal amount of the Reference Asset and the date of such redemption shall be deemed to be the Termination Date (if such redemption occurs on a date other than the scheduled Termination Date). (2) Should Party B commence a Voluntary Early Termination during any period in which the Obligor or Party B is undertaking a tender offer for the Notes, then for purposes of determining the Capital Appreciation or Capital Depreciation for the Relevant Calculation Period, US Dollar Market Value shall be equal to the tender price of the Notes, and the Termination Date shall be deemed to be the settlement date of the tender offer of the Notes. If the tender offer is not consummated, such Voluntary Early Termination by Party B shall not be effective. 6. FORMULA AMOUNT: In the event that all or any portion of this Transaction is terminated prior to April 5, 1999, then in addition to any other payments due on the new Termination Date, which shall include (as the case may be) Capital Appreciation/Depreciation and any applicable Fixed/Floating Amounts accruing up to but excluding the new Termination Date, one Party shall pay to the other Party the following: (L1 - L2) * D1 * Current Notional Amount ------------------------------------------------------ 360 Where: L1 = the Party B First Payment Floating Rate applicable on the new Termination Date (excluding the Spread). L2 = USD-LIBOR-BBA, with the Designated Maturity equal to D1 (as defined below) and the new Termination Date as the Reset Date. If there is no such Designated Maturity, Linear Interpolation of the next shorter and next longer published Designated Maturities of USD-LIBOR-BBA (whichever is closer to the Reset Date) shall be used. D1 = the actual number of days remaining in the Calculation Period, from and including the new Termination Date, up to but excluding the next Reset Date. If such amount calculated from the above formula (the "Formula Amount") is a positive amount, Party B shall pay Party A this amount on the Termination Date. If such Formula Amount is a negative amount, Party A shall pay Party B the absolute value of this amount on the Termination Date. 4 7. PARTY A VOLUNTARY EARLY TERMINATION: Party A has the right to change the Termination Date of this Swap Transaction to any New York Business Day from the Effective Date up to but excluding the scheduled Termination Date upon the occurrence of a Credit Event (as defined below), provided that Party A has furnished notice to Party B by 1:00 p.m. New York time on any New York Business Day within the first thirty (30) New York Business Days after the occurrence of such Credit Event, provided further that Party A has delivered such notice to Party B at least three New York Business Days prior to the date selected by Party A as the new Termination Date, and provided further still that no such notices or notice periods shall apply if Party B shall be a Defaulting Party under the Agreement. "Credit Event" means the occurrence or existence of any of the following events: (1) the Obligor shall fail to make any payment due under the Notes; (2) any event of default under the MPN Credit Agreement; (3) any event of default under the Mariner Credit Agreement; provided, however, that the event of default shall have occurred and be continuing for a period of at least thirty (30) days; or (4) an Event of Default under the Agreement occurs with respect to Party B, except that Section 5(a)(vi) of the Agreement shall not apply to this Transaction. 8. PARTY B VOLUNTARY EARLY TERMINATION: Party B shall have the right to change the Termination Date of this Swap Transaction to any New York Business Day from the Effective Date up to but excluding the scheduled Termination Date, by providing notice five New York Business Days in advance to Party A by 1:00 p.m. New York time. If the Swap Transaction is terminated early, in addition to any other payments due on the new Termination Date, which shall include (as the case may be) Capital Appreciation/Depreciation and any applicable Fixed/Floating Amounts accruing up to but excluding the new Termination Date, one Party shall pay to the other Party the Formula Amount. 9. OTHER PROVISIONS: Security Mariner Health Group, Inc. and the other guarantors under the Mariner Credit Agreement shall guarantee the obligations of Party B under this Agreement pursuant to a Guaranty dated as of September 21, 1998, subject to the limitations set forth in such Guaranty. Assignment: This Swap Transaction may be assigned only with prior written consent. Legal and Out-of-Pocket Expenses: For each party's own account. Governing Law: The Laws of the State of New York (without reference to the conflicts of laws principles thereof). Recording of Conversations: Each party to this Swap Agreement acknowledges and agrees to the tape or electronic recording of conversations between the parties to this Agreement whether by one or other or both of the parties, and that any such recordings may be submitted in evidence in any action or proceeding relating to the Agreement or any Transaction. Relationship Between Parties: In connection with this Confirmation, the Transaction to which this Confirmation relates and any other documentation 5 relating to the Agreement, each party to this Confirmation represents and acknowledges to the other party that: (i) it is not relying on any advice, statements or recommendations (whether written or oral) of the other party regarding the Transaction, other than the written representations expressly made by that other party in the Agreement and in this Confirmation in respect of the Transaction; and (ii) in respect of the Transaction under the Agreement, (a) it has the capacity to evaluate (internally or through independent professional advice) the Transaction (including decisions regarding the appropriateness or suitability of the Transaction) and has made its own decision to enter into the Transaction: (b) it understands the terms, conditions and risks of the transaction and is willing to accept those terms and conditions to assume (financially and otherwise) those risks; (c) it is entering into the transaction as principal and not as an agent for any other party and the power to vote or dispose of any Notes held by Party A shall at all times within the sole control of Party A; and (d) it acknowledges and agrees that the other party is not acting as a fiduciary or advisor to it in connection with the Transaction. Payment to NationsBank: Payment to Mariner Post-Acute Network, Inc.: (f/k/a Paragon Health Network, Inc.) NATIONSBANK N.A., Chase Bank of Texas CHARLOTTE ABA #113000609 ABA 053000196 Acct: 00100235234 ACCT: 10852016511 Ref: MRNR Bond Swap ATTN: CREDIT DERIVATIVE OPS Please confirm that the foregoing correctly sets forth the terms and conditions of our agreement by responding with three (3) Business Days by either returning this revised Confirmation in person or via telecopier to the attention of Swap Operations, Fax No.(312) 234-3160; Telephone No. (312) 234-2934. Failure to respond within such period shall not affect the validity or enforceability or of this Swap Transaction, and shall be deemed to be an affirmation of the terms and conditions contained herein, absent manifest error. Yours Sincerely, NATIONSBANK, N.A. By: ------------------------------ , Vice President -------------- Authorized Signatory 6 Confirmed as of the date first written above: MARINER POST-ACUTE NETWORK, INC. By: ---------------------------- Name: -------------------------- Title: ------------------------- Authorized Signatory 7 EX-10.77 38 GUARANTY, DATED 9/21/98 EXHIBIT 10.77 GUARANTY THIS GUARANTY dated as of September 21, 1998 (the "Guaranty") is given by -------- MARINER HEALTH GROUP, INC., a Delaware corporation ("Mariner"), each of its ------- subsidiaries signatory hereto (collectively, the "Mariner Subsidiary ------------------ Guarantors," and together with Mariner, the "Guarantors") in favor of ---------- NATIONSBANK, N.A., a national banking association organized under the laws of the United States ("NationsBank"), as Agent (in such capacity, "Agent") for the ----------- ----- Purchasers, as that term is defined in the LMS Confirmation referred to hereinbelow (the "Purchasers"). ---------- 1. Unconditional Guaranty ---------------------- In consideration of and to induce NationsBank to enter into a liability management swap transaction (the "LMS Transaction") with the Guarantors' --------------- affiliate, Mariner Post-Acute Network, Inc., a Delaware corporation (formerly known as Paragon Health Network, Inc. and referred to herein as "Counterparty"), ------------ pursuant to the ISDA Master Agreement dated as of October 31, 1997 between Counterparty and NationsBank (the "Master Swap Agreement") and the Confirmation --------------------- for U.S. Dollar Total Return Swap Transaction to be Subject to 1992 Master Swap Agreement dated September 21, 1998 between Counterparty and NationsBank (the "LMS Confirmation"), the Guarantors unconditionally guarantee to Agent, its - ----------------- successors and assigns, for the benefit of the Purchasers, the prompt payment when due, whether at maturity, upon acceleration or otherwise, of all present and future obligations and liabilities of all kinds (including any renewals, extensions or modifications thereof) arising out of the LMS Confirmation, but excluding any obligations arising in connection with the Master Swap Agreement not related solely to the LMS Transaction (the "Obligations"), subject to the ----------- limitations set forth herein. Except as specifically set forth herein, this Guaranty is an unconditional guaranty of payment and not merely of collection and shall not be affected by the genuineness, validity, regularity or enforceability of the Obligations or any instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor, or by any circumstance relating to the Obligations which might otherwise constitute a defense to this Guaranty. Except as specifically set forth herein, this Guaranty is absolute and unconditional and shall remain in full force and effect and be binding upon the Guarantors, their successors and assigns until all of the Obligations have been satisfied in full. In the event that any payment by the Counterparty in respect of any Obligations is rescinded or must otherwise be returned for any reason whatsoever, the Guarantors shall remain liable hereunder in respect of such Obligations as if such payment had not been made. The Guarantors agree that Agent may resort to the Guarantors for payment of any of the Obligations whether or not Agent has proceeded against any other obligor principally or secondarily liable for any Obligations, including the Counterparty. Agent shall not be obligated to file any claim relating to the Obligations, including any claim in the event that the Counterparty becomes subject to a bankruptcy, reorganization or similar proceeding, and the failure of Agent to file any such claim shall not affect the Guarantors' obligations hereunder. The Guarantors also specifically waive the presentment to or demand of payment from anyone whomsoever liable upon any of the Obligations, including presentment, demand, protest or notice of dishonor, and all other notices whatsoever (other than any notices expressly required under the Master Swap Agreement or the LMS Confirmation). Notwithstanding anything to the contrary contained herein, in the Master Swap Agreement or the LMS Confirmation, (a) the obligations of each Guarantor hereunder shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state law; and (b) if the execution or delivery of this Guaranty by any entity listed on the signature page hereof as a Mariner Subsidiary Guarantor, or the performance by such entity of its obligations hereunder, violates its organizational documents as in existence on the date hereof or any material agreement to which such entity is a party as of the date hereof, or is otherwise prohibited by any such organizational document or material agreement, then such entity shall automatically be deemed not to be a Mariner Subsidiary Guarantor and shall not be obligated hereunder in any way. 2. Consents -------- The Guarantors agree that the Agent may at any time extend the time of payment of or renew any of the Obligations, or make any agreement with the Counterparty or with any other party or person liable on any of the Obligations, for the extension, renewal, payment, compromise, discharge or release of the Obligations (in whole or in part), or for any modification of the terms thereof or of any agreement between the Agent and Counterparty or any such other party or person, without in any way impairing or affecting this Guaranty for any outstanding Obligations. 