-----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, SO/ew8PfviJH0uEsXli6v1mxAoI6g4a9MPGwyAv4F8CflW/VTg+vOma9A8wXjxMc HgZDcXOLd/5z4rmvyGWtPw== 0000950129-96-003475.txt : 19961220 0000950129-96-003475.hdr.sgml : 19961220 ACCESSION NUMBER: 0000950129-96-003475 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961219 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIVING CENTERS OF AMERICA 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: 1934 Act SEC FILE NUMBER: 033-44726 FILM NUMBER: 96682873 BUSINESS ADDRESS: STREET 1: 15415 KATY FREEWAY STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77094 BUSINESS PHONE: 7135784700 MAIL ADDRESS: STREET 1: 15415 KATY FREEWAY STREET 2: SUITE 800 CITY: HOUSTON STATE: TX ZIP: 77094 10-K405 1 LIVING CENTERS OF AMERICA, INC. - 09/30/96 1 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, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 33-44726 LIVING CENTERS OF AMERICA, 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.) 15415 KATY FREEWAY, SUITE 800 77094 HOUSTON, TEXAS (Zip Code) (Address of principal executive office) (281) 578-4600 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
Name of each exchange on Title of each class which registered ------------------- -------------------------------------- Common Stock, $.01 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [X] The aggregate market value of the outstanding Common Stock of the registrant held by non-affiliates of the registrant as of November 25, 1996, based on the closing sale price of the Common Stock on the New York Stock Exchange on said date, was $369,851,000. For purpose of the foregoing sentence only, all directors and officers of the registrant are assumed to be affiliates. There were 19,500,867 shares of Common Stock of the registrant outstanding as of November 25, 1996. DOCUMENTS INCORPORATED BY REFERENCE
INCORPORATED DOCUMENT PART OF FORM 10-K --------------------- ----------------- Proxy Statement for the 1997 Part III Annual Meeting of Stockholders
2
TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 13 ITEM 3. LEGAL PROCEEDINGS 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS 18 ITEM 6. SELECTED FINANCIAL DATA 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 50 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51 ITEM 11. EXECUTIVE COMPENSATION 51 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 51 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 52 SIGNATURES 57 SCHEDULES 59 EXHIBITS 60
3 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF THE BUSINESS Living Centers of America, Inc. ("Living Centers", or the "Company") is a Delaware corporation that primarily provides through its operating subsidiaries, a diverse range of health care services to senior citizens. (All references to "Living Centers" or the "Company" is intended to include the operating subsidiaries through which the services described herein are directly provided.) One of the largest providers of long-term care in the United States, Living Centers' operations are geographically concentrated and specifically focused in key regional markets. The Company's comprehensive continuum of health care services includes skilled nursing care, rehabilitation services, pharmaceutical services, assisted living services, subacute care, care for individuals with Alzheimer's disease, hospice care, home health care, and geriatric physician management services. American Rehabilitation Services, Inc. ("ARS"), Living Centers' rehabilitation subsidiary, through its subsidiaries, provides contract rehabilitation services to long- term care facilities, operates outpatient clinics, operates hospital rehabilitation departments on a contract basis, and offers therapy program management to long-term care providers. American Pharmaceutical Services, Inc. ("APS"), the Company's pharmaceutical services subsidiary, provides medical supplies, pharmaceuticals, and support services to subacute and long-term care providers. By operating this integrated network of services, Living Centers provides cost- effective services across the senior health care services continuum. The Company's subsidiaries are organized into three operational business units -- the long-term care services group, the rehabilitation services group, and the institutional pharmaceutical services group. While each group has its own distinct corporate structure and management team, each reports to the Company's Chief Operating Officer and is supported by the corporate group located in Houston, Texas. LONG-TERM CARE SERVICES GROUP LONG TERM NURSING SERVICES. Living Centers is one of the largest operators of long-term health care facilities in the United States and is the first or second largest provider of long-term care services in its key markets of Texas, North Carolina and Colorado. The long term care group is organized into three regionally concentrated operating units: The Southeast Area (Alabama, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and Virginia); the Texas Area; and the Rocky Mountain Area (Arizona, Colorado, Nebraska, and Wyoming). Since becoming a public company in February 1992, the Company has made two acquisitions which significantly increased its facility base. First, in October 1993, the Company consummated a merger transaction in which it acquired the outstanding stock of Vari-Care, Inc. ("Vari-Care") which added a total of 22 centers and approximately 2,500 beds in Alabama, Arizona, Florida and Texas. Second, in July 1995, the Company completed a transaction in which it acquired the outstanding stock of The Brian Center Corporation and 16 related S corporations (collectively the "BCC Entities", or "BCC"); the BCC acquisition added a total of 51 centers and approximately 6,000 beds in Florida, Georgia, North Carolina, South Carolina and Virginia. As of September 30, 1996, the Company operated 206 centers with in excess of 23,500 licensed beds. Living Centers' facilities provide a continuum of care designed to accommodate patients' and residents' needs as their acuity levels change. Services provided include skilled nursing care, assisted living services, care for individuals with Alzheimer's disease, subacute care, and hospice services, although not all services are provided in all facilities. All facilities must meet comprehensive state licensing requirements, and those participating in Medicare or Medicaid programs must also meet federal and state certification standards (see "Government Regulation"). The Company's facilities are generally equally distributed between urban and non-urban areas and typically compete only with other facilities in their respective local markets. SPECIALTY CARE SERVICES. The Company is increasingly emphasizing expansion and development of specialty care programs to better meet the long-term care needs of the communities it serves. These programs and services, none of which individually are material to the Company, are generally described as follows: -3- 4 Assisted Living Centers. The Company provides assisted living services in 35 of its long-term care centers and in four freestanding facilities with a total of 1,350 beds to residents who need assistance with the basic activities of daily living, but whose care needs have not yet reached a level that requires 24-hour nursing care. The Company has developed a freestanding assisted living center model in connection with the implementation of its assisted living program. During fiscal year 1996, Living Centers completed construction of one 38 bed assisted living facility in the Lincoln, Nebraska market. Additionally, the company began construction on two facilities which are expected to be completed in early fiscal year 1997 and further identified nine sites for construction of new assisted living facilities. The Company's assisted living development program is focused on markets where Living Centers has a skilled nursing facility presence so that as these residents' needs change and require higher acuity services, they can be accommodated in one of the Company's nursing facilities. These newly constructed assisted living facilities are intended to be exclusively private pay. Subacute Care Services. Since 1993, the Company has developed its Progressive Care Centers program in which distinct units of certain designated long-term care facilities are dedicated to subacute nursing care and rehabilitation services for patients with higher acuity levels. At Progressive Care Centers, specially trained staff offers care to patients with higher acuity levels in a technologically advanced physical plant as an alternative to more expensive patient treatment in the acute care hospital setting. Services offered by the Company in Progressive Care Centers include physical therapy, occupational therapy, speech therapy, enteral therapy, IV therapy, respiratory therapy, specialized wound management, ventilator care, and tracheostomy care, although not all services are provided at all Progressive Care Center units. The Company operates a total of approximately 250 beds in 14 facilities under its Progressive Care Centers program. Alzheimer's Care Services. The Company believes that it is a leading provider of long-term care to residents with Alzheimer's disease. Within specially designated and designed portions of certain of its long-term care centers, the Company operates over 60 units with approximately 1,700 beds dedicated to addressing the problems of disorientation and perceptual confusion 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 intends to continue its commitment to Alzheimer's care through implementation of Alzheimer's programs in more of its long-term care facilities as well as in association with its planned free-standing assisted living centers. Hospice Care. Hospice care is increasingly recognized as a preferred method of care for those patients diagnosed with a terminal illness and certified with a life expectancy of less than six months. Hospice services are designed to provide comfort for the physical and emotional needs of terminally ill patients. Hospice services focus on maximizing the quality of life of terminally ill patients as opposed to curing an illness; as a result, this modality of care is typically a more cost-effective alternative to more aggressive medical treatment. An estimated four to eight percent of nursing facility residents potentially require hospice services. During fiscal year 1996 the Company expanded its hospice initiative by purchasing a 50 percent interest in Heart of America Hospice ("Heart of America") of Kansas City, Missouri. Living Centers' existing hospice operation was combined with Heart of America, which will become Living Centers' hospice provider. Subsequent to September 30, 1996, Living Centers increased its ownership interest in Heart of America to approximately 83 percent. Home Health Care. Currently the Company provides home health care through agencies in Tennessee (acquired as part of the 1995 Rehability acquisition) and Corpus Christi, Texas. The Company plans to expand its home health care business through the acquisition and development of agencies in its key markets. The expansion of home health complements the Company's initiative to provide a complete continuum of senior health care in its targeted markets. Additionally, these home care businesses will be potential customers for Living Centers' rehabilitation therapy and pharmacy operations. At September 30, 1996, the Company was negotiating a letter of intent to acquire Colorado HomeCare which was executed subsequent to year end. The locations of this home health care provider's operations complement the Company's long-term care operations in Colorado. Geriatric Physician Management Services. Effective September 30, 1996 the Company purchased a 75 percent interest in American Geriatric Management Services, Inc. ("AGMS"). AGMS is a management services organization created to provide support services, record keeping, administrative management, budget development, and managed care contracting services to geriatric and long-term care physician group practices. Geriatric and long-term care physicians whose professional practices to be managed by AGMS make their professional medical services available on-site at skilled nursing, nursing, subacute, hospice and assisted living facilities. The Company expects that its association with AGMS will assist in expanding the complex care capabilities of its facilities. Living Centers intends to participate in the development of - 4 - 5 several regionally concentrated management service organizations which will provide services to long-term care physicians in the Company's key geographic markets. The Company believes that its association with AGMS will enable it to expand physician coverage at its long-term care facilities, thereby increasing the level and quality of services provided. This association should therefore make the Company more attractive to managed care providers. Living Centers - DevCon Divestiture. In September 1996, Living Centers divested its Living Centers - DevCon, Inc. subsidiary ("DevCon") which provided training and habilitation services to individuals with mental retardation and developmental disabilities (see Note 2 to the Consolidated Financial Statements). DevCon operated over 80 centers and group homes with approximately 400 beds in Florida and 1,750 beds in Texas and relied primarily on Medicaid for reimbursement. In recent years the revenues for this operation had grown at a slower rate than those associated with the Company's skilled nursing business. This divestiture is consistent with the Company's strategy of focusing on its senior health care services business. LONG-TERM CARE -- BUSINESS STRATEGY. The Company's strategy is to utilize its long-term care facilities as a platform to deliver a comprehensive array of senior health care services. As a consequence, the Company seeks to control the significant components of its care continuum, while diversifying its sources of revenue and positioning itself to be responsive to a variety of payors. Through the provision of cost-effective quality care, the Company believes that it can enhance profitability. Several current focuses of the long-term care group are as follows: Occupancy Level Increase. During fiscal year 1996, the Company significantly invested in the development of a Marketing and Managed Care Department, led by a Corporate Vice President of Marketing, to assist the facility-based staff to increase the occupancy of Living Centers' long-term facilities. Several new systems, including a comprehensive facility level training program and a demographic mapping system, are in the process of implementation which will enhance census development and retention. Due to the significant fixed cost component within the Company's long-term care business, marginal increases in a facility's occupancy are typically disproportionately more profitable. Assisted Living Expansion. Currently the Company has eleven assisted living facilities in various phases of development. This development is targeted for markets where Living Centers already has a presence with skilled nursing facilities. The residents of these assisted living centers will have the option to choose Living Centers' skilled nursing facilities when their needs for care increase. Additionally, these assisted living centers provide an additional customer base for the Company's institutional pharmacy and rehabilitation services businesses as well as for certain emerging service lines such as home health and geriatric physician management services. Hospice Care Expansion. A major initiative for the Company over the next several years is to expand the coverage of its hospice care capabilities within its key markets. Currently, hospice services are provided at approximately 140 of the Company's facilities by more than 100 different hospice providers. The Company's strategy is to offer Heart of America Hospice services in Living Centers' targeted markets as an alternative provider to these current third party providers. The Company's objective is to capture a meaningful portion of the hospice services provided within its long-term care facilities by offering the availability of consistent, quality hospice services to its residents. Complex Care Capability Enhancement. Typically, higher acuity, more complex services command higher fees and often times are more profitable. Furthermore, the provision of these services in a skilled nursing facility can be more cost-effective than in a hospital based acute care environment. The Company continually reviews its ancillary service offerings in an effort to serve the complex care needs of the patient population within its service areas. Closely aligned with this objective is Living Centers' recent acquisition of a controlling interest in American Geriatric Management Services, which will enhance complex care capabilities. Managed Care Positioning. Managed care payors require services for their members that encompass Living Centers' service and business lines. The Company's Corporate Director of Managed Care is responsible for all aspects of relationship management with this emerging payor including responsibility for moving the managed care patient seamlessly along Living Centers' continuum of care. 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. The Company is in the process of enhancing its management information systems to better accommodate additional needs of this payor; these enhancements will include the development and implementation of patient outcome systems. - 5 - 6 Facility Portfolio Optimization. The Company continuously reviews its existing long-term franchise area for facility expansion opportunities including the construction of new facilities. Additionally, acquisition opportunities within Living Centers existing geographic markets are analyzed. Furthermore, Living Centers continuously reviews its portfolio of long-term care centers for facilities which no longer meet the Company's operating, financial, or strategic objectives. During fiscal year 1996, the Company divested or closed six long-term care facilities, not including the divestiture of Living Centers - DevCon. The Company prefers to own rather than lease its long-term care facilities. During fiscal year 1996, the Company converted five leases to owned facilities. REHABILITATION THERAPY SERVICES GROUP In June 1995, the Company acquired Rehability Corporation ("Rehability") which became the foundation for the rehabilitation services group of the Company. In July 1995, the Company acquired MedTherapy Rehabilitation Services, Inc., as part of its merger with The Brian Center Corporation. In August 1995, the Company acquired Therapy Management Innovations, Inc. These three entities were subsequently combined to form the Company's rehabilitation services group which operates through its subsidiaries as American Rehabilitation Services, Inc. (including its subsidiaries "ARS"). During fiscal year 1996, Living Centers re-organized ARS into four distinct operating divisions aligned along service lines as opposed to the previous organization which was largely along geographic lines. The ARS service continuum includes nursing facility based rehabilitation, outpatient clinics, hospital rehabilitation management, and therapy management consulting. The following describes these four operating divisions: American Therapy Services. American Therapy Services ("ATS") employs licensed therapists to provide physical, occupational, and speech therapy to nursing facility residents through contracts with over 600 skilled nursing facilities throughout the United States (approximately 500 of which are unaffiliated with the Company). The ultimate payor for these services is typically Medicare; in some instances ATS invoices the skilled nursing facility which in turn bills Medicare, in other instances ATS invoices Medicare directly. Rehability Centers. Rehability Centers operates approximately 134 outpatient rehabilitation clinics in 19 states and provides home health services through its agencies located in Tennessee and Texas. The primary focus of the clinics is rehabilitation services related to occupational and sports injuries. The primary payor for these services is typically private employers (or their insurance carriers) for benefits associated with occupational injuries or worker's compensation claims. Rehability Hospital Services. Rehability Hospital Services manages approximately 50 hospital rehabilitation departments on a contract basis. Therapy Management Innovations. Therapy Management Innovations ("TMI") provides a variety of rehabilitation management consulting services to subacute 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. Prior to the TMI acquisition, TMI managed substantially all of the Company's rehabilitation therapy programs in its long-term care services group. REHABILITATION THERAPY SERVICES -- BUSINESS STRATEGY. Concurrent with the reorganization of ARS during 1996, ARS' financial and management information systems were modified to support this service line configuration. Several current focuses of this business group are as follows: Clinic and Contract Therapy Performance Monitoring. The enhanced financial systems now in place provide management the capability to monitor the financial and operating performance of individual clinics and contract therapy contracts. Based upon this information, the Company can better manage its portfolio of both outpatient clinics and therapy contracts. During fiscal year 1996 ARS closed approximately 30 clinics that no longer met the Company's financial or operating objectives. Additionally, during the fiscal year, ARS terminated over 100 nursing home contracts which did not meet the Company's performance objectives. This portfolio management process is ongoing. Overhead Reduction. During the year, as part of the service line re-alignment process, ARS streamlined its operations. This process resulted in the elimination of approximately 325 full time equivalent employees, representing 9% of ARS's work force. Most of these eliminated positions were non-revenue producing. ARS is in the process of centralizing - 6 - 7 its collection and billing functions; previously these functions were field based at approximately 100 locations nationwide. This process was completed for the ATS division during the fourth quarter of fiscal year 1996 and is expected to be completed for the balance of the ARS divisions during fiscal year 1997. The Company believes that this initiative will reduce overhead costs and improve the receivable collection process. Therapist Productivity Improvement. This tactical initiative has two objectives. First, ARS has open positions for therapists, many of which relate to additional available contracts with Living Centers' facilities, where rehabilitation services are provided by third party contractors. To address therapist recruiting, ARS has significantly enhanced its capabilities and intensified its recruiting activities. Second, until late in fiscal year 1996 when new management information systems were introduced, the Company was unable to monitor therapist productivity. Currently, approximately 60% of Living Centers' contract therapy needs are being serviced by ATS. The Company's objective for fiscal year 1997 is to further increase this internal penetration. Third Party Sales Improvement. With the realignment of ARS' operations complete, the four business lines can refocus on marketing these programs to nonaffiliated entities. ARS continues to review and evaluate its continuum of rehabilitation services for service and product line development opportunities. The Company believes that there exists cross-selling opportunities for its ancillary service lines. The same types of customers procure services from the ATS and TMI divisions, and American Pharmaceutical Services; however these customers are largely unrelated. PHARMACEUTICAL SERVICES GROUP American Pharmaceutical Services ("APS"), the institutional pharmaceutical services group of the Company, specializes in meeting the needs of health care providers in subacute and long-term care settings by providing pharmaceutical supplies and programs. APS and its subsidiaries provide services and products to approximately 1,000 long-term care centers (800 of which are unaffiliated with Living Centers) with more than 100,000 long-term care beds through 31 full-service institutional pharmacies. APS provides pharmacy dispensing, infusion therapy and specialty patient care products such as urologicals, wound care products and other ancillary supplies. APS also offers a comprehensive array of services and supplies to meet the needs of patients with higher acuity levels, such as intravenous (IV) and enteral therapy. In 1996, APS expanded its product line to include respiratory therapy and orthotic supplies and services. In addition, APS provides pharmacy consulting services, specializing in long-term care drug regimen reviews, medication procedures and regulatory monitoring. APS provides full clinical support for its products through long-term care facility staff education and quality assurance programs. PHARMACEUTICAL SERVICES -- BUSINESS STRATEGY. APS is the fastest growing of Living Centers' three business groups. Revenue increases have been derived from both internally generated sales as well as through acquisitions. Internally generated sales include adding new customer accounts as well as selling additional products and services to existing customers. Approximately 25% of APS's revenue base is derived from Living Centers' facility base with the balance associated with non-affiliated third party customers. Correspondingly, APS has effectively penetrated Living Center's long-term care facility franchise, fulfilling approximately 90% of its pharmaceutical service requirements. While APS' franchise area covers 21 states, its operations are concentrated largely in the same states where Living Centers operates facilities. The Company believes that APS is the largest long-term care institutional pharmacy provider in the states of Arizona, Colorado, Florida, Texas and North Carolina. Several current focuses of this business unit are as follows: Acquisition Integration. Since September 1994, when APS became a wholly-owned subsidiary of the Company, APS has acquired 12 institutional pharmacy-related businesses with 22 branch operations, six of which were added through the acquisition of Allied Pharmacy Management in September 1996. During fiscal year 1997, APS will continue to integrate the operations added in fiscal 1996 in order to realize operating efficiencies. Internal Growth Continuation. APS will continue to focus on internal growth by expanding product lines and adding new accounts. Purchasing Power and Overhead Leverage. APS purchases significant volumes of pharmaceutical products and has initiated a centralized purchasing program designed to lower its product procurement costs. APS has also developed and is implementing a preferred drug list (formulary) primarily directed at the geriatric population it serves. This program - 7 - 8 is expected to assist APS reduce its product procurement cost. Furthermore, as APS continues to grow its revenues, there exists opportunities to more efficiently leverage overhead costs. Targeted Acquisitions. The Company expects to continue to grow externally through acquisition and continuously reviews institutional pharmacy and pharmacy-related acquisition candidates. These potential opportunities could be within markets where APS already has a presence, or within new markets not currently served by the Company. APS' strategy is to be a significant provider in the markets in which it operates as an institutional pharmacy provider. SOURCES OF REVENUE The Company derives its net revenues from Medicaid, Medicare and private pay sources. As of September 30, 1996, distinct part units in 191 of the Company's 206 long-term care centers were certified to participate in the Medicare program. The Company classifies as private pay revenue all of the payments and receivables from individuals who pay directly for services without governmental assistance and revenues from managed care companies, commercial insurers, health maintenance organizations and other charge-based contracted payment sources. Veterans Administration payments are also included in private pay revenue and are received pursuant to renewable contracts negotiated periodically. For a summary of the approximate percentages of total resident revenues derived from the various sources of payment, see "Management's Discussion and Analysis of Financial Condition and Results of Operations". GOVERNMENT REGULATION Various aspects of the Company's business are regulated by the federal government and by the states where the Company has operations. Regulatory activities affect the Company's business activities by controlling its growth, requiring licensure and certification for its facilities and health care services, and controlling reimbursement for services provided. The Company believes it is in substantial compliance with these regulatory requirements, but there can be no assurance that the Company will be able to maintain such compliance, or will not be required to expend significant amounts to do so. MEDICARE AND MEDICAID. The Medicare program was enacted in 1965 to provide a nationwide, federally funded health insurance program for the elderly. The program is divided into Part A and Part B, each of which has separate rules and requirements and separate funding sources. Medicare Part A, the Hospital Insurance Program (42 U.S.C. Section 1395c et seq.) Is financed primarily through mandatory taxes on workers' wages. Part A pays for hospital, skilled nursing, home health agency, hospice, and dialysis services determined to be medically necessary for the individual patient. Medicare Part B, the Supplementary Medical Insurance program (42 U.S.C. Section 1395j et seq.), is a voluntary medical benefits plan in which eligible individuals can enroll to receive benefits in addition to those available under Part A. Under Part B, each beneficiary must pay a monthly premium, meet a deductible towards the cost of covered items and services determined to be medically necessary, and pay 20 percent of the Medicare allowable charge as coinsurance on most covered items. Non-institutional services, including physician services, outpatient hospital services, durable medical equipment, and laboratory services, among others, are paid under Medicare Part B. The Medicare program is administered by the Health Care Financing Administration (HCFA) of the U.S. Department of Health and Human Services (HHS). HCFA adopts regulations, and issues interpretive memoranda and program manuals providing detailed explanation of the Medicare program. The payment operations of the Medicare program are handled by intermediaries (under Part A) and carriers (under Part B) who are insurance companies and Blue Cross/Blue Shield plans which contract with the Secretary of HHS to make Medicare payments to providers in a particular geographic region. Individual intermediaries and carriers issue transmittals, bulletins, notices, and general instructions to providers and suppliers in their respective areas to facilitate the administration of the Medicare program, but are required to follow the Medicare statute, HCFA regulations, HCFA transmittals, and the program manuals. Within these requirements, intermediaries and carriers are granted broad discretion to establish particular guidelines and procedures for making Medicare coverage determinations and payments, including prior approval, utilization limits, and specific documentation. - 8 - 9 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. The federal and state governments share the costs of such aid pursuant to statutory formulae. The Secretary of HHS has primary federal responsibility for administering the Medicaid program. The responsibility has been delegated to HCFA, whose Medicaid Bureau carries out this delegation. States are not required to participate in the Medicaid program. States which choose to participate, however, must administer their Medicaid programs in accordance with federal law, the implementing regulations and policies of the Secretary and their approved state plans. A state becomes eligible to receive federal funds by submitting to the Secretary a state plan for medical assistance. The federal Medicaid statute establishes minimum standards for state plans in such areas as administration, eligibility, coverage of services, quality and provision of services, and payment for services. States have significant latitude, within these standards, to determine the mix of services and structure of their state Medicaid programs. The state plan must be amended by appropriate submission to the Secretary whenever necessary to reflect changes in federal statutes, regulations, policies, court decisions, or material changes in any phase of state law, policy, or operations. All of the Company's nursing facilities, assisted living facilities, home health and hospice agencies, pharmacies, and rehabilitation clinics, and rehabilitation clinics are licensed under applicable state law and are certified or approved (other than its assisted living facilities) as providers or suppliers under one or more of the Medicare or Medicaid programs, as applicable. Licensure and certification standards may vary from jurisdiction to jurisdiction, but generally focus upon physical environment and plant safety, administration, staffing and personnel, professional and support services, patient rights, and quality. Once a facility or service provider becomes licensed and certified, it must continue to comply with federal, state and local license requirements in addition to local building and life-safety codes. Long term care facilities must comply with certain requirements to participate either as a skilled nursing facility under Medicare or a nursing facility under Medicaid. Regulations effective October 1, 1990, pursuant to the Omnibus Budget Reconciliation Act of 1987, obligate facilities to demonstrate compliance with requirements relating to resident rights, resident assessment, quality of care, quality of life, physician services, nursing services, pharmacy services, dietary services, rehabilitation services, infection control, physical environment, and administration. Survey, certification, and enforcement procedures to be used by state and federal survey agencies to determine facilities' level of compliance with the participation requirements for Medicare and Medicaid were adopted by HCFA regulations effective July 1, 1995. The requirements include (I) that surveys focus on residents' outcomes of care and (ii) that all deviations from participation requirements will be considered deficiencies, but that all deficiencies will not constitute noncompliance. The regulations identify alternative remedies against facilities and specify the categories of deficiencies for which they will be applied. These remedies include: temporary management; denial of payment for new admissions; denial of payment for all residents; civil money penalties of $50 to $10,000 per day of violation; facility closure and/or transfer of residents in emergencies; directed plans of correction; and directed in- service training. The facilities and service providers operated by the Company's subsidiaries in the normal course of business are subject to annual inspections and complaint investigations. The Company has developed a management system to test compliance with the various standards and requirements, including training on regulatory requirements, and initiating and maintaining on-going quality assessment and improvement programs. The Company believes that its facilities and service providers are in substantial compliance with applicable regulatory requirements. From time to time, however, the Company receives notice of noncompliance with various requirements for Medicare/Medicaid participation or state licensure. The Company reviews such notices for factual correctness, and based on such review, either takes appropriate corrective action or challenges the stated basis for the allegation of noncompliance. In most cases, the Company and the reviewing agency will agree upon the measure to be taken to bring the facility or provider service 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, or the threatened decertification of a facility or provider from participation in the Medicare and/or Medicaid programs, or licensure revocation. While in certain instances facilities or providers have been fined, decertified, or had licensure sanctions imposed, the Company has been able to reinstate the certifications and satisfactorily resolve the fines and licensure sanctions. No such enforcement action against a facility or provider has had a material adverse impact on the Company. In all cases during fiscal year 1996, cited deficiencies were remedied before any facilities or providers were decertified or threatened licensure sanctions became effective. - 9 - 10 Medicare and Medicaid reimbursements are generally determined from annual cost reports filed by the Company which are subject to audit by the respective agency administering the programs. The Company believes that adequate provisions for loss have been recorded to reflect any adjustments which could result from audits to these cost reports. Adjustments to the Company's cost reports have not had a material adverse effect on the Company's operating results. 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 health care 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 health care programs. The statute contains exceptions for certain discounts, group purchasing organizations, employment relationships, waivers of coinsurance by community health centers, health plans, and practices defined in regulatory safe harbors. Pursuant to the "Health Insurance Portability and Accountability Act of 1996", effective January 1997, Congress has expanded the sanctions applicable to health care fraud. False claims are prohibited pursuant to criminal and civil statutes. Criminal provisions at 42 U.S.C. Section 1320a-7b 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. The Ethics in Patient Referrals Act, ("Stark I"), effective January 1, 1992, generally prohibited physicians from referring Medicare patients to clinical laboratories for testing, if the referring physician (or a member of the physician's immediate family) had a "financial relationship", through ownership or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II") expanding Stark I by prohibiting physicians from referring Medicare and Medicaid patients to an entity for the furnishing of a list of "designated health services" including physical therapy, occupational therapy, home health services, and others. If such a financial relationship exists, the entity is generally prohibited from claiming payment for such services under the Medicare or Medicaid programs. Compensation arrangements are generally exempted from the Stark provisions if, among other things, the compensation to be paid is set in advance, does not exceed fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties. Other provisions in the Social Security Act authorize other penalties, including exclusion from participation in Medicare and Medicaid, for various billing-related offenses. HHS can also initiate permissive exclusion actions for such improper billing practices as submitting claims "substantially in excess" of the provider's usual costs or charges, failure to disclose ownership and officers, or failure to disclose subcontractors and suppliers. Executive Order 12549 prohibits any corporation or facility from participating in federal contracts if it or its principals have been disbarred, suspended or are ineligible, or have been voluntarily excluded, from participating in federal contracts. A principal has been defined as an officer, director, owner, partner, key employee or other person with primary management or supervisory responsibilities. The Company expects that business practices of providers and financial relationships between providers will be subject to increased scrutiny as health care reform efforts continue at federal and state levels. Although the Company has contractual arrangements with some health care providers, the Company believes that its practices are not in violation of these federal and state prohibitions. The Company cannot reasonably predict whether enforcement activities will increase at the federal or state level or the effect of any such increase on its business. In the summer of 1995, a major anti-fraud demonstration project, "Operation Restore Trust", was announced by the OIG. A primary purpose for the project is to scrutinize the activities of health care providers who are reimbursed under the Medicare and Medicaid programs. Initial investigative efforts have focused on skilled nursing facilities, home health and hospice agencies, and durable medical equipment suppliers in Texas, Florida, New York, Illinois, California, and Louisiana. With the exception of Louisiana, the states were targeted because they collectively compromise 40% of Medicare and Medicaid beneficiaries. 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, - 10 - 11 and others to call to report suspected violations. The OIG has indicated it is specifically looking for evidence of excessive services to residents in nursing home, "drop shipments" of supplies for a resident that has not been properly assessed, billing for services not rendered, billing for equipment or supplies which were not used, the use of untrained staff, falsified plans of care, forged physician signatures, and kickbacks. Identified problems will result in increased audit scrutiny, letter inquiries or subpoenas for data and records, and onsite investigations. Enforcement actions could include criminal prosecutions, or suit for civil penalties, and/or Medicare program exclusion. While the Company does not believe that it is in violation of any such laws or is the target of any such investigation, there can be no assurance that substantial amounts will not be expended to cooperate with any such investigation or to defend allegations arising therefrom. If it were found that any of the Company's practices failed to comply with the anti- fraud provisions, the Company could be materially adversely affected. The Company is unable to predict the effect of future administrative or judicial interpretations of these laws, or whether other legislation or regulations on the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take, or their impact on the Company. There can be no assurance that such laws will ultimately be interpreted in a manner consistent with the Company's practices. CERTIFICATE OF NEED. Certificate of Need ("CON") statutes and regulations control the development and expansion of health care services and facilities in certain states. The CON process is intended to promote quality health care at the lowest possible cost and to avoid the unnecessary duplication of services, equipment and facilities. CON or similar laws generally require that approval must be obtained from the designated state health planning agency for certain acquisitions and capital expenditures, and 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. State approvals are generally issued for a specified maximum expenditure and require implementation of the proposal within a specified period of time. Failure to obtain the necessary state approval can result in the inability to provide the service, to operate the facility, to complete the acquisition, addition or other change, and can also result in the imposition of sanctions or adverse action on the facility's license and adverse reimbursement action. Most states in which the Company operates have adopted CON or similar laws that regulate the locations operated by the Company's subsidiaries, and/or the services provided. Some states, however, including, but not limited to Colorado, Texas, and Wyoming, do have other state laws which control the addition of nursing facility beds in a service area. CONs or other 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. ENVIRONMENTAL LAWS. Certain federal and state laws govern the handling and disposal of medical, infectious and hazardous waste. Failure to comply with those laws or the regulations promulgated thereunder could subject an entity covered by these laws to fines, criminal penalties and other enforcement actions. The Company has developed policies with respect to the handling and disposal of medical, infectious and hazardous waste to assure compliance by each of its centers with those laws and regulations. The Company believes that it is in material compliance with applicable laws and regulations governing medical, infectious and hazardous waste. OSHA. Federal regulations promulgated by the Occupational Safety and Health Administration impose additional requirements on the Company with regard to protecting employees from hazards in the workplace, including exposure to blood-borne pathogens. The Company cannot predict the frequency of compliance monitoring or enforcement actions that it may be subject to by governing agencies and there can be no assurance that the regulations will not adversely affect the operations of the Company and other long-term care providers. WORK OPPORTUNITY CREDIT. The targeted jobs credit expired on December 31, 1994. The 1996 Small Business Act (P.L. 104-188), Section 1201, replaced the targeted jobs credit under Section 51 with the work opportunity credit. The credit is available on an elective basis for employers hiring individuals from one or more of eight targeted groups, and generally, is equal to 35% of qualified first-year wages. However, no credit is allowed for wages paid unless the individual is employed by the employer for at least 180 days or 400 hours. In addition, the individual is not treated as a member of a targeted group unless certification requirements are met. The credit is available for wages paid or incurred to a qualified individual who begins work for an employer after September 30, 1996, and before October 1, 1997. COMPETITION The long-term health care industry is segmented into a variety of competitive areas which market similar services. These competitors include nursing homes, hospitals, extended care centers, retirement centers and communities, and home - 11 - 12 health and hospice agencies. The Company's centers historically have competed on a local basis with other long-term care providers, and the Company's competitive position has varied from center to center within the various communities it serves. During fiscal year 1996, however, the Company invested in the development of a Marketing and Managed Care Department, led by a Company Vice President of Marketing to assist facilities-based staffs increase the occupancies of the Company's long-term care centers. Several new systems are in the process of implementation which are designed to enhance census development and retention. Significant competitive factors include the quality of care provided, reputation, location and physical appearance of the long-term care centers 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 centers that is covered by Medicaid and Medicare and the location of the centers significantly affect a center's competitive position in its market. Competition in the institutional pharmaceutical and the rehabilitation services markets ranges from small local operators to companies which are national in scope and distribution capability. The Company cannot assure that its marketing initiative and the implementation of marketing systems will result in significant increases in census at its long-term care centers. 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"). These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements as a result of various factors, including, but not limited to, the following: (i) In recent years, an increasing number of legislative proposals have been introduced or proposed by Congress and in some state legislatures which would effect major changes in the healthcare system. However, the Company cannot predict the form of healthcare reform legislation which may be proposed or adopted by Congress or by state legislatures. Accordingly, the Company is unable to assess the effect of any such legislation on its business. There can be no assurance that any such legislation will not have a material adverse impact on the future growth, revenues and net income of the Company. (ii) The Company derives substantial portions of its revenues from third-party payors, including government reimbursement programs such as Medicare and Medicaid, and some portions of its revenues from 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. The Company cannot predict whether or what proposals or cost-containment measures will be adopted or, if adopted and implemented, what effect, if any, such proposals might have on the operations of the Company. (iii) The Company is subject to extensive federal, state and local regulations governing licensure, conduct of operations at existing facilities, construction of new facilities, purchase or lease of existing facilities, addition of new services, certain capital expenditures, cost-containment and reimbursement for services rendered. The failure to obtain or renew required regulatory approvals or licenses, the delicensing of facilities owned, leased or operated by the Company or the disqualification of the Company from participation in certain federal and state reimbursement programs could have a material adverse effect upon the operations of the Company. (iv) There can be no assurance that the Company will be able to continue its substantial growth or be able to fully implement its strategy to develop and its business strategies for its long-term care, pharmaceutical, or rehabilitation therapy services groups. - 12 - 13 EMPLOYEES The Company employs approximately 29,000 individuals, including approximately 5,000 registered and licensed practical nurses, 10,000 nursing assistants, over 2,000 therapists, 200 pharmacists and 1,500 employees who work at the corporate and field offices. ITEM 2. PROPERTIES As of September 30, 1996, Living Centers operated 206 long-term care and assisted living centers with 23,746 licensed beds in 13 states. The Company's lease arrangements for its long-term care centers are generally "triple net" leases, as is typical in the industry, whereby the Company rather than the landlord is responsible for all property taxes, insurance coverages and maintenance on the property. The average remaining life of the leases, including renewal options exercisable solely by the Company, is 11.8 years. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. The centers are generally refurbished or remodeled on a five to seven-year cycle. The following table lists, at September 30, 1996 by state, the total number of licensed beds and the number of centers owned, leased and managed by the Company. Licensed beds represent the number of beds for which a license has been issued and may vary from the actual beds available for use.