3. Rights; Expenses ---------------- No failure by the Agent or any Purchaser to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Agent or any Purchaser of any right, remedy or power hereunder preclude any other or future exercise of any right, remedy or power. Each and every right, remedy and power hereby granted to Agent or any Purchaser or allowed by law or other agreement shall be cumulative and not exclusive of any other right, remedy or power. The Guarantors agree to pay on demand all out-of-pocket expenses (including the reasonable fees and expenses of Agent's counsel) actually incurred by the Agent in any way relating to the enforcement or protection of Agent's rights under this Guaranty. 4. Subrogation ----------- The Guarantors shall not exercise any rights which they may have or acquire by way of subrogation until all of the Obligations are paid in full to the Agent. If any amounts are paid to the Guarantors in violation of the foregoing limitation, then such amounts shall be held in trust for the benefit of the Agent and shall forthwith be paid to the Agent to reduce the amount of outstanding Obligations, whether matured or unmatured. Subject to the foregoing, upon payment of all of the Obligations to the Agent, the Guarantors shall be subrogated to the rights of the Agent against the Counterparty, and the Agent agrees to take at the Guarantors' expense such actions as the Guarantors may reasonably require to implement such subrogation. 5. Assignment; Termination ----------------------- The Guarantors shall not assign their respective rights, interest, duties or obligations hereunder to any other person without the Agent's prior written consent; provided, however, that the assignment of the obligations of any -------- ------- Mariner Subsidiary Guarantor (including, without limitation, any assignment thereof by operation of law) shall be permitted in connection with any merger or consolidation, or sale of all or substantially all of the assets of such Mariner Subsidiary Guarantor, which is permitted under the terms of (i) that certain Credit Agreement dated as of May 18, 1994, by and among Mariner, as borrower, the financial institutions signatory thereto as lenders, and PNC Bank, National Association, as agent for such lenders, as such Credit Agreement may be amended, modified, restated, extended, refinanced or replaced from time to time, and (ii) the Indenture dated as of April 4, 1996 between Mariner and State Street Bank and Trust Company, as trustee, pursuant to which the Notes were issued, as such Indenture may be supplemented, amended, refinanced or replaced from time to time. None of the terms or provisions of this Guaranty may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the party or parties against whom such amendment is to be enforced. 6. Taxes ----- All payments by the Guarantors hereunder will be made in full without set- off or counterclaim and free and clear of and without withholding or deduction for or on account of any present or future taxes, 2 duties or other charges, unless the withholding or deduction of such taxes or duties is required by law. In any such event, however, the Guarantors shall pay such additional amounts as may be necessary in order that the net amount received by the Agent and/or Purchasers after such withholding or deduction shall equal the full amounts of moneys which would have been received by the Bank in the absence of such withholding or deduction. The Guarantors will pay all stamp duties and other documentary taxes payable in connection with this Guaranty and will keep the Agent and Purchasers indemnified against failure to pay the same. 7. Payments -------- Each Guarantor hereby guarantees that the Obligation will be paid to the Agent without set-off or counterclaim, in lawful currency of the United States of America at the offices of the Agent as specified in the LMS Confirmation. 8. Representations --------------- The Guarantors are duly organized, validly subsisting and in good standing under the laws of their respective jurisdiction of incorporation or organization, and each has full corporate power to execute, deliver and perform this Guaranty. The Guarantors have duly authorized this Guaranty, and the signatories of this Guaranty have been duly authorized and have full power to execute and deliver this Guaranty on behalf of each Guarantor. This Guaranty and the providing thereof to the Agent does not violate Mariner's constitutive documents, and this Guaranty does not violate any law, regulation or agreement applicable to Mariner or its assets. This Guaranty constitutes a valid and binding agreement of the Guarantors in accordance with its terms. 9. Governing Law; Jurisdiction --------------------------- This Guaranty shall be governed by and construed in accordance with, the laws of the State of New York, without reference to its conflicts of laws principles. With respect to any suit, action or proceeding concerning this Guaranty, the Agent and the Guarantors submit to the non-exclusive jurisdiction of the Federal and State courts located in the City, County and State of New York. The Agent and the Guarantors specifically and irrevocably waive (i) any objection which it may have at any time to the laying of venue of any suit, action or proceeding brought in such courts, (ii) any claim that the same has been brought in an inconvenient forum, and (iii) the right to object that such courts do not have jurisdiction over it. 3 IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered by the Guarantors to Agent as of the date first above written. MARINER HEALTH GROUP, INC. By: ------------------ Name: Boyd P. Gentry Title: Vice President 4 EX-10.78 39 EMPLOYEE STOCK PURCHASE (PARAGON HEALTH) EXHIBIT 10.78 PARAGON HEALTH NETWORK, INC. EMPLOYEE STOCK PURCHASE PLAN PARAGON HEALTH NETWORK, INC. EMPLOYEE STOCK PURCHASE PLAN TABLE OF CONTENTS Page 1. PURPOSE.......................................................... 1 2. DEFINITIONS...................................................... 1 3. ELIGIBILITY AND PARTICIPATION.................................... 2 4. PAYROLL DEDUCTIONS............................................... 3 5. WITHDRAWALS AND DISTRIBUTIONS UPON TERMINATION OF PARTICIPATION.. 3 6. GRANT OF OPTION AND OPTION EXERCISE PRICE........................ 4 7. STOCK SUBJECT TO PLAN............................................ 5 8. ADMINISTRATION................................................... 5 9. ADMINISTRATIVE FEES.............................................. 6 10. TRANSFERABILITY.................................................. 6 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION....................... 6 12. GENERAL RESTRICTION.............................................. 7 13. AMENDMENT OR TERMINATION......................................... 7 14. NOTICES.......................................................... 8 15. NO CONTRACT...................................................... 8 16. HEADINGS AND CONSTRUCTION........................................ 8 17. APPROVAL OF STOCKHOLDERS......................................... 8 i PARAGON HEALTH NETWORK, INC. EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE. The purpose of the Paragon Health Network, Inc. Employee Stock Purchase Plan (the "Plan") is to provide employees of Paragon Health Network, Inc., a Delaware corporation (the "Company"), and its subsidiary companies with an opportunity to acquire an interest in the Company and share in the success of the Company through the purchase of Common Stock of the Company ("Common Stock"), and to encourage such employees to remain in the employ of the Company. The Company intends the Plan to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. Accordingly, the provisions of the Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of Section 423. This Plan shall be effective as of April 1, 1998. 2. DEFINITIONS. (a) "Board of Directors" means the board of directors of the Company. ------------------ (b) "Code" means the Internal Revenue Code of 1986, as amended. ---- (c) "Compensation" means salary and wages paid to an Eligible ------------ Employee by the Company or a Subsidiary, including commissions and bonuses, but excluding income attributable to the exercise of stock options, and awards and other forms of remuneration. (d) "Contribution Account" means the bookkeeping account -------------------- established on behalf of a Participant to which shall be credited the amount of the Participant's payroll deductions and from which shall be debited all funds used to purchase Common Stock for the Participant under the Plan. (e) "Eligible Employee" means any Employee of the Company or a ----------------- Subsidiary excluding: (1) any Employee who customarily is employed for twenty (20) hours per week or less; (2) any Employee who would own (immediately after the grant of an option under the Plan and applying the rules of Code Section 424(d) in determining stock ownership) shares, and/or hold outstanding options to purchase shares, possessing five percent (5%) or more of the total combined voting power or value of all classes of shares of the Company or of any Parent or Subsidiary; and (3) any Employee who is customarily employed for not more than five (5) months in any calendar year. (f) "Employee" means any person who is employed by the Company or -------- a Subsidiary for purposes of the Federal Insurance Contributions Act. 1 (g) "Entry Date" means April 1st and October 1st of each calendar ---------- year. (h) "Parent" means a corporation, if any, having the relationship ------ to the Company described in Section 424(e) of the Code. (i) "Participant" means an Employee who participates in the Plan ----------- pursuant to Paragraph 3. (j) "Purchase Period" means each six-month period ending March 31 --------------- and September 30. (k) "Subsidiary" means any corporation having a relations to the ---------- Company described in Section 424(f) of the Code and which the Board of Directors, or its designee, has designated as eligible to participate in the Plan. 3. ELIGIBILITY AND PARTICIPATION (a) Any person who is an Eligible Employee on an Entry Date shall be eligible to become a Participant in the Plan beginning on that Entry Date and shall become a Participant as of that Entry Date by completing an enrollment form provided by the Company, in the form and containing such terms and conditions as the Company from time to time may determine (the "Authorization Form"), and filing it with the Company by the date required by the Company. (b) Any person who first becomes an Eligible Employee shall be eligible to become a Participant in the Plan as of the first day of the Purchase Period beginning after the date on which that person became an Eligible Employee and shall become a Participant as of such date by completing an Authorization Form and filing it with the Company by the date required by the Company; (c) A person shall cease to be a Participant upon the earliest to occur of: (1) the date the Participant ceases to be an Eligible Employee, for any reason; (2) the first day after the Purchase Period following a cessation of payroll deductions for the Participant under the Plan pursuant to Paragraph 4; or (3) the date of a withdrawal from the Plan by the Participant under Paragraph 5. 4. PAYROLL DEDUCTIONS. A Participant may contribute to the Plan through payroll deductions as follows: (a) A Participant shall on his Authorization Form elect to have payroll deductions made from his Compensation at a rate which, expressed as a whole 2 percentage, shall be at least one percent (1%) and not exceed fifteen percent (15%) of his Compensation. (b) Payroll deductions for a Participant shall be made during the period for which the Authorization Form is effective and shall continue until the effective date of an Employee's authorization to change the rate of his payroll deductions or stop payroll deductions. (c) A Participant may change the rate of his payroll deductions effective on the first day of any Purchase Period, provided the Employee files with the Company his Authorization Form by the date required by the Company. (d) A Participant may elect to discontinue payroll deductions any time after the first day of the payroll period coinciding with or immediately following the Company's processing the Participant's Authorization Form. If upon cessation of payroll deductions a Participant has cash credited to his Contribution Account which he has not elected to withdraw pursuant to Paragraph 5, he shall remain a Participant in the Plan until the end of the then current Purchase Period. (e) All payroll deductions made for a Participant shall be credited to his Contribution Account under the Plan and will be used for the purchase of Common Stock pursuant to Section 6 hereof. All payroll deductions made for a Participant under the Plan shall be commingled with the general assets of the Company and no separate fund shall be established for each such Participant. Participants' Contribution Accounts are solely for bookkeeping purposes and the Company shall not be obligated to pay Participants interest on Contribution Account balances. (f) A Participant may not make any separate cash payments or other contributions to his Contribution Account in a manner other than through payroll deductions as set forth in this Paragraph 4. 5. WITHDRAWALS AND DISTRIBUTIONS UPON TERMINATION OF PARTICIPATION. (a) A Participant may elect to cease participating in the Plan and to withdraw the balance of the cash credited to his Contribution Account under the Plan by giving written notice to the Company prior to the date specified by the Company before the end of the current Purchase Period. A Participant who receives a withdrawal of the cash balance of his Contribution Account under the Plan shall not be entitled to participate in the Plan until the next Entry Date. (b) The Company shall pay the cash balance of a Participant's Contribution Account to the Participant as soon as administratively feasible following (i) the date of processing of the withdrawal request or (ii) the date a person ceases to be a Participant pursuant to Paragraph 3(c), as applicable (clauses (i) and (ii) collectively, a "Termination Event"). 3 (c) Upon the occurrence of a Termination Event, the Participant's outstanding options under Section 6 of the Plan to purchase shares of Common Stock, shall immediately terminate. (d) Upon the occurrence of a Termination Event, no further payroll deductions will be made from the Participant's Compensation. 6. GRANT OF OPTION AND OPTION EXERCISE PRICE. (a) As of the beginning of each Purchase Period, a Participant is granted an option to purchase that whole number of shares of Common Stock as does not exceed in value the result of dividing 15% of the Participant's Compensation for that Purchase Period by eighty-five (85%) of the fair market value of the Common Stock on the last business day of the Purchase Period. On the last business day of each Purchase Period, each Participant will be deemed to have exercised his option to the extent of the funds then held in the Participant's Contribution Account and such funds will be applied to the purchase of whole shares of Common Stock; provided, however, the number of shares purchased for a Participant shall not be less than 1 share. The price of each share of Common Stock to be purchased with a Participant's Contribution Account during a Purchase Period shall be eighty-five (85%) of the fair market value of one share of Common Stock on the last day of the Purchase Period. Any funds remaining after the application of a Participant's Contribution Account to the purchase of shares of Common Stock shall continue to be credited to the Participant's Contribution Account and available for purchases of shares on the last business day of the next succeeding Purchase Period. (b) Notwithstanding the preceding subparagraph or any other provisions of the Plan, no Participant shall be granted an option which permits his rights to purchase shares under all employee stock purchase plans of the Company and its Parent and Subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the shares (determined at the time the option is granted) for each calendar year in which such stock option is outstanding at any time. (c) For purposes of the preceding subparagraphs, the fair market value of a share of Common Stock shall be determined as of each relevant date as follows: (1) if the Common Stock is traded on a national securities exchange, the closing sale price on that date; (2) if the Common Stock is not traded on any such exchange, the closing sale price as reported by the NASDAQ Stock Market; (3) if no such closing sale price information is available, the average of the closing bid and asked prices as reported by the NASDAQ Stock Market; or (4) if there are no such closing bid and asked prices, the average of the closing bid and asked prices as reported by any other commercial service. 4 (d) All options granted during an Offering Period shall expire on the last day of that Offering Period. 7. STOCK SUBJECT TO PLAN. (a) The shares of Common Stock (the "Shares") to be sold to Participants under the Plan may, at the election of the Company, be either treasury shares, shares originally issued for such purpose or shares acquired on the open market. The maximum number of Shares made available for sale under the Plan shall be 4,000,000, subject to adjustment upon changes in capitalization of the Company as provided in Paragraph 11. If the total number of Shares elected to be purchased under the Plan exceeds the number of Shares then available under the Plan, the Company shall make a pro rata allocation of the Shares available in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable. (b) A Participant shall not have rights as a stockholder with respect to any Shares covered by his option until the last day of the Purchase Period on which the Shares are purchased. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date the Shares are purchased, except as otherwise provided in the Plan. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant, or if so directed by the Participant and if permissible under applicable law, in the names of the Participant and one other person designated by the Participant, as joint tenants with rights of survivorship. 8. ADMINISTRATION AND INDEMNIFICATION OF COMMITTEE. (a) The Plan shall be administered by a committee appointed by the Board of Directors (the "Committee"). The Committee shall consist of not less than two members of the Company's Board of Directors. The Board of Directors may from time to time remove members from or add members to the Committee. Vacancies on the Committee shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts approved by a majority of the Committee in a meeting at which a quorum is present, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. (b) The Committee acting in its absolute discretion shall exercise such power and take such action as expressly called for under the Plan, and further, the Committee shall have the power to interpret the Plan to take such other action (except to the extent the right to take such action is expressly and exclusively reserved for the Board of Directors or the Company's stockholders) in the administration and operation of the Plan as the Committee deems equitable under the circumstances, which action shall be binding on the Company, on each affected participant and on each other person directly or indirectly affected by such action. No member of the Board of Directors or the 5 Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. (c) In addition to such other rights of indemnification that they may have as directors of the Company or a member of the Committee, the members of the Committee shall be indemnified by the Company against the reasonable expenses, including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted thereunder, and against all amounts paid by them in settlement thereof (provided the settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding except in relation to matters as to which it shall be adjudged in the action, suit or proceeding that the Committee member is liable for negligence or misconduct in the performance of his or her duties; provided that within sixty (60) days after institution of the action, suit or proceeding a Committee member shall in writing offer the Company the opportunity, at its own expense, to handle and defend it. 9. ADMINISTRATIVE FEES. The Committee may charge Participants' accounts for reasonable administrative fees to defray the administrative costs of the Plan, which shall in no event exceed the actual administrative costs of the Plan. 10. TRANSFERABILITY. Neither payroll deductions credited to a Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the Participant. Any attempted assignment, transfer, pledge, or other disposition shall be without effect. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The Committee will adjust the total number of shares and any outstanding options for any increase or decrease in the number of outstanding shares of Common Stock resulting from a stock split or a payment of a stock dividend on the shares of Common Stock, a subdivision or combination of the shares of Common Stock, a reclassification of the shares of Common Stock, a merger or consolidation of the Company or any other like changes in the Common Stock or in their value. No fractional shares will be issued as a result of any of these changes, and any fractional shares that result from a change will be eliminated from the outstanding options. All adjustments made by the Committee under this paragraph shall be final, conclusive and binding on all Participants and, further, shall not constitute an increase in the "aggregate number of shares which may be issued under options" pursuant to Section 7 of the Plan. 12. GENERAL RESTRICTION. Notwithstanding anything contained herein or in any of the Agreements to the contrary, no purported exercise of any option granted pursuant to the Plan shall be effective without the written approval of the Company, which may be withheld to the extent that the exercise, either individually or in the aggregate together with the exercise of other previously exercised stock options and/or offers and sales pursuant to any prior or contemplated offering of securities, would, in the sole and absolute judgment of the Company, require the filing of a registration statement with the United States Securities and Exchange Commission or 6 with the securities commission of any state. The Company shall avail itself of any exemptions from registration contained in applicable federal and state securities laws which are reasonably available to the Company on terms which, in its sole and absolute discretion, it deems reasonable and not unduly burdensome or costly. If an option cannot be exercised at the time it would otherwise expire due to the restrictions contained in this Section, the exercise period for that option shall be extended for successive one-year periods until that option can be exercised in accordance with this Section. Each Participant shall, prior to the exercise of an option, deliver to the Company any reasonable request in order for the Company to be able to satisfy itself that the Common Stock to be acquired in accordance with the terms of an applicable exemption from the securities registration requirements or applicable federal state securities laws. 13. AMENDMENT OR TERMINATION. (a) The Committee may at any time terminate or amend the Plan. (b) Prior approval of the stockholders of the Company shall be required with respect to any amendment for which such appraisal is necessary in order to comply with the requirements of Code Section 423 including the sale of more shares of Common Stock than are authorized under Paragraph 7 of the Plan. (c) If required by Rule 16b-3 of the Securities Exchange Act of 1934 or any successor thereto promulgated under the Exchange Act, prior approval of the stockholders of the Company shall be required with respect to any amendment which would materially increase the benefits accruing to Participants under the Plan or materially modify the requirements as to eligibility for participation in the Plan. 14. NOTICES. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the written form specified by the Company at the location, or by the person, designated by the Company. 15. NO CONTRACT. The Plan shall not be deemed to constitute a contract between the Company or any Subsidiary and any Employee or to be a consideration or an inducement for the employment of any Employee. Nothing contained in the Plan shall be deemed to give any Employee the right to be retained in the service of the Company or any Subsidiary or to interfere with the right of the Company or any Subsidiary to discharge any Employee at any time, regardless of the effect which such discharge shall have upon him as a Participant. 16. HEADINGS AND CONSTRUCTION. The headings to Paragraphs in the Plan have been included for convenience of reference only. The Plan shall be interpreted and construed in accordance with the laws of the State of Delaware. 