OWNED LEASED MANAGED TOTAL -------------- -------------- -------------- -------------- STATE CENTERS BEDS CENTERS BEDS CENTERS BEDS CENTERS BEDS Texas 51 5,854 42 4,656 1 120 94 10,630 North Carolina 29 3,429 3 458 1 91 33 3,978 Colorado 18 1,902 8 819 -- -- 26 2,721 Louisiana -- -- 6 1,260 -- -- 6 1,260 Georgia 2 270 6 706 -- -- 8 976 Alabama 7 820 -- -- -- -- 7 820 Arizona 2 215 5 545 -- -- 7 760 Nebraska 7 612 -- -- -- -- 7 612 Florida 2 295 1 266 1 51 4 612 Wyoming 3 385 2 140 -- -- 5 525 South Carolina 2 265 -- -- 1 120 3 385 Virginia -- -- 5 343 -- -- 5 343 Mississippi 1 124 -- -- -- -- 1 124 ---- ------ -- ----- --- --- --- ------ Total 124 14,171 78 9,193 4 382 206 23,746 === ====== == ===== === === === ======
Certain of the above properties serve as collateral for various mortgage debt instruments or capitalized lease obligations. See Note 5 to the Consolidated Financial Statements. The Company regularly reviews its portfolio of properties and intends to divest those centers which it believes do not meet patient care or financial performance standards. - 13 - 14 In addition to long-term care centers, at September 30, 1996 the Company operated 134 outpatient rehabilitation clinics in 19 states and 31 institutional pharmacies in 11 states, as follows:
OUTPATIENT INSTITUTIONAL STATE CLINICS PHARMACIES Alabama . . . . . . . . . . . . . . . . . -- 1 Arizona . . . . . . . . . . . . . . . . . 1 2 California . . . . . . . . . . . . . . . . 5 -- Colorado . . . . . . . . . . . . . . . . . -- 2 Connecticut . . . . . . . . . . . . . . . 3 -- Florida . . . . . . . . . . . . . . . . . 15 9 Georgia . . . . . . . . . . . . . . . . . 1 1 Illinois . . . . . . . . . . . . . . . . . -- 1 Indiana . . . . . . . . . . . . . . . . . -- 1 Iowa . . . . . . . . . . . . . . . . . . . 1 -- Kansas . . . . . . . . . . . . . . . . . . 11 -- Kentucky . . . . . . . . . . . . . . . . . 1 -- Louisiana . . . . . . . . . . . . . . . . 6 2 Maryland . . . . . . . . . . . . . . . . . 3 -- Mississippi . . . . . . . . . . . . . . . 8 -- Nevada . . . . . . . . . . . . . . . . . . 1 -- New Jersey . . . . . . . . . . . . . . . . -- 1 North Carolina . . . . . . . . . . . . . . 21 2 South Carolina . . . . . . . . . . . . . . 10 -- Tennessee . . . . . . . . . . . . . . . . 10 -- Texas . . . . . . . . . . . . . . . . . . 28 9 Virginia . . . . . . . . . . . . . . . . . 7 -- Washington . . . . . . . . . . . . . . . . 1 -- Wyoming . . . . . . . . . . . . . . . . . 1 -- -- -- Total . . . . . . . . . . . . . . . . 134 31 === ==
Substantially all of the Company's outpatient rehabilitation clinics and institutional pharmacy facilities are leased under "triple net" leases. The Company considers its properties to be in good operating condition and suitable for the purposes for which they are being used. In connection with the Rehability acquisition, the Company adopted a restructuring plan in which it expects to close a total of 30 outpatient rehabilitation centers prior to March 31, 1997. See Note 9 to the Consolidated Financial Statements. Certain of the above properties serve as collateral for various mortgage debt instruments or capitalized lease obligations. See Note 5 to the Consolidated Financial Statements. The Company regularly reviews its portfolio of properties and intends to divest those clinics and/or pharmacies which it believes do not meet quality or financial performance standards. - 14 - 15 ITEM 3. LEGAL PROCEEDINGS As is typical in the health care industry, the Company is subject to claims that its services have resulted in resident injury or other adverse effects, the risks of which are greater for higher acuity residents receiving services from the Company than for other long-term care residents. The Company has, from time to time, been subject to such negligence claims and other litigation. In addition, resident, visitor, and employee injuries also subject the Company to risk of litigation. While the Company believes that the ultimate resolution of pending legal proceedings will not have a material adverse effect on the Company's business or financial condition, there can be no assurance that any current or future claims will not have a material adverse effect on the Company's business or financial condition. Although the Company maintains insurance with coverages it deems appropriate in respect of such potential liabilities, there can be no assurance that such insurance will continue to be available at acceptable rates or that claims in excess of the current insurance coverages or claims not covered by insurance will not be asserted against the Company. Moreover, insurance coverage in certain states is not available to cover punitive damages, and proceedings involving claims of punitive damages are pending in certain of those states. See "Liquidity and Capital Resources" included in Management's Discussion and Analysis of Financial Condition and Results of Operations. An attorney in the Civil Division of the United States Department of Justice has advised Living Centers that a complaint under the Civil False Claims Act has been filed, under seal, against BCC and one of its subsidiaries, MedTherapy Rehabilitation Services, Inc. ("MedTherapy"), in the federal district court for the Western District of North Carolina. The Department of Justice has reviewed the sealed complaint and advised counsel for BCC and MedTherapy that the plaintiff alleges, in general, that BCC and MedTherapy caused certain therapists to make improper therapy record entries with respect to therapy screening services and that any claims filed with Medicare for payments which are based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. Under the Civil False Claims Act, any person who knowingly files false claims is liable for treble damages and penalties ranging from $5,000 to $10,000 for each false claim. Because the complaint is under seal, Living Centers does not know the number of claims alleged or the specific factual allegations set forth in the complaint. The Department of Justice has the right to intervene and pursue the claim on behalf of the plaintiff, but has not made a decision on intervention as of the date hereof. If the Department of Justice does not intervene, the plaintiff may continue to pursue the claim individually. BCC and MedTherapy have advised the Department of Justice that, based upon the information disclosed thus far by the Department of Justice, they dispute, and will vigorously contest, the claims of the plaintiff. Although the Company believes, based on discussions with counsel, that the plaintiff's claims are merit less, no assurances can be given that, if the plaintiff were to prevail in his claim, the resulting judgment would not have a material adverse effect upon the Company. Moreover, in connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless Living Centers 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 Common Stock. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. - 15 - 16 ITEM 4A. EXECUTIVE MANAGEMENT OF THE REGISTRANT The following table sets forth certain information concerning executive officers of the Company:
NAME AGE OFFICE HELD Edward L. Kuntz . . . . . . . . . . . . . . . . . . . . 51 Chairman, Chief Executive Officer, President and Director Leroy D. Williams . . . . . . . . . . . . . . . . . . . 55 Executive Vice President, Chief Operating Officer and Director Charles B. Carden . . . . . . . . . . . . . . . . . . . 51 Executive Vice President and Chief Financial Officer Donald C. Beaver . . . . . . . . . . . . . . . . . . . 56 Vice Chairman Pauline Bonner . . . . . . . . . . . . . . . . . . . . 47 Area President, Long Term Care Group Sydney K. Boone, Jr. . . . . . . . . . . . . . . . . . 51 Vice President, Acquisitions and Development David W. Budke . . . . . . . . . . . . . . . . . . . . 33 Vice President, Program Development James P. Dorn . . . . . . . . . . . . . . . . . . . . . 49 Vice President, Human Resources Boyd P. Gentry . . . . . . . . . . . . . . . . . . . . 37 Vice President, Investor Relations and Treasurer Kelly R. Gill . . . . . . . . . . . . . . . . . . . . . 41 President, Therapy Services Group Laura Kislowski . . . . . . . . . . . . . . . . . . . . 42 Vice President, Marketing William R. Korslin . . . . . . . . . . . . . . . . . . 47 President, Pharmaceutical Services Group Keith Krein, M.D. . . . . . . . . . . . . . . . . . . . 44 Medical Director and Vice President, Professional Services John D. Lee, III . . . . . . . . . . . . . . . . . . . 50 Area President, Long Term Care Group James L. Martin, Jr. . . . . . . . . . . . . . . . . . 38 Vice President, Purchasing Kenneth Morgan . . . . . . . . . . . . . . . . . . . . 53 Area President, Long Term Care Group Karuppanna Muthuswamy . . . . . . . . . . . . . . . . . 51 Vice President, Information Services Susan Thomas Whittle . . . . . . . . . . . . . . . . . 48 Vice President, General Counsel and Secretary
There are no family relationships existing among any of the above listed officers. Officers are elected annually and serve at the discretion of the Board of Directors. Each of the executive officers has employment agreements that provide for annual salaries ranging from $113,000 to $500,000 for periods of employment up to 36 months and severance payments of up to 36 months of salary plus certain benefits. The severance arrangements also provide for an additional 12 months of compensation and benefits in the event of a change in control of the Company. Mr. Kuntz became Chief Executive Officer and a Director in December 1991, Chairman in January 1992 and President in November 1993. He served as President until February 1996. He joined Living Centers as Executive Vice President in February 1985. Prior to joining the Company, Mr. Kuntz was employed by ARA since 1978 and was general counsel to ARA Living Centers (the predecessor of Living Centers). Mr. Williams became Executive Vice President in December 1991 and a Director in January 1992. He was appointed Chief Operating Officer in August 1995, and President in February 1996. He joined Living Centers in 1978 as Regional Controller of Living Centers--Eastern Region. From May 1983 to February 1985, Mr. Williams was Financial Vice President for Living Centers--Texas. In March 1985, he was appointed Vice President--Finance and became Senior Vice President--Finance in January 1991. Mr. Carden was appointed Executive Vice President and Chief Financial Officer effective October 1996. Previously, he was Chief Financial Officer of Leaseway Transportation Corp. where he was employed for fourteen years. He also has had various supervisory and analytical positions in corporate finance with Ford Motor Company. Mr. Beaver was appointed Vice Chairman concurrent with the acquisition by the Company of the outstanding stock of The Brian Center Corporation in July 1995. Previously, Mr. Beaver had been the sole shareholder of The Brian Center Corporation. - 16 - 17 Ms. Bonner became Area President, for the Rocky Mountain Area, in February 1996. She has held various operational positions since joining the Company in 1980, including District Director of Operations and Area Vice President for the Rocky Mountain Area. Mr. Boone became Vice President, Acquisitions and Development and Associate General Counsel in November 1993. He had served as Assistant General Counsel since joining the Company in May 1989. Previously, he was in private law practice. Mr. Budke became Vice President, Program Development in November 1993. He previously held various marketing and public relation positions at the Company since joining the Company in September 1987. Mr. Dorn became Vice President, Human Resources in March 1996. Previously, he was Vice-President - Human Resources for Curtin Matheson Scientific, and has held human resources management positions for over twenty years. Mr. Gentry became Vice President, Investor Relations and Treasurer in August 1995. Previously, Mr. Gentry was a Senior Vice President of NationsBank. Mr. Gentry served NationsBank and its predecessors in a variety of corporate finance and corporate banking positions for over 12 years prior to joining the Company. Ms. Kislowski became Vice President, Marketing in August 1995. Previously, Ms. Kislowski had significant experience in long-term care sales and marketing positions, most recently with Regency Health Services. Mr. Korslin has served as President of APS since May 1994. Mr. Korslin joined APS in July 1987 as General Manager, Enteral Services. From 1989 through 1992, he served as Eastern Area Vice President of APS and, from 1992 to 1994, Mr. Korslin was Senior Vice President in charge of all field operations of APS. He was appointed as a Vice President of Living Centers in September 1995. Mr. Lee became Area President, for the Southeast Area in February 1996. He previously held the position of Area Vice President for the Southeast Area since joining the Company in May 1994. Previously, Mr. Lee had held Senior Management positions with long-term care companies located in the Eastern and Southeastern United States. Mr. Martin became Vice President, Purchasing in May 1996. Mr. Martin joined the Company through the acquisition of The Brian Center Corporation in July 1995, where he had been Controller. Mr. Morgan became Area President, for the Texas Area in February 1996. He previously held the position of Area Vice President for the Texas Area since joining the Company in January 1995. Previously, Mr. Morgan had owned and operated long-term care facilities, and held Senior Management positions with long-term care companies located in Texas and the Midwestern United States. Dr. Krein became Medical Director and Vice President, Professional Services in November 1989. Previously, he was regional medical director for Spectrum Emergency Care, Inc. (a subsidiary of ARA) from September 1984 until he joined the Company in November 1989. Mr. Muthuswamy became Vice President, Information Services in January 1991. Previously, he was Director of Operation Services Development for ARASERVE (an ARA business sector) from March 1978 until he joined the Company in May 1989. Ms. Whittle became Vice President, General Counsel and Secretary in September 1993. Previously, she was a partner with the law firms of Clark, Thomas & Winters of Austin, Texas and Wood, Lucksinger & Epstein, a national health care law firm. - 17 - 18 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 is traded on the New York Stock Exchange under the symbol "LCA." The high and low sales prices for each quarter for the last two fiscal years is presented in the table below:
Fiscal Year 1996 Fiscal Year 1995 ----------------------- -------------------------- High Low High Low Quarter Ended ------------- December 31 35 25 1/2 34 1/4 29 1/4 March 31 41 31 1/2 38 1/4 32 3/4 June 30 39 1/4 32 5/8 37 1/2 25 1/4 September 30 28 1/8 20 3/4 34 7/8 267/16
NUMBER OF STOCKHOLDERS As of November 25, 1996 there were approximately 512 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 the common stock. The Company's Bank Credit Facility and various other note agreements contain covenants which effectively limited the payment of cash dividends as of September 30, 1996 to $24.4 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 5 to the Consolidated Financial Statements. - 18 - 19 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 of BCC as though the transaction occurred on September 30, 1990; such transaction has been accounted for using the pooling of interests method of accounting. 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, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 INCOME STATEMENT DATA: (1) Net revenues.............................. $ 1,114,491 $ 893,869 $ 708,873 $ 576,140 $ 511,838 Income from operations.................... 89,556 57,005(2) 49,468 38,464 30,868 Interest expense, net.................. 12,461 10,817 10,894 8,998 11,001 Equity earnings/minority interests..... (156) (204) 1,603 1,582 1,210 Net Income............................. 43,180 24,234 26,616 20,899 14,249 Pro forma taxes(4)........................ -- 599 899 899 726 Pro forma net income(4)................... 43,180 23,635 25,717 20,000 13,523 Earnings per share........................ $ 2.13 $ 1.27(3) $ 1.56 $ 1.32 $ 0.92 Pro forma earnings per share(4)........... $ 2.13 $ 1.24(3) $ 1.51 $ 1.26 $ 0.87 Weighted average number of shares outstanding (in thousands)............ 20,315 19,034 17,080 15,824 15,551 OPERATING STATISTICS: Number of centers (end of period)......... 206 294 288 267 261 Average occupancy rate.................... 83.9% 85.1% 85.2% 84.3% 84.3% Percentage of patient revenues from: Private................................ 31.9% 25.5% 23.7% 24.0% 25.2% Medicare............................... 25.5 23.9 17.5 13.6 9.9 Medicaid............................... 42.6 50.6 58.8 62.4 64.9 Percentage operating margin............... 8.0% 6.4%(2) 7.0% 6.7% 6.0%
SEPTEMBER 30, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 BALANCE SHEET DATA: Working capital........................... $ 101,091 $ 34,631 $ 14,955 $ 15,960 $ 17,258 Total assets.............................. 821,734 730,708 525,639 376,248 354,974 Long term debt, including current portion 276,448 216,910 206,097 135,409 145,956 Stockholders' equity...................... 329,315 303,596 172,018 119,432 105,521 Total capitalization...................... 605,763 520,506 378,115 254,841 251,477
- --------------------------- (1) Years prior to 1994 have been restated to reflect the implementation of SFAS 109. (2) Includes $14.3 million of non-recurring merger and acquisition and related costs associated with the BCC merger. Excluding these non-recurring merger and acquisition and related costs, the percentage operating margin would have been 8.0%. (3) Excluding non-recurring merger and acquisition and related costs in the amount of $14.3 million, earnings per share and proforma earnings per share would have been $1.93 and $1.90, respectively. (4) A pro forma income tax provision has been provided to reflect the estimated federal and state income taxes as if all BCC S corporations were taxable entities. See Note 1 to Consolidated Financial Statements. - 19 - 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides a diverse range of services in the health care continuum including long-term health care, rehabilitation therapy, and pharmaceutical services. Services provided at the Company's long-term care facilities, which comprise approximately 70% of the Company's total revenue, include long-term nursing services and specialty care services including assisted living services, subacute care, and care for individuals with Alzheimer's disease. The Company is currently expanding or developing additional specialty care services such as hospice care, geriatric physician management services and home health care. See Business - Long-Term Care Services Group. The Company's rehabilitation therapy group provides services to over 600 skilled nursing and other health care facilities, offers therapy program management services to long-term health care companies, and operates approximately 134 outpatient clinics. The pharmaceutical group operates 31 institutional pharmacies and provides services to more than 100,000 long-term health care beds through its various product lines. When the Company began its operations as a separate, publicly-traded company in 1992, it provided primarily long-term nursing services. From fiscal year 1992 through fiscal year 1995 it grew rapidly through acquisitions, adding specialty care services, rehabilitation therapy, and pharmaceutical services, as well as additional long-term care facilities. During this period the Company's net revenue increased from $351 million to $894 million and its net income, adjusted for non-recurring merger and acquisition costs in 1995, increased from $10.5 million to $36.1 million. During the fiscal year ending September 30, 1995 the Company completed several significant acquisitions including The Brian Center Corporation ("BCC"), Rehability, and TMI. Accordingly, the fiscal year ended September 30, 1996 was the first year that fully reflected the financial results from all of the Company's major acquisitions. The Company's net revenue for the fiscal year ended September 30, 1996 increased to $1.1 billion and net income, excluding non-recurring items, increased to $45.0 million. During the fiscal year ended September 30, 1996, the Company turned its focus to integrating the BCC, Rehability, and TMI operations and divesting its DevCon subsidiary, which provided training and habilitation services to individuals with mental retardation and developmental disabilities. During fiscal year 1996, the Company finalized a plan originating in June 1995 to restructure the operations and exit certain activities of ARS, including closing or downsizing unprofitable clinics and offsite contracts. See Note 9 to the Consolidated Financial Statements. The divestiture of DevCon was completed in September 1996 through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million in cash. The Company's results for the fiscal year ended September 30, 1996 and prior years reflect the inclusion of the DevCon operations. DevCon's net revenue and income from operations for fiscal year 1996 were $47.6 million and $5.7 million, respectively. The Company expects its reported earnings to reflect the effects of this divestiture until the proceeds from the divestiture are reinvested. The Company's strategy is to utilize its core long-term care facilities as a platform to deliver a comprehensive array of senior health care services. As a consequence, the Company seeks to control the significant components of its care continuum, while diversifying its sources of revenue and positioning itself to be responsive to a variety of payors. Through the provision of cost-effective quality care, the Company believes that it can enhance profitability. However, future operating performance will continue to be affected by the issues facing the senior health care industry including quality of care, occupancy levels, availability of nursing, therapy and other personnel, adequacy of funding of federal and state reimbursement programs in addition to the Company's continued expansion of its non-nursing home operations and its ability to control costs. - 20 - 21 RESULTS OF OPERATIONS The following table sets forth data from the statement of income expressed as a percentage of net revenues:
YEARS ENDED SEPTEMBER 30, -------------------------- 1996 1995 1994 Net Revenues: Nursing home 69.7% 82.6% 94.3% Non-nursing home: Pharmacy 11.4 10.4 4.0 Therapy 18.5 6.6 1.1 Other .4 .4 .5 ------ ------ ------ 100.0 100.0 100.0 ------ ------ ------ Costs and Expenses: Salaries and wages 40.9 40.3 42.0 Employee benefits 8.7 9.1 11.7 Nursing, dietary, and other supplies 5.4 6.3 6.6 Ancillary services 16.9 16.6 11.2 General and administrative 15.1 15.1 17.5 Depreciation and amortization 3.5 3.5 3.7 Provision for bad debts 1.5 1.3 .4 Life insurance proceeds (.2) -- -- Gain on sale (2.0) -- -- Impairment of long-lived assets 2.3 -- -- Other .3 -- -- Mergers and acquisition cost -- 1.4 -- ------ ------ ------ Income from operations 7.6 6.4 7.0 Interest expense, net 1.1 1.2 1.5 ------ ------ ------ Income before income taxes and equity earnings/ minority interest 6.5 5.2 5.5 Provision for income taxes 2.8 2.4 1.9 ------ ------ ------ Income before equity earnings/minority interest 3.7 2.8 3.6 Equity earnings/minority interest -- .1 .2 ------ ------ ------ Net income 3.7 2.8 3.8 Pro forma taxes (unaudited) -- .1 .1 ------ ------ ------ Pro forma net income (unaudited) 3.7% 2.1% 3.7% ====== ====== ======
-21- 22 Nursing home revenues are derived from two basic sources: routine services $(630.7 million or 81.2 % in fiscal year 1996) and ancillary services $(145.8 million or 18.8 % in fiscal year 1996) and are a function of occupancy rates in the long-term care facilities and the payor mix. Occupancy rates, as identified in the following table, decreased in fiscal year 1996 partially due to an increase in hospital-operated skilled units in key markets. The Company has invested in the marketing and managed care areas and has implemented an aggressive marketing program to increase census and improve quality mix. Years Ended September 30,
Years Ended September 30, --------------------------------- 1996 1995 1994 Weighted licensed bed count 25,498 26,355 26,617 Total average residents 21,405 22,428 22,669 Average occupancy 83.9% 85.1% 85.2%
Payor mix is the source of payment for the services provided and consists of private pay, Medicare and Medicaid. Private pay includes revenue from individuals who pay directly for services without governmental assistance, managed care companies, commercial insurers, health maintenance organizations, and Veteran's administration contractual payments. Managed care as a payor source to health care providers is expected to increase over the next several years. The Company has increased its managed care contracting capabilities and has created a system which allows the centralized case management of these patients within targeted markets. However, the impact to the Company of this increasing payor source 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. To the extent unfavorable changes in economic conditions impact payments under governmental or third-party payor programs, the Company would be adversely affected. See Business - Government 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, ------------------------------ 1996 1995 1994 Private pay 31.9% 25.5% 23.7% Medicare 25.5% 23.9% 17.5% Medicaid 42.6% 50.6% 58.8%
The increasing trend in the percentage of revenues derived from private pay and Medicare sources is attributable primarily to the growth in the Company's pharmacy and therapy operations. The revenue from these operations, which is generated primarily from private pay and Medicare sources, results in a reduction of the percentage of net revenue derived from the Medicaid program. In addition, average reimbursement rates for Medicare patients have increased more rapidly than for Medicaid residents due primarily to the higher reimbursement rates associated with the increase in acuity levels. Although cost reimbursement for Medicare residents generates a higher level of revenue per patient day, profitability is not proportionally increased due to the additional costs associated with the required higher level of care and other services for such residents. The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled with the applicable administrative agencies. The Company does not expect any differences between revenue recorded and as finally determined to have a significant effect on the Company's results of operations or financial position. See Note 1 to the Consolidated Financial Statements. - 22 - 23 Costs and expenses, excluding depreciation and amortization, primarily consist of salaries, wages, and employee benefits. Various federal, state, and local regulations impose, depending on the services provided, a variety of regulatory standards for the type, quality and level of personnel required to provide care or services. These regulatory requirements have an impact on staffing levels, as well as the mix of staff, and therefore impact total costs and expenses. See Business-Government 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 cost of the Company's various insurance programs, except worker's compensation. See Note 12 to the Consolidated Financial Statements. FISCAL 1996 COMPARED TO FISCAL 1995. Net revenues comprising nursing home and non-nursing home operations totaled $1.1 billion for the year ended September 30, 1996, an increase of $220.6 million or 24.7%, as compared to fiscal 1995. Nursing home operations contributed $38.1 million of the increase which included rate increases of $37.2 million and higher ancillary service billings resulting from the improvement in patient mix, primarily Medicare, of $22.6 million. Divesture of nursing home operations decreased revenue $19.6 million and lower census reduced revenue by $7.6 million. Non-nursing home operations contributed $182.5 million of the increase, consisting of $34.6 million from pharmacy operations, $146.5 million from therapy services and $1.4 million from medical supplies. Acquisitions, primarily Rehability, provided $177.0 million of the $182.5 million increase in non-nursing home revenue. Costs and expenses, including non-recurring items totaled, $1.0 billion for the year ended September 30, 1996, an increase of $188.1 million or 22.5%, as compared to fiscal 1995. Acquisitions, primarily Rehability and TMI, were $171.0 million of the increase and divestitures reduced total expenses by $24.3 million. Other increases include payroll and related $(15.8 million) and ancillary services $(28.4 million). The increase in ancillary services corresponds to the increase in ancillary revenue and the higher level of patient acuity as well as an increase in the cost of pharmaceuticals related to higher pharmacy services revenue. Non-recurring items reduced total costs and expenses in fiscal year 1996 by $1.1 million compared to the $12.4 million of merger and acquisition costs from the BCC purchase in fiscal 1995. Non-recurring items included a $2.0 million gain from the receipt of life insurance proceeds on the former President of the Rehabilitation Services Group. In addition the Company recognized a $22.5 million gain in September 1996 on the sale of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million. The Company also recorded non-recurring charges of $2.9 million primarily related to the closure of its medical supplies business and the write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement. Non-recurring items also included an impairment loss of $20.5 million related to nursing facilities with current period operating losses and certain other nursing facilities and goodwill where management believed an impairment existed as a result of the regulatory or competitive environment. 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. 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. See Note 8 to the Consolidated Financial Statements. Net interest expense totaled $12.5 million for the year ended September 30, 1996, an increase of $1.6 million or 15.2%, as compared to the same period for fiscal 1995. The increase reflects a full year of interest expense for fiscal 1996 versus three months of interest expense for fiscal 1995 on the additional debt incurred to acquire Rehability. The provision for income taxes increased $12.0 million in fiscal year 1996 but resulted in a lower effective tax rate of 43.8% compared to 47.1% in fiscal year 1995. The decrease in non-deductible merger and acquisition costs reduced the effective tax rate by 7.2% while the elimination of the Targeted Jobs Tax Credit, increased non-deductible goodwill amortization, and other items resulted in an increase of 3.9%. - 23 - 24 FISCAL 1995 COMPARED TO FISCAL 1994. Net revenues totaled $893.9 million for the year ended September 30, 1995, an increase of $185.0 million or 26.1%, as compared to fiscal 1994. Nursing home operations contributed $69.7 million of the increase, which includes $18.7 million of acquisitions and approximately $32.4 million in rate increases and improvements in patient mix over the prior period (primarily in the area of Medicaid and Medicare services). Ancillary revenue in the nursing home operations increased approximately $29.7 million due to higher acuity levels and an increase in Medicare patients. Nursing home revenues were lower by $11.1 million due to divestitures. Non-nursing home operations contributed $115.3 of the increase, which includes $68.0 million of pharmacy acquisitions, primarily APS, and $51.2 million in therapy services, primarily Rehability and TMI. Costs and expenses totaled $836.9 million for the year ended September 30, 1995, an increase of $177.5 million or 26.9%, as compared to the same period for fiscal 1994. Acquisitions contributed $125.3 million of the increase, which includes acquisitions, primarily APS$(60.0 million), Rehability $(41.2 million), TMI $(5.3 million) and nursing homes $(18.8 million). Other major expense increases included $22.5 million in payroll related expenses, $3.0 million in nursing dietary and other supplies, $19.1 million in ancillary services (primarily from the higher resident acuity level and the increase in the number of Medicare residents in the Company's nursing home operations), $2.4 million in general and administrative expenses and $2.0 million in bad debt expense. All fiscal 1995 expense categories expressed as a percentage of revenues reflect a significant change from fiscal 1994. This percentage shift in expense categories is attributable to the inclusion of APS's cost of products sold in the expense category "operating and administrative" and, to a lesser extent, the lower labor intensity of the APS operation. Non-recurring merger and acquisition and related costs were $14.3 million due to the acquisition of Rehability. Also, divestitures decreased total expenses by $11.1 million. Net interest expense totaled $10.8 million for the year ended September 30, 1995, a decrease of $.01 million or .7%, as compared to the same period for fiscal 1994. Interest income from the Company's insurance subsidiary increased and the Company used the proceeds from the February 1995 public offering of Common Stock to retire existing debt. However, the effects of the common stock offering were partially offset by additional debt incurred to acquire Rehability. Equity earnings/minority interests incurred a loss of $.2 million for the year ended September 30, 1996, a decrease of $1.8 million, as compared to the same period for fiscal 1994. This decrease is the result of APS recorded as a fully consolidated subsidiary for fiscal 1995 as opposed to an unconsolidated equity investment (49% ownership) for fiscal 1994. Net income totaled $24.2 million for the year ended September 30, 1995, a decrease of $2.4 million, or 8.9%, as compared to the same period for fiscal 1994. The decrease reflects the impact of the nonrecurring merger and acquisition and related costs of $14.3 million, most of which is non-deductible for federal income tax purposes. Excluding non-recurring merger and acquisition and related costs, net income would have increased $7.8 million or 27.0% from fiscal 1994. SEASONALITY The Company's revenues and operating income generally fluctuate from quarter to quarter. This seasonality is related to a combination of factors which include the timing of Medicaid rate increases, the number of work days in the period, and seasonal census cycles. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $21.4 million at September 30, 1996, a $3.5 million increase from September 30, 1995 and working capital was $101.0 million, an increase of $66.5 million during fiscal year 1996. Cash provided by operations was $31.8 million or $34.6 million less than fiscal year 1995. Net income of $43.1 million, non-cash items totaling $44.9 million and an increase in accrued expenses of $17.5 million contributed to the cash provided by operations. The increase in income taxes payable is primarily the taxes due on the gain on the sale of DevCon stock which will be paid in the first quarter of fiscal year 1997. These items were offset by the reduction in accounts payable of $13.8 million due to the timing of payments and an increase in receivables of $69.6 million. The increase in receivables was primarily attributable to acquisitions $(15.6 million), timing of collections on Medicare cost reports and other rate adjustments $(13.1 million), receivables due to LCA Insurance Company, Ltd. (see Note 12 to the Consolidated Financial Statements) from third-party insurance companies $(11.7 million), and an increase in average days outstanding, net of allowance, $(13.0 million). - 24 - 25 Excluding the $47.5 million in proceeds from the disposition of DevCon, cash used in investing activities was $114.2 million in fiscal 1996 compared to $139.9 million in fiscal year 1995. Investing activities in fiscal year 1996 included six pharmacy related acquisitions $(60.3 million), conversion of five previously leased long-term care facilities to an ownership position $(14.8 million), construction of five assisted living facilities and expansion of existing facilities $(13.3 million), the acquisition of a 50% interest in a hospice operation $(2.8 million), and routine capital expenditures. Capital commitments on four assisted living facilities remaining under construction and expansion of existing long-term care facilities totaled $9.6 million at September 30, 1996. These commitments are expected to be funded by cash from operations or the Bank Credit Facility. Financing activities provided $38.4 million during fiscal 1996. During the fourth quarter the Company entered into an amended bank credit facility (the "Bank Credit Facility") with a group of banks pursuant to which the banks agreed to provide $500 million to the Company. A complete description of the Bank Credit Facility is included in Note 5 to the Consolidated Financial Statements. Total debt increased $57.4 million as funds were used in investing activities and the purchase of $20.0 million of the Company's common stock in accordance with a share repurchase program. The shares are to be utilized over the next several years to fulfill the Company's obligations under its various employee benefit programs. In October 1996 the Company entered into a leasing program, initially totaling $70.0 million, which will be used as the primary funding mechanism for future assisted living and skilled nursing facility construction, lease conversions, and other facility acquisitions. The company's long-term strategy in managing working capital is to maintain substantial available commitments under bank credit agreements or other financial agreements to finance short-term capital requirements in excess of internally generated cash. IMPACT OF INFLATION The health care industry is labor intensive. Wages and other labor-related costs are especially sensitive to inflation. Increases in wages and other labor-related costs as a result of inflation, or the increase in minimum wage requirements effective October 1996, without a corresponding increase in Medicaid and Medicare reimbursement rates would adversely impact the Company. - 25 - 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS To the Stockholders and Board of Directors of Living Centers of America, Inc. We have audited the accompanying consolidated balance sheets of Living Centers of America, Inc. and subsidiaries as of September 30, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1996. 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 Living Centers of America, 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 Living Centers of America, Inc. and subsidiaries at September 30, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in the fourth quarter of 1996 the Company changed its method of accounting for impairment of long-lived assets in accordance with the adoption of SFAS 121. /s/ ERNST & YOUNG LLP Houston, Texas November 25, 1996 - 26 - 27 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share amounts)