17. APPROVAL OF STOCKHOLDERS. The Plan shall be submitted to the stockholders of the Company for their approval within twelve (12) months after the adoption of the Plan by the Board of Directors. The Plan is conditioned upon the approval of the stockholders of the Company, and failure to receive their approval shall render the Plan and all outstanding options issued thereunder void and of no effect. 7 IN WITNESS WHEREOF, the Company has caused this Plan to be executed as of this day of , 1998. --- --------- PARAGON HEALTH NETWORK, INC. By: ------------------------------- Title: ----------------------------- ATTEST: - ------------------------ Title: ------------------ [CORPORATE SEAL] 8 EX-10.79 40 1ST AMD-EMPLOYEE STOCK PURCHASE (MARINER) EXHIBIT 10.79 FIRST AMENDMENT TO THE MARINER POST-ACUTE NETWORK, INC. EMPLOYEE STOCK PURCHASE PLAN (FORMERLY THE PARAGON HEALTH NETWORK, INC. EMPLOYEE STOCK PURCHASE PLAN) THIS FIRST AMENDMENT is made on this _________ day of ____________, 1998, by Mariner Post-Acute Network, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Company maintains the Paragon Health Network, Inc. Employee Stock Purchase Plan (the "Plan") under an indenture effective April 1, 1998, the purpose of which is to provide employees of the Company and any subsidiary corporations with an opportunity to acquire an interest in the Company through the purchase of its Common Stock; and WHEREAS, the Company desires to amend the Plan to reflect its new name and to provide for the purchase of fractional shares in addition to the purchase of whole shares of Common Stock: NOW, THEREFORE, the Company does hereby amend the Plan, effective October 1, 1998, as follows: 1. By deleting the existing Company name Paragon Health Network, Inc. wherever it may be written in the Plan and by substituting the following Company name in its place: "Mariner Post-Acute Network, Inc." 2. By deleting the existing Plan name Paragon Health Network, Inc. Employee Stock Purchase Plan wherever it may be written in the Plan and by substituting the following Plan name in its place: "Mariner Post-Acute Network, Inc. Employee Stock Purchase Plan" 3. By replacing existing Plan Section 6(a) with the following new Plan Section 6(a): "(a) As of the beginning of each Purchase Period, a Participant is granted an option to purchase that number of shares, including fractional shares, of Common Stock as does not exceed in value the result of dividing fifteen percent (15%) of the Participant's Compensation for that Purchase Period by eighty-five percent (85%) of the fair market value of the Common Stock on the last business day of the Purchase Period. On the last business day of each Purchase Period, each Participant will be deemed to have exercised his option to the extent of the funds then held in the Participant's Contribution Account and such funds will be applied to the purchase of shares, including fractional shares, of Common Stock. The price of each share of Common Stock to be purchased with a Participant's Contribution Account during a Purchase Period shall be eighty-five (85%) of the fair market value of one share of Common Stock on the last day of the Purchase Period. 4. By replacing existing Plan Section 11 with the following new Plan Section 11: "11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The Committee will adjust the total number of shares and any outstanding options for any increase or decrease in the number of outstanding shares of Common Stock resulting from a stock split or a payment of a stock dividend on the shares of Common Stock, a subdivision or combination of the shares of Common Stock, a reclassification of the shares of Common Stock, a merger or consolidation of the Company or any other like changes in the Common Stock or in their value. Fractional shares may be issued as a result of any of these changes. All adjustments made by the Committee under this paragraph shall be final, conclusive and binding on all Participants and, further, shall not constitute an increase in the "aggregate number of shares which may be issued under options" pursuant to Section 7 of the Plan." Except as specifically amended hereby, the Plan shall remain in force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed as of this _____ day of _______________, 1998. MARINER POST-ACUTE NETWORK, INC. By: ----------------------------- Title: -------------------------- [CORPORATE SEAL] Attest: - -------------------------------- -2- EX-10.82 41 GRANCARE EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.82 GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN Effective as of January 1, 1997 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS....................................................... 1 SECTION 2. PARTICIPATION..................................................... 6 2.1. Date of Participation.......................................... 6 2.2. Commencement of Deferral Period................................ 6 2.3. Termination of Participation................................... 6 2.4. Benefit Agreement.............................................. 6 2.5. Leave of Absence............................................... 7 2.6. Executive and Leadership Group Deferred Compensation Plans..... 7 SECTION 3. DEFERRAL ELECTIONS................................................ 7 3.1. Election of Deferral........................................... 7 3.2. Company Matching Contribution.................................. 7 SECTION 4. ESTABLISHMENT OF AND CREDITING OF ACCOUNTS........................ 7 4.1. Establishment of Accounts...................................... 7 4.2. Crediting of Deferrals......................................... 8 4.3. Crediting of Contributions..................................... 8 SECTION 5. INVESTMENT OF ALLOCATED ACCOUNTS.................................. 8 5.1. Investment Direction........................................... 8 5.2. Investment Experience.......................................... 8 SECTION 6. HARDSHIP LOANS.................................................... 8 6.1. Financial Hardship............................................. 8 6.2. Payment for Hardship........................................... 9 6.3. Suspension of Deferrals........................................ 9 SECTION 7. RETIREMENT INCOME BENEFITS........................................ 9 7.1. Normal Retirement Benefit...................................... 9 7.2. Termination Benefit............................................ 9 7.3. Disability..................................................... 10 7.4. Change in Control Benefit...................................... 10 7.5. Alternative Forms of Benefit................................... 10 7.6 Scheduled Withdrawal........................................... 10 SECTION 8. DEATH BENEFITS.................................................... 10 8.1. Pre-Retirement Death Benefit................................... 10 8.2. Post-Retirement Death Benefit.................................. 11 SECTION 9. ADMINISTRATION OF PLAN............................................ 11 9.1. Operation of the Committee..................................... 11 9.2. Duties of the Committee........................................ 11
9.3. Action by Company or a Plan Sponsor........................... 11 SECTION 10. CLAIMS REVIEW PROCEDURE......................................... 12 10.1. Denial of Claims.............................................. 12 10.2. Appeal of Denial.............................................. 12 10.3. Written Notice for Review..................................... 12 10.4. Hearing....................................................... 12 10.5. Counsel....................................................... 13 10.6. Decision on Appeal............................................ 13 SECTION 11. LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS................ 13 11.1. No Alienation................................................. 13 11.2. Attempts to Transfer.......................................... 13 11.3. Minors or Incompetents........................................ 13 11.4. Missing Persons............................................... 14 SECTION 12. LIMITATION OF RIGHTS............................................ 14 SECTION 13. AMENDMENT OR TERMINATION OF PLAN................................ 14 13.1. Amendment and Termination..................................... 14 13.2. Termination by Plan Sponsor................................... 14 13.3. Termination by Company........................................ 14 SECTION 14. ADOPTION OF PLAN BY AFFILIATES.................................. 15 SECTION 15. MISCELLANEOUS................................................... 15 15.1. Unfunded Plan................................................. 15 15.2 Withholding................................................... 15 15.3 Governing Law................................................. 15
-ii- GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN SECTION 1. DEFINITIONS Whenever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise, and the following words and phrases shall, when used herein, have the meanings set forth below: 1.1. "Account" means the bookkeeping accounts established and maintained ------- by the Committee to reflect the interest of a Participant under the Plan and shall include the following: (a) "Employee Deferred Account" which shall reflect deferrals by a ------------------------- Participant pursuant to Plan Sections 3.1 and 4.1 and, if the Participant maintained Accounts under the Executive Deferred Compensation Plan and/or the Leadership Group Deferred Compensation Plan, the balance of such Accounts, as adjusted to reflect other credits or charges. (b) "Company Matching Account" which shall reflect credits to a ------------------------ Participant's Account made on his behalf pursuant to Plan Sections 3.2 and 4.1, as adjusted to reflect other credits or charges. A sub-account shall be maintained to reflect any Deferrals made by the Participant under a Benefit Agreement to be received as a lump-sum payment on a Scheduled Distribution Date. 1.2. "Act" means the Employee Retirement Income Security Act of 1974 --- (ERISA), as amended from time to time. 1.3. "Affiliate" means (a) any corporation which is a member of the same --------- controlled group of corporations (within the meaning of Code Section 414(b)) as is the Company and (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with a Plan Sponsor. 1.4. "Anniversary Date" means any January 1 after the Effective Date. ---------------- 1.5. "Base Salary" means the amount paid to an Employee by the Company ----------- during the portion of the Plan Year during which he is a Participant as compensation that would be subject to income tax withholding under Code Section 3401(a), excluding bonuses, expense reimbursements and other non-recurring forms of remuneration, but increased by salary deferrals or other pre-tax contributions under this Plan or any plan maintained by the Company. 1.6. "Beneficiary" means the person or entity designated in writing by ----------- the Participant on forms provided by the Committee to receive distribution of certain death benefits under the Plan in the event of the Participant's death. A Participant may change the designated Beneficiary from time to time by filing a new written designation with the Committee, and such designation shall be effective upon receipt by the Committee. The designation of a Beneficiary other than the Participant's spouse must be consented to in writing by the spouse. If a Participant has not designated a Beneficiary, or if a designated Beneficiary is not living or in existence at the time of a Participant's death, the term Beneficiary means (a) the Participant's spouse, or (b) if no spouse is alive, the Participant's surviving children, or (c) if no children are alive, the Participant's parent or parents, or (d) if no parents are alive, the legal representative of the Participant's estate. 