September 30, ------------------------ ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 21,394 $ 17,886 Receivables (less allowances of $22,783 and $16,500) 204,462 151,969 Notes receivable, net 3,756 3,403 Receivable from affiliates -- 2,698 Supplies 16,582 13,264 Prepaid expenses 6,450 10,503 Deferred income taxes 19,644 17,264 Other (including patient trust funds of $3,768 and $4,506) 9,273 9,865 ---------- ---------- TOTAL CURRENT ASSETS 281,561 226,852 PROPERTY AND EQUIPMENT: Land, buildings and improvements 359,137 356,725 Furniture, fixtures and equipment 104,363 92,996 Leased property under capital leases 12,551 13,465 ---------- ---------- 476,051 463,186 Less accumulated depreciation 186,333 169,815 ---------- ---------- 289,718 293,371 GOODWILL, NET 188,508 145,402 RESTRICTED INVESTMENTS 31,040 36,622 INVESTMENT IN UNCONSOLIDATED AFFILIATE 3,016 205 NOTES RECEIVABLE, NET 10,780 10,781 OTHER ASSETS 17,111 17,475 ---------- ---------- $ 821,734 $ 730,708 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current maturities of long-term debt $ 13,746 $ 34,981 Accounts payable 60,210 73,076 Accrued payroll and related expenses 60,089 55,957 Accrued property taxes 4,995 5,131 Patient trust funds 3,768 4,506 Accrued income taxes payable 16,921 4,534 Other accrued expenses 20,741 14,036 ---------- ---------- TOTAL CURRENT LIABILITIES 180,470 192,221 LONG-TERM DEBT, NET OF CURRENT MATURITIES 262,702 181,929 LONG-TERM INSURANCE RESERVES 26,093 22,986 MINORITY INTERESTS 289 604 DEFERRED INCOME TAXES AND OTHER NONCURRENT LIABILITIES 22,865 29,372 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, par value $ .01; 4,650,000 shares authorized; none issued -- -- Series A - Junior participating preferred stock, par value $.01; 350,000 authorized and reserved; none issued -- -- Common stock, par value $ .01; 75,000,000 and 35,000,000 shares authorized; 20,267,920 shares issued 203 203 Capital surplus 228,171 227,099 Retained earnings 120,733 77,553 Unrealized loss on securities available-for-sale (18) -- Treasury stock at cost - 767,053 and 77,109 shares (19,774) (1,259) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 329,315 303,596 ---------- ---------- $ 821,734 $ 730,708 ========== ==========
The accompanying notes are an integral part of these financial statements. - 27 - 28 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts)
Years Ended September 30, -------------------------------------- 1996 1995 1994 NET REVENUES Nursing home revenue: Net patient services $ 767,747 $ 724,924 $ 656,493 Other 8,799 13,556 12,306 Non-nursing home revenue: Pharmacy services 127,439 92,843 28,574 Therapy services 205,785 59,278 7,934 Medical supplies and other 4,721 3,268 3,566 ---------- ---------- ---------- 1,114,491 893,869 708,873 COSTS AND EXPENSES: Salaries and wages 455,702 360,571 297,509 Employee benefits 96,716 82,007 83,231 Nursing, dietary and other supplies 60,427 55,991 46,505 Ancillary services 188,937 148,746 79,195 General and administrative 168,333 134,697 123,771 Depreciation and amortization 39,214 31,158 26,072 Provision for bad debts 16,666 11,220 3,122 Non-recurring items: Life insurance proceeds (2,015) -- -- Gain on sale (22,451) -- -- Impairment of long-lived assets 20,489 -- -- Other 2,917 -- -- Merger and acquistion costs -- 12,474 -- ---------- ---------- ---------- 1,024,935 836,864 659,405 ---------- ---------- ---------- INCOME FROM OPERATIONS 89,556 57,005 49,468 INTEREST EXPENSE, NET: Interest expense 20,128 18,322 16,043 Interest income (7,667) (7,505) (5,149) ---------- ---------- ---------- 12,461 10,817 10,894 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES AND EQUITY EARNINGS/MINORITY INTEREST 77,095 46,188 38,574 PROVISION FOR INCOME TAXES 33,759 21,750 13,561 ---------- ---------- ---------- INCOME BEFORE EQUITY EARNINGS/ MINORITY INTEREST 43,336 24,438 25,013 EQUITY EARNINGS/MINORITY INTEREST (156) (204) 1,603 ---------- ---------- ---------- NET INCOME $ 43,180 $ 24,234 $ 26,616 ========== ========== ========== PRO FORMA DATA (UNAUDITED): INCOME BEFORE PRO FORMA TAXES $ 43,180 $ 24,234 $ 26,616 PRO FORMA TAXES -- 599 899 ---------- ---------- ---------- PRO FORMA NET INCOME $ 43,180 $ 23,635 $ 25,717 ========== ========== ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 20,315 19,034 17,080 ========== ========== ========== EARNINGS PER SHARE $ 2.13 $ 1.27 $ 1.56 ========== ========== ========== PRO FORMA EARNINGS PER SHARE $ 2.13 $ 1.24 $ 1.51 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. - 28 - 29 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars and shares in thousands)
Common Stock Unrealized Treasury Stock --------------- Capital Retained Loss on ---------------- Shares Amount Surplus Earnings Securities Shares Amount Total ------ ------ -------- --------- ---------- ------ ------ ------ BALANCE, SEPTEMBER 30, 1993 15,941 $ 159 $ 93,058 $ 30,591 - 274 $(4,376) $ 119,432 Issuance of stock as partial consideration of Vari-Care merger transaction 1,193 12 25,492 25,504 Transaction costs associated with Vari-Care merger transaction (349) (349) Net income 26,616 26,616 Transfer S corporation earnings, net of distributions (9) 9 0 Stockholder distributions (2,414) (2,414) Funding of employee benefit plans 274 (55) 870 1,144 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax 103 (44) 708 811 Issuance of warrants in APS purchase transaction 1,274 1,274 ------ ----- -------- --------- ---- --- ------- --------- BALANCE, SEPTEMBER 30, 1994 17,134 171 119,843 54,802 - 175 (2,798) 172,018 Net income 24,234 24,234 Transfer S corporation earnings, net of distributions (898) 898 0 Stockholder distributions (2,381) (2,381) Proceeds from additional public offering 2,875 29 99,032 99,061 Issuance of stock as consideration for TMI merger transaction 258 3 8,320 8,323 Funding of employee benefit plans 656 (44) 678 1,334 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax 146 (54) 861 1,007 ------ ----- -------- --------- ---- --- ------- --------- BALANCE, SEPTEMBER 30, 1995 20,267 203 227,099 77,553 - 77 (1,259) 303,596 Net income 43,180 43,180 Funding of employee benefit plans 736 (46) 846 1,582 Funding of options exercised under 1992 Employee Stock Option Plan, net of tax 336 (40) 639 975 Purchase of treasury stock 776 (20,000) (20,000) Unrealized loss on securities available-for-sale (18) (18) ------ ----- -------- --------- ---- --- ------- --------- BALANCE, SEPTEMBER 30, 1996 20,267 $ 203 $228,171 $ 120,733 $(18) 767 $(19,774) $ 329,315 ====== ===== ======== ========= ==== === ======= =========
The accompanying notes are an integral part of these financial statements. - 29 - 30 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Years Ended September 30, -------------------------------------- 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 43,180 $ 24,234 $ 26,616 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 39,214 31,158 26,072 Income taxes deferred (9,141) (3,429) (9,409) Equity earnings/minority interest 156 204 (1,603) Provision for bad debts 16,666 11,220 3,122 Gain on sale (22,451) -- -- Impairment of long-lived assets 20,489 -- -- Additions to asset valuation reserve -- -- 4,998 Changes in noncash working capital: Receivables (69,634) (35,387) (16,729) Receivable from affiliates 2,698 (844) 1,925 Supplies (519) 258 (863) Prepayments, including insurance 4,053 (4,106) 175 Other current assets (221) (2,073) (1,923) Accounts payable (13,774) 34,194 4,706 Accrued expenses and other current liabilities 17,465 8,860 (1,241) Changes in other noncurrent liabilities, primarily insurance 2,694 756 7,999 Other 933 1,389 1,588 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 31,808 66,434 45,433 CASH FLOWS USED IN INVESTING ACTIVITIES: Acquisitions and investments (68,710) (87,602) (91,216) Purchases of property and equipment (53,366) (38,946) (23,473) Proceeds from sale of DevCon 47,500 -- -- Disposals of property, equipment and other assets 2,690 7,022 8,533 Restricted investments 5,564 (19,822) (16,200) Additions to notes receivable (1,519) (3,488) (22,507) Collections on notes receivable 981 3,173 21,905 Other 209 (198) (2,862) ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (66,651) (139,861) (125,820) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 1,469 219,342 120,835 Net draws under credit line 194,615 1,955 10,000 Repayment of long-term debt (138,708) (247,461) (66,466) Proceeds from additional public offering -- 99,061 -- Issuance of warrants for APS purchase -- -- 1,274 Issuance of common stock for Vari-Care merger -- -- 25,152 Purchase of treasury stock (20,000) -- -- Shareholder distributions -- (2,381) (2,414) Funding of options under 1992 employee stock purchase plan and employee benefit plans 975 1,007 1,152 ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 38,351 71,523 89,533 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,508 (1,904) 9,146 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,886 19,790 10,644 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,394 $ 17,886 $ 19,790 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. - 30 - 31 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Living Centers of America, Inc. (the "Company" or "Living Centers"), engages in the operation of long-term care facilities, specialty health care services, pharmacy and rehabilitation services through its operating subsidiaries. The Company's operations are geographically concentrated and specifically focused in key markets, including Texas, North Carolina, and Colorado. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries and exclude all significant intercompany transactions. In February 1995, the Company issued an additional 2,875,000 shares of its common stock in an additional public offering. The net proceeds of the transaction, approximately $99.1 million, were used to retire existing debt and for working capital and general corporate purposes. Effective July 31, 1995, the Company issued approximately 6,479,000 additional shares of its common stock in a merger transaction with The Brian Center Corporation and 16 related S corporations (collectively the "BCC Entities"). The merger was accounted for using the pooling of interests methodology and the accompanying financial statements have been restated to include the accounts of the BCC Entities as though the transaction occurred on September 30, 1992. See Note 3. CASH MANAGEMENT The Company maintains a centralized cash management system in which cash receipts are transferred daily from facility and ancillary company depository accounts to a cash concentration account. Cash is then used to provide for normal working capital requirements, including reduction of the outstanding credit lines or placement of excess funds in commercial grade investments. To the extent that cash transferred from the facility and ancillary company depository accounts is not sufficient to provide for cash disbursement requirements, a cash advance is obtained from the Bank Credit Facility. See Note 5. Cash equivalents consist of temporary investments with original maturities of three months or less. NOTES RECEIVABLE, NET Notes receivable, net, aggregating $14.5 million and $14.2 million at September 30, 1996 and 1995, 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 12.25% and maturities through 2012, including approximately $12.5 million due after 1999. Notes receivable, net at September 30, 1996 and 1995, include reserves for potential uncollectible amounts of $3.5 million. Management believes the collateral values are sufficient to recover the net carrying amount of these notes in the event of default. RECEIVABLE FROM AFFILIATES Included in the merger with the BCC Entities (see Note 3) were receivables from various related corporations (which were not part of the merger transaction) and the major stockholder of the BCC Entities. Such receivables originated from services or products provided by the BCC Entities to such corporations or the major stockholder and were repaid during fiscal year 1996. SUPPLIES Supplies, consisting principally of pharmaceutical and medical supplies, are valued at the lower of cost (first-in, first out) or market. - 31 - 32 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost and include interest on funds borrowed to finance construction. Capitalized interest was $.2 million for 1996 and none in 1995 or 1994. Maintenance and repairs are charged to operations currently and replacements and significant improvements are capitalized. Depreciation and amortization are provided over the estimated useful lives of the assets on a straight-line basis as follows: Buildings .............................. 25-40 years Building improvements .................. 10-15 years Furniture, fixtures and equipment....... 3-15 years
GOODWILL, NET Goodwill represents primarily an allocation from the Company's previous parent as a result of a management buyout transaction which is amortized on a straight-line basis over 40 years and the excess of purchase price over fair market value of assets acquired in various purchase transactions which is amortized on a straight line basis over 30 years. Accumulated amortization at September 30, 1996 and 1995 was $11.7 million and $5.5 million, respectively. Amortization of goodwill charged to expense was $5.6 million, $2.8 million and $1.2 million for the three years ended September 30, 1996, 1995 and 1994, respectively. IMPAIRMENT OF LONG-LIVED ASSETS In September 1996 the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121). SFAS 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. Goodwill is also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of these assets, including goodwill, is measured by comparing the carrying amount of the asset to its fair value with any excess of carrying value over fair value written off. Fair value is based on market prices where available, an estimate of market value, or determined by various valuation techniques including discounted cash flow. See Note 8. Prior to adoption of SFAS 121 the Company performed its analyses of impairment of long-lived assets by consideration of the projected undiscounted cash flows on an entity-wide basis. RESTRICTED INVESTMENTS Restricted investments represent cash and other investments that have been designated to pay insurance claims of the Company's wholly-owned insurance subsidiary. The invested funds restricted to pay insurance claims have been classified as available-for-sale securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and are recorded at their estimated market value. See Note 4. INVESTMENT IN UNCONSOLIDATED AFFILIATE Investment in unconsolidated affiliate at September 30, 1996 primarily consists of a 50% owned interest in Heart of America Hospice, LLC, a Kansas-based hospice. This investment is recorded under the equity method of accounting. - 32 - 33 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) Investment in unconsolidated affiliate at September 30, 1995 consists of a 50% owned interest in Charlotte/Advance, Inc. (a corporation which partially owns and operates three long-term care facilities), which is recorded using the equity method. This investment was sold during fiscal year 1996. At September 30, 1995, the Company also held minority interests in an institutional pharmacy and a joint venture operation in American Rehabilitation Services, Inc. ("ARS"). Both were recorded using the equity method of accounting. Prior to September 30, 1994, the Company owned a 49% interest in American Pharmaceutical Services, Inc. ("APS"), which was recorded using the equity method. APS provides nutritional and infusion therapy services, as well as pharmacy services, at selected Company facilities. See Note 3. The Company's equity earnings in APS's net income for fiscal year 1994 was $1.7 million and is reflected as equity earnings in the Consolidated Statements of Income. On September 30, 1994, the Company acquired the remaining 51% of the outstanding stock of APS and the investment in unconsolidated affiliate was eliminated as part of the purchase allocation. INCOME TAXES Noncurrent deferred income taxes arise primarily from timing differences resulting from using accelerated depreciation for tax purposes and reserves for uninsured losses not deductible in the current period. Current deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and financial reporting purposes which are expected to reverse within one year. See Note 10. The Company filed a consolidated federal income tax return the year ended September 30, 1995 which included pre-merger (non BCC) operations and will continue to file on a consolidated basis for subsequent years. Federal and state income tax payments made (including the BCC Entities) during fiscal 1996, 1995 and 1994 were $31.5 million, $21.2 million and $16.4 million, respectively. The various corporations (exclusive of the S corporations) included in the BCC Entities filed consolidated tax returns through the date of the merger. For state income tax purposes, each corporation within the federal consolidated group filed a separate income tax return. The S corporations included in the merger are not subject to income taxes as their attributes flow through to their individual stockholders; accordingly, the accompanying consolidated financial statements do not include a provision for income taxes with respect to the earnings of these entities through July 31, 1995. A pro forma income tax provision has been provided to reflect the estimated federal and state income taxes as if all of the S corporations were taxable entities. This estimate is based on the maximum effective federal and state income tax rates in effect during the years presented. Effective August 1, 1995, all of these corporations became taxable entities and the operations of these companies are included in the consolidated tax return of Living Centers. TREASURY STOCK During fiscal year 1996, the Company acquired 775,740 shares of treasury stock on the open market for a total cost of $20.0 million. The shares repurchased are primarily intended to be used as part of a plan to fund the employer's contribution to the Company's 401(k) Plan and Deferred Retirement Incentive Plan and to fund employee purchases made under the Company's Employee Stock Purchase Plan. See Note 16. NET REVENUES Revenues are recorded in the period in which services are provided at established rates whether or not collection in full is anticipated. Contractual adjustments and the results of other arrangements for providing services at less than established rates are reported as deductions to arrive at net revenues. Contractual adjustments include differences between established billing rates and amounts estimated by management as reimbursable under various cost reimbursement formulas or contracts in effect. An appropriate provision for bad debt expense is included as an operating expense and a corresponding reserve for doubtful accounts is reflected in net receivables to reduce gross receivables to an amount actually expected to be collected. - 33 - 34 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The administrative procedures associated with the Medicare cost reimbursement program generally preclude final determination of amounts due the Company until cost reports are audited or otherwise reviewed and settled with the applicable administrative agencies. Normal estimation differences between final settlements and amounts recorded in previous years are generally reported as current year contractual adjustments. The Company does not expect any differences between revenue recorded and as finally determined to have a significant effect on the Company's results of operations or financial position. Medicare revenues represented 26%, 24% and 18% and Medicaid revenues represented 43%, 51%, 59% of net revenue for fiscal years 1996, 1995 and 1994, respectively. 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 will be required to provide pro-forma disclosures of net income and earnings per share as if the fair-value method of accounting had been applied. The Company is required to adopt SFAS 123 for the year ending September 30, 1997. As the Company expects to retain their current accounting method, SFAS 123 will not have an impact on the Company's results of operation or financial position. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events, they may ultimately differ from actual results. OTHER Certain prior year amounts have been reclassified to conform with the 1996 presentation. NOTE 2. DIVESTITURES In September 1996, the Company completed the divestiture of its DevCon operations, which provided training and habilitation services to individuals with mental retardation and developmental disabilities, through the recapitalization and subsequent sale of the majority of DevCon's stock for $47.5 million in cash. The Company will retain a small ownership interest in the recapitalized company. Proceeds from the divestiture were utilized to reduce debt related to various acquisitions. - 34 - 35 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) NOTE 3. ACQUISITIONS FISCAL YEAR 1996 ACQUISITIONS In May 1996, the Company acquired a 50% interest in Heart of America Hospice, a Kansas based hospice company, for $2.8 million in cash. In June 1996, the Company acquired certain assets of Lahr Pharmacy, Inc. and related companies for $13.4 million in cash. An additional $3.5 million may be paid in connection with this acquisition if certain predetermined earnings targets are achieved during the subsequent three years. If paid, this additional consideration will be included in goodwill. The Company has not completed the evaluations necessary to determine the final purchase price allocation related to this acquisition. Effective September 1, 1996, the Company acquired the stock of Allied Pharmacy Management, Inc., which operates five institutional pharmacies and a home health care business in Florida, for $29.6 million in cash. The Company has not completed the evaluations necessary to determine the final purchase price allocation related to the this acquisition. The Company also acquired other previously leased long-term care facilities, institutional pharmacies, and therapy operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. FISCAL YEAR 1995 ACQUISITIONS On June 30, 1995, Living Centers completed a merger with Rehability Corporation in which it acquired all of the outstanding stock of the company through a cash tender offer of $11.50 per share. In the transaction, the Company paid approximately $88.1 million in cash for the stock and various transaction costs and assumed approximately $36 million in debt. The name of the acquired company was subsequently changed to American Rehabilitation Services, Inc. ("ARS" or "Rehability"). The transaction was recorded using the purchase method of accounting. The allocation of purchase price includes approximately $81.9 million of goodwill which will be amortized over a 30-year period. Effective August 1, 1995 the Company issued approximately 258,000 shares of its common stock valued at $8.3 million in exchange for all of the capital stock of Therapy Management Innovations, Inc. and related entities ("TMI"). The transaction was recorded using the purchase method of accounting. The allocation of purchase price includes approximately $7.9 million of goodwill which will be amortized over a 30-year period. The following information presents the results of operations on a pro forma basis as though the APS, Rehability and TMI transactions all occurred on October 1, 1993. Information is presented for informational purposes only and may not be indicative of actual operating results that would have been achieved. All amounts are in thousands, except per share amounts.
Years Ended September 30, --------------------------- 1995 1994 Net revenues .......................... $1,041,228 $ 941,297 Net Income ............................ 26,893(a) 25,296 Earnings per share .................... $ 1.37(a) $ 1.46
- ----------- (a) Excluding non-recurring merger and acquisition and other related costs of $14.3 million, net income and earnings per share would have been $38.8 million and $2.02, respectively. - 35 - 36 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) On July 31, 1995, the Company acquired all of the outstanding stock of The Brian Center Corporation and 16 related S corporations (collectively the "BCC Entities") in exchange for approximately 6,479,000 shares of its common stock in a merger transaction which was accounted for as a pooling of interests. In addition, the Company paid $3.7 million in cash to acquire various minority interests associated with several of the BCC affiliates. The Company used a portion of its bank credit facility to retire approximately $70.0 million of existing debt of BCC. The retained earnings of the S corporations $(1.8 million at July 31, 1995 and $2.6 million at September 30, 1994 and 1993) have been reclassified to Capital Surplus. Financial statements for periods prior to the merger have been restated to reflect the financial position and results of operations of the combined companies as if they had merged on September 30, 1992. Separate results of operations of the companies prior to the acquisition are summarized below (in thousands):
Ten Months Year Ended July 31, Ended 1995 September 30, (unaudited) 1994 Net Revenues: Living Centers ............... $529,405 $498,633 The BCC Entities ............. 183,127 210,240 -------- -------- Combined ..................... $712,532 $708,873 ======== ======== Income From Operations(a): Living Centers ............... $ 37,310 $ 33,269 The BCC Entities ............. 10,004 16,199 -------- -------- Combined ..................... $ 47,314 $ 49,468 ======== ======== Net Income: Living Centers ............... $ 20,110 $ 18,718 The BCC Entities ............. 2,109 7,898 -------- -------- Combined ..................... $ 22,219 $ 26,616 ======== ======== Pro Forma Net Income: Living Centers ............... $ 20,110 $ 18,718 The BCC Entities ............. 1,510 6,999 -------- -------- Combined ..................... $ 21,620 $ 25,717 ======== ========
- ------------- (a) Includes merger and acquisition expenses of $4.5 million for Living Centers and $1.3 million for BCC Entities. In addition to the above, the Company has acquired other long-term care facilities and five separate pharmaceutical operations as part of several smaller transactions, primarily for cash. All such acquisitions were recorded using the purchase method of accounting. - 36 - 37 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) FISCAL YEAR 1994 ACQUISITIONS On September 30, 1994, the Company completed a transaction in which it acquired the remaining 51% of the common stock of Abbey Pharmaceutical Services, Inc. The name of the acquired company was subsequently changed to American Pharmaceutical Services, Inc. ("APS"). In the transaction, the Company paid $20.5 million in cash and issued warrants to purchase 250,000 shares of common stock of the Company at $35 per share. The Company valued the warrants, which can be exercised anytime within seven years after the transaction closing date, at $1.3 million. The purchase agreement also contemplates the Company's preparing, upon request by Abbey Healthcare Group, Inc. (the previous 51% owner of APS), one registration statement for its resale of such shares. Any such registration statement is to become effective ten days after the filing by the Company of its next annual or quarterly report required to be filed with the Securities and Exchange Commission after such request, and is to remain effective for 60 days. Financing for the transaction was provided through the Company's Bank Credit Facility. The transaction was recorded using the purchase method of accounting. The allocation of purchase price includes approximately $24.8 million of goodwill which will be amortized over a 30-year period. NOTE 4. RESTRICTED INVESTMENTS Restricted investments at September 30, 1996 and 1995 included the following:
Gross Gross Estimated Amortized Unrealized Unrealized Market September 30, 1995 Cost Gains Losses Value - ------------------ ------- ------- ------- ------- U. S. Treasury Notes $14,187 $ 122 $ (186) $14,123 Asset-backed securities 5,859 21 (32) 5,848 Corporate debt securities 2,691 25 (27) 2,689 Mortgage-backed securities 1,401 59 -- 1,460 Repurchase Pooling Arrangement 5,892 -- -- 5,892 Cash 1,028 -- -- 1,028 ------- ------- ------- ------- Total $31,058 $ 227 $ (245) $31,040 ======= ======= ======= =======
Gross Gross Estimated Amortized Unrealized Unrealized Market September 30, 1995 Cost Gains Losses Value - ------------------ ------- ------- ------- ------- U. S. Treasury Notes $15,135 $ 432 (605) $14,962 Asset-backed securities 6,400 59 (7) 6,452 Corporate debt securities 2,701 43 (16) 2,728 Mortgage-backed securities 1,382 94 -- 1,476 Repurchase Pooling Arrangement 5,600 -- -- 5,600 Cash 5,404 -- -- 5,404 ------- ------- ------- ------- Total $36,622 $ 628 $ (628) $36,622 ======= ======= ======= =======
Proceeds from sales and maturities of investments were $14.5 million, $3.7 million and none in fiscal years 1996, 1995 and 1994, respectively. Gross gains of $0.1 million, $0.1 million, and none were realized during fiscal years 1996, 1995 and 1994. - 37 - 38 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The amortized cost and estimated market value of debt securities at September 30, 1996 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 Market Cost Value ------- ------- Due after one year through five years $ 9,664 $ 9,748 Due after five years through ten years 7,216 7,064 ------- ------- 16,880 16,812 Cash 1,028 1,028 Repurchase Pooling Arrangement 5,892 5,892 Mortgage-backed securities 1,401 1,460 Asset-backed securities 5,859 5,848 ------- ------- Total $31,058 $31,040 ======= =======
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 5. DEBT Long-term debt at September 30, 1996 and 1995 is summarized in the following table (in thousands):
September 30, ---------------------------- 1996 1995 Bank Credit Facility.................................... $225,315 $168,950 SouthTrust Bank of Alabama, NA.......................... 20,000 20,000 Variable Annuity Life Insurance Company................. 10,000 10,000 NationsBank of Texas, NA................................ 10,000 -- Mortgage notes (6% to 10.75% due through 2014).................................. 1,444 1,795 Other notes payable (8% to 10% due through 2008).................................. 5,688 11,202 -------- -------- 272,447 211,947 Obligations under capital leases........................ 4,001 4,963 -------- -------- 276,448 216,910 Less short-term notes payable and current portion ...... (13,746) (34,981) -------- -------- Total long-term debt.................................... $262,702 $181,929 ======== ========
Interest paid on the above debt was $19.3 million, $17.7 million and $15.8 million during fiscal years 1996, 1995 and 1994, respectively. In February 1992, the Company entered into an agreement (the "Bank Credit Facility") with several banks in which the banks provided financing to the Company. During the last several years, the Bank Credit Facility has been amended and/or restated to provide financing for various purchase transactions. In August, 1996, the Company entered into a Third Amended and Restated Credit Agreement (the "1996 Bank Credit Facility"), pursuant to which the banks agreed to provide $500 million to Living Centers, including a $350 million five-year revolving credit and competitive advance facility (Tranche - 38 - 39 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) A) and a $150 million 364-day revolving credit facility with a four-year term out (Tranche B). The Company recorded a non-recurring charge of $0.9 million for the write-off of unamortized deferred financing costs related to the Second Amended and Restated Credit Agreement. See Note 8. The 1996 Bank Credit Facility allows Living Centers to borrow at the base rate in effect at NationsBank of Texas, N.A. or at LIBOR plus an applicable margin ranging from 0.25% to 0.65% and also provides for a facility fee of 0.15% to 0.225%. The applicable margin and facility fee are subject to adjustment depending on Living Centers' leverage ratio at the quarter end immediately preceding the borrowing. Living Centers may prepay borrowings made under Tranche A at any time, but all amounts drawn must be repaid by August 19, 2001 with a provision for earlier extension if the Company and banks agree. If not extended prior thereto, the balance of Tranche B at August 18, 1997 will be converted to a term note and repaid in equal quarterly installments beginning October 1, 1997. The 1996 Bank Credit Facility is an unsecured credit facility and contains various financial covenants similar to those in the original Bank Credit Facility. Balances available under the 1996 Bank Credit Facility and predecessor agreements at September 30, 1996 and 1995 (after giving consideration to outstanding letters of credit of $4.7 million) were $270.0 million and $84.6 million, respectively. As of September 30, 1996 and 1995, the announced base rate of NationsBank was 8.25% and 8.75%, respectively. The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate long-term debt. At September 30, 1996, the Company had outstanding three interest rate swap agreements with commercial banks having a total notional principal amount of $60 million. These agreements effectively changed the Company's interest rate exposure on $60 million under the 1996 Bank Credit Facility to approximately 6.8% through 2005. The Company receives floating rates on these swaps which are based on LIBOR. The Company's use of swap agreements and reverse swap agreements did not have a material effect on the weighted-average borrowing rate of reported interest expense during the years ended September 30, 1996, 1995, and 1994 and the Company is not exposed to credit loss on these swaps. See Note 13 for fair value disclosures. The difference between amounts paid and received on swap agreements is recorded on an accrual basis as an adjustment to net interest over the periods covered by the agreements. The related amount receivable from or payable to counter parties is included in other receivables or payables, respectively. The fair values of the swap agreements and changes thereto are not recognized in the consolidated financial statements. On October 1, 1993, the Company borrowed $20 million from SouthTrust Bank of Alabama, NA which was used to repay debt that was assumed in the Vari-Care merger transaction. The note is unsecured and bears interest at the rate of 6.95%, payable semi-annually. The principal is repayable in five annual payments of $4 million beginning October 1, 1998. The Company also assumed approximately $6.3 million of existing Vari-Care notes and capital lease obligations under substantially the same terms that existed prior to the merger. In January 1994, the Company issued, in a private placement, a $10 million note to American General Insurance Company that was later sold to The Variable Annuity Life Insurance Company ("Variable Annuity Life") at a fixed rate of interest of 7.79%. The note is unsecured and will mature in a single payment due in ten years. The note agreement contains restrictions similar to other unsecured debt of the Company. In May 1994, the Company executed a promissory note (payable on demand or by June 29, 1997) with NationsBank of Texas, N.A. in the principal amount of $10 million. Subject to the Bank's prior approval of any request for an advance, the Company may borrow, repay and reborrow principal amounts in increments such that the unpaid principal balance at anytime shall not exceed $10 million. The interest rate on each advance is quoted separately based on market conditions that exist at that time. At September 30, 1996, there was $10.0 million outstanding under the note agreement. - 39 - 40 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) Long-term debt maturing in the next five fiscal years is presented below (in thousands):
September 30, 1996 ------------------ 1997..................... $ 13,746 1998..................... 3,813 1999..................... 5,149 2000..................... 4,833 2001..................... 230,214
The covenants governing the 1996 Bank Credit Facility and the notes with SouthTrust Bank and Variable Annuity Life provide for the maintenance of various financial ratios. The Company is in compliance with the terms of all such covenants. These covenants also limit the Company's ability to pay dividends. At September 30, 1996 and 1995, these restrictions effectively limited dividend payments to no more than $24.4 million and $16.7 million, respectively. Even though the covenants of the 1996 Bank Credit Facility permit the payment of dividends as described above, the Company does not presently intend to pay any such dividends. NOTE 6. EMPLOYEE RETIREMENT PLANS The Company's employees are eligible to participate in defined contribution retirement plans sponsored by the Company. Company contributions to these plans represents a matching percentage of certain employee contributions which is subject to management's discretion based upon consolidated financial performance. The employees of ARS are also covered by a defined contribution plan which provides for Company contributions in cash of up to 50% of certain employee contributions. Total combined expense recognized by the Company under both of these plans was $2.2 million, $1.8 million and $1.1 million in fiscal years 1996, 1995 and 1994, respectively. The Company does not provide post-retirement health care or life insurance benefits to employees. Accordingly, the Company is not subject to the requirements of Statement of Financial Accounting Standards No. 106, "Employers" Accounting for Post Retirement Benefits Other Than Pensions." NOTE 7. LIFE INSURANCE PROCEEDS The Company recorded a non-taxable gain of $2.0 million from the receipt of insurance proceeds on Don W. Wortley, former President of TMI and the Rehabilitation Services Group. NOTE 8. IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING ITEMS The Company recorded an impairment loss of $20.5 million upon adoption of SFAS 121 which is included in the Statement of Income as Impairment of long-lived assets. This loss is related to nursing facilities with current period operating losses, facilities where management believed an impairment existed as a result of the regulatory or competitive environment, and goodwill, primarily TMI. The impairment of TMI goodwill is primarily a result of the death of its former President (see Note 7). 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 their estimate of fair value. Fair value was estimated based on either management's estimate of fair value or present value of future cash flows. In addition, this impairment loss included a reduction to fair value of certain nursing facilities to be replaced or expected to be disposed of. Fair value for facilities to be replaced or disposed of was calculated based on either management's estimate of fair value or market value less estimated cost to sell. Facilities to be disposed of had a carrying value of $4.8 million at September 1996 and are expected to be divested in fiscal year 1997. - 40 - 41 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The Company also recorded non-recurring charges of $2.9 million primarily related to the closure of its medical supplies business and the write-off of unamortized loan acquisition costs related to the Second Amended and Restated Credit Agreement. NOTE 9. RESTRUCTURING PLAN During fiscal year 1996, the Company finalized a plan originating in June 1995 to restructure the operations and exit certain activities of ARS. This plan includes centralization of billing and collection, closing or downsizing unprofitable clinics and offsite contracts, and staff reductions of approximately 300 employees in both corporate overhead and field management. This plan resulted in an increase to the original purchase price of the acquisition by $10.1 million which included an accrual for estimated exit costs of $8.6 million. The increase in purchase price includes the following: Termination/severance for displaced employees $ 4,394 Future lease costs for abandoned real property 4,176 Write off of abandoned tangible and intangible assets at closed locations 1,532 ------- Total $10,102 =======
The Company has charged $1,038 against the accrual for termination/severance for approximately 200 displaced employees and $309 against the accrual for future lease costs. At September 30, 1996, the Company believes that the remaining accruals for the restructuring plan are adequate. The restructuring is expected to be completed during the second quarter of fiscal 1997. NOTE 10. INCOME TAXES The provision for income taxes is presented in the table below (in thousands):
Years Ended September 30, -------------------------------------- 1996 1995 1994 Current: Federal ............ $ 38,326 $ 21,982 $ 14,476 State & Local ...... 5,141 4,237 2,978 -------- -------- -------- 43,467 26,219 17,454 Deferred: Federal ............ (8,276) (3,698) (3,373) State & Local ...... (1,432) (771) (520) -------- -------- -------- (9,708) (4,469) (3,893) -------- -------- -------- Total .......... $ 33,759 $ 21,750 $ 13,561 ======== ======== ========
- 41 - 42 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The provision for income taxes varies from the amount determined by applying the Federal statutory rate to pre-tax income as a result of the following:
Years Ended September 30, ----------------------------- 1996 1995 1994 Federal statutory income tax rate ..................... 35.0% 35.0% 35.0% Increase (decrease) in taxes resulting from: State & local taxes, net of federal tax benefit ... 3.4 4.9 4.0 Permanent book/tax differences, primarily resulting from goodwill ....................... 7.0 2.0 1.2 Targeted job tax credits .......................... -- (2.7) (4.0) Non-deductible merger and acquisition cost ........ -- 7.2 -- Other, net ............................................ (1.6) 0.7 (1.0) ------ ------ ------ Effective tax rate .................................... 43.8% 47.1% 35.2% ====== ====== ======
The components of deferred income taxes are as follows (in thousands):
Years Ended September 30, --------------------------------- 1996 1995 1994 Reserves for potential claims ...... $ (2,134) $ (1,984) $ (1,840) Purchase accounting ................ (1,749) (1,828) (1,435) FAS 121 asset valuation ............ (4,030) -- -- Tax depreciation under book ........ (1,822) (1,023) (147) Bad debts .......................... (1,295) (761) (342) Texas Occupational Injury accrual .. 1,847 835 568 Net operating losses ............... (262) -- 1,116 Other, net ......................... (525) 292 (1,352) Changes in valuation allowance ..... 262 -- (461) -------- -------- -------- TOTAL ............ $ (9,708) $ (4,469) $ (3,893) ======== ======== ========
- 42 - 43 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The components of the net deferred tax liability are as follows (in thousands):
September 30, --------------------- 1996 1995 Deferred tax liabilities: - ------------------------- Amounts relating to property and equipment ... $(34,773) $(36,905) Abbey equity accounting ...................... -- (883) Other ........................................ (1,596) (1,105) -------- -------- Total deferred tax liabilities ............... (36,369) (38,893) -------- -------- Deferred tax assets: - -------------------- Financial reserves not yet deductible for tax purposes: Asset valuation ......................... 4,243 2,564 Insurance ............................... 8,524 7,562 Notes receivable allowance .............. 821 821 Payroll and benefits .................... 4,884 4,460 Bad debts ............................... 6,572 5,355 Restructuring reserve ................... 3,159 -- NOL carryforwards ....................... 1,785 1,293 Other miscellaneous ..................... 5,243 6,276 Timing differences in Medicare .......... 1,592 899 -------- -------- Total deferred tax assets .................... 36,823 29,230 Less valuation allowances .................... (1,785) (808) -------- -------- Net deferred tax liability ................... $ (1,331) $(10,471) ======== ========
The net change in the valuation allowance for deferred tax assets was an increase of $977 at September 30, 1996 and a nominal increase at September 30, 1995. NOTE 11. COMMITMENTS AND CONTINGENCIES Certain of the Company's facilities are held under operating or capital leases. All capital leases will expire by 2009. Certain of these leases also contain provisions allowing the Company to purchase the leased assets during the term or at the expiration of the lease, at fair market value. Facilities operating under capital leases are summarized as follows (in thousands):
September 30, -------------------- 1996 1995 Centers operating under capital leases ....... $ 12,551 $ 13,465 Less accumulated amortization ................ (5,084) (4,473) -------- -------- $ 7,447 $ 8,992 ======== ========
Rental expense, net of sublease rent income, for all operating leases was $44.2 million, $36.9 million and $31.8 for fiscal years 1996, 1995 and 1994, respectively. Certain leases also contain increases based on the Consumer Price Index, Medicaid reimbursement rates, or at amounts specified in the lease agreement. Sublease rent income was $6.9 million, $6.1 million and $5.9 million for fiscal years 1996, 1995 and 1994 respectively. Contingent rent based primarily on revenues was $1.6 million, $1.4 million and $1.2 million for fiscal years 1996, 1995 and 1994, respectively. - 43 - 44 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) The table below presents a schedule of the future minimum rental commitments and sublease income under all noncancellable leases as of September 30, 1996 (in thousands):
September 30, 1996 --------------------------------------------- Sublease Operating Income Capital 1997........................................... $ 38,576 $ 6,545 $ 1,249 1998........................................... 33,478 6,429 969 1999........................................... 28,223 5,552 645 2000........................................... 21,127 2,342 634 2001........................................... 18,897 2,348 647 Subsequent years............................... 100,142 9,992 982 -------- ------- -------- Total minimum rental obligations............... $240,443 $33,208 5,126 ======== ======= Less amount representing interest.............. (1,125) -------- Present value of capital leases................ 4,001 Less current portion........................... (1,007) -------- Long-term obligations under capital leases..... $ 2,994 ========
The Company is a party to various legal proceedings in the normal course of business. The Company takes every legal claim seriously and investigates and, where appropriate, defends such allegations vigorously. Such claims are generally covered by insurance, or the Company has provided reserves which it believes are adequate for any potential losses which may result from such claims. The Company believes that the results of any such proceedings, if determined unfavorably to the Company, will not have a material adverse effect on its consolidated financial position or its results of operations. An attorney in the Civil Division of the United States Department of Justice has advised Living Centers that a complaint under the Civil False Claims Act has been filed, under seal, against BCC and one of its subsidiaries, MedTherapy Rehabilitation Services, Inc. ("MedTherapy"), in the federal district court for the Western District of North Carolina. The Department of Justice has reviewed the sealed complaint and advised counsel for BCC and MedTherapy that the plaintiff alleges, in general, that BCC and MedTherapy caused certain therapists to make improper therapy record entries with respect to therapy screening services and that any claims filed with Medicare for payments which are based upon such improper record entries should be viewed as false claims under the Civil False Claims Act. Under the Civil False Claims Act, any person who knowingly files false claims is liable for treble damages and penalties ranging from $5,000 to $10,000 for each false claim. Because the complaint is under seal, Living Centers does not know the number of claims alleged or the specific factual allegations set forth in the complaint. The Department of Justice has the right to intervene and pursue the claim on behalf of the plaintiff, but has not made a decision on intervention as of the date hereof. If the Department of Justice does not intervene, the plaintiff may continue to pursue the claim individually. BCC and MedTherapy have advised the Department of Justice that, based upon the information disclosed thus far by the Department of Justice, they dispute, and will vigorously contest, the claims of the plaintiff. Although the Company believes, based on discussions with counsel, that the plaintiff's claims are merit less, no assurances can be given that, if the plaintiff were to prevail in his claim, the resulting judgment would not have a material adverse effect upon the Company. Moreover, in connection with the Company's acquisition of BCC, the primary stockholder (Donald C. Beaver) agreed to indemnify and hold harmless Living Centers 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 Common Stock. - 44 - 45 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) NOTE 12. INSURANCE COVERAGES The Company insures auto, general, and professional liability and workers' compensation risks through insurance policies with third parties. Some of these third-party policies subsequent to February 21, 1994 are subject to reinsurance agreements between the insurer and LCA Insurance Company, Ltd., a wholly-owned subsidiary of the Company that was formed during 1994. The liabilities for incurred losses are estimated by independent actuaries on an undiscounted basis. Cash reserves of LCA Insurance Company, Ltd. have been designated as restricted investments to pay for future claims experience applicable to policy periods subsequent to February 21, 1994. Restricted investments at September 30, 1996 and 1995 designated to pay such claims were $31.0 million and $36.6 million, respectively. In 1992, the Company elected under Texas law to decline to participate in the Texas workers' compensation insurance program. As part of the election, the Company implemented an employee benefit plan providing for employer-paid benefits comparable to those provided under the Texas workers' compensation program and obtained insurance that limits the Company's exposure for any individual injury. During 1994, the Company established a trust in which to fund the amount applicable to actuarially determined claims to be incurred for fiscal year 1994 and subsequent years. The BCC Entities are insured for current and past workers' compensation claims under various types of insurance and financial plans, certain of which are loss-sensitive in nature and design, which subject the Companies to additional future premiums for losses incurred in a prior year but paid in a subsequent fiscal period, as losses develop. The BCC Entities have recorded expenses under these plans based upon actual and estimated losses based on the available incurred loss structure. Additionally, certain of these loss-sensitive workers' compensation plans in which the Companies have participated were organized as pools or funds, with joint and several or pro rata liability ascribed to its members. Such plans may lead to the potential of future loss assessments for the BCC Entities; however, the amount of such additional potential assessments, if any, is not determinable at this time. It is the opinion of management that any additional assessments will not have a material adverse effect on the financial position or results of operations of the Companies. NOTE 13. DISCLOSURES REGARDING FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value because of the short maturity of those instruments. NOTES RECEIVABLE Fair value for each significant note receivable was estimated based on the net present value of cash flows that would be received on each note over the remaining note term using current market interest rates rather than stated interest rates. The discount factor was the estimated rate for long-term debt in effect at September 30, 1996 and 1995. Further adjustments were made to the value of the notes based on management's opinion of the credit risk of the note obligee. LONG-TERM DEBT Since the Company recently renegotiated its Bank Credit Facility, the Company believes that the fair value of the long-term debt is properly reflected at current carrying amounts except for certain fixed rate debt instruments. Fair values for each significant fixed rate debt instrument was estimated based on the net present value of cash flows that would be paid on each note over the remaining note term using the Company's current incremental borrowing rate rather than the stated interest rates on the notes. See Note 5. - 45 - 46 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) INTEREST RATE SWAP AGREEMENTS Fair values for the Company's various interest rate swap agreements were estimated based on quoted amounts from the issuers which would be required to terminate the agreement. See Note 5. The estimated values of the Company's financial instruments as of September 30, 1996 and 1995 are as follows (in thousands):
SEPTEMBER 30, ---------------------------------------------------------- 1996 1995 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Cash and cash equivalents............... $ 21,394 $ 21,394 $ 17,886 $ 17,886 Notes receivable........................ 14,536 15,517 14,184 14,562 Restricted investments.................. 31,040 31,040 36,622 36,622 Long-term debt.......................... 276,448 277,413 216,910 216,985 Interest rate swap agreements........... -- 341 -- (1,575)
NOTE 14. RELATED PARTY TRANSACTIONS The Company purchases services and medical supplies from APS at current market prices under certain service and supply agreements and all significant intercompany purchases have been eliminated for the years ended September 30, 1996 and 1995. Prior to acquiring the remaining 51% of APS on September 30, 1994, the Company also purchased services and supplies from APS which amounted to approximately $4.8 million which is included in the accompanying Consolidated Statement of Income for fiscal year 1994. See Note 3. The Company also purchases therapy services from ARS and TMI at current market prices under certain service agreements. The total purchases from these companies prior to their acquisition by the Company on June 30, 1995 and August 1, 1995, respectively amounted to $1.5 million and $0.9 million in 1995 and 1994, respectively for ARS and $1.9 million and $1.8 million 1995 and 1994, respectively for TMI. All significant intercompany purchases from these two subsidiaries since their acquisition have been eliminated. NOTE 15. EARNINGS PER COMMON SHARE The table below presents a reconciliation of the number of weighted average common shares used in computing primary earnings per share (in thousands):
Years Ended September 30, ---------------------------------------- 1996 1995 1994 Common shares outstanding, end of period..................... 19,501 20,190 10,481 Issuance of shares in connection with the BCC Entities merger.......................................... -- -- 6,479 Effect of using weighted average shares outstanding......... 623 (1,340) (37) Effect of using treasury stock method on stock options.............................................. 191 184 157 ------ ------ ------ Shares used in computing earnings per share.................. 20,315 19,034 17,080 ====== ====== ======
In February 1995, the Company issued an additional 2,875,000 shares of its common stock in an additional public offering. The net proceeds of the transaction, approximately $99.1 million, were used primarily to retire existing debt. Assuming the transaction had occurred on October 1, 1994, net income and earnings per share for the year ended September 30, 1995 would have been $25.5 million and $1.27, respectively. - 46 - 47 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) NOTE 16. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS The Company established an Employee Stock Option Plan in 1992 which authorizes the granting of incentive stock options, nonqualified options, or any combination of the foregoing to purchase up to 1,400,000 shares of the Company's common stock. 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, 1996 and 1995, there were 1,259,548 and 779,625, respectively, options granted and outstanding. The following is a summary of the stock option activity under the plan:
Years Ended September 30, ------------------------------------------------ 1996 1995 1994 Options outstanding a beginning of period........... 779,625 597,775 542,300 Options granted..................................... 691,540 334,250 189,975 Options exercised................................... (39,434) (54,010) (44,770) Options forfeited................................... (172,183) (98,390) (89,730) --------- ------- ------- Options outstanding at end of period................ 1,259,548 779,625 597,775 ========= ======= ======= Options exercisable at end of period................ 317,011 207,280 146,780 ========= ======= ======= Option price range.................................. $13.25-$38.75 $13.25-$35.50 $13.25-$28.75 ============= ============= =============
The Company established an Employee Stock Purchase Plan in 1993. The plan authorizes the purchase of up to 120,000 shares of the Company's common stock by eligible employees. The provisions of the plan include eligibility for all full time employees who have completed one year of service, employee contributions equal to the lesser of 10% of base salary or $10,000, the purchase price being equal to the lesser of the fair market value of the stock on the first or the last day of the plan year, and an option to purchase shares of stock or withdraw all payroll deductions plus interest at the end of the plan year. As of September 30, 1995 and 1996, a total of 32,006 shares and 43,160 shares, respectively, had been issued under the plan. - 47 - 48 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) NOTE 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The table below sets forth summarized quarterly financial data for the years ended September 30, 1996 and 1995 (in thousands, except per share amounts):
Fourth Third Second First Quarter Quarter Quarter Quarter 1996 Net revenues ................................ $ 284,838 $ 281,217 $ 278,056 $ 270,380 Income from operations ...................... 21,172(a) 22,951(a) 24,110 21,323 Income before income taxes and equity earnings/minority interests .......... 17,700 20,038 21,154 18,203 Equity earnings/minority interests .......... (87) 122 (189) (2) Net income .................................. $ 7,053 $ 12,816 $ 12,412 $ 10,899 ========= ========= ========= ========= Earnings per share .......................... $ 0.35 $ 0.63 $ 0.61 $ 0.54 ========= ========= ========= ========= Weighted average common and common equivalent shares outstanding ........ 19,913 20,501 20,503 20,360 ========= ========= ========= =========
(a) Includes $2.0 million income and $0.9 million expense of non-recurring items in the third and fourth quarters, respectively (or $.10 per share income and $0.19 per share expense after tax, respectively) 1995 Net revenues ................................ $ 267,793 $ 215,851 $ 208,081 $ 202,144 Income from operations ...................... 15,170(b) 12,835(b) 14,793(b) 14,207 Income before income taxes and equity earnings/minority interests .......... 11,807 11,111 12,339 10,931 Equity earnings/minority interests .......... (112) (43) (30) (19) Net income .................................. 4,474 5,208 7,692 6,860 Pro forma tax expense ....................... 50 166 165 218 Pro forma net income ........................ $ 4,424 $ 5,042 $ 7,527 $ 6,642 ========= ========= ========= ========= Earnings per share: Primary .............................. $ 0.22 $ 0.26 $ 0.41 $ 0.40 ========= ========= ========= ========= Pro forma ............................ $ 0.22 $ 0.25 $ 0.40 $ 0.39 ========= ========= ========= ========= Weighted average common and common equivalent shares outstanding ........ 20,265 20,089 18,718 17,179 ========= ========= ========= =========
- -------------- (b) Includes $0.6 million, $4.7 million and $7.1 million of mergers and acquisitions cost in second, third and fourth quarters, respectively (or $.03, $0.23 and $0.29 per share, respectively) - 48 - 49 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-----(CONTINUED) NOTE 18. STOCKHOLDER RIGHTS PLAN Since November 17, 1994, when the Company's Board of Directors declared a dividend of one right for each outstanding share of the Company's common stock, each share of the Company's outstanding common stock carries with it such right. Each right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, for an exercise price of $160, subject to adjustment. The rights expire on November 17, 2004. Such rights will not be exercisable nor transferable apart from the Common Stock until such time as a person or group acquires 15% of the Company's Common Stock or initiates a tender offer or exchange offer that will result in ownership of 15% of the Company's Common Stock. In the event that the Company is merged, and its Common Stock is exchanged or converted, the rights will entitle the holders to buy shares of the acquiror's common stock at a 50% discount. Under certain other circumstances, the rights can become rights to purchase the Company's Common Stock at a 50% discount. The rights may be redeemed by the Company for one cent per right at any time until 10 days following the first public announcement of a 15% acquisition of beneficial ownership of the Company's Common Stock. - 49 - 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In November 1994, the Company engaged Ernst & Young LLP as independent certified public accountants to audit the Company's financial statements for the fiscal year ending September 30, 1995. At that time, the Company chose not to renew the engagement of Arthur Andersen LLP, who previously served as the Company's independent certified public accountants. The decision to change accountants was approved by the Company's Board of Directors. The Company also engaged Ernst & Young LLP to audit the Company's financial statements for the fiscal year ended September 30, 1994 which is presented under the pooling of interests method of accounting for the BCC acquisition. In connection with the audit of the Company's financial statements for the two fiscal years ended September 30, 1994 and during the interim period following September 30, 1994 through the date of dismissal of Arthur Andersen LLP, there were no disagreements with Arthur Andersen LLP on any matters of accounting principles or practice, financial statement disclosure or auditing scope or procedure which, if not resolved to its satisfaction, would have caused Arthur Andersen LLP to make reference thereto in connection with its report. Arthur Andersen LLP's report on the Company's financial statements for the fiscal year ended September 30, 1994 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. - 50 - 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information on directors of the registrant appears in the Company's Proxy Statement for the 1997 annual meeting of stockholders expected to be held February 6, 1997, which is to 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 Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Information on executive compensation appears in the Company's Proxy Statement for the 1997 annual meeting of stockholders expected to be held February 6, 1997, which is to 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 appears in the Company's Proxy Statement for the 1997 annual meeting of stockholders expected to be held February 6, 1997, which is to 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 appears in the Company's Proxy Statement for the 1997 annual meeting of stockholders expected to be held February 6, 1997, which is to be filed with the Securities and Exchange Commission, and is incorporated herein by reference. - 51 - 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS The following reports, financial statements and schedule are filed herewith on the pages indicated:
Page ---- Report of Independent Auditors 26 Consolidated Balance Sheets at September 30, 1995 and 1996 27 Consolidated Statements of Income for Fiscal Years 1994, 1995 and 1996 28 Consolidated Statements of Stockholders' Equity for Fiscal Years 1994, 1995 and 1996 29 Consolidated Statements of Cash Flows for Fiscal Years 1994, 1995 and 1996 30 Notes to Consolidated Financial Statements 31 FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts and Reserves 59
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. - 52 - 53 EXHIBIT INDEX
Exhibit No. Document ----------- -------- *2.1 Stock Purchase Agreement by and between Abbey Healthcare Group, Incorporated and Living Centers of America, Inc. with respect to the sale of Abbey Pharmaceutical Services, Inc. (filed as Exhibit 99.2 to Registrant's 8-K dated October 14, 1994 and incorporated herein by reference). *2.2 Schedule 14D-1 Tender Offer Statement for Rehability Corporation filed on May 23, 1995. *2.3 Amended and Restated Agreement and Plan of Merger dated March 27, 1995 among Living Centers of American, Inc., and Living Centers/Brian Care Company and The Brian Center Corporation, The Beaver Property Entities and Donald C. Beaver, as amended (filed as Exhibit 2.1 of the Fourth Amendment to Registrant's Registration Statement on Form S-4, Registration No. 33-90676 and incorporated herein by reference). *2.4 Agreement of Purchase and Exchange among Living Centers of America, Inc. and Living Centers Specialty Care Services, Inc. and Cason, Inc., Don W. Wortley, Don W. Wortley Trust, Mary Ann Wortley Trust, and 726 Cottonwood, Ltd. dated as of August 1, 1995 (filed as Exhibit 10.1 in Registrant's Registration Statement on Form S-3, Registration No. 33-97616, and incorporated herein by reference). *2.5 Form of Registration Rights Agreement between Donald C. Beaver and Living Centers of America, Inc., (filed as Exhibit 2.2 to Registrants' Registration Statement on Form S-4, Registration Number 33-90676 and incorporated herein by reference). *2.6 Form of Registration Covenant between Donald C. Beaver and Living Centers of America, Inc. (filed as Exhibit 2.3 to Registrant's Registration Statement on Form S-4, Registration Number 33-90676 and incorporated herein by reference). 2.7 Recapitalization Agreement, as amended, by and among Living Centers of America, Inc., DevCon Holding Company, Living Centers-DevCon, Inc., and Golder, Thoma, Cressey, Rauner Fund IV, L.P. *3.1 Restated Certificate of Incorporation of Living Centers of America, Inc. (filed as Exhibit 4.1 to the Registrant's Form S-8 on August 7, 1996, Registration No. 333-09707, and incorporated herein by reference). *3.2 By-laws of Living Centers of America, Inc. (filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference). *4.1 Restated Certificate of Incorporation of Living Centers of America, Inc. (filed as Exhibit 3.1 hereto). *4.2 By-laws of Living Centers of America, Inc. (filed as Exhibit 3.2 hereto). *4.3 Certificate of Designations of Series A Junior Participating Preferred Stock of Living Centers of American, Inc. (filed as Exhibit 4.1 to Registrant's Form 10-Q for the quarter ended December 31, 1994, Commission File Number 33-44726 and incorporated herein by reference). *4.4 Rights Agreement dated as of November 17, 1994 between the Registrant and Chemical Bank, as Rights Agent, specifying the terms of the rights to purchase the Company's Series A Junior Participating Preferred Stock, and the exhibits thereto (filed as Exhibit 1 to the Company's Registration Statement on Form 8-A dated November 17, 1994), as amended by Loan Agreement dated October 1, 1993 between Living Centers of America, Inc. and SouthTrust Bank of Alabama, N.A. (filed as Exhibit 4(d) to Registrant's Form 8-K dated October 15, 1993 and incorporated herein by reference).
- 53 - 54
Exhibit No. Document ----------- -------- *4.5 Amendment to Loan Agreement dated October 1, 1993 between Living Centers of America, Inc. and SouthTrust Bank of Alabama, N.A. (filed as Exhibit 99.7 to Registrant's Form 8-K dated October 14, 1994 and incorporated herein by reference). *4.6 Senior Note Purchase Agreement among Living Centers of America, Inc. and the purchasers listed in the Schedule of Purchasers attached thereto as ANNEX I, dated January 21, 1994 (filed as Exhibit 4 to Registrant's Form 10-Q for the quarter ended December 31, 1993, Commission File Number 33-44726, and incorporated herein by reference), as amended by Amendment Number 1 to Senior Note Purchase Agreement dated January 21, 1994 among Living Centers of America, Inc. and Purchaser (filed as Exhibit 4.1 to Registrant's Form 10-Q for the quarter ended March 31, 1994, Commission File Number 33- 44726, and incorporated herein by reference) by Second Amendment and Consent to Senior Note Purchase Agreement between Living Centers of America, Inc. and the Variable Annuity Life Insurance Company (filed as Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended June 30, 1994, Commission File Number 33-44726 and incorporated herein by reference), and by Third amendment to Senior Note Purchase Agreement between Living Centers of America, Inc. and the Variable Annuity Life Insurance Company (filed as Exhibit 99.8 to Registrant's 8-K dated October 14, 1994 and incorporated herein by reference). 4.7 Third Amended and Restated Credit Agreement, dated as of August 19, 1996 among Living Centers of America, Inc., the banks named therein, Chase Securities Inc., Toronto Dominion (Texas), Inc. and NationsBank of Texas, N.A. +*10.1 Employment Agreement between Living Centers of America, Inc. and Edward L. Kuntz (filed as Exhibit 10.1 to Registrant's Registration Statement on Form S-4, Registration No. 33-66588, and incorporated herein by reference.) +10.2 Extension and Ratification of Employment Agreement between Living Centers of America, Inc. and Edward L. Kuntz. +*10.3 Employment Agreement between Living Centers of America, Inc. and Leroy D. Williams (filed as Exhibit 10.3 to Registrant's Registration Statement on Form S-4, Registration No. 33-66588, and incorporated herein by reference.) + 10.4 Extension and Ratification of Employment Agreement between Living Centers of America, Inc. and Leroy D. Williams. + 10.5 Employment Agreement between Living Centers of America, Inc. and Charles B. Carden. +*10.6 Employment Agreement between Living Centers of America, Inc. and Donald C. Beaver (filed as Exhibit 2.2 to Registrant's Registration Statement on Form S-4, Registration Number 33-90676 and incorporated herein by reference). + 10.7 Employment Agreement between Living Centers of America, Inc. and Pauline Bonner. +*10.8 Employment agreement between Living Centers of America, Inc. and Sydney K. Boone, Jr. (filed as Exhibit 10.4 to the Registrant's Form 10-K for the fiscal year ended September 30, 1993, Commission File Number 33-44726 and incorporated herein by reference). +*10.9 Employment Agreement between Living Centers of America, Inc. and David W. Budke (filed as Exhibit 10.5 to the Registrant's Form 10-K for the fiscal year ended September 30, 1993, Commission File Number 33-44726, and incorporated herein by reference).
- 54 - 55
Exhibit No. Document ----------- -------- +*10.10 Employment Agreement between Living Centers of America, Inc. and Boyd P. Gentry (filed as Exhibit 10.7 to the Registrant's Form 10-K for the fiscal year ended September 30, 1995, Commission File Number 33-44726, and incorporated herein by reference). +*10.11 Employment Agreement between Living Centers of America, Inc. and Kelly R. Gill (filed as Exhibit 10 to the Registrant's Form 10-Q for the quarter ended December 31, 1995, Commission File Number 33- 44726, and incorporated herein by reference). +*10.12 Employment Agreement between Living Centers of America, Inc. and Laura Kislowski (filed as Exhibit 10.8 to the Registrant's Form 10-K for the fiscal year ended March 31, 1996, Commission File Number 33-44726, and incorporated herein by reference). +*10.13 Employment Agreement between Living Centers of America, Inc. and William R. Korslin (filed as Exhibit 10 to the Registrant's Form 10-Q for the quarter ended December 31, 1995, Commission File Number 33-44726, and incorporated herein by reference). +*10.14 Employment Agreement between Living Centers of America, Inc. and Keith Krein, M.D. (filed as Exhibit to Registrant's Registration Statement on Form S-4, Registration No. 33-66588, and incorporated herein by reference.) + 10.15 Employment Agreement between Living Centers of America, Inc. and John D. Lee, III. +*10.16 Employment Agreement between Living Centers of America, Inc. and James L. Martin, Jr. (filed as Exhibit 10.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1996, Commission File Number 33-44726, and incorporated herein by reference). + 10.17 Employment Agreement between Living Centers of America, Inc. and Kenneth Morgan. +*10.18 Employment Agreement between Living Centers of America, Inc. and Karuppanna Muthuswamy (filed as Exhibit 10.10 to Registrant's Registration Statement on Form S-4, Registration No. 33-66588, and incorporated herein by reference.) +*10.19 Employment Agreement between Living Centers of America, Inc. and Susan Thomas Whittle (filed as Exhibit 10.10 to the Registrant's Form 10-K for the fiscal year ended September 30, 1993, Commission File Number 33-44726, and incorporated herein by reference). +*10.20 1992 Stock Option Plan of Living Centers of America, Inc., as amended (filed as Exhibit 10.1 to Registrant's Form S-8 on August 7, 1996, Registration No. 333-09707, and incorporated herein by reference). +*10.21 Deferred Retirement Incentive Plan of Living Centers of America, Inc. (filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, File No. 33-44726, and incorporated herein by reference). *10.22 Indemnification Agreement dated as of February 21, 1992 between Living Centers of America, Inc. and The ARA Group, Inc. (filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference). *10.23 Assignment Agreement dated as of February 21, 1992 between Living Centers of America, Inc. and The ARA Group, Inc. (filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-1, Registration No. 33-44726, and incorporated herein by reference).
- 55 - 56
Exhibit No. Document ----------- -------- +*10.24 Management Incentive Bonus Plan of Living Centers of America, Inc. (filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1992, File No. 33- 44726, and incorporated herein by reference). +*10.25 Employee Stock Purchase Plan of Living Centers of America, Inc. (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993, File No. 33-44726, and incorporated herein by reference). 11 Statement regarding computation of per share earnings. 21 Subsidiaries of the Registrant. 23 Consent of Ernst & Young LLP 24 Powers of Attorney 27 Financial Data Schedule
- -------------- * Incorporated by reference as indicated. + Represents management contracts or compensatory plans or arrangements required to be filed as exhibits to this Annual Report by Item 601(b)(10)(iii) of Regulation S-K. The Company will furnish a copy of any exhibit described above to any beneficial holder of the Company's securities upon receipt of a written request therefor provided that such request sets forth a good faith representation that as of December 16, 1996, the date of record for the Company's 1997 annual stockholder's meeting, such beneficial owner is entitled to vote at such meeting, and provided further that such holder pays to the Company a fee compensating the Company for its reasonable expenses in furnishing such exhibits. REPORTS ON FORM 8-K There were no reports filed on Form 8-K during the quarter ended September 30, 1996. - 56 - 57 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. LIVING CENTERS OF AMERICA, INC. (Registrant) By: /s/ Susan Thomas Whittle --------------------------------------------- Susan Thomas Whittle Vice President, General Counsel and Secretary Date: December 16, 1996 - 57 - 58 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Living Centers of America, Inc. and in the capacities and on the date indicated.