1.7. "Benefit Agreement" means the form of agreement described in ----------------- Sections 2.4 and 3.1 on which a Participant records his Deferral election attributable to a specific Plan Year. 1.8. "Board of Directors" means the Board of Directors of the Company. ------------------ 1.9. "Change in Control" means, the first to occur of the following ----------------- events: (a) any person (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee) (the Company, all Subsidiaries, and such employee benefit plans and trustees acting as trustees being hereafter referred to as the "Company ------- Group"), but including a `group' as defined in Section 13(d)(3) of the ----- Exchange Act (a "Person"), becomes the beneficial owner of shares of the ------ Company having at least thirty percent (30%) of the total number of votes that may be cast for the election of directors of the Company (the "Voting ------ Shares"); provided that no Change of Control will occur as a result of an ------ acquisition of stock by the Company Group which increases, proportionately, the stock representing the voting power of the Company beneficially owned by such person or group above thirty percent (30%) of the voting power of the Company, and provided further that if such person or group acquires beneficial ownership of stock representing more than thirty percent (30%) of the voting power of the Company by reason of share purchases by the Company Group, and after such share purchases by the Company Group acquires any additional shares representing voting power of the Company, then a Change of Control shall occur; (b) the shareholders of the Company shall approve any merger or other business combination of the Company, sale of the Company's assets or combination of the foregoing transactions (a "Transaction") other than a ----------- Transaction involving only the Company and one or more of its Subsidiaries, or a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity excluding for this purpose any shareholder owning directly or indirectly more than ten percent (10%) of the shares of the other company involved in the merger; or (c) within any 24-month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent --------- Directors") shall cease (for any reason other than death) to constitute at --------- least a majority of the Board of Directors or the board of directors of any successor to the Company, provided that any director who was not a director as of the effective date of this Plan shall be deemed to be an Incumbent Director if such director was elected to the Board of Directors by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then -2- qualified as Incumbent Directors either actually or by prior operation of this clause (c); and provided further that any director elected to the Board of Directors to avoid or settle a threatened or actual proxy contest shall in no event be deemed to be an Incumbent Director. 1.10. "Claims Coordinator" means the individual(s) designated by the ------------------ Committee to receive applications for benefits by Participants or their Beneficiaries. 1.11. "Code" means the Internal Revenue Code of 1986, as amended. ---- 1.12. "Committee" means the Committee appointed by the Board of Directors --------- which is responsible for administration of the Plan. 1.13. "Company" means New GranCare, Inc., a Delaware corporation, its ------- successors and assigns. 1.14. "Covered Bonus" means any incentive compensation payable to an ------------- Eligible Employee in a Plan Year. 1.15. "Covered Salary" means the excess of an Eligible Employee's annual -------------- Base Salary, excluding any bonus or other form of remuneration, payable in a Plan Year, over the Social Security Taxable Wage Base for such Plan Year. 1.16. "Deferral" means the portion of a Participant's Covered Salary -------- and/or Covered Bonus that has been deferred to the Participant's Employee Deferred Account at the election of a Participant pursuant to Section 3.1. The Company contributes Deferral amounts to the Trust. 1.17. "Deferral Period" means the first Plan Year with respect to which a --------------- Participant executed a Benefit Agreement and the three consecutive Plan Years thereafter. 1.18. "Disability" has the same meaning provided in the long-term ---------- disability plan or policy maintained or, if applicable, most recently maintained, by the Company or, if applicable, any affiliate of the Company for the Participant. If no long-term disability policy was ever maintained on behalf of the Participant, Disability shall mean that condition described in Code Section 72(m)(7), as amended from time to time, to the extent that the Participant is entitled to disability retirement benefits under the federal Social Security Act. In the event of a dispute, the determination of Disability shall be made by the Committee and shall be so supported by the advice of a physician competent in the area to which such Disability relates. 1.19. "Distribution" means the distribution by GranCare, Inc., a ------------ California corporation, to its subsidiaries of all the issued and outstanding shares of the Company. 1.20. "Distribution Record Date" means the date established by the board ------------------------ of directors of GranCare, Inc., a California corporation, for determining shareholders of record for purposes of the Distribution. -3- 1.21. "Effective Date" means January 1, 1997, the effective date of the -------------- adoption of the Plan. 1.22. "Eligible Employee" means any Employee of the Company (a) who is ----------------- considered to be a "management" or "highly compensated" employee of the Company within the meaning of Section 201(2) of the Act; (b) who is a member of the New GranCare, Inc., a Delaware corporation, Leadership Group; and (c) who has been specifically designated by the Board of Directors as eligible to become a Plan Participant, such designation not having been revoked. 1.23. "Employee" mean any person who is employed by a Plan Sponsor or an -------- Affiliate for purposes of the Federal Insurance Contribution Act. 1.24. "Executive Deferred Compensation Plan" means the GranCare, Inc. ------------------------------------ Executive Deferred Compensation Plan, as maintained by GranCare, Inc., a California corporation, effective as of October 1, 1993. 1.25. "Leadership Group Deferred Compensation Plan" means the GranCare ------------------------------------------- Leadership Group Deferred Compensation Plan, as maintained by GranCare, Inc., a California corporation, effective as of January 1, 1992. 1.26. "Leave" means any period during which an Eligible Employee who is ----- employed by the Company immediately prior to the commencement thereof is absent from the Company pursuant to a leave of absence granted by the Company. 1.27. "Minimum Annual Deferral" means the minimum amount of Deferral that ----------------------- a Participant may make in any Plan Year under Section 3.1. 1.28. "Normal Retirement Date" means the first day of the month coinciding ---------------------- with or next following the Participant's attainment of age 65. 1.29. "Participant" means an Eligible Employee who has made a written ----------- election to participate in the Plan in accordance with Section 2.1. 1.30. "Plan" means the GranCare, Inc. Executive Deferred Compensation ---- Plan, as maintained by New GranCare, Inc., a Delaware corporation, as described herein and as hereafter amended. 1.31. "Plan Sponsor" means individually the Company or any other affiliate ------------ or other entity which has adopted the Plan with the consent of the Company. 1.32. "Plan Year" means the calendar year. --------- 1.33. "Post-Retirement Death Benefit" means the benefit payable to the ----------------------------- Beneficiary of -4- a Participant who dies after the commencement of his Retirement Income Benefit, as described in Section 8.2. 1.34. "Pre-Retirement Death Benefit" means the benefit payable to the ---------------------------- Beneficiary of a Participant who dies prior to the commencement of his Retirement Income Benefit, as described in Section 8.1. 1.35. "Retirement Income Benefit" means the retirement benefit described ------------------------- in Section 7. 1.36. "Scheduled Distribution Date" means January of the year selected by --------------------------- the Participant on the Benefit Agreement, prior to the date the Participant would otherwise be entitled to receive a distribution under Section 7 or Section 8 of the Plan, on which he shall receive a lump-sum payment of the portion of the Participant's sub-account attributable to Deferrals in the Plan Year for which the Benefit Agreement applies. 1.37. "Trust Agreement" means the GranCare, Inc. Executive Deferred --------------- Compensation Plan Trust Agreement entered into between the Company and the Trustee as of January 1, 1997. 1.38. "Trustee" means UMB Bank, N.A. ------- 1.39. "Unforeseen Emergency" means a severe financial hardship to a -------------------- Participant resulting from a sudden and unexpected illness or accident of a Participant or of a dependent (as defined in Code Section 152) of the Participant, loss of the Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The circumstances that shall constitute an Unforeseen Emergency shall depend upon the facts of each case, but, in any case, payment may not be made to the extent Unforeseen Emergency is or may be relieved (a) through reimbursement or compensation by insurance or otherwise, or (b) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship. Examples of what would not be considered as an Unforeseen Emergency include the need to send a Participant's child to college or the desire to purchase a home. Any determination of the existence of an Unforeseen Emergency and the amount to be distributed on account thereof shall be made by the Committee (or such other person as may be required to make such decisions) in accordance with rules applied in a uniform and nondiscriminatory manner. 1.40. "Year of Service" means a 12-consecutive month period during which --------------- the Participant has been in the continuous employ of the Company, commencing on or after the October 1, 1993 and shall include a period during which the Participant had been in the continuous employ of GranCare, Inc., a California corporation. SECTION 2. PARTICIPATION 2.1. Date of Participation. An Eligible Employee shall become a --------------------- Participant hereunder -5- upon execution by the Eligible Employee and the Committee of a Benefit Agreement. Eligible Employees who were participants in the Executive Deferred Compensation Plan and/or the Leadership Group Deferred Compensation Plan prior to the Distribution Record Date shall be given the opportunity for immediate participation in the Plan; provided that, the Eligible Employee delivers to the Committee within ninety (90) days of the Distribution Record Date, a signed release form releasing GranCare, Inc., a California corporation, its subsidiaries, affiliates and their successors from liability for any benefits under the Executive Deferred Compensation Plan and/or the Leadership Group Deferred Compensation Plan. 2.2. Commencement of Deferral Period. For the Plan Year commencing ------------------------------- January 1, 1997, the Benefit Agreement may be executed by the parties on or before January 31, 1997; for all subsequent Plan Years, the Benefit Agreement must be executed by the parties on or before December 1 of the year immediately preceding the Plan Year to which such Benefit Agreement shall relate. 2.3. Termination of Participation. The participation of any Participant ---------------------------- (other than a disabled Participant described in Section 7.3) may be terminated prospectively at any time upon written notice from the Chairman of the Board of Directors. Any provision of the Plan to the contrary notwithstanding, effective upon such termination, the Participant shall no longer be entitled to make any further Deferrals or to be credited with any further Company Matching contributions, and such Participant may continue to direct the investment of his Accounts until they are distributed in accordance with Section 7 or Section 8. 2.4. Benefit Agreement. The Committee shall provide to each Eligible ----------------- Employee a form of Benefit Agreement with respect to each Plan Year for which the Committee will permit the Eligible Employee to make Deferrals, which shall set forth the Eligible Employee's acceptance of the benefits provided hereunder, his agreement to be bound by the terms of the Plan, any Scheduled Distribution Date with respect to Deferrals to be made during that Plan Year and such other matters as are set forth in this Plan or deemed advisable by the Committee. 2.5. Leave of Absence. An Eligible Employee who is on Leave, with or ---------------- without salary, for a period of not more than six months, shall be deemed to be an Eligible Employee employed by the Employer during such Leave. An Eligible Employee who is on Leave without salary for a period in excess of six months shall be deemed to have voluntarily terminated his employment as of the end of such six-month period. 2.6. Executive and Leadership Group Deferred Compensation Plans. If an ---------------------------------------------------------- Eligible Employee, prior to the Distribution Record Date, maintained account balances in the Executive Deferred Compensation Plan and/or the Leadership Group Deferred Compensation Plan and the Eligible Employee elects immediate participation in the Plan and provides the appropriate release as described in Section 2.1, the account balances maintained under the Executive Deferred Compensation Plan and/or the Leadership Group Deferred Compensation Plan shall be credited to the Employee Deferred Account as of the Distribution Record Date. -6- SECTION 3. DEFERRAL ELECTIONS 3.1. Election of Deferral. Each Participant shall complete a Benefit -------------------- Agreement form in which he elects the Deferral that he will make, and in which he indicates the amount of the Deferral which relates to covered Bonus and the amount of the Deferral which relates to covered Salary. Such Deferral shall not exceed 100% of the Participant's Covered Bonus and shall not exceed 50% of the Participant's Covered Salary. The minimum Deferral shall be $5,000 for each year of the Deferral Period. Each Benefit Agreement shall indicate whether the Participant wishes to receive distribution of benefits in a lump sum, or in reasonably level payments over a five, ten or fifteen year period. Subject to Section 2.3, the elections made in a Benefit Agreement shall be irrevocable. 3.2. Company Matching Contribution. Each year the Company will decide ----------------------------- whether it will match a portion or all of the Deferrals of Participants for that year. SECTION 4. ESTABLISHMENT OF AND CREDITING OF ACCOUNTS 4.1. Establishment of Accounts. ------------------------- (a) The Committee shall establish an Employee Deferred Account for each Participant to which the Participant's Deferrals shall be credited, hypothetical earnings in accordance with Section 5.2 shall be credited, and distributions shall be debited. A Participant shall be 100% vested in his Employee Deferred Account at all times. (b) The Committee shall establish a Company Matching Account for each Participant to which the Participant's Company Matching contributions shall be credited, hypothetical earnings in accordance with Section 5.2 shall be credited, and distributions shall be debited. A Participant shall be 100% vested in his Company Matching Account upon the completion of three (3) Years of Service with the Company, or upon the occurrence of a Change in Control. 4.2. Crediting of Deferrals. Deferrals for a Plan Year shall be credited ---------------------- to Participants' Employee Deferred Account as of the end of the month in which the Deferral is withheld from the Participant's Covered Bonus or Covered Salary. 4.3. Crediting of Contributions. If the Company chooses to provide a -------------------------- Company Matching Contribution, each affected Participant's Company Matching Account will be credited with the amount of the Company Matching Contribution properly allocable to such Participant, as of the last day of the Plan Year to which the matching contribution relates. -7- SECTION 5. INVESTMENT OF ALLOCATED ACCOUNTS 5.1. Investment Direction. Each Participant shall be permitted, as of -------------------- each calendar quarter, to direct the Committee in writing, utilizing a form to be furnished by the Committee, to credit or debit the Participant's Accounts as though the Account assets were actually invested in one or more of the following types of investment funds in multiples of 10% of the Participant's Accounts: Emerging Growth Equity, Common Stock, Real Estate Securities, Balanced Assets, Capital Growth Bond and Money Market. The Committee will select, from time to time, a publicly traded mutual fund or separate accounts under a specified group insurance contract having the requisite investment characteristics for the purpose of determining the appropriate rates of return to credit Participant's Accounts. Earnings and losses will be credited or debited to the Participant's Accounts as if such Accounts were actually invested as directed by the Participant. Under no circumstance will the Committee be required to instruct the Trustee to invest any portion of the Plan assets in accordance with the elections submitted by the Participants. The Committee may, however, instruct the Trustee to do so in order to minimize its risk of loss. 5.2. Investment Experience. Investment earnings or losses determined with --------------------- reference to a Participant's investment elections shall be credited or debited to such Participant's Accounts as of the last day of each month. The Company may, in its sole discretion, make interim debits or credits in the event of a substantial shift in the investment marketplace, provided that such debits and credits are made uniformly to all similarly situated Participants. SECTION 6. HARDSHIP WITHDRAWALS 6.1. Financial Hardship. The Committee may pay all or a portion of a ------------------ Participant's Account prior to the Normal Retirement Date; provided, however, that any such distribution shall be made only if the Participant is an Employee and demonstrates that he will suffer a financial hardship if he does not receive a distribution due to an Unforeseen Emergency determined to constitute a hardship by the Committee. The Committee shall have the sole and absolute discretion to determine if a Unforeseen Emergency exists with respect to a Participant. 6.2. Payments for Hardship. Hardship payments shall be made to a --------------------- Participant only in accordance with such rules, policies, procedures, restrictions, and conditions as the Committee may from time to time adopt. Any determination of the amount to be distributed on account of an Unforeseen Emergency shall be made by the Committee. A payment under this Plan Section shall be made in a lump sum in cash to the Participant and shall be charged against the Participant's Deferral Account as of the day coinciding with or immediately preceding the date on which payment is made. 6.3. Suspension of Deferrals. Notwithstanding the foregoing, a ----------------------- Participant who receives a payment of all or any portion of his Employee Deferred Account pursuant to this Section 6 shall be suspended from making deferrals under Plan Section 3 for a period of 12 months immediately following the date the Participant receives a payment under this Section 6. -8- SECTION 7. RETIREMENT INCOME BENEFITS 7.1. Normal Retirement Benefit. Each Participant who retires, or ------------------------- voluntarily or involuntarily terminates employment, at his Normal Retirement Date shall be entitled to a Retirement Income Benefit commencing at Normal Retirement Date. The Participant's Retirement Income Benefit shall be paid, in accordance with the Participant's selection in his Benefit Agreement, either in a single lump sum distribution of the Participant's Accounts, or in equal annual installments of 5, 10, or 15 years. Payment of the Participant's Retirement Income Benefit in equal installments shall only be made if the entire balance in the Participant's Accounts is equal to or greater than $25,000. The amount of the annual payments shall be calculated to pay out over the specified period the entire balance in the Participant's Accounts as of his Normal Retirement Date with earnings. The Participant's Accounts shall continue to be credited with earnings until they are fully distributed to the Participant. Payment of benefits hereunder shall be made or shall commence as soon as possible after the first day of the month following the end of the calendar quarter following the quarter in which the Participant terminates employment or dies. 7.2. Termination Benefit. A Participant who voluntarily terminates ------------------- employment or who is discharged from employment prior to his Normal Retirement Date shall be entitled to a termination benefit. The termination benefit shall be a lump-sum payment made within ninety (90) days after the Participant terminates his employment, equal to the value of his Accounts as vested as of the date of distribution including earnings. A Participant who is discharged for cause will receive the sum of his Deferrals without earnings thereon. After a Participant has received a termination benefit under the Plan, neither the Participant nor his spouse or other Beneficiary shall be entitled to any further benefit hereunder. 7.3. Disability. A Participant who has suffered a Disability shall be ---------- deemed to be an Eligible Employee during such period and shall continue to be eligible for Retirement Income Benefits under Section 7.1 without reduction and Pre-Retirement and Post-Retirement Death Benefits under Sections 8.1 and 8.2. If the period of Disability occurs within a Deferral Period, he shall be excused from making the required minimum Deferral set forth in Section 3.1 for each Plan Year of Disability, but no amounts shall be credited to his Accounts with respect to such excused Deferral(s). However, if he returns to employment within the Deferral Period, he may elect, upon his return, to make the required minimum Deferrals that were previously excused to the extent that the amount of such Deferrals does not exceed the amount of compensation which the Participant expects to receive but has not yet been paid during the remainder of the Plan Year. 7.4. Right to Accelerate. The Board of Directors in its sole discretion ------------------- may accelerate all vested benefits upon termination of the Plan, and pay such benefits in a single, actuarially equivalent lump-sum. 7.5. Alternative Forms of Benefit. The Committee in its sole discretion, ---------------------------- but with the consent of the recipient, may elect to pay the Participant, Spouse or Beneficiary an actuarially -9- equivalent lump-sum or other form of benefit that it deems appropriate in lieu of the form of benefit otherwise provided. 7.6. Scheduled Withdrawal. A Participant may elect, on a Benefit -------------------- Agreement form, to receive or commence receiving distributions on a Scheduled Distribution Date. If a Scheduled Distribution Date is selected, the Participant shall receive on the Scheduled Distribution Date a single lump-sum distribution from the Participant's Accounts. The lump sum distribution will be from the sub- account of the Participant's Accounts attributable to Deferrals in the Plan Year for which the Benefit Agreement applies. The initial election must be for a Scheduled Distribution Date that is four (4) years or more from the date of the Benefit Agreement. If the initial election is for a Scheduled Distribution Date, then a Participant may delay receipt of the scheduled distribution provided that his subsequent election is filed with the Committee at least one year (365 days) prior to his Scheduled Distribution Date. Notwithstanding this Section 7.6, in no event shall a Scheduled Distribution Date remain in effect beyond the date the Participant would otherwise be entitled to receive a distribution under Section 7 or Section 8 of this Plan. SECTION 8. DEATH BENEFITS 8.1. Pre-Retirement Death Benefit. If a Participant dies while employed ---------------------------- by the Company, or if a Participant dies after termination of employment, but prior to the commencement of his Retirement Income Benefit, his Beneficiary shall be entitled to receive the balance in the Participant's Accounts as of the Participant's date of death. This amount will be paid to the Beneficiary in a lump-sum as soon as possible after the first day of the month following the end of the calendar quarter following the calendar quarter in which the Participant died. 8.2. Post-Retirement Death Benefit. The Beneficiary of a Participant who ----------------------------- dies after commencement of his Retirement Income Benefit shall be entitled to continue to receive the Retirement Income Benefit payments being made to the Participant under Section 7.1 for the remainder of the period specified in that section. SECTION 9. 