Signature Title /s/ Edward L. Kuntz Chairman, Chief Executive Officer, and - ------------------------------ Director (Principal Executive Officer) Edward L. Kuntz /s/ Leroy D. Williams President, Chief Operating Officer and - ------------------------------ Director Leroy D. Williams /s/ Charles B. Carden Executive Vice President and Chief - ------------------------------ Financial Officer (Principal Financial Charles B. Carden Officer) * Vice Chairman and Director - ------------------------------ Donald C. Beaver * Director - ------------------------------ Roger J. Bulger, M.D. FACP * Director - ------------------------------ Anthony M. Frank * Director - ------------------------------ Eddy J. Rogers, Jr. * Director - ------------------------------ Robert H. Hurlbut /s/ Ronald W. Fleming Controller and Chief Accounting Officer - ------------------------------ (Principal Accounting Officer) Ronald W. Fleming
* Executed on behalf of the aforementioned directors by Susan Thomas Whittle pursuant to the powers of attorney included in Exhibit 24. /s/ Susan Thomas Whittle ------------------------------ Susan Thomas Whittle Date: December 16, 1996 - 58 - 59 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES LIVING CENTERS OF AMERICA, INC. (DOLLARS IN THOUSANDS)
Balance, Deduction Additions Balance, Beginning Charged From From End of of Period to Income Reserve Acquisitions Period ---------- ---------- ---------- ------------ ---------- Fiscal Year 1996: Allowance for doubtful accounts ... $ 16,500 $ 16,666 $ (12,492) $ 2,109 $ 22,783 ========== ========== ========== ========== ========== Notes receivable reserves ......... $ 3,550 $ 0 $ (34) $ -- $ 3,516 ========== ========== ========== ========== ========== Fiscal Year 1995: Allowance for doubtful accounts ... $ 6,632 $ 10,520 $ (11,071) $ 10,419 $ 16,500 ========== ========== ========== ========== ========== Notes receivable reserves ......... $ 2,850 $ 700 $ -- $ -- $ 3,550 ========== ========== ========== ========== ========== Fiscal Year 1994: Allowance for doubtful accounts ... $ 3,781 $ 3,122 $ (2,978) $ 2,707 $ 6,632 ========== ========== ========== ========== ========== Notes receivable reserves ......... $ 5,424 $ (2,416)(a) $ (158) $ -- $ 2,850 ========== ========== ========== ========== ==========
(a) Includes reversal of reserves based on collections of notes previously considered doubtful. - 59 - EX-2.7 2 RECAPITALIZATION AGREEMENT 1 Exhibit 2.7 RECAPITALIZATION AGREEMENT, AS AMENDED, BY AND AMONG LIVING CENTERS OF AMERICA, INC., DEVCON HOLDING COMPANY, LIVING CENTERS-DEVCON, INC., AND GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. 2 RECAPITALIZATION AGREEMENT DATED AS OF AUGUST 30, 1996 BY AND AMONG LIVING CENTERS OF AMERICA, INC., DEVCON HOLDING COMPANY, LIVING CENTERS-DEVCON, INC., AND GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. 3 TABLE OF CONTENTS [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS]
Page ---- 1. Authorization and Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1A. Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1B. Purchase and Sale, Financing, Redemption and Related Transactions . . . . . . . . . . . . . . . . . . 3 1C. The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1D. Repurchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. Conditions of Purchaser's Obligations at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2A. Representations and Warranties; Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2B. Amendment of Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2C. Amendment of the Company's Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2D. Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2E. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2F. Securities Law Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2G. Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2H. Bank and Subdebt Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2I. Transition Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2J. No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2K. Reclassification of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2L. Contribution; Repayment of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2M. Opinion of the Company's Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2N. Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2O. Transfer of Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2P. Transfer of Excluded Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2Q. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2R. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2S. Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2T. Interim Period Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2U. Company Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2V. Thomas Care Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2W. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2X. Settlement of Interim Period Liabilities and Advances . . . . . . . . . . . . . . . . . . . . . . . . 9 2Y. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2-1. Conditions of the Company's and Existing Stockholders' Obligations at the Closing . . . . . . . . . . . . . 10 2-1A. Representations and Warranties; Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2-1B. Corporate Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2-1C. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2-1D. Opinion of the Purchaser's Special Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1E. Compliance with Applicable Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
-i- 4 [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS] 2-1F. Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1G. Registration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1H. Intercompany Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1I. Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1J. Transition Services Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1K. Environmental Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1L. Solvency Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2-1M. Company Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2-1N. Thomas Care Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2-1O. Settlement of Interim Period Liabilities and Advances . . . . . . . . . . . . . . . . . . . . . . . 13 2-1P. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 2-1Q. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3. Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3A. Interim Agreements of the Company and the Existing Stockholders . . . . . . . . . . . . . . . . . . 13 3B. Closing Conditions and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3C. Exclusivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3D. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3E. LCA Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3F. Tax Basis Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3G. Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3H. Transfer of Certain Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3I. Delivery of Offsite Tangible Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3J. Release of Guarantees, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4. Certain Covenants between Effective Time and Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5A. Organization, Corporate Power and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5B. Capital Stock and Related Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5C. Subsidiaries; Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5D. Authorization; No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5E. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5F. Absence of Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5G. No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5H. Absence of Certain Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 5I. Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5J. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 5K. Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5L. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5M. Litigation, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5N. Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5O. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
- ii - 5 [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS] 5P. Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 5Q. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 5R. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5S. Environmental and Safety Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 5T. Affiliated Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5U. Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 5V. Healthcare Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5W. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 5X. Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6. Remedies for Breaches of this Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6A. Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 6B. Indemnification Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 6C. Matters Involving Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 6D. Environmental Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6E. Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 6F. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 7. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 7A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 7B. Cross Reference to Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 8A. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 8B. Purchaser's Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 8C. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 8D. Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 8E. Consent to Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8F. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 8G. Generally Accepted Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8H. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8I. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8J. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8K. Descriptive Headings; Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8L. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8M. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 8N. No Strict Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 8O. Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 8P. Termination; Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 8Q. Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
- iii - 6 SCHEDULES Schedule 2T - Certain Leased Real Property Schedule 5C - Subsidiaries Schedule 5E - Financial Statements (to be attached) Schedule 5F - Liabilities Schedule 5G - Adverse Change Schedule 5H - Developments Schedule 5I - Assets Schedule 5J - Taxes Schedule 5K - Contracts Schedule 5M - Litigation Schedule 5N - Brokerage Schedule 5O - Insurance Schedule 5P - Employees Schedule 5Q - Employee Benefits Schedule 5R - Compliance Schedule 5S - Environmental Schedule 5T - Affiliated Transactions Schedule 5U - Real Property Schedule 5V - Healthcare Schedule 7A - Liens EXHIBITS Exhibit 1A - Terms of Stock Exhibit 1B - New Board of Directors Exhibit 2C - Bylaws Exhibit 2D - Stockholders Agreement Exhibit 2E - Registration Agreement Exhibit 2G - Services Agreement Exhibit 2I - Transition Services Agreement (to be attached) Exhibit 2M - Opinion of Company's Counsel Exhibit 2-1C - Opinion of Purchaser's Special Counsel Exhibit 2-1H - Form of Release Exhibit 2-1N - Thomas Care Letter Exhibit 7A - Exceptions to GAAP - iv - 7 RECAPITALIZATION AGREEMENT THIS RECAPITALIZATION AGREEMENT (this "Agreement") is made as of August 30, 1996, among Living Centers- Devcon, Inc., a Florida corporation (the "Company"), Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware limited partnership (the "Purchaser"), Living Centers of America, Inc. ("LCA") and Devcon Holding Company ("Holding"). LCA and Holding are collectively referred to herein as the "Existing Stockholders." Except as otherwise indicated herein, capitalized terms used herein are defined in Section 7 hereof. WHEREAS, Holding sought indications of interest with respect to an acquisition of the Company; WHEREAS, in connection with Holdings' solicitation of such indications of interest, the Purchaser indicated an interest in pursuing a transaction whereby it would purchase certain equity securities of the Company, it would arrange for debt financing for the Company, and the Company would effect a redemption of a substantial majority of the equity securities of the Company held by Holding; WHEREAS, in connection with the transactions described above, the Company desires to reconstitute its capital structure through the redemption of certain of its outstanding equity securities and the issuance and sale of certain new equity securities on the terms and subject to the conditions set forth herein; WHEREAS, Holding desires to sell certain of its equity securities of the Company on the terms and subject to the conditions set forth herein; WHEREAS, the Purchaser desires to acquire newly-issued equity securities of the Company on the terms and subject to the conditions set forth herein; WHEREAS, prior to the closing of the transactions contemplated by this Agreement, the Company's existing equity securities will be recapitalized so that immediately prior to the Closing, the Company's outstanding equity securities, including securities exercisable for or convertible into equity securities, will consist solely of 100,000 shares of Class B Common Stock, par value $.01 per share, all owned by Holding; and WHEREAS, immediately following the Closing, American Habilitation Services, Inc., a Delaware corporation will merge with and into the Company (the "Merger"), with the Company being the surviving corporation but being renamed "American Habilitation Services, Inc." in connection with such Merger. 8 NOW, THEREFORE, the parties hereto agree as follows: Section 1. Authorization and Closing. 1A. Authorizations. (i) Authorization of Recapitalization. Effective as of the Closing, the New Board of Directors (as defined below) will approve and ratify this Agreement and the transactions contemplated hereby and, subject to the terms and conditions herein, Holding shall have approved the transactions described in Sections 2B and 2K below in its capacity as a stockholder of the Company. (ii) Purchaser Stock. The New Board of Directors shall authorize the issuance and sale to the Purchaser (or its designees) of an aggregate of 13,900 shares of Class A Preference Stock for a purchase price of $1,000.00 per share and an aggregate of 70,000 shares of Class C Common for a purchase of $ 1.43 per share, each having the rights and preferences set forth in Exhibit 1A attached hereto. The shares of Class A Preference Stock and Class C Common to be purchased hereunder are collectively referred to herein as the "Purchaser Stock." (iii) Redemption. At the Closing, but effective immediately after the issuance of the Purchaser Stock to the Purchaser as contemplated by this Agreement, the New Board of Directors (as defined below) shall authorize the Company's repurchase from Holding and simultaneous cancellation of 80,000 shares of Class B Common for an aggregate repurchase price of $47.5 million, reduced dollar-for-dollar for the amount of the Company's Indebtedness at the Closing (if any) and subject to further adjustment as set forth in Section 1D hereof (as adjusted, the "Repurchase Price"). The shares of Class B Common to be repurchased hereunder are collectively referred to herein as the "Existing Stock." (iv) Financing Arrangements. At the Closing, but effective immediately before the issuance of the Purchaser Stock to the Purchaser as contemplated by this Agreement, the New Board of Directors shall authorize the execution, delivery and performance of the Bank Agreement and Subdebt Agreement (as defined in Section 2H). (v) Equity Agreements. At the Closing, but effective immediately after the issuance of the Purchaser Stock to the Purchaser as contemplated by this Agreement, the New Board of Directors shall authorize the execution, delivery and performance of the Equity Agreements. (vi) Transition Services Agreement. At the Closing, but effective immediately after the redemption of the Existing Stock as contemplated by this Agreement, the New Board of Directors shall authorize the execution, delivery and performance of the Transition Services Agreement. - 2 - 9 1B. Purchase and Sale, Financing, Redemption and Related Transactions. (i) Purchase and Sale of Purchaser Stock. At the Closing, subject to the terms and conditions set forth herein, the Company shall sell to the Purchaser (or its designees), and the Purchaser (or its designees) shall purchase from the Company, the number of shares of Class A Preference Stock and Class C Common set forth in Section 1A(i) hereof for an aggregate purchase price of $14.0 million. (ii) Financing. At the Closing (effective immediately before the transaction described in Section 1B(i) above), subject to the terms and conditions set forth herein, the Company shall enter into the Bank Agreement and the Subdebt Agreement and shall, in connection therewith, obtain or have available to it (subject to the conditions precedent contained therein) loans and advances totaling at least $35.0 million pursuant thereto. (iii) Redemption of Existing Stock. At the Closing (effective immediately after the transactions described in Sections 1B(i) and (ii) above), subject to the terms and conditions set forth herein, the Company shall repurchase from Holding, and Holding shall sell to the Company, the number of shares of Class B Common set forth in Section 1A(ii) hereof for the Repurchase Price, payable as set forth in Section 1C hereof. (iv) New Board of Directors. At the Closing (effective immediately before the transaction described in Section 1B(i) above), the members of the Board of Directors of the Company serving immediately prior to the Closing shall resign and the Persons designated on Exhibit 1B hereof shall be elected to the Company's Board of Directors (the "New Board of Directors"). (v) Related Transactions. At the Closing (effective immediately after the transactions described in Sections 1B (i) through (iii) above), the Company, the Purchaser, and Holding, as appropriate, shall enter into the Equity Agreements. 1C. The Closing. The closing of the purchase and sale of the Purchaser Stock and redemption of the Existing Stock (the "Closing") shall take place at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois (or, at the Purchaser's election, at the offices of Winston & Strawn, 200 Park Avenue, New York, New York) at 10:00 a.m. on September 6, 1996 or at such other place, on such other date, or at such other time as the Company and the Purchaser may agree in writing (the "Closing Date"). At the Closing, (i) the Company shall deliver to the Purchaser (or its designees) stock certificates evidencing the Purchaser Stock to be purchased by the Purchaser (or its designees), registered in the Purchaser's (or its designees' names) upon payment by the Purchaser (or its designees) of the purchase price therefor by a cashier's or certified check, or by wire transfer of immediately available funds to such account as is designated by the Company, in the aggregate amount set forth in Section 1B(i) hereof, (ii) the Company shall enter into the financing arrangements described in Section 1B(ii) hereof, and (iii) Holding shall deliver to the Company - 3 - 10 stock certificates evidencing the Existing Stock to be repurchased from Holding by the Company upon payment of the Repurchase Price therefor by a cashier's or certified check, or by wire transfer or immediately available funds to such account as is designated by Holding. 1D. Repurchase Price Adjustment. (i) Post-Closing Determination. On the Closing Date, Holding and its auditors shall perform an inventory and such other procedures as are reasonably necessary to be performed on such date in order to enable the Parties to have an accurate and complete Closing Review. Within 45 days after the Closing Date, Holding and its auditors will conduct a review (the "Closing Review") of Working Capital as of the open of business on the Closing Date and will prepare and deliver to the Purchaser a computation of the amount of Working Capital (the "Draft Balance Sheet") as of the open of business on September 1, 1996 (the "Effective Time"). The Purchaser and its auditors will cooperate fully with Holding and its auditors, and Holding and its auditors will cooperate fully with the Purchaser and its auditors, in connection with the Closing Review (including, without limitation, making all relevant information available for review and making all relevant personnel available for discussions). Holding and its auditors shall give the Purchaser and its auditors an opportunity to observe the Closing Review and shall make available to such Persons all records and work papers used in preparing the Draft Balance Sheet. The Purchaser shall be deemed for all purposes hereof to have agreed with the computation of Working Capital as of the Effective Time set forth on the Draft Balance Sheet (and such amount will be conclusive and binding upon the Parties) unless the Purchaser, within 20 days after receipt of the Draft Balance Sheet, delivers a notice (an "Objection Notice") to Holding setting forth the Purchaser's calculation of the disputed amount(s). Holding and the Purchaser will use reasonable efforts to resolve any disagreements as to such computations, but if they do not obtain a final resolution within 20 days after Holding has received the Objection Notice, Holding and the Purchaser will jointly retain an independent accounting firm of recognized national standing (the "Firm") to resolve any remaining disagreements. If Holding and the Purchaser are unable to agree on the choice of the Firm, the Firm will be a "big-six" accounting firm selected by lot (after excluding one firm designated by each of Holding and the Purchaser). Holding and the Purchaser shall direct the Firm to render a determination within 60 days of its retention, and the Parties and their respective employees shall cooperate with the Firm during its engagement. The Firm shall consider only those items and amounts in the Draft Balance Sheet set forth in the Objection Notice which Holding and the Purchaser are unable to resolve. The Firm's determination shall be based on the definition of Working Capital included herein. The determination of the Firm will be conclusive and binding upon the Parties. The Parties shall bear the costs and expenses of the Firm based on the percentage which the portion of the contested amount not awarded to each Party bears to the amount actually contested by such Party. The amount of Working Capital as of the Effective Time, as finally determined pursuant to this Section 1D, is referred to herein as "Actual Working Capital." - 4 - 11 (ii) Post-Closing Adjustment. If Actual Working Capital is greater than $5,483,437 ("Baseline Working Capital"), the Company shall, within five (5) business days after the determination thereof, pay to Holding an amount equal to such excess by wire transfer or delivery of other immediately available funds. If Actual Working Capital is less than Baseline Working Capital, Holding shall, within five (5) business days after the determination thereof, pay to the Company an amount equal to such deficiency by wire transfer or delivery of other immediately available funds. All such payments shall be treated as adjustments to the Repurchase Price. Baseline Working Capital was calculated in the manner set forth on the Latest Balance Sheet. Section 2. Conditions of Purchaser's Obligations at the Closing. The obligation of the Purchaser to purchase and pay for the Purchaser Stock at the Closing is subject to the satisfaction as of the Closing of the following conditions (provided, however, that the conditions set forth in Sections 2W and 2Y shall have been satisfied on or before September 6, 1996 and provided further that the parties shall have agreed to the form and substance of the Transition Services Agreement on or before such date): 2A. Representations and Warranties; Covenants. The respective representations and warranties contained in Section 5 and Section 8B hereof shall be true and correct in all material respects at and as of the Closing (not taking into account, for purposes of this condition, any updates to the Schedules or other disclosures made to the Purchaser pursuant to Section 3A(iv)), and the Company and the Existing Stockholders shall have performed in all material respects all of the covenants required to be performed by them hereunder on or prior to the Closing; provided that to the extent the Company takes any action or fails to take any action during the Interim Period at the direction of the Purchaser as a result of which any representation or warranty contained herein become untrue or inaccurate, such untruth or inaccuracy shall not be taken into account for purposes of this condition. 2B. Amendment of Articles of Incorporation. The Company's Articles of Incorporation (the "Articles of Incorporation") shall have been duly amended to include the provisions set forth in Exhibit 1A hereto, shall be in full force and effect under the laws of the State of Florida as of the Closing as so amended, and shall not have been further amended or modified. 2C. Amendment of the Company's Bylaws. The Company's Bylaws shall have been duly restated as set forth in Exhibit 2C hereto, shall be in full force and effect as of the Closing as so amended, and shall not have been further amended or modified. 2D. Stockholders Agreement. The Company, the Purchaser, Holding and each of the other stockholders of the Company shall have entered into a stockholders agreement in form and substance as set forth in Exhibit 2D attached hereto (the "Stockholders Agreement"), and the Stockholders Agreement shall be in full force and effect as of the Closing. - 5 - 12 2E. Registration Agreement. The Company, the Purchaser, Holding and each of the other stockholders of the Company shall have entered into a registration agreement in form and substance as set forth in Exhibit 2E attached hereto (the "Registration Agreement"), and the Registration Agreement shall be in full force and effect as of the Closing. 2F. Securities Law Compliance. The Company shall have made all filings under all applicable federal and state securities laws to the extent necessary to consummate the issuance of the Purchaser Stock pursuant to this Agreement in compliance with such laws without registering the Purchaser Stock for sale to the public in accordance with such laws. 2G. Services Agreement. The Company and GTCR IV, L.P., an Illinois limited partnership, shall have entered into a services agreement, in form and substance as set forth in Exhibit 2G hereto (the "Services Agreement"), and the Services Agreement shall be in full force and effect as of the Closing. 2H. Bank and Subdebt Agreements. (i) The Company and National Westminster Bank Plc (the "Bank") shall have entered into a credit agreement and related documents (collectively, as such agreement and documents are amended, modified or waived from time to time, the "Bank Agreement") providing for loans to the Company of up to $40.0 million in form and substance satisfactory to the Purchaser, the Bank Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified, and the Bank shall have advanced not less than $30.0 million to the Company under the Bank Agreement; and (ii) the Company and National Westminster Bank Plc (the "Subdebt Lender") shall have entered into a credit agreement and related documents (collectively, as such agreement and documents are amended, modified or waived from time to time, the "Subdebt Agreement") providing for loans to the Company of up to $10.0 million in form and substance satisfactory to the Purchaser, the Subdebt Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified, and the Subdebt Lender shall have advanced not less than $5.0 million to the Company under the Subdebt Agreement; provided that the Purchaser shall use reasonable efforts to obtain the financing described in the commitment letters from the Bank and the Subdebt Lender previously provided to the Company. 2I. Transition Services Agreement. The Company and LC Management Company, Inc. shall have entered into a transition services agreement in form and substance satisfactory to the Purchaser and the Existing Stockholders which will on the Closing Date be attached hereto as Exhibit 2I (the "Transition Services Agreement") and the Transition Services Agreement shall be in full force and effect as of the Closing. - 6 - 13 2J. No Material Adverse Change. Since June 30, 1996, the Company shall have not suffered a change in its business, assets, condition (financial or otherwise), prospects or relations with its customers, suppliers or employees that would be reasonably expected to have a Material Adverse Effect (a "Material Adverse Change"). 2K. Reclassification of Stock. The Company's existing equity securities will have been recapitalized so that immediately prior to the Closing the Company's outstanding equity securities, including securities exercisable for or convertible in equity securities, will consist solely of 100,000 shares of Class B Common Stock, par value $.01 per share, all owned by Holding. 2L. Contribution; Repayment of Indebtedness. All intercompany liabilities owing from the Company to the Existing Stockholders or their Affiliates as of the close of business on the day preceding the Effective Time will be reclassified to capital of the Company (i.e., after the Closing the Company shall not have any obligation to repay such intercompany liabilities) and all of the Company's obligations relating to Indebtedness accrued as of the close of business on the day preceding the Effective Time, including, but not limited to, capitalized leases, accrued interest and prepayment premiums accrued as of the close of business on the day preceding the Effective Time will have been repaid in full. 2M. Opinion of the Company's Counsel. The Purchaser shall have received from general or special counsel for the Company and the Existing Stockholders reasonably acceptable to the Purchaser, opinions with respect to the matters set forth in Exhibit 2M attached hereto, which shall be addressed to the Purchaser and the Bank, dated the date of the Closing and in form and substance reasonably satisfactory to the Purchaser. 2N. Proceedings. All corporate and other proceedings taken or required to be taken by the Company and the Existing Stockholders in connection with the transactions contemplated hereby to be consummated at or prior to the Closing shall have been taken. 2O. Transfer of Real Property. (i) The Existing Stockholders shall have caused (i) the contribution, transfer and conveyance to the Company of each parcel of real property used by the Company but owned by LCA or any Subsidiary of LCA other than the Company (each, a "Real Property Transferor"), each transfer of which shall be by general warranty deed (unless the Real Property Transferor did not obtain title insurance in connection with its acquisition of such parcel, in which case such transfer shall be by special warranty deed), and (ii) the cancellation of all leases concerning such owned real property to which the Company is a party; provided that each such general warranty deed shall specifically provide that the Company's recovery against the Real Property Transferor in any way related to title matters concerning prior title holders including, without limitation, defects, transfers or encumbrances arising or existing prior to the date title vested in such Real Property - 7 - 14 Transferor as shown in such title insurance policy shall be limited to the Real Property Transferor's recovery (if any) against the applicable title insurer. (ii) The Existing Stockholders shall have caused the contribution, transfer and conveyance to the Company of each parcel of real property used by the Company, but leased from a third party to LCA or any Subsidiary of LCA other than the Company, by assignment of lease if permitted by the particular lease without the necessity of obtaining the lessor's consent; provided that if an assignment of lease is prohibited by the terms of such lease but a sublease is permitted by the terms of such lease, such transfer shall be by sublease. 2P. Transfer of Excluded Assets and Liabilities. The Existing Stockholders shall have caused the termination of the lease of the Company's Retama Manor-San Antonio South facility and the distribution, transfer and conveyance to, and the assumption by, a Subsidiary of LCA (other than the Company or any of its Subsidiaries) of all other assets and liabilities (whether known or unknown, accrued, absolute, contingent, unliquidated or otherwise, whether due or to become due and regardless of when asserted) arising out of or relating to the Company's Retama Manor- San Antonio South facility (collectively, the "Excluded Assets and Liabilities"). 2Q. Expenses. At the Closing, the Company shall have reimbursed the Purchaser for, or paid directly, the fees and expenses of the Purchaser's special counsel as provided in Section 8A hereof. 2R. Compliance with Applicable Laws. The purchase of Purchaser Stock by the Purchaser hereunder shall not be prohibited by any applicable law or governmental rule or regulation and shall not subject the Purchaser to any material penalty, liability or, in the Purchaser's reasonable judgment, other materially onerous condition under or pursuant to any applicable law or governmental rule or regulation, and the purchase of the Purchaser Stock by the Purchaser hereunder shall be permitted by laws, rules and regulations of the jurisdictions and governmental authorities and agencies to which the Purchaser is subject. 2S. Environmental Report. The Phase I Environmental Report (the "Environmental Report") to be prepared by the Purchaser's environmental consultant concerning the following Facilities: Thomas Care Center, Sherman Oaks Development Center, San Augustine Nursing and Development Center, Green Acres Convalescent and Development Center, Robinson Development Center and the Human Development Center, shall not disclose environmental issues with respect to which the aggregate Adverse Consequences are reasonably anticipated to exceed $500,000. 2T. Interim Period Decisions. The Purchaser shall be satisfied with all significant decisions relating to the Company and its Subsidiaries made during the Interim Period pursuant to Section 4(i)(a) below. - 8 - 15 2U. Company Closing Documents. The Company shall have delivered to the Purchaser all of the following documents: (i) an Officer's Certificate, dated the date of the Closing, stating that the conditions specified in Sections 2A, 2B, 2C, 2J, 2K, 2L, 2N (except to the extent the proceedings referred to therein shall be by the New Board of Directors), 2O and 2P, inclusive, have been fully satisfied; (ii) certified copies of (a) the resolutions duly adopted by the Company's Board of Directors authorizing the execution, delivery and performance of this Agreement and each of the other agreements contemplated hereby, the filing of the amendment to the Articles of Incorporation referred to in Section 2B, the amendment to the Company's Bylaws referred to in Section 2C, the issuance and sale of the Purchaser Stock and the consummation of all other transactions contemplated by this Agreement, and (b) the resolutions duly adopted by the Company's stockholders adopting the amendment to the Articles of Incorporation referred to in Section 2B; (iii) certified copies of the amended Articles of Incorporation, and the Company's amended Bylaws, each as in effect at the Closing; (iv) copies of all third party and governmental consents, approvals and filings (other than as to matters described in Section 5V) specifically required of the Existing Stockholders or the Company to be obtained prior to the Closing in connection with the consummation of the transactions hereunder (including, without limitation, all waivers of all preemptive rights and rights of first refusal); (v) at the Company's sole cost and expense, copies of all title insurance policies currently maintained by the Company or any Affiliate of the Company (the "Title Policies") for each parcel of Owned Real Property and Leased Real Property (collectively, the "Real Property") insuring title to the Real Property in the Company or such Affiliate of the Company; (vi) at the Company's sole cost and expense, copies of all Real Property surveys in the possession of the Company or any Affiliate of the Company; (vii) an estoppel certificate in such form as shall be reasonably acceptable to Purchaser with respect to each parcel of Leased Real Property identified on the Schedule 2T - Certain Leased Real Property attached hereto; and (viii) such other documents relating to the transactions contemplated by this Agreement as the Purchaser may reasonably request. - 9 - 16 2V. Thomas Care Agreement. The Company and the Existing Stockholders shall have entered into the side letter relating to the Thomas Care Center in the form of Exhibit 2-1N attached hereto and such agreement shall be in full force and effect. 2W. Financial Statements. The Existing Stockholders shall have provided the Purchaser with the financial statements referred to in Section 5E and the Purchaser shall be satisfied with such financial statements. 2X. Settlement of Interim Period Liabilities and Advances. At the Closing, the Company and the Existing Stockholders, as appropriate, shall have paid, in cash, the Interim Settlement Amount as provided in Section 4(iii). 2Y. Insurance. On or before September 6, 1996, the Purchaser, the Company and the Existing Stockholders shall have mutually agreed as to the payment and allocation of costs and risks relating to retention of uninsured claims, as among the Company and the Existing Stockholders, associated with insurance (including, without limitation, health, life, accident, dental, disability, and general liability insurance), workers' compensation, and claims that would generally be covered by such policies. Any condition specified in this Section 2 shall be waived if consented to in writing by the Purchaser or if the Purchaser proceeds with the Closing with knowledge that such condition has not been satisfied. Section 2-1. Conditions of the Company's and Existing Stockholders' Obligations at the Closing. The obligation of the Company to issue the Purchaser Stock and the obligation of the Existing Stockholders to sell the Existing Stock to the Company is subject to the satisfaction as of the Closing of the following conditions (provided, however, that the conditions set forth in Sections 2-1P and 2-1Q shall have been satisfied on or before September 6, 1996 and provided further that the parties shall have agreed to the form and substance of the Transition Services Agreement on or before such date): 2-1A. Representations and Warranties; Covenants. The representations and warranties contained in Section 8B shall be true and correct in all material respects at and as of Closing. 2-1B. Corporate Proceedings. The Company's Board of Directors shall have resigned and a New Board of Directors shall have been elected. The New Board of Directors shall have authorized the execution of the Bank Agreement, the Subdebt Agreement, the Services Agreement, the Solvency Certificate and the redemption of the Existing Stock from the Existing Stockholders utilizing the proceeds from the sale of the Purchaser Stock and the financing received pursuant to the Bank Agreement and the Subdebt Agreement. - 10 - 17 2-1C. Financing. (i) The Company and the Bank shall have entered into the Bank Agreement providing for loans to the Company of up to $40.0 million, the Bank Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified, and the Bank shall have advanced not less than $30.0 million to the Company under the Bank Agreement. (ii) The Company and the Subdebt Lender shall have entered into the Subdebt Agreement providing for loans to the Company of up to $10.0 million, the Subdebt Agreement shall be in full force and effect as of the Closing and shall not have been amended or modified, and the Subdebt Lender shall have advanced not less than $5.0 million to the Company under the Subdebt Agreement. (iii) The Purchaser shall have purchased the Purchaser Stock and in exchange therefor paid the Purchase Price in immediately available funds. 2-1D. Opinion of the Purchaser's Special Counsel. The Company and the Existing Stockholders shall have received from Kirkland & Ellis, special counsel for the Purchaser, an opinion with respect to the matters set forth in Exhibit 2-1C attached hereto, which shall be addressed to the Company, the Existing Stockholders and the Bank, dated the date of the Closing and in form and substance reasonably satisfactory to the Company and the Existing Stockholders. 2-1E. Compliance with Applicable Laws. The issuance of Purchaser Stock to the Purchaser hereunder and the subsequent purchase by the Company of the Existing Stock shall not be prohibited by any applicable law or governmental rule or regulation and shall not subject the Company or the Existing Stockholders to any material penalty, liability or, in the Company or the Existing Stockholders' reasonable judgment, other materially onerous condition under or pursuant to any applicable law or governmental rule or regulation, and the issue of the Purchaser Stock to the Purchaser and the subsequent purchase by the Company of the Existing Stock hereunder shall be permitted by laws, rules and regulations of the jurisdictions and governmental authorities and agencies to which the Company or the Existing Stockholders are subject. 2-1F. Stockholders Agreement. The Company, the Purchaser, Holding and each of the other stockholders of the Company shall have entered into the Stockholders Agreement, and the Stockholders Agreement shall be in full force and effect as of the Closing. 2-1G. Registration Agreement. The Company, the Purchaser, Holding and each of the other stockholders of the Company shall have entered into the Registration Agreement, and the Registration Agreement shall be in full force and effect as of the Closing. - 11 - 18 2-1H. Intercompany Claims. The Company and its Subsidiary shall have executed a Release, in form and substance as set forth in Exhibit 2-1H attached hereto and such Release shall be in full force and effect at Closing. 2-1I. Services Agreement. The Company and GTCR IV, L.P., an Illinois limited partnership, shall have entered into the Services Agreement, and the Services Agreement shall be in full force and effect as of the Closing. 2-1J. Transition Services Agreement. The Company and LC Management Company, Inc. shall have entered into the Transition Services Agreement, and the Transition Services Agreement shall be in full force and effect as of the Closing. 2-1K. Environmental Report. The Environmental Report shall not disclose environmental issues with respect to which the aggregate Adverse Consequences are reasonably anticipated to exceed $500,000. 2-1L. Solvency Certificate. The Company shall have delivered to the Existing Stockholders a certificate of the Company (the "Solvency Certificate") authorized by the New Board of Directors and executed by Bill M. Wooten and Deborah Moffett, in their capacities as Chief Executive Officer of the Company and Chief Financial Officer of the Company, respectively, stating that: (i) "the Company is solvent as of the Closing and shall not become insolvent as a result of the consummation of the transactions contemplated by this Agreement; the Company is, and after giving effect to the transactions contemplated by this Agreement shall be, able to pay its debts as they become due, and the Company's property now has, and after giving effect to the transactions contemplated hereby shall have, a fair salable value greater than the amounts required to pay its debts (including a reasonable estimate of the amount of all contingent liabilities); the Company has adequate capital to carry on its business, and after giving effect to the transactions contemplated by this Agreement, the Company shall have adequate capital to conduct its business; and no transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the intent to hinder, delay or defraud either present or future creditors of the Company;" (ii) attached to such certificate are true and correct records of the proceedings of the New Board of Directors reflecting the New Board of Directors' determination that the Company has sufficient capital and surplus to effect the purchase of the Existing Stock as contemplated hereby in compliance with applicable corporate law and the Company meets the solvency and other standards described in Section 2-1L(i) above and ratifying and approving the execution, delivery and performance of this Agreement by the Company; and - 12 - 19 (iii) attached to such certificate is an acknowledgment of the Purchaser to the effect that it will not in the future dispute, and will not in the future take a position which is inconsistent with, the Company's certifications and determinations referenced in Sections 2-1L(i) and (ii) above. 2-1M. Company Closing Documents. The Company shall have delivered to the Existing Stockholders all of the following documents: (i) an officer's certificate, dated the date of Closing, stating that the conditions specified in Sections 2-1A through 2-1L, inclusive, have been fully satisfied; (ii) certified copies of (a) the resolutions duly adopted by the Company's New Board of Directors authorizing the execution, delivery and performance of the documents and certificates described in Section 2-1B above, and (b) the resolutions duly adopted by the Company's then stockholders adopting the redemption of the Existing Stock and approving the actions of the New Board of Directors described in Section 2-1B above; (iii) copies of all third party and governmental consents, approvals and filings specifically required to be obtained by Purchaser and the Company hereunder in connection with the consummation of the transactions hereunder; (iv) the Solvency Certificate as provided in Section 2-1L above; and (v) such other documents relating to the transactions contemplated by this Agreement as the Existing Stockholders may reasonably request. 2-1N. Thomas Care Agreement. The Company and the Existing Stockholders shall have entered into the side letter relating to the Thomas Care Center in the form of Exhibit 2-1N attached hereto and such agreement shall be in full force and effect. 2-1O. Settlement of Interim Period Liabilities and Advances. At the Closing, the Company and the Existing Stockholders, as appropriate, shall have paid, in cash, the Interim Settlement Amount as provided in Section 4(iii). 2-1P. Insurance. On or before September 6, 1996, the Purchaser, the Company and the Existing Stockholders shall have mutually agreed as to the payment and allocation of costs and risks relating to retention of uninsured claims, as among the Company and the Existing Stockholders, associated with insurance (including, without limitation, health, life, accident, dental, disability, and general liability insurance), workers' compensation, and claims that would generally be covered by such policies. 2-1Q. Financial Statements. The condition to the Purchaser's obligation set forth in Section 5W shall have been satisfied. - 13 - 20 Any condition specified in this Section 2-1 shall be waived if consented to in writing by the Company and the Existing Stockholders or if the Company and the Existing Stockholders proceed with the Closing with knowledge that such condition has not been satisfied. Section 3. Covenants. 3A. Interim Agreements of the Company and the Existing Stockholders. The Company covenants and agrees that prior to the Closing, unless the Purchaser agrees otherwise in writing, or as otherwise expressly contemplated or permitted by this Agreement, the Company will conduct its business only in, and the Existing Stockholders will cause the Company to conduct its business only in, the ordinary course of business, in substantial accordance with all Legal Requirements and the Company's past custom and practice. Without limiting the generality of the preceding sentence, each such party covenants that except as contemplated hereby: (i) the Company will not, directly or indirectly, (a) sell, pledge, dispose of or encumber any of its material assets, except in the ordinary course of business consistent with the Company's past practice, (b) engage in any activity which would delay the payment of its accounts payable, or reduce or otherwise restrict the amount of supplies on hand, other than in the ordinary course of the conduct of such business, (c) acquire (by merger, exchange, consolidation, acquisition of stock or assets or otherwise) any corporation, partnership, joint venture or other business organization or division or material assets thereof, (d) take any action with respect to the grant of any bonuses, salary increases, severance or termination pay, except in the ordinary course of business consistent with the Company's past practice, (e) declare, set aside, or pay any dividend or make any distribution with respect to the capital stock of the Company or redeem, purchase, or otherwise acquire any of the capital stock of the Company except insofar as is necessary to effect contribution of all intercompany liabilities owing from the Company to the Existing Stockholders or their Affiliates to capital of the Company, to eliminate all cash balances (other than Interim Cash) and except for the repurchase of the Existing Stock contemplated by Section 1 above, (f) take any action within its control which would render, or which could reasonably be expected to render, any representation or warranty made by the Company or any Existing Stockholder in this Agreement untrue at (or at any time prior to) the Closing, - 14 - 21 (g) adopt or amend any employee benefit or welfare plan insofar as such plan relates directly to the Company's employees other than to provide the same treatments and benefits to the Company's employees as are applied or extended to employees of LCA and its consolidated subsidiaries, (h) engage in any activity which is intended to delay or hinder the Company's capital expenditures and commitments with a view to, or in anticipation of a transaction of the type contemplated by Section 3C with the Purchaser or any other Person, or (i) enter into or modify, or propose to enter into or modify, any agreement, arrangement or understanding to take any of the actions referred to in clauses (a) through (h) above; (ii) the Company and each Existing Stockholder will use its best efforts to cause the Company's current insurance policies not to be canceled or terminated, and not to permit any of the coverage pursuant to any such policy to lapse, unless at the time of such termination, cancellation or lapse there is in full force and effect a replacement policy which provides coverage in an amount which is not less than the amount of the coverage pursuant to the canceled, terminated or lapsed policy; (iii) the Company and each Existing Stockholder will: (a) use commercially reasonable efforts to (A) preserve intact the Company's organization, (B) keep available the services of the key employees that are employed at the Company's facilities, (C) maintain satisfactory relationships with the Company's material suppliers and customers and other Persons having business relationships with the Company, and (D) maintain the Company's facilities and assets in their existing condition, ordinary wear and tear excepted, (b) upon reasonable request, confer with representatives of the Purchaser and the Purchaser's present and proposed financing sources regarding the Company and its business, and (c) notify the Purchaser of any change in the normal course of the Company's business or in the condition of the Company's assets and any governmental or third party complaint, investigation or hearing (or communication indicating that such a complaint, investigation or hearing is or may be contemplated) if such change, complaint, investigation or hearing could reasonably be expected to have a Material Adverse Effect; - 15 - 22 (iv) the Company and each Existing Stockholder promptly will notify the Purchaser if it obtains knowledge that any representation or warranty by such Party set forth in this Agreement was untrue when made or subsequently has become untrue; and (v) the Company and each Existing Stockholder will permit representatives of the Purchaser and the Purchaser's present and proposed financing sources to have full access (at reasonable times and in a manner so as not to unreasonably interfere with the Company's normal business operations) to all the Company's personnel and all premises, properties, books, records, contracts, Tax records and other documents of the Company, and will allow such Persons to make and retain copies of such documents; provided, however, that as a condition to obtaining such access, each such Person shall be required to execute and deliver a customary confidentiality agreement to the Company, in form and substance reasonably satisfactory to Holding. 3B. Closing Conditions and Consents. Each Party hereto agrees to use its commercially reasonable efforts to cause the conditions to the obligations of the respective Parties set forth in Section 2 to be satisfied and to cooperate with the other Parties in respect to obtaining necessary governmental or third party consents required to effectuate the transactions to be consummated at the Closing. 3C. Exclusivity. Until the Closing (or until the date of termination of this Agreement, if sooner), each of the Company or the Existing Stockholders will not (and will not permit any Affiliate, employee, officer, director, shareholder, agent or other person acting on its behalf to) (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets, of the Company (including any acquisition structured as a merger, consolidation, or similar reorganization) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. Each of the Company and the Existing Stockholders agrees to notify the Purchaser immediately if any Person makes any proposal, offer, inquiry, or contact with respect to any of the foregoing. 3D. Further Assurances. From and after the Closing, each party will execute all documents and take any other action which it is reasonably requested to execute or take to effectuate further the transactions contemplated by this Agreement and to consummate the Merger. 3E. LCA Marks. Immediately following the Closing, the Merger will occur pursuant to which, among other things, Company's name will be changed to "American Habilitation Services, Inc." or another name designated by Purchaser which does not include, and is not confusingly similar to, the words "Living Centers." The Company will cease using the name "Living Centers" as of the Closing. In recognition of the fact that certain of the Company's assets have imprinted thereon the words "Living Centers" and LCA's logotype and variations thereof, the Company shall remove, within 30 days after the Closing, such name or logotype from, or render the - 16 - 23 same illegible on, all assets of the Company on which they are imprinted or legible or, in the alternative, shall discontinue use of such assets. Subject to the foregoing, during the 30 day period following Closing, the Company is granted a non-exclusive, nonassignable royalty-free license to use all assets utilizing the words "Living Centers," and LCA's logotype and variations thereof (the "Marks"). The Company shall not use the Marks in any way indicating or implying that the Marks are the property of the Company. The Company shall not create any liabilities or obligations of LCA in connection with the use of the Marks. The Company shall not use the Marks in any manner which indicates that the Company is in any way related to or acting on behalf of LCA or any of its Subsidiaries. The Company shall not assert any claim of ownership of, or any claim to, any goodwill or reputation associated with the Marks by reason of the Company's use of the Marks pursuant to this Section 3E or otherwise. The Company shall not take action in derogation of any of the rights of LCA in the Marks. The Company shall maintain quality standards for all assets utilizing the Marks that are substantially equivalent to the standards currently used by LCA in connection with such assets. 3F. Tax Basis Information. Within 30 days after the Closing, the Existing Stockholders will deliver to the Purchaser a complete list of the Company's assets and an estimate of the tax basis of such assets, dated as of the Effective Time or as of a reasonable date preceding the Effective Time. On or before June 30, 1997, the Existing Stockholders shall furnish the Company with a final list of the tax basis of such assets. 3G. Cooperation. Purchaser, the Company and the Existing Stockholders shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with (i) the preparation and audit of LCA's consolidated financial statements or the Company's financial statements, (ii) responses with respect to regulatory matters or (iii) administration of or with respect to litigation and other claims, in each case for any period beginning before the Closing Date or for any date occurring before or as of the Closing Date. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such preparation, audit, administration and response and making employees available on a mutually convenient basis (without unreasonably interfering with such employees' other business activities) to provide additional information and explanation of any material provided hereunder. The Company and the Existing Stockholders agree to retain all books and records with respect to the matters covered by this Section 3G pertinent to the Company relating to any period beginning before the Closing Date or to any date occurring before or as of the Closing Date, in each case until the seventh anniversary of the date hereof and to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company or the Existing Stockholders, as the case may be, shall allow the other party to take possession of such books and records. 3H. Transfer of Certain Intellectual Property. Effective as of the Closing, the Existing Stockholders hereby assign, transfer and deliver to the Company, as is and without warranties, and the Company hereby acquires and receives from the Existing Stockholders, for no additional consideration, the Habilitation Documentation Software and the Devcon Quality - 17 - 24 Information System, along with all copies and tangible embodiments thereof (in whatever form or medium) (except that any data communications equipment located at LCA's corporate headquarters used to transmit information between the Facilities and LCA's corporate headquarters is not included), and all income, royalties, damages and payments due or payable as of the Closing or thereafter, including, without limitation, damages and payments for past, present or future infringements or misappropriations thereof, the right to sue and recover for past infringements or misappropriations thereof and any and all corresponding rights that, now or hereafter, may be secured throughout the world. The Transition Services Agreement sets forth the exclusive manner in which the agreement set forth in the preceding sentence shall be performed by the Existing Stockholders. 3I. Delivery of Offsite Tangible Property. Within seven days after the Closing, the Existing Stockholders will deliver to the Company, and the Company will receive from the Existing Stockholders, all of the following items of tangible personal property to the extent they relate to the Company and are currently located at LCA's corporate headquarters or at any other location other than a Facility: all (i) minute books and stock record books, (ii) records and other information pertaining to customers, suppliers and employees, (iii) permits, licenses, certifications and approvals from all permitting, licensing, accrediting and certifying agencies, (iv) leases, contracts, and other agreements, (v) purchasing and sales records, accounting records, tax or financial records, risk management records, and (vi) other tangible property of any kind owned by the Company or its Subsidiaries. 3J. Release of Guarantees, etc. The Company shall use commercially reasonable efforts to cause (and, in any event, by the 90th day following the Closing, shall cause) the Existing Stockholders and their Affiliates (other than the Company and its Subsidiaries) to be released and discharged from the G.E. Capital vehicle leases and the Xerox machine leases described on Schedule 7A-Liens to the extent such leases relate to, or are for the benefit of, the Company or its Subsidiaries and the Existing Stockholders or such Affiliates are directly or contingently liable with respect to such leases for periods from and after the Closing. Such commercially reasonable efforts shall include, without limitation, posting security in reasonable amounts and executing reasonable financial assurances in favor of G.E. Capital or Xerox, as the case may be. Section 4. Certain Covenants between Effective Time and Closing. (i) During the period between the Effective Time and the Closing (the "Interim Period"), the Company will be operated on behalf of, and for the account of, the Purchaser, rather than the Existing Stockholders. In connection therewith, the Company shall maintain separate cash accounts into which all cash (the "Interim Cash") arising from the operations of the Company and its Subsidiaries will be placed and from which the only disbursements will be in connection with the discharge of ordinary course liabilities and obligations of the Company (including, but not limited to, overhead charges in accordance with past custom and practice (including, without limitation, expenses and obligations that were previously paid or accrued at the LCA corporate level in behalf of the Company) and - 18 - 25 Interim Period Liabilities in accordance with past custom and practice). These accounts are referred to collectively as the "Interim Cash Accounts." The Existing Stockholders shall keep an accurate and complete memo account of the Interim Period Cash Account. In addition to the other covenants contained in this Agreement, the Existing Stockholders and the Company covenant and agree that during the Interim Period, unless the Purchaser agrees otherwise in writing, the Company will, and the Existing Stockholders will cause the Company to: (a) promptly inform the Purchaser of any significant issues and/or decisions relating to the Company and its Subsidiaries; (b) obtain the Purchaser's approval (which approval shall not be unreasonably withheld or delayed) of each of the Company's and its Subsidiaries' disbursements out of the Interim Cash Accounts and each of the Company's and its Subsidiaries' commitments in excess of $10,000, other than (A) disbursements approved of or committed to prior to the date hereof and (B) disbursements of amounts accrued as current liabilities in the calculation of Actual Working Capital; (c) notify the Purchaser of any change in the normal course of the Company's business or in the condition of the Company's assets or of any governmental or third party complaint, investigation or hearing of which the Existing Stockholders have knowledge (or communication indicating that such a complaint, investigation or hearing is or may be contemplated); (d) not, directly or indirectly, sell, pledge, dispose of or encumber any of its assets, except in the ordinary course of business consistent with the Company's past practice, (e) not, directly or indirectly, take any action with respect to the grant of any bonuses, salary increases, severance or termination pay (except for salary increases, severance or termination pay made in the ordinary course of business consistent with the Company's past practice); and (f) not, directly or indirectly, declare, set aside, or pay any dividend or make any distribution with respect to its capital stock or redeem, purchase, or otherwise acquire any of its capital stock, except in payment of the Repurchase Price, in connection with the distribution of the Excluded Assets and Liabilities, and except to the extent necessary to pay intercompany charges attributable to disbursements in connection with the discharge of ordinary course liabilities and obligations of the Company (including, but not limited to, overhead charges in accordance with past custom and practice). (ii) The Purchaser, the Company and the Existing Stockholders agree that all liabilities, expenses and obligations incurred with respect to the Interim Period, and all - 19 - 26 risk of loss or damage during the Interim Period, associated with the Company's or its Subsidiaries' business, their activities, their employees, and/or their assets or properties (the "Interim Period Liabilities") shall be borne by the Company. To the extent that the Existing Stockholders or their Affiliates (except the Company or its Subsidiaries) become or are directly or indirectly liable for or otherwise suffer or pay any Interim Period Liabilities, the Company agrees that it will promptly upon request, without offset or deduction for any claim hereunder or otherwise, pay all such Interim Period Liabilities or reimburse the Existing Stockholders or such Affiliates for any such payments that they make to the extent that Interim Period Liabilities have not been paid pursuant to Section 4(iii) below. Without limiting the foregoing, Interim Period Liabilities include (i) any liabilities for any claims or occurrences during the Interim Period with respect to matters covered by health, life, dental, casualty or other insurance coverage of the type listed on Exhibit 7A-Exceptions to GAAP provided through any of the Existing Stockholders or their Affiliates (whether on a self-insured basis or otherwise), (ii) employee payroll, withholding, bonus and benefit payments or liabilities with respect to employees of the Company or its Subsidiaries, (iii) all liabilities under vehicle leases as to vehicles operated by the Company and supplies provided under any master supply arrangement to the Company or the Subsidiary with respect to the Interim Period. Notwithstanding the foregoing, nothing in this paragraph shall be construed to limit or impair, or create any right of setoff or counterclaim with respect to, any claim the Company may make as a Purchaser Indemnified Party or Seller Indemnified Party against any party hereto pursuant to this Section 6. (iii) During the Interim Period, the Existing Stockholders shall provide the Purchaser with a list of disbursements to be made from the Interim Cash Account (or made as advances by the Existing Stockholders on behalf of the Company) to satisfy liabilities and expenses referenced in Section 4(i) above. Immediately prior to the Closing, the Existing Stockholders shall provide a statement listing the amount of Interim Cash deposited in, and disbursements made from, the Interim Cash Accounts and liabilities and expenses referenced in Section 4(i) above as to which no disbursements have been made. To the extent that such statement reflects that the amount of Interim Cash deposited exceeds the sum of such disbursements made, such liabilities and expenses, the Interim Tax Amount (as defined below) and the Prepaid Rent Amount (as defined below), the Company will retain such excess and the Existing Stockholders will be entitled to all amounts not so retained; to the extent that such statement reflects that the amount of Interim Cash deposited is less than such sum of disbursements made, liabilities and expenses, the Interim Tax Amount and the Prepaid Rent Amount, then the Company shall pay to the Existing Stockholders the amount of such deficiency at the Closing. The amount of such excess or deficiency shall be referred to herein as the "Interim Settlement Amount." The term "Interim Tax Amount" means an amount equal to 25% of the excess (to the extent positive) of (A) the amount of Interim Cash deposited in the Interim Cash Accounts in the Interim Period, over (B) the sum of (x) the disbursements made from the Interim Cash Accounts during the Interim Period and (y) the liabilities and expenses referenced in Section 4(i) above (other than contingent liabilities) with respect to the Interim Period as to which no disbursements have been made. The Prepaid Rent Amount shall mean lease payments made on behalf of the Company in the - 20 - 27 amount of $132,562.62. LCA will pay and hold the Company harmless with respect to the payroll payments due to the Company's and its Subsidiary's employees on Wednesday September 4, 1996 (without limiting the generality of the foregoing, the Interim Cash Account will not be reduced by the amount of such payment). The preceding sentence will not apply to any other payroll payments made during the Interim Period. Section 5. Representations and Warranties. The Company and the Existing Stockholders hereby jointly and severally represent and warrant that: 5A. Organization, Corporate Power and Licenses. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida and is qualified to do business in every jurisdiction in which the failure to so qualify has had or would reasonably be expected to have a Material Adverse Effect. The Company possesses all requisite corporate power and authority and, except as to licenses, permits and authorizations as to matters of the type described in Sections 5J, 5P, 5Q, 5S and/or 5V, all material licenses, permits and authorizations necessary to own and operate its properties, to carry on its businesses as now conducted and to carry out the transactions contemplated by this Agreement (assuming approval of such transactions by the New Board of Directors). The copies of the Company's charter documents and Bylaws, which have been furnished to the Purchaser's special counsel, reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5B. Capital Stock and Related Matters. (i) The authorized capital stock of the Company consists of 1,000 shares of Common Stock, par value $1.00 per share, all of which are issued and outstanding and owned beneficially and of record by Holding. As of the Closing, the Company and each Subsidiary shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor shall it have outstanding any rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans, except as set forth in the Equity Agreements. As of the Closing, the Company and each Subsidiary shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except as contemplated by this Agreement. All of the outstanding shares of the Company's and each Subsidiary's capital stock are validly issued, fully paid and nonassessable. (ii) Except as contemplated by this Agreement, there are no statutory or contractual stockholders preemptive rights or rights of refusal with respect to the issuance of the Purchaser Stock hereunder. The Company has not violated any applicable federal or state securities laws in connection with the offer, sale or issuance of any of its capital stock, and the offer, sale and issuance of the Purchaser Stock hereunder do not require registration under the Securities Act or any applicable state securities laws (assuming that the Purchaser's - 21 - 28 representations and warranties set forth herein are true and correct). There are no agreements between the Existing Stockholders with respect to the voting or transfer of the Company's or any Subsidiary's capital stock or with respect to any other aspect of the Company's or any Subsidiary's affairs, except as set forth in this Agreement. (iii) Holding is the record and beneficial owner and has good title to, the Existing Stock to be repurchased by the Company hereunder. Immediately following the Closing, Holding will have conveyed to the Company good title to all of such Existing Stock, free and clear of all Liens, claims and encumbrances of any nature whatsoever. The execution, delivery and performance of this Agreement by such Existing Stockholder does not conflict or result in a breach of any of the terms or provisions of, or constitute a default under, any material contract, agreement or instrument to which such Existing Stockholder is a party or by which such Existing Stockholder is bound. 5C. Subsidiaries; Investments. The attached Schedule 5C-Subsidiaries correctly sets forth the name of each Subsidiary the Company has ever had, the jurisdiction of its incorporation and the Persons owning the outstanding capital stock of such Subsidiary. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is qualified to do business in every jurisdiction in which the failure to so qualify has had or would reasonably be expected to have a Material Adverse Effect. Each Subsidiary possesses all requisite corporate power and authority and, except as to licenses, permits and authorizations as to matters of the type described in Sections 5J, 5P, 5Q, 5S and/or 5V, all material licenses, permits and authorizations necessary to own and operate its properties, to carry on its businesses as now conducted and to carry out the transactions contemplated by this Agreement. The copies of each Subsidiary's charter documents and bylaws, which have been furnished to the Purchaser's special counsel, reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete. 5D. Authorization; No Breach. (i) The execution, delivery and performance of this Agreement, the amendment of the Articles of Incorporation and the amendment of the Company's Bylaws have been duly authorized by the Company. This Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms (assuming, for purposes of this sentence, that this Agreement constitutes a valid and binding obligation of each other party hereto and thereto, enforceable in accordance with its terms). Assuming, for purposes of this sentence that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, the execution and delivery by the Company of this Agreement, the amendment of the Articles of Incorporation and the Company's Bylaws and the fulfillment of and compliance with the respective terms hereof and thereof by the Company, would not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation - 22 - 29 of any lien, security interest, charge or encumbrance upon the Company's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) except in connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and, except as to matters of the type addressed in Sections 5J, 5P, 5Q, 5S and/or 5V, require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the charter or Bylaws of the Company or any law, statute, rule or regulation to which the Company is subject, or any material agreement or instrument, order, judgment or decree to which the Company is subject. (ii) The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which either Existing Stockholder is a party have been duly authorized by such Existing Stockholder. This Agreement and all other agreements contemplated hereby to which either Existing Stockholder is a party each constitutes a valid and binding obligation of such Existing Stockholder, enforceable in accordance with its terms (assuming, for purposes of this sentence, that each such agreement constitutes a valid and binding obligation of each other party hereto and thereto, enforceable in accordance with its terms). Assuming, for purposes of this sentence that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, the execution and delivery by each Existing Stockholder of this Agreement and all other agreements contemplated hereby to which either Existing Stockholder is a party, and the fulfillment of and compliance with the respective terms hereof and thereof by each Existing Stockholder, would not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon either Existing Stockholder's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) except in connection with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and, except as to matters of the type addressed in Sections 5Q and/or 5V, require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the charter or bylaws of either Existing Stockholder or any law, statute, rule or regulation to which either Existing Stockholder is subject, or any material agreement or instrument, order, judgment or decree to which either Existing Stockholder is subject. 5E. Financial Statements. On or before September 6, 1996, there will be attached hereto as Schedule 5E - Financial Statements the following financial statements: (i) the unaudited balance sheets of the Company as of September 30, 1995 and the related operating statements for the twelve-month period then ended; and - 23 - 30 (ii) the unaudited balance sheet of the Company as of June 30, 1996 (the "Latest Balance Sheet"), and the related operating statements for the nine-month period then ended. Each of the foregoing financial statements has been prepared from the books and records of account of the Company in conformity with the Company's prior accounting practices on a consistent basis, and is in substantial accordance with GAAP, subject to the absence of footnote disclosure and such other qualifications as are described on the attached Schedule 5E - Financial Statements, and, subject to the absence of footnote disclosure and such other qualifications as are described on the attached Schedule 5E - Financial Statements, is fairly stated or is true and correct in all material respects, reflects accurately in all material respects the books and records of account for the Company as of such dates and for such periods, and presents the financial condition at such dates and results of operations of the Company for the periods then ended. The Latest Balance Sheet additionally has been adjusted on a pro forma basis to reflect the exclusion of the Excluded Assets and Liabilities. In addition, LCA will furnish to the Purchaser on or before September 6, 1996 copies of the internal trial balances for the Facilities as of September 30, 1994 and the Devcon Area detailed operating statements for the years ending September 30, 1993 and 1994. The trial balances described properly and fairly reflect the transactions of the Facilities (except for the items as set forth on the attached Schedule 5E - Financial Statements) for the periods described above and have been produced from the books and records of account of the Facilities on a consistent basis in accordance with LCA's past accounting and reporting practices. 5F. Absence of Undisclosed Liabilities. Except as set forth on the attached Schedule 5F - Liabilities, neither the Company nor any Subsidiary has any obligation or liability that would be of a type required to be reflected on a balance sheet (or in a note thereto) prepared in accordance with GAAP other than: (i) liabilities set forth on the Latest Balance Sheet (including any notes thereto), (ii) liabilities and obligations of the type set forth on the Latest Balance Sheet which have arisen after the date of the Latest Balance Sheet in the ordinary course of business (none of which is a material liability resulting from breach of contract, breach of warranty, tort, infringement, claim or lawsuit) and (iii) other liabilities and obligations expressly disclosed in the other Schedules to this Agreement. 5G. No Material Adverse Change. Except as set forth on the attached Schedule 5G - Adverse Change, since the date of the Latest Balance Sheet, there has been no Material Adverse Change (other than changes in general economic conditions or general changes similarly affecting similarly situated participants in the Company's industry). 5H. Absence of Certain Developments. Except as expressly contemplated by this Agreement or as set forth on the attached Schedule 5H - Developments, since June 30, 1996 (and, with respect to items (v), (vii), (viii), (ix), (x) and (xiv) below, since March 31, 1996), neither the Company nor any Subsidiary has: - 24 - 31 (i) engaged in any activity which accelerated the collection of its accounts or notes receivable, delayed the payment of its accounts payable, or reduced or otherwise restricted the amount of supplies on hand, other than in the ordinary course of the conduct of such business; (ii) issued any notes, bonds or other debt securities or any capital stock or other equity securities or any securities convertible, exchangeable or exercisable into any capital stock or other equity securities; (iii) borrowed any amount or incurred or become subject to any material liabilities, except liabilities incurred in the ordinary course of business and liabilities under contracts entered into in the ordinary course of business and except for Indebtedness that will be discharged by the Existing Stockholders at the Closing; (iv) discharged or satisfied any material Lien or paid any material obligation or liability (other than as contemplated by this Agreement), other than liabilities paid in the ordinary course of business; (v) declared or made any payment or distribution of property (other than cash) or Interim Cash to its stockholders with respect to its capital stock or other equity securities or purchased or redeemed any shares of its capital stock or other equity securities (including, without limitation, any warrants, options or other rights to acquire its capital stock or other equity securities); (vi) mortgaged or pledged any of its properties or assets or subjected them to any material Lien, except Permitted Liens for current property taxes not yet due and payable; (vii) sold, assigned or transferred any of its assets or canceled any debts or claims, except in the ordinary course of business; (viii) suffered any extraordinary losses or waived any rights of material value, whether or not in the ordinary course of business or consistent with past practice; (ix) made capital expenditures or commitments therefor that aggregate in excess of $50,000, except for capital expenditures in substantial accordance with the Company's capital expenditure budget and replacement programs (as in effect on March 31, 1996); (x) engaged in any activity which was intended to delay or hinder the Company's capital expenditures and commitments with a view to, or in anticipation of, a transaction of the type contemplated by Section 3C with the Purchaser or any other Person; - 25 - 32 (xi) made any loans or advances to, guarantees for the benefit of, or any Investments in, any Persons in excess of $50,000 in the aggregate (except for those which will be discharged or released at or prior to the Closing); (xii) made any charitable contributions or pledges in excess of $10,000 in the aggregate; (xiii) made any Investment in or taken steps to incorporate any Subsidiary; or (xiv) entered into any other material transaction other than in the ordinary course of business. Included with the attached Schedule 5G - Adverse Change is a statement of amounts expended by LCA and its Subsidiaries during the current fiscal year with respect to the Company and its Subsidiaries and charged to the Company's fixed asset additions account. 5I. Assets. Except as set forth on the attached Schedule 5I - Assets, the Company and each Subsidiary has good title to, or a valid leasehold interest in, the material properties and assets used by it or shown on the Latest Balance Sheet or acquired thereafter, free and clear of all Liens other than Permitted Liens, except for (i) such properties and assets disposed of in the ordinary course of business since the date of the Latest Balance Sheet, (ii) Liens disclosed on the Latest Balance Sheet (including any notes thereto), (iii) Liens for current property taxes not yet due and payable and (iv) assets owned by the Existing Stockholders or their Affiliates which will be made available to the Company pursuant to, and for the period provided in, the Transition Services Agreement. Except to the extent addressed by Section 5U and except as described on Schedule 5I - Assets, the Company's and each Subsidiary's material equipment and other material tangible assets are suitable in condition and repair for their current use in all material respects, subject to the provision of usual and customary maintenance provided in the ordinary course of business with respect to assets of like nature, age, usage and construction. Except as set forth on the attached Schedule 7A - Liens, the Company and each Subsidiary owns, or have a valid leasehold interest in, all material assets necessary for the conduct of its business as presently conducted (except for assets owned by the Existing Stockholders or their Affiliates which will be made available to the Company pursuant to, and for the periods provided in, the Transition Services Agreement). 5J. Tax Matters. (i) Except as set forth on the attached Schedule 5J - Taxes, (A) the Company and each Subsidiary has filed all Tax Returns which it is required to file under applicable laws and regulations, all such Tax Returns are complete and correct and have been prepared in compliance with all applicable laws and regulations; (B) each Affiliated Group has timely filed all income Tax Returns (in which the Company or any Subsidiary is includable) required to be filed with respect to each taxable period during which the Company or any Subsidiary was a member of the Affiliated Group, each such income Tax Return has been - 26 - 33 prepared in compliance with all applicable laws and regulations, in all respects insofar as such income Tax Returns relate to the Company and the Subsidiaries; (C) the Company and each Subsidiary has paid all Taxes due and owing by it (whether or not such Taxes are required to be shown on a Tax Return) and has withheld and paid over to the appropriate taxing authority all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third party; (D) all Taxes (for which the Company or any Subsidiary may have any liability either directly or pursuant to Treasury Regulation Section 1.1502-6 (and any similar provision of state, local or foreign law)) due and payable by each Affiliated Group with respect to each taxable period during which the Company or a Subsidiary was a member of the Affiliated Group have been paid; (E) neither the Company, nor any Subsidiary has waived any statute of limitations with respect to any Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency and LCA has not waived any statute of limitations or agreed to any extension of time with respect to any Tax assessment or deficiency with respect to any consolidated, combined or unitary Tax Return (in which the Company or any Subsidiary is includable) filed by it during a period in which either the Company or any Subsidiary was a member of LCA's Affiliated Group; (F) the federal income Tax Returns of the Company and each Subsidiary and the consolidated federal income Tax Return of LCA's Affiliated Group have been audited or are closed for all tax years through 1995; (G) no foreign, federal, state or local tax audits or administrative or judicial proceedings are pending or being conducted with respect to the Company or any Subsidiary; (H) no information related to Tax matters has been requested in writing by any foreign, federal, state or local taxing authority and no written notice indicating an intent to open an audit or other review has been received by the Company or any Subsidiary from any foreign, federal, state or local taxing authority; and (I) no claim has ever been made by a taxing authority in a jurisdiction where the Company or any Subsidiary does not file Tax Returns that the Company or such Subsidiary is or may be subject to Taxes assessed by such jurisdiction. (ii) The Company and each Subsidiary has not made an election under IRC Section 341(f). (iii) There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company or any Subsidiary. (iv) The Company and each Subsidiary will not be required to include any amount in taxable income or exclude any item of deduction or loss from taxable income for any taxable period (or portion thereof) ending after the Closing Date (A) as a result of a change in method of accounting for a taxable period ending on or prior to the Closing Date, (B) as a result of any "closing agreement," as described in IRC Section 7121 (or any corresponding provision of state, local or foreign income Tax law) entered into on or prior to the Closing Date, and (C) as a result of any sale reported on the installment method where such sale occurred on or prior to the Closing Date. - 27 - 34 (v) The Company and each Subsidiary has no obligation or liability for the payment of Taxes of any other person, including but not limited to the following, a liability of the Company or any Subsidiary for the payment of any Tax arising (A) as a result of being (or ceasing to be) a member of any Affiliated Group (other than the Affiliated Group of which LCA is the common parent), or being included (or required to be included) in any Tax Return relating thereto, (B) as a result from any expressed or implied obligation to indemnify another person, and (C) as a result from the Company assuming or succeeding to the Tax liability of any other person as a successor, transferee or otherwise. (vi) The Company and each Subsidiary is not a party to or bound by any Tax allocation or Tax sharing agreement and has no current or potential contractual obligation to indemnify any other person with respect to Taxes. (vii) The Company and each Subsidiary is not and will not become obligated (under any contract entered into on or before the Closing Date) to make any payments, that will be non-deductible under IRC Section 280G (or any corresponding provision of state, local or foreign income Tax law). (viii) The Company and each Subsidiary is a member of an Affiliated Group that (A) includes LCA and Holding, (B) files a consolidated federal income Tax Return and (C) has LCA as the parent corporation. 