9.1. Operation of the Committee. The Board of Directors shall have the -------------------------- right to remove any member of the Committee at any time by notice in writing. Any member of the Committee may resign at any time by written notice of resignation to the Board of Directors. Upon removal or resignation of a member of the Committee, the Board of Directors shall appoint a successor. -10- 9.2. Duties of the Committee. ----------------------- (a) The Committee shall make all payments under the terms of the Plan. (b) The Committee shall from time to time establish rules, not contrary to the provisions of the Plan, for the administration of the Plan and the transaction of its business. All elections and designations under the Plan by a Participant or Beneficiary shall be made on forms prescribed by the Committee. The Committee shall have discretionary authority to construe the terms of the Plan and shall determine all questions arising in the administration, interpretation and application of the Plan, including, but not limited to, those concerning eligibility for benefits and it shall not act so as to discriminate in favor of any person. All determinations of the Committee shall be conclusive and binding on all Employees, Participants, and Beneficiaries, subject to the provisions of the Plan and subject to applicable law. (c) The Committee shall furnish Participants and Beneficiaries with all disclosures now or hereafter required by the Act. The Committee shall file, as required, the various reports and disclosures concerning the Plan and its operations as required by the Act and by the Code, and shall be solely responsible for establishing and maintaining all records of the Plan. (d) The statement of specific duties for a Committee in this Plan Section is not in derogation of any other duties which a Committee has under the provisions of the Plan or under applicable law. 9.3. Action by the Company or a Plan Sponsor. Any action to be taken by --------------------------------------- the Company or a Plan Sponsor shall be taken by resolution or written direction duly adopted by its board of directors or appropriate governing body, as the case may be; provided, however, that by such resolution or written direction, the board of directors or appropriate governing body, as the case may be, may delegate to any officer or other appropriate person of a Plan Sponsor the authority to take any such actions as may be specified in such resolution or written direction, other than the power to amend, modify or terminate the Plan or to determine the basis of any Plan Sponsor contributions. SECTION 10. Error! Bookmark not defined. 10.1. Denial of Claims. In the event that a Participant or Beneficiary is ---------------- denied a claim for benefits under a Plan, the Committee shall provide to such claimant written notice of the denial which shall set forth: (a) the specific reasons for the denial; -11- (b) specific references to the pertinent provisions of the Plan on which the denial is based; (c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (d) an explanation of the Plan's claim review procedure. 10.2. Appeal of Denial. After receiving written notice of the denial of a ---------------- claim, a claimant or his representative may: (a) request a full and fair review of such denial by written application to the Committee; (b) review pertinent documents; and (c) submit issues and comments in writing to the Committee. 10.3. Written Notice for Review. If the claimant wishes such a review of ------------------------- the decision denying his claim to benefits under the Plan, he must submit such written applications to the Committee within sixty (60) days after receiving written notice of the denial. 10.4. Hearing. Upon receiving such written application for review, the ------- Committee may schedule a hearing for purposes of reviewing the claimant's claim, which hearing shall take place not more than thirty (30) days from the date on which the Committee received such written application for review. At least ten (10) days prior to the scheduled hearing, the claimant and his representative designated in writing by him, if any, shall receive written notice of the date, time, and place of such scheduled hearing. The claimant or his representative, if any, may request that the hearing be rescheduled, for his convenience, on another reasonable date or at another reasonable time or place. 10.5. Counsel. All claimants requesting a review of the decision denying ------- their claim for benefits may employ counsel for purposes of the hearing. 10.6. Decision on Appeal. No later than sixty (60) days following the ------------------ receipt of the written application for review, the Committee shall submit its decision on the review in writing to the claimant involved and to his representative, if any; provided, however, a decision on the written application for review may be extended, in the event special circumstances such as the need to hold a hearing require an extension of time, to a day no later than one hundred twenty (120) days after the date of receipt of the written application for review. The decision shall include specific reasons for the decision and specific references to the pertinent provisions of the Plan on which the decision is based. -12- SECTION 11. LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS 11.1. No Alienation. No benefit which shall be payable under the Plan to ------------- any person shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person, nor shall it be subject to attachment or legal process for, or against, such person, and the same shall not be recognized under the Plan, except to such extent as may be required by law. 11.2. Attempt To Transfer. If any person who shall be entitled to any ------------------- benefit under the Plan shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge such benefit under the Plan, then the payment of any such benefit in the event a Participant or Beneficiary is entitled to payment shall, in the discretion of the Committee, cease and terminate and in that event the Committee shall apply the same for the benefit of such person, his spouse, children, other dependents or any of them in such manner and in such proportion as the Committee shall determine. 11.3. Minors or Incompetents. Whenever any benefit which shall be payable ---------------------- under the Plan is to be paid to or for the benefit of any person who is then a minor or determined to be incompetent by qualified medical advice, the Committee need not require the appointment of a guardian or custodian, but shall be authorized to cause the same to be paid over to the person having custody of such minor or incompetent, or to cause the same to be paid to such minor or incompetent without the intervention of a guardian or custodian, or to cause the same to be paid to a legal guardian or custodian of such minor or incompetent if one has been appointed or to cause the same to be used for the benefit of such minor or incompetent. 11.4. Missing Persons. Whenever the Committee cannot, within a reasonable --------------- time after payments are to commence, locate any person to or for the benefit of whom such payments are to be made, after making a reasonable effort to locate such person, the Committee may direct that the payment and any remaining payments otherwise due to the Participant be cancelled on the records of the Plan, except that in the event the Participant later notifies the Committee of his whereabouts and requests the payments due to him under the Plan, the Plan Sponsor shall re-credit the Participant's account and provide for payment of the re-credited amount to the Participant as soon as administratively feasible. SECTION 12. LIMITATION OF RIGHTS Participation in the Plan shall not give any Employee any right or claim except to the extent that such right is specifically fixed under the terms of the Plan. The adoption of the Plan by any -13- Plan Sponsor shall not be construed to give any Employee a right to be continued in the employ of a Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the employment of any Employee at any time. SECTION 13. AMENDMENT TO OR TERMINATION OF THE PLAN 13.1. Amendment and Termination. The Company or any successor thereto ------------------------- reserves the right by action of its Board of Directors or its delegatee at any time to modify or amend or terminate the Plan. No such modifications or amendments shall have the effect of retroactively changing or depriving Participants or Beneficiaries of benefits already accrued under the Plan. Notwithstanding anything contained in the Plan to the contrary, upon termination of the Plan each Participant's Account shall be payable to the Participant as soon thereafter as is reasonably practicable. No Plan Sponsor other than the Company shall have the right to so modify, amend or terminate the Plan. Notwithstanding the foregoing, each Plan Sponsor may terminate its own participation in the Plan. 13.2. Termination by Plan Sponsor. Each Plan Sponsor other than the --------------------------- Company shall have the right to terminate its participation in the Plan by resolution of its board of directors or other appropriate governing body and notice in writing to the Company. Any termination by a Plan Sponsor, shall not be a termination as to any other Plan Sponsor. 13.3. Termination by Company. If the Plan is terminated by the Company it ---------------------- shall terminate as to all Plan Sponsors. SECTION 14. ADOPTION OF PLAN BY AFFILIATES Any corporation or other business entity related to the Company by function or operation and any Affiliate, if the corporation, business entity or Affiliate is authorized to do so by written direction adopted by the Board of Directors, may adopt the Plan by action of the board of directors or other appropriate governing body of such corporation, business entity or Affiliate. Any adoption shall be evidenced by certified copies of the resolutions of the foregoing board of directors or governing body indicating the adoption by the adopting corporation, or business entity or Affiliate. The resolution shall state and define the effective date of the adoption of the Plan by the Plan Sponsor. -14- SECTION 15. MISCELLANEOUS 15.1. Unfunded Plan. All payments provided under the Plan shall be paid ------------- from the general assets of the applicable Plan Sponsor and no separate fund shall be established to secure payment. Notwithstanding the foregoing, the Company may establish a grantor trust to assist it in funding its obligations under the Plan, and any payments made to a Participant or Beneficiary from such trust shall relieve the Plan Sponsor from any further obligations under the Plan only to the extent of such payment. 15.2. Withholding. Each Plan Sponsor shall withhold from any benefits ----------- payable under the Plan all federal, state and local income taxes or other taxes required to be withheld pursuant to applicable law. 15.3. Governing Law. To the extent not preempted by applicable federal ------------- law, the Plan shall be governed by and construed in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, the Company has caused this Plan to be executed this _____ day of _______________, 199__. NEW GRANCARE, INC., a Delaware company By______________________________________ Title___________________________________ ATTEST By_________________________ Title______________________ [CORPORATE SEAL] -15- EX-10.83 42 1ST AMD TO EXECUTIVE COMPENSATION PLAN EXHIBIT 10.83 FIRST AMENDMENT TO THE GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN THIS FIRST AMENDMENT made on the 12th day of February, 1997, by NEW GRANCARE, INC., a Delaware corporation (the "Primary Sponsor"); W I T N E S S E T H: ------------------- WHEREAS, the Primary Sponsor maintains the GranCare, Inc. Executive Deferred Compensation Plan, effective as of January 1, 1997 (the "Plan"); and WHEREAS, the Primary Sponsor now desires to amend the Plan to allow participants to direct a committee administering the Plan to credit or debit their accounts as though the account assets were actually invested in New GranCare, Inc. common stock, $.001 par value; NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan, effective as of February 12, 1997 for those participants in the Plan who are officers of the Primary Sponsor or its affiliates and effective as of April 1, 1997 for all other participants in the Plan, by substituting the following language for the existing language of Plan Section 5.1: "5.1 Investment Direction. Each Participant shall be permitted, as of -------------------- each calendar quarter, to direct the Committee in writing, utilizing a form to be furnished by the Committee, to credit or debit the Participant's Accounts as though the Account assets were actually invested in one or more of the following types of investment funds in multiples of 10% of the Participant's Accounts: Emerging Growth Equity, Common Stock, Real Estate Securities, Balanced Assets, Capital Growth Bond, Money Market and New GranCare Common Stock, $.001 par value. With respect to investments other than New GranCare Common Stock, the Committee will select, from time to time, a publicly traded mutual fund or separate accounts under a specified group insurance contract having the requisite investment characteristics for the purpose of determining the appropriate rates of return to credit Participant's Accounts. Earnings and losses will be credited or debited to the Participant's Accounts as if such Accounts were actually invested as directed by the Participant. Under no circumstance will the Committee be required to instruct the Trustee to invest any portion of the Plan assets in accordance with the elections submitted by the Participants. The Committee may, however, instruct the Trustee to do so in order to minimize its risk of loss." Except as specifically provided herein, the Plan shall remain in full force and effect as prior to the First Amendment. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed as of the day and year first above written. NEW GRANCARE, INC. By:________________________________ Title:_____________________________ ATTEST: By:____________________________ Title:_________________________ [CORPORATE SEAL] EX-10.84 43 2ND AMD TO DEFERRED EXECUTIVE COMPENSATION PLAN EXHIBIT 10.84 SECOND AMENDMENT TO GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN THIS SECOND AMENDMENT, made on this ____ day of ____________, 1997, by GRANCARE, INC. (the "Company"), a corporation duly organized and existing under the laws of the State of Delaware; W I T N E S S E T H: ------------------- WHEREAS, the Company maintains the Grancare, Inc. Executive Deferred Compensation Plan (the "Plan"); and WHEREAS, the Company desires to amend the Plan to change the definition of eligible employee; NOW, THEREFORE, the Plan is hereby amended effective as of the first written above by deleting Plan Section 1.22 and replacing it with the following: "1.22. `Eligible Employee' means any Employee of the ----------------- Company (a) who is considered to be a `management' or `highly compensated employee' of the Company within the meaning of Section 201(2) of the Act and (b) who has been specifically designated by the Board of Directors as eligible to become a Plan Participants." Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this Second Amendment. IN WITNESS WHEREOF, the Company has caused this Second Amendment to be executed on the day and year first above written. GRANCARE, INC. By: -------------------------------- Title: ----------------------------- ATTEST: - ---------------------------- Title: ---------------------- [CORPORATE SEAL] GRANCARE, INC. RESOLUTIONS RESOLVED, that the Company does hereby approve the adoption of the Second Amendment to the GranCare, Inc. Executive Deferred Compensation Plan (the "Second Amendment") in the form and substance substantially similar to that presented to and reviewed by the Board of Directors of the Company. RESOLVED, that the officers of the Company, and their respective designees, are hereby authorized and directed to take all actions and to finalize, execute and deliver all agreements, instruments, and other documents as they shall respectively deem necessary to carry out the intent of the foregoing resolutions, including, without limitation, executing and delivering the Second Amendment. RESOLVED, that the signature of any officer or his designee on any agreement, instrument, indenture, or document shall be conclusive evidence of his authority. EX-21 44 SUBSIDIARIES OF MARINER POST-ACUTE NETWORK, INC. EXHIBIT 21 SUBSIDIARIES OF REGISTRANT MARINER POST-ACUTE NETWORK, INC. DIRECT AND INDIRECT SUBSIDIARIES State/Country Incorporated AMS Green Tree, Inc. (WI) AMS Properties, Inc. (DE) APS Holding Company, Inc. (NV) APS Pharmacy Management, Inc. (TX) Acme Repackaging, Inc. (TN) Aid and Assistance, Inc. (CT) American--Cal Medical Services, Inc. (CA) American Geriatric Management Services, Inc. (TX) American Pharmaceutical Services, Inc. (DE) American Rehability Management, Inc. (TN) American Rehability Services, Inc. (UT) American Senior Health Services, Inc. (DE) Amerra Health Services, Inc. (DE) Amerra Properties, Inc. (DE) Beaver Properties/Newco, Inc. (NC) Beechwood Heritage Retirement Community, Inc. (MD) Brian Center of Asheboro, Inc. (NC) Brian Center of Central Columbia, Inc. (SC) Brian Center Health & Rehabilitation/Tampa, Inc. (AL) Brian Center Health & Retirement/Alleghany, Inc. (NC) Brian Center Health & Retirement/Bastian, Inc. (NC) Brian Center Health & Retirement/Wallace, Inc. (NC) Brian Center Management Corporation (NC) Brian Center Nursing Care/Austell, Inc. (GA) Brian Center Nursing Care/Fincastle, Inc. (NC) Brain Center Nursing Care/Hickory, Inc. (NC) Brian Center Nursing Care/Powder Springs, Inc. (NC) Bride Brook Nursing & Rehabilitation Center, Inc. (CT) Cambridge Bedford, Inc. (MI) Cambridge East, Inc. (MI) Cambridge North, Inc. (MI) Cambridge South, Inc. (MI) Clintonaire Nursing Home, Inc. (MI) Compass Pharmacy Services of Maryland, Inc. (DE) Compass Pharmacy Services of Texas, Inc. (DE) Compass Pharmacy Services, Inc. (MA) Connerwood Healthcare, Inc. (IN) Coordinated Home Health Services, Inc. (CA) Cornerstone Health Management Company (DE) Crestmont Health Center, Inc. (MI) Cypress Nursing Facility, Inc.(SC) Devcon Holding Company (DE) EH Acquisition Corp. (GA) EH Acquisition Corp. II (GA) i EH Acquisition Corp. III (GA) Evergreen Healthcare, Inc. (GA) Frenchtown Nursing Home, Inc. (MI) Functional Enhancements, Inc. (DE) GC Services, Inc. (CA) GCI Bella Vita, Inc. (CO) GCI-Cal Health Care Centers, Inc. (CA) GCI-Cal Therapies Company (CA) GCI Camellia Care Center, Inc. (CO) GCI Colter Village, Inc. (AZ) GCI East Valley Medical & Rehabilitation Center, Inc. (AZ) GCI Faith Nursing Home, Inc. (SC) GCI Health Care Centers, Inc. (DE) GCI Indemnity, Inc. (VT) GCI Jolley Acres, Inc. (SC) GCI Palm Court, Inc. (CA) GCI Prince George, Inc. (SC) GCI Realty, Inc. (DE) GCI Rehab, Inc. (CA) GCI Springdale Village, Inc. (SC) GCI Therapies, Inc. (CA) GCI Valley Manor Health Care Center, Inc. (CO) GCI Village Green, Inc. (SC) GCI-Wisconsin Properties, Inc. (WI) GW Acquisition Corp. (GA) GranCare, Inc. (DE) GranCare of Michigan, Inc. (MI) GranCare of North Carolina, Inc. (NC) GranCare of Northern California, Inc. (CA) GranCare GPO Services, Inc. (GA) GranCare Home Health Services, Inc. (CA) GranCare Nursing Services And Hospice, Inc. (WI) GranCare South Carolina, Inc. (SC) GranCare Trading, Inc. (GA) Gulf Coast Physical Therapy Group, Inc. (MS) HMI Convalescent Care, Inc. (CA) Hampton Nursing Center, Inc. (SC) Heritage of Louisiana, Inc. (LA) Heritage Nursing Home, Inc. (MI) HomeCare Associates of America, Inc. (DE) Home Health Management Associates of America, Inc. (DE) Hospice Associates of America, Inc. (DE) Hospice Care of Tennessee, Inc. (DE) Hospice Management Partners, Inc. (DE) HostMasters, Inc. (CA) International Health Care Management, Inc. (MI) International X-Ray, Inc. (MI) LC Management Company (DE) LCA Insurance Co. Ltd. (Grand Cayman Islands) LCA Operational Holding Company (DE) LCR, Inc. (DE) Living Centers--East, Inc. (DE) ii Living Centers--PHCM, Inc. (NC) Living Centers--Rocky Mountain, Inc. (NV) Living Centers--Southeast, Inc. (NC) Living Centers--Southeast Development Corporation (NC) Living Centers of Texas, Inc. (DE) Living Centers Development Company (DE) Living Centers Holding Company (DE) Living Centers LTCP Development Company (DE) Long Ridge Nursing & Rehabilitation Center, Inc. (CT) Longwood Rehabilitation Center, Inc. (MA) MHC Rehab Corp. (DE) MHC Transportation, Inc. (DE) Madonna Nursing Center, Inc. (MI) Mansfield Nursing & Rehabilitation Center, Inc. (CT) Mariner Health at Bonifay, Inc. (DE) Mariner Health Care, Inc. (MA) Mariner Health Care of Baltimore, Inc. (MA) Mariner Health Care of Fort Wayne, Inc. (DE) Mariner Health Care of Greater Laurel, Inc. (MA) Mariner Health Care of Lake Worth, Inc. (DE) Mariner Health Care of Nashville, Inc. (DE) Mariner Health Care of North Hills, Inc. (DE) Mariner Health Care of Orange City, Inc. (DE) Mariner Health Care of Palm City, Inc. (DE) Mariner Health Care of Pinellas Point, Inc. (DE) Mariner Health Care of Port Orange, Inc. (DE) Mariner Health Care of Southern Connecticut, Inc. (CT) Mariner Health Care of Toledo, Inc. (DE) Mariner Health Care of West Hills, Inc. (DE) Mariner Health Central, Inc. (DE) Mariner Health Group, Inc. (DE) Mariner Health Home Care, Inc. (DE) Mariner Health of Atlantic Shores, Inc (DE). Mariner Health of Deland, Inc. (DE) Mariner Health of Florida, Inc. (DE) Mariner Health of Inverness, Inc. (DE) Mariner Health of Jacksonville, Inc. (DE) Mariner Health of MacClenny, Inc. (DE) Mariner Health of Maryland, Inc. (DE) Mariner Health of Metrowest, Inc. (DE) Mariner Health of Orlando, Inc. (DE) Mariner Health of Palmetto, Inc. (DE) Mariner Health of Tampa, Inc. (DE) Mariner Health of Tuskawilla, Inc. (DE) Mariner Health Resources, Inc. (MA) Mariner Home Care of Florida, Inc. (DE) Mariner Physician Services, Inc. (DE) Mariner Practice Corporation (DE) Mariner Supply Services, Inc. (DE) MarinerSelect Staffing Solutions, Inc. (DE) Med-Care Sales and Rentals, Inc. (NC) MedRehab, Inc. (DE) iii MedRehab of Florida, Inc. (FL) MedRehab of Illinois, Inc. (DE) MedRehab of Indiana, Inc. (IN) MedRehab of Louisiana, Inc. (LA) MedRehab of Missouri, Inc. (MO) MedRehab of Texas, Inc. (TX) MedRehab of Wisconsin, Inc. (WI) Med-Therapy Rehabilitation Services, Inc. (NC) Merrimack Valley Nursing & Rehabilitation Center, Inc. (MA) Methuen Nursing & Rehabilitation Center, Inc. (MA) Mid-America Professional Services, Inc. (KY) Middlebelt Nursing Home Inc. (MI) Middlebelt-Hope Nursing Home, Inc. (MI) Mystic Nursing & Rehabilitation Center, Inc. (MA) Nan-Dan Corp. (FL) National Health Strategies, Inc. (MA) National Heritage Realty, Inc. (LA) Nightingale East Nursing Center, Inc. (MI) Ocean Pharmacy, Inc. (CT) Omega/Indiana Care Corp. (DE) PHG Ventures, Inc. (MA) Park Terrace Nursing & Rehabilitation Center, Inc. (MA) Pendleton Nursing & Rehabilitation Center, Inc. (CT) Pinnacle Care Corporation (DE) Pinnacle Care Corporation of Huntington (TN) Pinnacle Care Corporation of Hutchinson (TN) Pinnacle Care Corporation of Lexington (TN) Pinnacle Care Corporation of Louisville (TN) Pinnacle Care Corporation of Marion (TN) Pinnacle Care Corporation of McMurray (TN) Pinnacle Care Corporation of Morganton (TN) Pinnacle Care Corporation of Nashville (TN) Pinnacle Care Corporation of North Carolina (TN) Pinnacle Care Corporation of Salina (TN) Pinnacle Care Corporation Seneca (TN) Pinnacle Care Corporation of Sumter (TN) Pinnacle Care Corporation of Williams Bay (TN) Pinnacle Care Corporation of Wilmington (TN) Pinnacle Care Management Corp. (TN) Pinnacle Pharmaceutical Services, Inc. (TN) Pinnacle Rehabilitation, Inc. (MA) Pinnacle Rehabilitation, Inc. (TN) Pinnacle Rehabilitation of Florida, Inc. (FL) Pinnacle Rehabilitation of Georgia, Inc. (TN) Pinnacle Rehabilitation of Illinois, Inc. (IL) Pinnacle Rehabilitation of Missouri, Inc. (MO) Pinnacle Rehabilitation of Texas, Inc. (DE) Prism Care Centers, Inc. (MA) Prism Health Group, Inc. (MA) Prism Home Care Company, Inc. (MA) Prism Home Care, Inc. (MA) Prism Home Health Services, Inc. (MA) iv Prism Hospital Ventures, Inc. (TX) Prism Rehab Systems, Inc. (MA) Professional Health Care Management, Inc. (MI) Professional Rx Systems, Inc. (FL) Professional Rehabilitation, Inc. (DE) Professional Rehabilitation of Georgia, Inc. (GA) Professional Rehabilitation Agency, Inc. (SC) Progressive Care Centers of America, Inc. (DE) Rehability Health Services, Inc. (TX) Rehability Hospital Services, Inc. (DE) Renaissance Mental Health Center, Inc. (WI) St. Anthony Nursing Home, Inc. (MI) Sassaquin Nursing & Rehabilitation Center, Inc. (MA) StoneCreek Management Company, Inc. (MO) Summit Hospital Holdings, Inc. (GA) Summit Hospital of East Georgia, Inc. (GA) Summit Hospital of Southeast Arizona, Inc. (GA) Summit Hospital of Southeast Texas, Inc. (GA) Summit Hospital of Southwest Louisiana, Inc. (GA) Summit Hospital of West Georgia, Inc. (GA) Summit Institute for Pulmonary Medicine and Rehabilitation, Inc. (GA) Summit Institute of Austin, Inc. (GA) Summit Institute of West Monroe, Inc. (GA) Summit Medical Holdings, Ltd. (DE) Summit Medical Management, Inc. (GA) Tampa Medical Associates, Inc. (FL) TN Occupational Medicine, Inc. (TN) TOICA, Inc. (DE) TheraCare Home Health Agency, Inc. (TN) Therapy Management Innovations, Inc. (NV) Tri-State Health Care, Inc. (WV) Windward Health Care, Inc. (MA) WorkHealth Healthcare Management, Inc. (DE) v EX-23 45 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 December 21, 1998, 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, 1998. Ernst & Young LLP December 22, 1998 Atlanta, Georgia EX-27 46 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 3,314 0 650,518 33,138 31,516 807,923 1,184,851 257,698 3,036,651 457,707 1,977,865 0 0 733 396,281 3,036,651 2,035,529 2,035,529 0 2,129,601 0 0 114,302 (208,374) (10,559) (198,377) 0 (11,275) 0 (209,652) (4.31) (4.31)
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