5K. Contracts and Commitments. (i) Except (i) as expressly contemplated by this Agreement (ii) as set forth on the attached Schedule 5K - Contracts, Schedule 5Q - Employee Benefits or Schedule 5U - Real Property, (iii) for agreements which were contained in the facility files in the data room at LCA's headquarters on June 19 and 20, 1996, the originals of which will be delivered by LCA to the Company pursuant to Section 3I (the "Facility File Contracts"), (iv) agreements provided to Purchaser's special counsel through the date hereof, indices of which are attached as Schedule 5K(iv)-Supplemental Contracts and (v) for agreements which are terminable by the Company upon 90 days or less notice without penalty or not otherwise material, neither the Company nor any Subsidiary is a party to or bound by any written or oral: (a) pension, profit sharing, stock option, employee stock purchase or other plan or arrangement providing for deferred or other compensation to employees or any other employee benefit plan or arrangement, or any collective bargaining agreement or any other contract with any labor union, or severance agreements, programs, policies or arrangements; (b) contract for the employment of any officer, individual employee or other Person on a full-time, part-time, consulting or other basis - 28 - 35 providing annual compensation in excess of $50,000 or contract relating to loans to officers, directors or Affiliates; (c) contract under which the Company or any Subsidiary has advanced or loaned any other Person amounts in the aggregate exceeding $50,000; (d) agreement or indenture relating to Indebtedness (other than borrowed money) in amounts in excess of $50,000, any agreement or indenture relating to borrowed money, or the mortgaging, pledging or otherwise placing a Lien on any material asset or material group of assets of the Company or any Subsidiary except for, in any case, Indebtedness that will be discharged by the Existing Stockholders at the Closing; (e) guarantee of any obligation, other than those to be released at or prior to the Closing; (f) lease or agreement under which the Company or any Subsidiary is lessee of or holds or operates any property, real or personal, owned by any other party, except for any lease of real or personal property under which the aggregate annual rental payments do not exceed $50,000; (g) lease or agreement under which the Company or any Subsidiary is lessor of or permits any third party to hold or operate any property, real or personal, owned or controlled by the Company or any Subsidiary; (h) contract or group of related contracts with the same party or group of affiliated parties the performance of which involves consideration in excess of $50,000; (i) assignment, license, indemnification or agreement with respect to any intangible property (including, without limitation, any Intellectual Property); (j) any warranty agreement with respect to its services rendered or its products sold or leased; (k) agreement under which it has granted any Person any registration rights (including, without limitation, demand and piggyback registration rights); (l) distribution or franchise agreement; (m) contract or agreement expressly prohibiting it from freely engaging in any business or competing anywhere in the world; or - 29 - 36 (n) any other agreement which involves a consideration in excess of $50,000 annually. (ii) Those Facility File Contracts which if canceled or terminated could reasonably be expected to materially impair the business of the Company or the Company's ability to provide necessary services to a significant number of its patients or hinder the Company's compliance with Legal Requirements, and all of the contracts, agreements and instruments set forth on Schedule 5K - Contracts, are referred to collectively as the "Applicable Contracts." The Applicable Contracts are valid, binding and enforceable against the Company in accordance with their respective terms. The Company has performed all material obligations required to be performed by it under the Applicable Contracts and is not, except as set forth on Schedule 5K - Contracts, in material default under or in breach of nor in receipt of any written claim of material default or breach under any Applicable Contract; to the Existing Stockholders' knowledge, no event has occurred which with the passage of time or the giving of notice or both would result in a material default or breach by the Company or any Subsidiary under any Applicable Contract; to the Existing Stockholders' knowledge, there is no breach or anticipated breach by the other parties to any Applicable Contract. (iii) The Purchaser's special counsel has been supplied with a true and correct copy of each of the written instruments, plans, contracts and agreements and an accurate description of each of the oral arrangements, contracts and agreements which are referred to on Schedule 5K - Contracts, together with all amendments, waivers or other changes thereto. 5L. Intellectual Property Rights. Except for the use of the LCA mark, the name "Living Centers" or "Living Centers of America," the use of the computerized information services used by the LCA group and the use of the Habilitation Documentation Software and the Quality Information System, neither the Company nor any Subsidiary owns or uses any material Intellectual Property Rights. To the Existing Stockholders' knowledge, the conduct of the Company's and its Subsidiaries' business has not infringed, misappropriated or conflicted with and does not infringe, misappropriate or conflict with any Intellectual Property Rights or other rights of other Persons. 5M. Litigation, etc. Except as set forth on the attached Schedule 5M - Litigation, there are no (i) actions, suits, proceedings, orders or claims pending or, to the Existing Stockholders' knowledge, threatened or (ii) to the Existing Stockholders' knowledge, any investigations pending or threatened, against or affecting the Company or any Subsidiary (or to the Existing Stockholders' knowledge, pending or threatened against or affecting any of the officers, directors or employees of the Company or any Subsidiary with respect to its business or proposed business activities) at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality (including, without limitation, any actions, suit or proceedings with respect to the transactions contemplated by this Agreement) which are not covered by insurance or described in Schedule 5V-Healthcare; the Company and each Subsidiary is not subject to any arbitration - 30 - 37 proceedings under collective bargaining agreements or otherwise or, to the Existing Stockholders' knowledge, any governmental investigations or inquiries not described in Schedule 5V-Healthcare.. The Company and each Subsidiary is not subject to any judgment, order or decree of any court or other governmental agency. 5N. Brokerage. Except as set forth on the attached Schedule 5N - Brokerage, there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Company, any Subsidiary or either Existing Stockholder. The Existing Stockholders shall pay, and hold the Purchaser, the Company and each Subsidiary harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any claim by, through or under the Company or the Existing Stockholders. 5O. Insurance. The attached Schedule 5O - Insurance contains a description of each insurance policy or program maintained on behalf of the Company and each Subsidiary with respect to its properties, assets and businesses, and each such policy or program is in full force and effect immediately prior to the Closing. The Company and each Subsidiary is not in default with respect to its obligations under any insurance policy maintained by it. Except as set forth on Schedule 5O - Insurance, the Company and each Subsidiary does not have any self-insurance or co- insurance programs, and the reserves maintained by the Existing Stockholders on behalf of the Company and its Subsidiaries are adequate to cover all anticipated liabilities of the Company and its Subsidiaries to the Closing Date with respect to any such self-insurance or co-insurance programs. 5P. Employees. Except as set forth on the attached Schedule 5P - Employees, the Company is not aware that any of Johnny Creager, Betsy Garner or Linda Mabile or any group of employees of the Company or any Subsidiary has any plans to terminate employment with the Company or such Subsidiary. The Company and each Subsidiary has complied in all material respects with all laws relating to the employment of labor (including, without limitation, provisions thereof relating to wages, hours, equal opportunity, collective bargaining and the payment of social security and other taxes), and neither the Company, any Subsidiary, nor any Existing Stockholder is aware that the Company or any Subsidiary has any union organization activities, threatened or actual strikes or work stoppages or material grievances. Except as set forth on the attached Schedule 5P - Employees, the Company and each Subsidiary is not subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreements relating to, affecting or in conflict with the present business activities of the Company or any Subsidiary, except for agreements between the Company or any Subsidiary and its present and former employees. The Company possesses all material licenses, permits and authorizations concerning employee matters (if any) necessary to carry on its businesses as now conducted and to carry out the transactions contemplated by this Agreement. Assuming, for purposes of this sentence that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, then with respect of employee matters, the execution and delivery by the Company of this Agreement, the amendment of the Articles of Incorporation and the Company's Bylaws and the - 31 - 38 fulfillment of and compliance with the respective terms hereof and thereof by the Company, would not require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to any law, statute, rule or regulation to which the Company is subject, or any material agreement or instrument, order, judgment or decree to which the Company is subject. 5Q. ERISA. (i) Schedule 5Q - Employee Benefits sets forth all of the bonus, deferred and incentive compensation, profit sharing, retirement, vacation, sick leave, leave of absence, hospitalization, severance, and fringe benefit plans, all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) which the Company or any Subsidiary maintains, to which the Company or any Subsidiary contributes or has an obligation to contribute, or with respect to which the Company or any Subsidiary has any liability or reasonable expectation of liability, whether or not any such plan has terminated and whether or not any such plan is or was maintained or contributed to by any current or former member of the Company's Controlled Group (within the meaning of Section 414 of the IRC) (the "Plans") during the six-year period immediately preceding the Closing Date. None of the Plans (i) is subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the IRC or Section 302 of ERISA, (ii) is a plan of the type described in Section 4063 of ERISA or Section 413(c) of the IRC, (iii) is a "multiemployer plan" (as defined in Section 3(37) of ERISA), (iv) provides for medical or life insurance benefits to current or future retired or former employees of the Company or any Subsidiary (other than as required under IRC Section 4980B or applicable state law), or (v) obligates the Company or any Subsidiary to pay any severance or similar benefit solely as a result of a change in control or ownership within the meaning of Section 280G of the IRC. (ii) Each Plan is, in all material respects, in compliance, and has been administered, maintained and funded in all material respects in accordance, with the applicable provisions of ERISA and the IRC and all other applicable laws, rules and regulations, including, but not limited to, medical continuation under IRC Section 4980B. None of the Company, any Controlled Group member, any fiduciary or any other person has, other than in an immaterial respect, with respect to any Plan, (i) engaged in any transaction prohibited by ERISA, the IRC or other applicable law; (ii) breached any fiduciary duty owed by it; or (iii) failed to file and distribute timely and properly all reports and information required to be filed or distributed in accordance with ERISA or the IRC. There are also no pending or, to the Existing Stockholders' knowledge, threatened, actions, suits, investigations or claims with respect to any Plan (other than routine claims for benefits) which could reasonably be expected to result in liability to the Company or any Subsidiary. - 32 - 39 (iii) All contributions or premiums which are due on or before the Closing Date with respect to the Plans have been timely, or will have been prior to the Closing Date, paid. (iv) Each Plan which is intended to be qualified under section 401(a) of the IRC (i) has been timely amended to reflect all requirements of the Tax Reform Act of 1986 ("TRA 86") and all subsequent legislation which is required to be adopted prior to the end of the TRA 86 remedial amendment period and (ii) has received from the Internal Revenue Service a favorable determination letter which considers the terms of the Plan as amended for such tax law changes. Nothing has occurred since the date of such letter that could adversely affect the qualified status of such Plan or the tax-exempt status of any related trust. (v) No under funded defined benefit plan has been, during the five years preceding the Closing Date, transferred out of the Company's Controlled Group. (vi) Except as set forth on Schedule 5Q - Employee Benefits, the Company and each Subsidiary has not incurred, and has no reason to expect that it will incur, any material liability to the Internal Revenue Service, the Department of Labor, the PBGC, any multiemployer plan or otherwise under Title IV of ERISA (including any withdrawal liability) or under the IRC with respect to any Plan or any other plan that the Company or any member of its Controlled Group maintains or ever has maintained or to which any of them contributes, ever has contributed, or ever has been required to contribute. (vii) With respect to each Plan, the Company has provided Purchaser with true, complete and correct copies, to the extent applicable, of (i) all documents pursuant to which the Plans are maintained, funded and administered, (ii) the most recent annual report (Form 5500 series) filed with the Internal Revenue Service (with attachments), (iii) the most recent financial statement, and (iv) all rulings, determinations, and opinions issued by any Governmental Entity in the last three years (and pending requests for governmental rulings, determinations, and opinions). 5R. Compliance with Laws. Except with respect to Legal Requirements addressed by Sections 5J (Tax Matters), 5P (Employees), 5Q (ERISA), 5S (Environmental and Safety Matters), and 5V (Healthcare Matters), and except as set forth on the attached Schedule 5R - Compliance, the Company and each Subsidiary is in substantial compliance with all Legal Requirements, and the Company and each Subsidiary has not received notice of any such non-compliance. 5S. Environmental and Safety Matters. (i) For purposes of this Agreement, the term "Environmental and Safety Requirements" shall mean all applicable federal, state and local statutes, regulations, ordinances and other provisions having the force or effect of law, and all applicable judicial - 33 - 40 and administrative orders and determinations, in each case concerning public health and safety, worker health and safety and pollution or protection of the environment (including, without limitation, all those relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, Release, threatened Release, control or cleanup of any hazardous materials, substances or wastes, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation); "Release" shall have the meaning set forth in CERCLA (as defined below); and "Environmental Lien" shall mean any Lien, whether recorded or unrecorded, in favor of any governmental entity, relating to any liability of the Company or any Subsidiary arising under any Environmental and Safety Requirements. (ii) Except as set forth on the attached Schedule 5S - Environmental: (a) The Company and each Subsidiary has complied with and is currently in compliance with all Environmental and Safety Requirements, and the Company has not received any notice, report or information regarding any liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) or any corrective, investigatory or remedial obligations arising under Environmental and Safety Requirements which relate to the Company or any of its properties or facilities. (b) Without limiting the generality of the foregoing, the Company and each Subsidiary has obtained and complied with, and is currently in compliance with all permits, licenses and other authorizations that may be required pursuant to any Environmental and Safety Requirements for the occupancy of its properties or facilities or the operation of its business. (c) None of the following exists at any property or facility owned, occupied or operated by the Company or any Subsidiary: (1) underground storage tanks or regulated surface impoundments; (2) asbestos-containing materials in any form or condition that could subject the owner or operator of such property or facility to regulation; (3) materials or equipment containing polychlorinated biphenyls; or (4) landfills. (d) The Company and each Subsidiary has not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled or Released any substance (including, without limitation, any hazardous substance) or owned, occupied or operated any facility or property, in each case so as to give rise to liabilities of the Company or any Subsidiary for response costs, natural resource damages or attorneys' fees pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, or any other Environmental and Safety Requirements. - 34 - 41 (e) Without limiting the generality of the foregoing, there are no facts, events or conditions relating to the past or present properties, facilities or operations of the Company or any Subsidiary that would give rise to any material corrective, investigatory or remedial obligations, or material liabilities, whether accrued, absolute, contingent, unliquidated or otherwise, pursuant to Environmental and Safety Requirements (including, without limitation, those liabilities relating to onsite or offsite Releases or threatened Releases of hazardous materials, substances or wastes, personal injury, property damage or natural resources damage). (f) The Company and each Subsidiary has not, either expressly or by operation of law, assumed or undertaken any liability or corrective, investigatory or remedial obligation of any other Person relating to any Environmental and Safety Requirements. (g) No Environmental Lien has, to the Existing Stockholders' knowledge, attached to any property owned, leased or operated by the Company or any Subsidiary. 5T. Affiliated Transactions. Except as set forth on the attached Schedule 5T - Affiliated Transactions, no officer, director or Affiliate of LCA or any of its Subsidiaries or, to the Existing Stockholders' knowledge, no employee of LCA or any of its Subsidiaries or any individual related by blood, marriage or adoption to any officer, director, Affiliate or employee of LCA or any of its Subsidiaries or any entity in which any such Person owns a five percent (5%) or more beneficial interest, is a party to any agreement, contract, commitment or transaction with the Company or any Subsidiary or has any interest in any material property used by the Company or any Subsidiary. 5U. Real Property. (i) The attached Schedule 5U(i) - Real Property sets forth a list of all of the real property owned by the Company and its Subsidiaries (the "Owned Real Property"). With respect to each parcel of the Owned Real Property: (i) each such parcel is owned in fee simple subject only to the Permitted Liens; and (ii) except as disclosed in Schedule 5V(b) - Thomas Care, all buildings, structures and other improvements, which are material to the Company, located on the Owned Real Property are suitable in condition and repair for their current use in all material respects, subject to the provision of usual and customary maintenance provided in the ordinary course of business with respect to buildings, structures and improvements of like nature, age, usage and construction and all water, gas, electrical, steam, compressed air, telephone, sanitary and storm sewage lines and other utilities and systems necessary to and serving the Owned Real Property are sufficient to enable the continued operation of the Owned Real Property as it is now operated in the conduct of the business of the Company and its Subsidiaries. - 35 - 42 (ii) The attached Schedule 5U(ii) - Leases sets forth a list of all of the leases and subleases (the "Leases") of real property in which the Company and its Subsidiaries have a leasehold or subleasehold interest (the "Leased Real Property") and all lease and sublease documents. The Company has delivered to the Purchaser's counsel complete and accurate copies of each of the Leases. With respect to each Lease: (i) the Lease is legal, valid, binding, enforceable and in full force and effect according to its terms and the Company holds a valid leasehold or subleasehold interest in such Lease; (ii) the Lease will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms as of immediately following the Closing; (iii) neither the Company nor, to the Existing Stockholders' knowledge, any other party to the Lease, is in breach or default, and no event as to the Company or, to the Existing Stockholders' knowledge, as to any other party, has occurred which, with notice or lapse of time, would constitute such a breach or default or permit termination, modification or acceleration under the Lease; (iv) the Company has not, and to the Existing Stockholders' knowledge, no other party to the Lease has, repudiated any provision thereof; (v) there are no disputes, oral agreements, or forbearance programs in effect as to the Lease; (vi) the Lease has not been modified in any respect, except to the extent that such modifications are disclosed by the documents delivered to the Purchaser's counsel; (vii) the Company and each Subsidiary has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease; (viii) to the Existing Stockholders' knowledge, all buildings, improvements and other structures located upon the Leased Real Property which are material to the operation of the business of the Company have been operated and maintained in substantial accordance with all applicable Legal Requirements (other than as to matters of the type addressed in Section 5V) and the terms and conditions of the Leases; and (ix) to the Existing Stockholders' knowledge, all buildings, structures and other improvements located upon the Leased Real Property which are material to the operation of the business of the Company are in suitable condition and repair for their current use in all material respects, subject to the provision of usual and customary maintenance in the ordinary course of business, with respect to buildings, structures and improvements of like nature, age, usage and construction, and all water, gas, electrical, steam, compressed air, telephone, sanitary and storm sewage and other utility lines and systems necessary to and serving the Leased Real Property are sufficient to enable the operation of the Leased Real Property as it is now operated in the operation of the business of the Company. (iii) The attached Schedule 5U(iii) - Managed Property sets forth a list of all of the management agreements (the "Management Agreements") for the property managed by the Company and its Subsidiaries (the "Managed Property"). The Company has delivered to the Purchaser's counsel complete and accurate copies of each of the Management Agreements. With respect to each Management Agreement: (i) the Management Agreement is legal, valid, binding, enforceable and in full force and effect in accordance with its terms; (ii) the Management Agreement will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms as of immediately following the Closing; (iii) neither the Company nor, to the Existing Stockholders' knowledge, any other party to the - 36 - 43 Management Agreement, is in breach or default, and no event as to the Company or, to the Existing Stockholders' knowledge, as to any other party, has occurred which, with notice or lapse of time, would constitute such a breach or default or permit termination, modification or acceleration under the Management Agreement; (iv) the Company has not, and to the Existing Stockholders' knowledge, no other party to the Management Agreement has, repudiated any provision thereof; (v) there are no disputes, oral agreements, or forbearance programs in effect as to the Management Agreement; (vi) the Management Agreement has not been modified in any respect, except to the extent that such modifications are disclosed by the documents delivered to the Purchaser's counsel; and (vii) the Company and each Subsidiary has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Management Agreement. (iv) The attached Schedule 5U(iv) - Utility Bonds sets forth a list of all of the Company's utility bonds, each of which will terminate as of the Closing Date. 5V. Healthcare Matters. (i) Set forth in Schedule 5V(i) - Healthcare is a list of each License maintained by the Company with respect to the Company's operation of the Facilities. The number of beds Licensed at each Facility on the Closing Date is set forth on Schedule 5V - Healthcare. Except as set forth in Schedule 5V - Healthcare, the Company has obtained or applied for all Licenses required by law, rule or regulation from any applicable Governmental Entity necessary for the legal operation of the Facilities as MR/DD Facilities or, where applicable, long term care nursing Facilities. (a) Except as set forth on Schedule 5V(b) - Thomas Care, the Company is in substantial compliance with all Licenses listed on Schedule 5V - Healthcare; and (b) Except as set forth on Schedule 5V(b) - Thomas Care, the Company has received no written notice from any Governmental Entity in respect of the threatened, pending, or possible suspension, revocation, amendment or termination of any License listed on Schedule 5V - Healthcare, which has not been determined in favor of the Company nor to the Existing Stockholders' knowledge is there any proposed or threatened issuance of any such notice. Assuming, for purposes of this sentence that the Purchaser has and the Company will post Closing properly file and timely file with all necessary governmental authorities all necessary reports, notifications or other documentation of the transactions described herein and that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, the transactions described herein would not, - 37 - 44 to the Existing Stockholders' knowledge, constitute a violation of any License currently held by the Company. (ii) (a) The Facilities listed on Schedule 5V(ii)(a) - Healthcare are certified to participate in the Medicaid program of the state in which they are located and are parties to Medicaid participation agreements (or contracts) for payment by the Medicaid programs. Except as set forth in Schedule 5V(ii)(a) - Healthcare and Schedule 5V(b) - Thomas Care, the Facilities with Medicaid certification and Medicaid participation agreements (contracts) have not been subject to or, to the Existing Stockholders' knowledge, threatened with, loss of Medicaid funding or termination of Medicaid participation agreements during the 12-month period terminating on the Closing Date and the Company has received no written notice of pending, threatened or possible investigations by or loss of participation in any Medicaid program for any such Facilities. Assuming, for purposes of this sentence that the Purchaser has and the Company will post Closing properly file and timely file with all necessary governmental authorities all necessary reports, notifications or other documentation of the transactions described herein and that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, the transactions described herein would not, to the Existing Stockholders' knowledge, constitute a breach of or a default under any contract between the Company and the state with which the Medicaid provider agreement exists. (b) The Facilities listed on Schedule 5V(ii)(b) - Healthcare are all of the Facilities managed by the Company under contract with the State of Florida Residential MR District which owns the Facility and provider agreement. Except as set forth in Schedule 5V(ii)(b), the contracts with the State of Florida have not been subject to, or to the Existing Stockholders' knowledge, threatened with, termination during the 12-month period terminating on the Closing Date and the Company has received no written notice of pending, threatened or possible contract terminations by the State of Florida for any such Facilities. Assuming, for purposes of this sentence that the Purchaser has and the Company will post Closing properly file and timely file with all necessary governmental authorities all necessary reports, notifications or other documentation of the transactions described herein and that this Agreement provided for the sale of Existing Stock by Holding to the Purchaser rather than the issuance of Purchaser Stock by the Company to the Purchaser and the repurchase of the Existing Stock by the Company from Holding, the transactions described herein would not, to the Existing Stockholders' knowledge, constitute a breach of or a default under any management contract between the Company and the State of Florida Residential MR District. - 38 - 45 (c) The facilities listed on Schedule 5V(ii)(c) - Healthcare are all of the Facilities operated under the Texas Home and Community-Based Services Waiver Program under Section 1915(c) of the Social Security Act. The Facilities listed on Schedule 5V(ii)(c) - Healthcare are certified by the TDMHMR as HCS Program Providers. (d) The Facilities listed on Schedule 5V(ii)(d) - Healthcare are contracted with the State of Florida to provide service to waiver clients. (iii) The Company has filed, in respect to all Facilities for which Medicaid cost reports are required, all required cost reports for the fiscal year 1995, and such reports have been filed either on a timely basis or prior to the time any penalty could be incurred for failure to file on a timely basis. Except for inadvertent errors and good faith claims which may be subject to challenge by the applicable state agency, to the Existing Stockholders' knowledge, all such cost reports accurately reflect the information to be included thereon and do not claim, and neither the Facilities nor the Company has received, reimbursement in excess of the amount provided by applicable governmental rules and regulations. Schedule 5V(iii) - Healthcare hereto indicates which of such costs reports have been audited and finally settled. The Company has made available to Purchaser the status of such cost reports which have not been audited and finally settled and notices of program reimbursement, proposed or pending audit adjustments, disallowances, appeals of disallowances and any and all other unresolved claims or disputes in respect of such cost reports of which the Company has received notice. Except as set forth on Schedule 5V(iii) - Healthcare, there are no facts or circumstances which may reasonably be expected to give rise to any material disallowance under any such cost reports. (iv) Each Facility has a patient trust fund account with a local financial institution as reflected on Schedule 5V - Healthcare. The Company's patient trust fund department monitors trust fund activity and ensures that proper documentation is in place for all disbursements from trust funds. Except for inadvertent errors which may nonetheless be subject to challenge upon audit by the applicable state agency, to the Existing Stockholders' knowledge, all such patient trust fund accounts in the aggregate accurately reflect the amount of patient trust funds required to be maintained by each facility. The Company has made available to Purchaser the status of any patient trust fund audits which have not been finally settled and notices of proposed or pending audit adjustments, disallowances, appeals of disallowances and any and all other unresolved claims or disputes of which the Company has received notice in respect of such patient trust fund accounts. Except as set forth on Schedule 5V(iv) - Healthcare, there are no facts or circumstances which may reasonably be expected to give rise to any material audit adjustment regarding any such patient trust fund accounts. Schedule 5V(iv) - Healthcare reflects Patient Trust Security Bonds of the Company, each of which will terminate as of the Closing Date. - 39 - 46 5W. Disclosure. Neither this Agreement, nor any of the schedules, attachments or Exhibits hereto, contains any untrue statement of a material fact or omits a material fact necessary to make each statement contained herein or therein, not misleading. 5X. Closing Date. The representations and warranties of the Company and the Existing Stockholders contained in this Section 5 and elsewhere in this Agreement and all information contained in any schedule hereto shall be true and correct in all material respects on the date of the Closing as though then made, except as affected by the transactions expressly contemplated by this Agreement. Section 6. Remedies for Breaches of this Agreement. 6A. Survival of Representations and Warranties. The representations and warranties of the Company and the Existing Stockholders contained in Section 5S above shall survive the Closing and continue in full force and effect for a period of four years thereafter, the representations and warranties of the Company and the Existing Stockholders contained in Sections 5A, 5B, 5C, 5J and 5Q and the first two sentences of Section 5D, and the representations and warranties of the Purchaser contained in Section 8B, shall survive the Closing and continue in full force and effect until the expiration of the applicable statute of limitations after giving effect to any extensions or waivers thereof, and all other written representations and warranties of the parties contained in this Agreement shall survive the Closing and continue in full force and effect for a period of two years thereafter. 6B. Indemnification Provisions. (i) Indemnification by Existing Stockholders. Subject to the limitations set forth herein, the Existing Stockholders (but not the Company) agree jointly and severally to indemnify each of the Purchaser (and certain management investors to be designated by the Purchaser) and the Company and their respective officers, directors, employees, partners, shareholders and agents (collectively, the "Purchaser Indemnified Parties") from and against the entirety of any Adverse Consequences any Purchaser Indemnified Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences any Purchaser Indemnified Party may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, or caused by: (i) the breach of any of the representations or warranties contained in Section 5 (as such representations and warranties are updated pursuant to Section 3A(iv) above with respect to facts, events or circumstances occurring during the Interim Period); provided that to the extent the Company takes any action or fails to take any action during the Interim Period at the direction of the Purchaser as a result of which any representation or warranty contained herein become untrue or inaccurate, such untruth or inaccuracy shall not be considered a breach for purposes of this paragraph (i); - 40 - 47 (ii) the breach of any of the pre-Closing covenants or agreements of the Company contained in this Agreement; (iii) the breach of any of the covenants or agreements of the Existing Stockholders contained in this Agreement; (iv) any Tax of the Company for any taxable period (or portion thereof) ending on or prior to the Closing Date; (v) any liability or obligation resulting from, arising out of, relating to, or caused by the Excluded Assets and Liabilities; (vi) any liability or obligation resulting from, arising out of, relating to, or caused by the management fees paid to the Company with respect to its Florida Facilities; (vii) any environmental issue described in the Environmental Report; (viii) any liability or obligation arising out of any transaction, event, occurrence or circumstance occurring or existing at or prior to the Effective Time, which is of a type which would normally be accrued or expensed on the books and records of LCA or any of its Subsidiaries rather than those of the Company and its Subsidiaries (including, without limitation, all claims incurred prior to the Effective Time with respect to health, life, dental, casualty and other insurance (including those referred to on Exhibit 7A - Exceptions to GAAP); workers' compensation and occupational injury; accrued payroll, withholding, bonuses and 401(k) and DRIP accruals and contributions; income, franchise and deferred income taxes; and discontinued operations); . (ix) any liability for the proposed recoupment pursuant to the Proposed Retroactive Rate Reduction referenced in the 8/31/95 letter from TDMHMR with respect to the Thomas Care Center; or (x) any liability or obligation resulting from, arising out of, relating to, or caused by the items disclosed on Schedule 5M - Litigation. (ii) Indemnification by Purchaser. Subject to the limitations set forth herein, the Purchaser agrees to indemnify each of the Existing Stockholders and the Company and their respective officers, directors, employees, partners, shareholders and agents (collectively, the "Seller Indemnified Parties") from and against the entirety of any Adverse Consequences any Seller Indemnified Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences any Seller Indemnified Party may suffer after the end of any applicable survival period) resulting from, - 41 - 48 arising out of, relating to, or caused by (i) the breach of any of the representations or warranties contained in Section 8B, or (ii) the breach of any of the covenants or agreements of the Purchaser contained in this Agreement. (iii) Indemnification by the Company. Subject to the limitations set forth herein, the Company agrees to indemnify each of the Purchaser (and certain management investors to be designated by the Purchaser) and the Existing Stockholders, and each of their respective officers, directors, employees, partners, shareholders and agents (collectively, the "Company Indemnified Parties") from and against the entirety of any Adverse Consequences any Company Indemnified Party may suffer through and after the date of the claim for indemnification (including any Adverse Consequences any Company Indemnified Party may suffer after the end of any applicable survival period) resulting from, arising out of, relating to, or caused by (A) the breach of any of the post-Closing covenants or agreements of the Company contained in this Agreement, (B) Interim Period Liabilities, or (C) any liability or obligation of the Company arising out of the Company's operations and activities from and after the Closing (including, without limitation, obligations under leases and other contracts assigned by the Existing Stockholders to the Company for which the Existing Stockholders remain primarily or secondarily liable to the other parties to such leases and other contracts); provided that nothing in this paragraph (iii) shall be construed to limit or impair, or create any right of setoff or counterclaim with respect to, any claim the Company may make as a Purchaser Indemnified Party or Seller Indemnified Party against any party hereto pursuant to this Section 6; provided further that nothing contained in this Section 6 shall give the right of setoff (and no right of setoff shall be asserted) as against any payment due from or obligation of the Company by reason of the existence of any claim against the Existing Stockholders hereunder. (iv) Limitations on Indemnification. With respect to claims for indemnification pursuant to Sections 6B(i) and 6B(ii) above, the following provisions shall apply: (a) If there is an applicable survival period pursuant to Section 6A above with respect to such claim, the party making such claim must make a written claim for indemnification against the party from which such party is seeking indemnification within such survival period, and with respect to any Environmental Claim, the party making such claim must make a written claim for indemnification against the party from which such party is seeking indemnification on or before the fourth anniversary of the Closing. (b) The Existing Stockholders shall not have any obligation to indemnify any Purchaser Indemnified Party from and against any Adverse Consequences arising pursuant to the breach of any of the representations or warranties contained in Section 5S above or pursuant to clause (vii) of Section 6B(i) above (each, an "Environmental Claim") unless and until (and then, subject to the - 42 - 49 other limitations herein, only to the extent) Purchaser Indemnified Parties have collectively suffered Adverse Consequences by reason of all such breaches in excess of a $500,000 aggregate basket (the "Environmental Sub-Basket"). (c) The Existing Stockholders shall not have any obligation to indemnify any Purchaser Indemnified Party from and against any Adverse Consequences arising pursuant to clauses (i) or (vii) of Section 6B(i) above unless and until (and then, subject to the other limitations herein, only to the extent) Purchaser Indemnified Parties have collectively suffered Adverse Consequences by reason of all such breaches in excess of a $1,000,000 aggregate basket (excluding for purposes of such calculation, any Adverse Consequences used in satisfying the Environmental Sub-Basket, it being the intent that as to Environmental Claims, the Existing Stockholders will have the benefit of the Environmental Sub-Basket and the provisions of this paragraph (c) to the extent of any excess). (d) The Purchaser shall not have any obligation to indemnify any Seller Indemnified Party from and against any Adverse Consequences arising pursuant to clause (i) of Section 6B(ii) unless and until (and then, subject to the other limitations herein, only to the extent) Seller Indemnified Parties have collectively suffered Adverse Consequences by reason of all such breaches in excess of a $1,000,000 aggregate basket (at which point the Purchaser will be obligated to indemnify Seller Indemnified Parties from and against all such Adverse Consequences in excess of such basket). (e) In no event shall the aggregate amount of any liability of the Existing Stockholders with respect to Adverse Consequences arising pursuant to clauses (i), (vi) or (vii) of Section 6B(i) exceed $10,000,000, and in no event shall the aggregate amount of any liability of the Purchaser with respect to Adverse Consequences arising pursuant to clause (i) of Section 6B(ii) exceed $10,000,000. (f) Neither Existing Stockholder shall be liable under the indemnification provisions of this Section 6 hereof with respect to Adverse Consequences arising pursuant to clause (i) of Section 6B(i) (other than with respect to the breach of any of the representations or warranties contained in Section 5E) to the extent that Bill M. Wooten or Tommy Ford has knowledge of facts or circumstances not disclosed, which if disclosed, would not constitute a breach at the Closing. (g) Any set of common facts and circumstances which constitute the basis for claims that both (i) a representation or warranty has been breached and (ii) a pre-Closing covenant or agreement has been breached, shall be construed as being the basis for such claim that a representation or warranty has been breached - 43 - 50 rather than the basis for such claim that a pre-Closing covenant or agreement has been breached. (h) The amount of any indemnification payable under Section 6 shall be (i) net of any insurance recoveries received by the Indemnified Party, (ii) net of any income Tax benefit realized by the Indemnified Party, (iii) increased to take account of any income Tax cost incurred by the Indemnified Party arising from the receipt or accrual of indemnity payments hereunder (grossed up for such increase) and (iv) in the case of a claim for indemnification with respect to a matter for which a reserve was taken into account in the determination of Actual Working Capital, decreased by the amount of such reserve. In computing the amount of any such Tax cost or Tax benefit, the Indemnified Party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any indemnity payment hereunder or the incurrence or payment of any indemnified Adverse Consequences. Any indemnification payment hereunder shall initially be made without regard to this paragraph and shall be increased or reduced to reflect any such net Tax cost (including gross-up) or net Tax benefit only after the Indemnified Party has actually realized such cost or benefit. For purposes of this Agreement, an Indemnified Party shall be deemed to have "actually realized" a net Tax cost or a net Tax benefit to the extent that, and at such time as, the amount of Taxes payable by such Indemnified Party is increased above or reduced below, as the case may be, the amount of Taxes that such Indemnified Party would be required to pay but for the receipt or accrual of the indemnity payment of the incurrence or payment of such Adverse Consequences, as the case may be. The amount of any increase or reduction hereunder shall be adjusted to reflect any final determination (which shall include the execution of Form 870-AD or successor form) with respect to the Indemnified Party's liability for Taxes and payments between the Existing Stockholders and the Purchaser to reflect such adjustment shall be made if necessary. Any indemnity payment under this Agreement shall be treated as an adjustment to the Repurchase Price for Tax purposes, unless a final determination (which shall include the execution of a form 870-AD or successor form) with respect to the Indemnified Party or any of its Affiliates causes any such payment not to be treated as an adjustment to the Repurchase Price for United States federal income Tax purposes. For purposes of the preceding sentence, the amount of any state income tax benefit or cost shall take into account the federal income tax effect of such benefit or cost. (i) If a Purchaser Indemnified Party suffers any Adverse Consequences for which such Purchaser Indemnified Party is entitled to indemnification under the provisions of this Agreement by reason of a violation of a Legal Requirement (a "Violation Based Loss"), then, notwithstanding anything to the contrary contained in this Agreement, to the extent the discovery of such violation by a Governmental Entity or other third party or the incurring of such - 44 - 51 Violation Based Loss resulted from the Purchaser Indemnified Party disclosing such matter to such Governmental Entity or other third party under circumstances where such Purchaser Indemnified Party was not obligated to do so under any Legal Requirement or contractual obligation, neither Existing Stockholder shall be liable to such Purchaser Indemnified Party under the indemnification provisions of this Section 6 hereof to the extent the indemnification claim resulted from such non-required disclosure. (j) With respect to any Environmental Claim for any Facility, the Existing Stockholders shall not have any obligation to indemnify any Purchaser Indemnified Party from and against any Adverse Consequences to the extent such Adverse Consequences arise solely from the diminution in fair market value of such Facility as a result of the facts and circumstances underlying such Environmental Claim. (k) With respect to any Environmental Claim asserted hereunder, the Existing Stockholders' obligation to provide indemnification hereunder shall not exceed the amount of indemnification that would be required with respect to such Environmental Claim if the use of the relevant Facility were to remain the same as the use existing as of the Closing Date. 6C. Matters Involving Third Parties. (i) If any third party shall notify any Person entitled to indemnification hereunder (each an "Indemnified Party") with respect to any matter (a "Third Party Claim") which may give rise to a claim for indemnification against any Party (each an "Indemnifying Party") under Section 6B, then the Indemnified Party shall promptly notify the Indemnifying Party thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve any Indemnifying Party from any obligation hereunder unless (and then solely to the extent) such Indemnifying Party thereby is prejudiced. (ii) Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice so long as (A) the Indemnifying Party notifies the Indemnified Party in writing within 15 days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Adverse Consequences the Indemnified Party may suffer (subject to the limitations in this Agreement) resulting from, arising out of, relating to, or caused by the Third Party Claim, and (B) the Indemnifying Party conducts the defense of the Third Party Claim diligently. The Indemnified Party shall provide the Indemnifying Party with access to such information and materials (including the right to make copies thereof) as may be reasonably necessary in order for the Indemnifying Party to evaluate the Third Party Claim. - 45 - 52 (iii) So long as the Indemnifying Party is conducting the defense of the Third Party Claim in accordance with Section 6C(ii) above, (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate (but the Indemnifying Party shall control) in defense of the Third Party Claim, (B) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party, not to be withheld unreasonably, and (C) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement containing injunctive or equitable relief (to the extent such equitable relief cannot reasonably be satisfied with money damages) with respect to the Third Party Claim without the prior written consent of the Indemnified Party not to be withheld unreasonably. Notwithstanding anything to the contrary in this Section 6C, any Third Party Claim that is also an Environmental Claim shall also be subject to the terms of Section 6D hereof; without limiting the generality of the foregoing clause, the participation by the Indemnified Party in the defense of such Third Party Claim shall be subject to the provisions of Section 6D(i)- (ii) hereof. (iv) In the event any of the conditions in Section 6C(ii) above is or becomes unsatisfied, however, (A) the Indemnified Party may defend against, and consent to the entry of any judgment or enter into any settlement with respect to, the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, any Indemnifying Party in connection therewith), (B) to the extent the Indemnified Party is entitled to indemnification as provided herein, the Indemnifying Party will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including reasonable attorneys' fees and expenses) (subject to the limitations in this Agreement), and (C) the Indemnifying Party will remain responsible for any Adverse Consequences the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim to the fullest extent provided in Section 6B (subject to the limitations in this Agreement). 6D. Environmental Management. (i) Upon assertion by a Purchaser Indemnified Party of an Environmental Claim hereunder, the Existing Stockholders shall be entitled to assume Principal Management of the subject matter of such claim. To assume Principal Management, the Existing Stockholders must notify the Purchaser Indemnified Party within 30 days of such notice that it intends to assume Principal Management. If exigent circumstances require action (including, without limitation, release reporting or remedial action) more promptly than is contemplated by the above-referenced 30-day period, the Purchaser Indemnified Party may, if reasonable under the circumstances, specify in its notice that the Existing Stockholders must provide their notice within such shorter time as is specified in such notice by the Purchaser Indemnified Party. In the event the Existing Stockholders elect not to undertake Principal Management, the Purchaser Indemnified Party shall assume Principal - 46 - 53 Management of the subject matter of the claim. As of the Closing Date, the Existing Stockholders are deemed to have assumed Principal Management with respect to the matters so designated on Schedule 5S - Environmental. "Principal Management" means the authority to principally direct the handling of the subject matter of the Environmental Claim, including, without limitation, selection of consultants, contractors, experts or advisors; investigation, evaluation, selection and implementation of remedial measures; and negotiations with or challenges to any governmental agencies and third parties. The party exercising Principal Management shall exercise sole and exclusive authority to conduct any negotiations with governmental agencies or third parties concerning the investigation, evaluation, selection, and implementation of remedial measures, subject to the express rights afforded to the party not exercising Principal Management under Section 6D(ii) below. (ii) The party not exercising Principal Management with respect to a particular matter shall be entitled, at its sole cost and expense, to reasonably participate in the management of such matter. Such participation shall include, without limitation: (A) the right to receive copies of all reports, work plans and analytical data submitted to governmental agencies, all notices or other letters or documents received from governmental agencies, any other documentation and correspondence materially bearing to the claim, and notices of material meetings; (B) the opportunity to attend such material meetings; and (C) the right to reasonably consult with, and approve in advance (which approval will not be unreasonably withheld or delayed) material actions by, the party exercising Principal Management. (iii) In the event they undertake Principal Management of any matter, the Existing Stockholders shall, upon reasonable notice to the Purchaser Indemnified Party, have reasonable access to the relevant subject Facility. The Existing Stockholders shall undertake all activities that they conduct or coordinate hereunder in a manner that does not unreasonably interfere with the day-to-day operation of such Facility of the Purchaser Indemnified Party. The party undertaking Principal Management hereunder for any matter shall manage the matter in good faith and in a responsible manner, and any activities conducted in connection therewith shall be undertaken promptly and completed expeditiously using commercially reasonable efforts, subject to the schedules and approvals required by the applicable governmental body. The parties agree to reasonably cooperate with one another in connection with addressing any matter hereunder. Without prejudicing its rights (or the rights of any other party hereto) to indemnification under this Agreement, any party hereto may take any reasonable action that is required to respond to an actual or threatened emergency or imminent endangerment situation arising from a matter otherwise covered hereunder. (iv) Any matter covered hereunder shall be deemed to have been adequately completed to the extent that it (A) attains compliance with Environmental and Safety Requirements, including without limitation, all action levels or cleanup standards - 47 - 54 promulgated thereunder and (B) does not unreasonably interfere with the operations of the affected property as such operations are now conducted. (v) In selecting a remedial measure for any Environmental Claim asserted hereunder, the parties hereto agree to use the most cost-effective remedy that satisfies the criteria specified in clauses (A) and (B) of Section 6D(iv) hereof. (vi) Notwithstanding anything to the contrary in this Section 6D, any Environmental Claim that is also a Third Party Claim shall also be subject to the terms of Section 6C hereof. 6E. Other Provisions. Each Existing Stockholder hereby agrees that it will not make any claim for indemnification hereunder against the Company by reason of the fact that (i) it was a director, officer, employee, or agent of the Company or was serving at the request of the Company as a partner, trustee, director, officer, employee, or agent of another entity or (ii) the Company joined in making representations or warranties to the Purchaser (whether such claim is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses or expenses) with respect to any action, suit, proceeding, complaint, claim, or demand brought by the Purchaser against the Existing Stockholders (if such action, suit, proceeding, complaint, claim, or demand is pursuant to this Agreement). 6F. Remedies. Except and only to the extent expressly provided in this Agreement or the Equity Agreements, on and after the Closing the Existing Stockholders, their officers, directors, employees, agents and affiliates, and the officers and directors of the Company holding offices prior to the election of the New Board members shall not have any liability, responsibility or obligation to the Purchaser, American Habilitation Services, Inc., the Company, the Company's Subsidiary or their respective officers, directors, employees, agents or Affiliates with respect to or by reason of any fact, circumstance, event, condition, act, omission, claim, transaction or arrangement in any way relating to or affecting the Company and/or its Subsidiary (including, without limitation, any environmental, corporate or healthcare matter), regardless of whether such liability, responsibility or obligation arising or is alleged to arise by reason of negligence or breach of fiduciary duty. The indemnification provisions set forth in this Agreement, together with specific performance under Section 8Q below, constitute the sole and exclusive remedy of the parties hereto in connection with the matters set forth herein and the transactions contemplated hereby and are in lieu of any other statutory, equitable common law or other remedy that any such party may have relative to such matters. In addition, THE PURCHASER AND EACH EXISTING STOCKHOLDER EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER XVII, SUBCHAPTER E. SECTIONS 17.41 THROUGH 17.63, INCLUSIVE, (EXCEPT FOR SECTION 17.55) OF THE TEXAS BUSINESS AND COMMERCE CODE, WHICH IS GENERALLY KNOWN AS THE TEXAS DECEPTIVE TRADE PRACTICES ACT. THE PURCHASER AND EACH EXISTING STOCKHOLDER REPRESENTS AND WARRANTS THAT IT (I) HAS ASSETS OF $5 MILLION OR MORE, (II) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE SUCH PARTY TO EVALUATE - 48 - 55 THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED HEREBY, (III) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO THE OTHER PARTIES AND (IV) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY. Nothing set forth in this Section 6F is intended to be construed or shall be construed to (a) modify, alter or otherwise affect in any way the respective rights, undertakings, duties, obligations, claims or liabilities of each of the parties under or arising out of this Agreement, the Stockholders Agreement, the Registration Agreement, the Transition Services Agreement, or any of the other documents, agreements, or instruments executed in connection herewith or therewith, (b) exonerate or exculpate any such Person with respect to any intentional fraud committed by such Person, or (c) limit or impair (or create any right of setoff or counterclaim with respect to) any claim the Company may make as a Purchaser Indemnified Party or Seller Indemnified Party against any party hereto pursuant to this Section 6 Section 7. Definitions. 7A. Definitions. For the purposes of this Agreement, the following terms have the meanings set forth below: "Adverse Consequences" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses, but excluding consequential or incidental damages other than those of a third party sought to be recovered by an Indemnified Party in a Third Party Claim. "Affiliate" of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, contract or otherwise. "Affiliated Group" means any affiliated group as defined in IRC Section 1504 that has filed a consolidated return for federal income tax purposes (or any similar group under state, local or foreign law) for a period during which the Company was a member. "Class A Preference Stock" means the Company's Class A Preference Stock, par value $.01 per share. "Class B Common" means the Company's Class B Common Stock, par value $.01 per share. "Class C Common" means the Company's Class C Common Stock, par value $.01 per share. - 49 - 56 "Equity Agreements" means the Stockholders Agreement, the Registration Agreement and the Services Agreement. "Facilities" means all Owned Real Property, Leased Real Property and Managed Property. "GAAP" means United States generally accepted accounting principles, consistently applied. "Governmental Entity" shall mean any court or any federal, state, or local legislative body or administrative agency, governmental municipality, department, commission, regulatory authority, board, bureau, or other body, including, without limitation, any such entity having jurisdiction over the operations of the Facilities owned or operated by the Company. "Indebtedness" means at a particular time, without duplication, (i) any indebtedness for borrowed money or issued in substitution for or exchange of indebtedness for borrowed money, (ii) any indebtedness evidenced by any note, bond, debenture or other debt security, (iii) any indebtedness for the deferred purchase price of property or services with respect to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade payables and other current liabilities incurred in the ordinary course of business), (iv) any commitment by which a Person expressly assures a creditor against loss (including, without limitation, contingent reimbursement obligations with respect to letters of credit), (v) any indebtedness guaranteed in any manner by a Person (including, without limitation, guarantees in the form of an agreement to repurchase or reimburse), (vi) any obligations under capitalized leases with respect to which a Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or with respect to which obligations a Person expressly assures a creditor against loss, and (vii) any indebtedness secured by a Lien on a Person's assets other than Permitted Liens. "Intellectual Property Rights" means all (i) patents, patent applications, patent disclosures and inventions (whether or not patentable and whether or not reduced to practice), (ii) trademarks, service marks, trade dress, trade names, logos and corporate names and registrations and applications for registration thereof together with all of the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable works and registrations and applications for registration thereof, (iv) mask works and registrations and applications for registration thereof, (v) computer software, data, data bases and documentation thereof, (vi) trade secrets and other confidential information (including, without limitation, ideas, formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced to practice), know-how, manufacturing and production processes and techniques, research and development information, drawings, specifications, designs, plans, proposals, technical data, copyrightable works, financial and marketing plans and customer and supplier lists and information), (vii) other intellectual property rights, (viii) copies and tangible embodiments thereof (in whatever protectable form or medium), and (ix) license agreements related thereto. - 50 - 57 "Investment" as applied to any Person means (i) any direct or indirect purchase or other acquisition by such Person of any notes, obligations, instruments, stock, securities or ownership interest (including partnership interests and joint venture interests) of any other Person and (ii) any capital contribution by such Person to any other Person. "IRC" means the Internal Revenue Code of 1986, as amended, and any reference to any particular IRC section shall be interpreted to include any revision of or successor to that section regardless of how numbered or classified. "knowledge" or "aware" as applied to any Person means the actual knowledge or awareness of such Person (which as applied to the Existing Stockholders shall mean such knowledge and awareness of Edward Kuntz, Lee Williams, Susan Whittle, Sydney Boone, Gary Reicherzer and Ron Prince, and which as applied to the Purchaser shall mean such knowledge and awareness of Bill M. Wooten, Deborah Moffett, Tommy Ford, Bryan Cressey and Don Edwards). "Legal Requirement" means any requirement arising under any action, statute, law, ordinance, order, judgment, decree, treaty, rule, regulation, determination or direction of any Governmental Entity, including any Environmental and Safety Requirement. "Licenses" shall mean all permits, licenses, registrations, franchises, concessions, orders, certificates, consents, authorizations and approvals of any Governmental Entity required in order to possess, use, alter, repair, maintain, or operate the Facilities owned or operated by the Company. "Liens" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof), any sale of receivables with recourse against the Company or any Affiliate, any filing or agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar statute other than to reflect ownership by a third party of property leased to the Company under a lease which is not in the nature of a conditional sale or title retention agreement, or any subordination arrangement in favor of another Person (other than any subordination arising in the ordinary course of business). "Material Adverse Effect" means a material adverse effect upon the financial condition, operating results, assets, operations or business prospects of the Company and its Subsidiaries taken as a whole. "Officer's Certificate" means a certificate signed by the Company's president or its chief financial officer, stating that the officer signing such certificate has made or has caused to be made such investigations as are reasonably necessary in order to permit him to verify the accuracy of the information set forth in such certificate. "Permitted Liens" means: - 51 - 58 (i) tax liens with respect to taxes not yet due and payable or which are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established in accordance with GAAP; (ii) deposits or pledges made in connection with, or to secure payment of, utilities or similar services, workers' compensation, unemployment insurance, old age pensions or other social security obligations; (iii) purchase money security interests in any property acquired by the Company to the extent permitted by this Agreement; (iv) interests or title of a lessor under any Lease; (v) mechanics', materialmen's or contractors' liens or encumbrances or any similar lien or restriction arising or incurred in the ordinary course of business for amounts which are not delinquent and which are not, individually or in the aggregate, material to the business of the Company and its Subsidiaries; (vi) easements, rights-of-way, restrictions and other similar charges and encumbrances not interfering with the ordinary conduct of the business of the Company or detracting from the value of the assets of the Company; (vii) liens to secure Indebtedness being repaid at the Closing; and (viii) liens outstanding on the date hereof set forth on Schedule 7A - Liens. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Provider Agreement" shall mean all agreements or contracts with any state Governmental Entity for the provision of services to Medicaid-eligible clients for which reimbursement is made under Title XIX of the Social Security Act (the Medicaid Program) or a Medicaid Waiver Program. "Securities Act" means the Securities Act of 1933, as amended, or any similar federal law then in force. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that - 52 - 59 Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control any managing director or general partner of such limited liability company, partnership, association or other business entity. "Tax" or "Taxes" means federal, state, county, local, foreign or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto). "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. "TDMHMR" means the Texas Department of Mental Health and Mental Retardation. "Treasury Regulations" means the United States Treasury Regulations promulgated under the IRC, and any reference to any particular Treasury Regulation section shall be interpreted to include any final or temporary revision of or successor to that section regardless of how numbered or classified. "Working Capital" shall mean (i) the Company's consolidated current assets (other than the Excluded Assets and Liabilities) minus (ii) the Company's consolidated current liabilities (other than Indebtedness (including intercompany Indebtedness), current liabilities resulting from the Company's obligations pursuant to Section 8A below and the Excluded Assets and Liabilities), each determined on a consolidated basis in accordance with GAAP, except for the exceptions to GAAP set forth on Exhibit 7A attached hereto. 7B. Cross Reference to Other Definitions. Set forth below is a cross reference to other defined terms used in this Agreement:
Term Section ---- ------- Actual Working Capital 1D(i) Agreement Preface Applicable Contracts 5K(i) Articles of Incorporation 2B
- 53 - 60 Bank 2H(i) Bank Agreement 2H(i) Baseline Working Capital 1D(ii) CERCLA 5S(ii)(e) Closing 1C Closing Date 1C Closing Review 1D(i) Company Preface Company Indemnified Parties 6B(iii) Draft Balance Sheet 1D(i) Effective Time 1D(i) Environmental and Safety Requirements 5S(i) Environmental Sub-Basket 6B(iv)(b) Environmental Claim 6B(iv)(b) Environmental Lien 5S(i) Environmental Report 2S Environmental Sub-Basket 6B(iv)(b) ERISA 5Q(i) Excluded Assets and Liabilities 2P Existing Stock 1A(iii) Existing Stockholders Preface Facility File Contracts 5K(i) Firm 1D(i) Health Plan 8D(v) HMO Contracts 8D(vii) Holding Preface Incident 8D(iv) Indemnified Party 6C(i) Indemnifying Party 6C(i) Interim Cash 4(i) Interim Cash Accounts 4(i) Interim Period 4(i) Interim Period Liabilities 4(ii) Interim Settlement Amount 4(iii) Interim Tax Amount 4(iii) Latest Balance Sheet 5E(ii) Leased Real Property 5U(ii) Leases 5U(ii) Managed Property 5U(iii) Management Agreements 5U(iii) Marks 3E Material Adverse Change 2J Merger Recitals
- 54 - 61 New Board of Directors 1B(iv) Objection Notice 1D(i) Owned Real Property 5U(i) Plans 5Q(i) Post-Closing Third Party Tax Claim 8C(vi)(b) Pre-Closing Third Party Tax Claim 8C(vi)(a) Principal Management 6D(i) Purchaser Preface Purchaser Indemnified Parties 6B(i) Purchaser Stock 1A(ii) Real Property 2T(v) Real Property Transferor 2O(i) Registration Agreement 2E Release 5S(i) Repurchase Price 1A(iii) Seller Indemnified Parties 6B(ii) Services Agreement 2G Solvency Certificate 2-1L Stockholders Agreement 2D Subdebt Agreement 2H(ii) Subdebt Lender 2H(ii) Third Party Claim 6C(i) Title Policies 2T(v) TOI Plan 8D(ix) TRA 86 5Q(iv) Transfer Taxes 8C(v) Transition Services Agreement 2I Violation Based Loss 6B(iv)(i)
Section 8. Miscellaneous. 8A. Expenses. The Company shall pay, and hold the Purchaser and all holders of Purchaser Stock harmless against liability for the payment of, (i) all of the fees and expenses of the Company and the Purchaser in connection with this Agreement, the Equity Agreements and the other transactions contemplated hereby, including the reasonable fees and expenses of the Purchaser's legal counsel and accountants (subject to any separate agreement between the Company and such Person) which shall be payable at the Closing, (ii) the fees and expenses incurred with respect to any amendments or waivers (whether or not the same become effective) under or in respect of this Agreement, the Equity Agreements and the other agreements contemplated hereby, the Articles of Incorporation (including, without limitation, in connection with any proposed merger, sale or recapitalization of the Company), (iii) stamp and other taxes which may be payable in respect of the execution and delivery of this Agreement or the issuance, delivery or sale of any shares of Purchaser Stock, (iv) the fees and expenses incurred with respect to the enforcement of the rights - 55 - 62 granted under this Agreement, the Equity Agreements and the other agreements contemplated hereby, if the Purchaser or holder of Purchaser Stock prevails in such enforcement action, and (v) the reasonable fees and expenses incurred by each such Person in any required filing with any governmental agency with respect to its investment in the Company or in any other required filing with any governmental agency with respect to the Company which mentions such Person; provided that none of the foregoing obligations of the Company (and no payments by the Company in satisfaction of any such obligations) shall be deemed to reduce Working Capital for purposes of Section 1D above and the Existing Stockholders shall have no liability therefor under Section 6 or otherwise. The Existing Stockholders shall pay all fees and expenses of attorneys, investment bankers, brokers, consultants, and other advisors to the Company and the Existing Stockholders relating to the transactions contemplated by this Agreement. 8B. Purchaser's Representations. The Purchaser hereby represents and warrants that: (i) the Purchaser is a limited partnership duly organized, validly existing and in good standing under the laws of Delaware and is qualified to do business in every jurisdiction in which the failure to so qualify has had or would reasonably be expected to have a Material Adverse Effect; the Purchaser possesses all requisite partnership power and authority and all material licenses, permits and authorizations necessary to carry out the transactions contemplated by this Agreement; (ii) the execution, delivery and performance of this Agreement have been duly authorized by the Purchaser; (iii) this Agreement constitutes a valid and binding obligation of the Purchaser enforceable in accordance with its terms (assuming, for purposes of this sentence, that this Agreement constitutes a valid and binding obligation of each other party hereto and thereto, enforceable in accordance with its terms); (iv) the execution and delivery by the Purchaser of this Agreement, and the fulfillment of and compliance with the respective terms hereof by it, do not and shall not (A) conflict with or result in a breach of the terms, conditions or provisions of, (B) constitute a default under, (C) result in a violation of, or (D) require any authorization, consent, approval, exemption or other action by or notice or declaration to, or filing with, any court or administrative or governmental body or agency pursuant to, the organizational documents of the Purchaser, or any law, statute, rule or regulation to which it is subject, or any agreement, instrument, order, judgment or decree to which it is bound or otherwise subject; (v) the Purchaser is an "accredited investor" (as such term is defined under Regulation D of the Securities Act) and is acquiring the Purchaser Stock purchased hereunder or acquired pursuant hereto for its own account with the present intention of holding such securities for purposes of investment, and that it has no intention of selling such - 56 - 63 securities in a distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein shall prevent the Purchaser and subsequent holders of Purchaser Stock from transferring such securities in compliance with the provisions of the Stockholders Agreement; (vi) there are no claims for brokerage commissions, finders' fees or similar compensation in connection with the transactions contemplated by this Agreement based on any arrangement or agreement binding upon the Purchaser; the Purchaser shall pay, and hold the Existing Stockholders harmless against, any liability, loss or expense (including, without limitation, reasonable attorneys' fees and out-of-pocket expenses) arising in connection with any claim by, through or under the Purchaser; and (vii) to the Purchaser's knowledge, the purchase of Purchaser Stock by the Purchaser hereunder is not prohibited by any applicable law or governmental rule or regulation and will not subject the Purchaser to any material penalty, liability or, in the Purchaser's reasonable judgment, other materially onerous condition under or pursuant to any applicable law or governmental rule or regulation, and the purchase of the Purchaser Stock by the Purchaser hereunder is permitted by laws, rules and regulations of the jurisdictions and governmental authorities and agencies to which the Purchaser is subject. 8C. Tax Matters. The following provisions shall govern the allocation of responsibility as between Purchaser and the Existing Stockholders for certain tax matters following the Closing Date: (i) Tax Periods Ending on or Before the Closing Date. The Existing Stockholders shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company and the Subsidiaries for all periods ending on or prior to the Closing Date which are filed after the Closing Date. The Existing Stockholders shall be responsible for and shall indemnify Purchaser against any liability of the Company and any Subsidiary for Taxes with respect to such periods. The Company shall provide a power of attorney to the Existing Stockholders to permit the Existing Stockholders to sign and file such Tax Returns and the Existing Stockholders shall indemnify and hold harmless all officers of the Company for any liability in connection with the preparation and filing of such Tax Returns. Each such Tax Return shall be prepared in a manner consistent with past returns and in compliance with applicable law. The Existing Stockholders shall provide copies of all such Tax Returns to the Company within 15 days of filing such Tax Returns. (ii) Affiliated Group Returns. The Existing Stockholders shall prepare or cause to be prepared and file or cause to be filed all income Tax Returns with respect to periods for which the consolidated, unitary and combined income Tax Returns of LCA will include the operations of the Company or any Subsidiary. The portion of each such Tax Return relating to the Company and each Subsidiary shall be prepared in a manner consistent with past returns, and each such return shall be prepared in compliance with applicable law. - 57 - 64 The Existing Stockholders shall be responsible for and shall indemnify Purchaser against any liability of the Company and any Subsidiary under Treasury Regulation Section 1.1502-6 (and any similar provision of state, local or foreign law) for Taxes of any Affiliated Group. The Existing Stockholders shall provide copies of the portions of all such Tax Returns relating to the Company and each Subsidiary within 15 days of filing such Tax Returns. (iii) Tax Periods Beginning Before and Ending After the Closing Date. The Company shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company for Tax periods which begin before the Closing Date and end after the Closing Date. The Existing Stockholders shall pay to the Company within 15 days of the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date. For purposes of this Section, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall (x) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the Closing Date and the denominator of which is the number of days in the entire Taxable period, and (y) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. For purposes of this Section, in the case of any Tax credit relating to a Taxable period that begins before and ends after the Closing Date, the portion of such Tax credit which relates to the portion of such Taxable period ending on the Closing Date shall (A) in the case of a credit with respect to Taxes other than Taxes based upon income or receipts, be the amount which bears the same relationship to the total amount of such Tax credit as the amount of Taxes described in (x) above bears to the total amount of such Taxes for such Taxable period, and (B) in the case of a credit with respect to Taxes based upon income or receipts, be the amount which bears the same relationship to the total amount of such Tax credit as the amount of Taxes described in (y) above bears to the total amount of such Taxes for such Taxable period. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company. In the event of any disputes concerning such determinations, procedures similar to those set forth in Section 1D(i) hereof shall be used. (iv) Cooperation on Tax Matters. (a) Purchaser, the Company and the Existing Stockholders shall cooperate fully, as and to the extent reasonably requested by the other party, (A) in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes and (B) in connection with respect to any Tax planning of the Company, the Purchaser or the Existing Stockholders. Such cooperation shall include the retention and (upon the other - 58 - 65 party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and the Existing Stockholders agree (A) to retain all books and records with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by the Purchaser of the Company, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company or the Existing Stockholders, as the case may be, shall allow the other party to take possession of such books and records. (b) Purchaser and the Existing Stockholders further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to IRC Section 6043 and all Treasury Department Regulations promulgated thereunder. (v) Certain Taxes. The Purchaser on the one hand and the Existing Stockholders on the other hand shall each be responsible for 50% of all transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement ("Transfer Taxes"). Any Tax Returns or other documentation with respect to Transfer Taxes shall be timely prepared and filed by the party normally obligated by law or regulation to make such filing. The parties agree to cooperate with each other in connection with the preparation and filing of such returns. At the time Transfer Taxes are paid, the Purchaser on the one hand and the Existing Stockholders on the other hand shall each pay 50% of such Transfer Taxes to the applicable taxing authority. (vi) Notice of Tax Audits/Claims. (a) If any third party notifies any member of the Existing Stockholders' Affiliated Group of the existence of any audit, litigation or other proceeding relating to Taxes of the Affiliated Group's combined, consolidated or unitary Tax Return relating to any taxable period during which the Company or any Subsidiary was a member of such Affiliated Group (a"Pre-Closing Third Party Tax Claim"), the Existing Stockholders shall give notice to the Company and to the Purchaser within 15 days of the notice of the Pre-Closing Third Party Tax Claim. The Existing Stockholders further covenant not to settle or otherwise dispose of any Pre-Closing Third Party Tax Claim, if such claim shall have adverse Tax consequences to the Company, any Subsidiary and/or the Purchaser (other than an adverse Tax consequence to which the Existing Stockholders have a duty to - 59 - 66 indemnify the Purchaser pursuant to Section 6 hereof), without first obtaining written consent of such settlement or disposition by the Company and the Purchaser. Such consent by the Company and the Purchaser shall not be unreasonably withheld. The Parties agree that, for purposes of this Section 8C(vi)(a), no consent shall be required from the Company or Purchaser in the event a settlement or disposition of a Pre-Closing Third Party Tax Claim (x) requires no change to the Tax Returns (involved in the Pre-Closing Third Party Tax Claim) as prepared and filed with the applicable taxing authority and such Tax Returns are prepared consistent with the past practice of the Company pursuant to this Section 8C, and (y) imposes no conditions on the manner in which Tax Returns for any period (or portion thereof) beginning after the Closing Date are prepared. (b) If any third party notifies the Company of the existence of any audit, litigation or other proceeding relating to Taxes of the Company or any Subsidiary relating to any taxable period beginning on or after the Closing which may have adverse tax consequences to the Existing Stockholders (a "Post-Closing Third Party Tax Claim"), the Company shall give notice to the Existing Stockholders within 15 days of the notice of the Post-Closing Third Party Tax Claim. If a proposed settlement or other disposition of such claim actually would result in adverse Tax consequences to the Existing Stockholders, the Purchaser shall cause the Company not to agree to such settlement or other disposition without first obtaining the written consent of the Existing Stockholders. Such consent by the Existing Stockholders shall not be unreasonably withheld. 8D. Employee Matters. (i) LCA shall be responsible for all liabilities and obligations arising under its Plans and the Company shall not assume any liability or obligation arising under the Plans, except as specifically provided below in this Section 8D. (ii) LCA shall contribute a matching contribution on behalf of each of the Company's employees who participated in the Living Centers of America, Inc. Retirement Savings Plan or the Living Centers of America, Inc. Deferred Retirement Income Plan at the same time LCA makes such matching contributions on behalf of the other active participants of such Plans (which contributions are expected to occur in November or December of 1996), equal to the matching contribution percentage then contributed on behalf of all other active participants of such Plans pro rated based on the number of days between the first day of LCA's current fiscal year or such employee's commencement date in such Plan, whichever is later, and the Closing Date. All employees of the Company and its Subsidiaries who have account balances in the Living Centers of America, Inc. Retirement Savings Plan or the Living Centers of America, Inc. Deferred Retirement Income Plan immediately prior to the Closing Date (including pursuant to the preceding sentence) shall be fully vested in all of - 60 - 67 their account balances as of the Closing Date and in the matching contribution contributed to their accounts subsequent to the Closing Date. (iii) At the Closing Date or as soon as practicable thereafter and also as soon as practicable after the date the matching contribution, which is attributable to the plan year in which the Closing Date occurs, is contributed to Company employees' accounts, LCA, the Company, and the Purchaser shall execute and deliver such documents and instruments as may be required to: (i) effect transfers of all account balances of each of the Company's employees who participated in the Living Centers of America, Inc. Retirement Savings Plan, including notes evidencing participant loans, to a plan which is sponsored by the Company and (ii) ensure that all assets of such plan which correspond to such account balances, as the same exist as of the most recent valuation date prior to each transfer, are transferred in the form of cash and/or property mutually agreed upon by LCA and the Company to a plan which is sponsored by the Company. Subsequent to the Closing Date, but only with respect to the first plan year of the Company's plan, LCA shall provide any information and assistance reasonably requested by the Company in connection with the Company's efforts to maintain the Company's plan, including any reporting, disclosure or filing requirements arising after the Closing Date with respect to the Company's plan. (iv) LCA shall retain all liabilities and obligations relating to statutory workers' compensation claims made by any Company employee which relate to Incidents first arising before the Closing Date, regardless of whether such claims were filed or presented before or after the Closing Date. For the purposes of the immediately preceding sentence, "Incident" includes, without limitation, death, accident, disability, injury, or disease. (v) LCA or its insurer shall be liable for all liabilities with respect to long term disability benefits payable to each Company employee covered under the Living Centers of America, Inc. Group Life and Health Plan (the "Health Plan") and, subject to the applicable terms and conditions of the Health Plan, whose disability commenced prior to October 1, 1996 (regardless of whether each such employee's disability status had actually been determined prior to October 1, 1996 to constitute a "disability" as defined under the Health Plan). For purposes of the preceding sentence, the term "Company employees" shall include (a) all such employees who participated in the Health Plan as of the Closing Date and who are in receipt of or eligible to receive long-term disability benefits thereunder prior to October 1, 1996, (b) all such employees who participated in the Health Plan as of the Closing Date whose disability commenced prior to October 1, 1996 and who remain disabled for the length of the relevant waiting period under the Health Plan and (c) all such employees who participated in the Health Plan as of the Closing Date and who, as of the Closing Date, were absent from active employment by reason of illness, pregnancy or injury but who, as of the Closing Date, were reasonably expected to be able to perform all of the duties of their respective positions within six months after the Closing Date but subsequently are not able - 61 - 68 to return to active employment with the Company after the Closing Date due to a disability that qualifies for long-term disability benefits under the terms of the Health Plan. (vi) Subject to the following provisions of this paragraph and the terms and conditions of the Health Plan, LCA agrees to continue to provide coverage under the HealthSelect coverage under the Health Plan for and on behalf of Company employees (and their covered dependents), who participated in the HealthSelect coverage under the Health Plan immediately prior to the Closing Date, until 12:01 a.m. on September 15, 1996 as if such Company employees had continued to be actively employed by LCA throughout the Transition Period (as defined below). For the purposes of this paragraph, the Transition Period is the period beginning at 12:01 a.m. on September 1, 1996 and ending at 12:01 a.m. on September 15, 1996. (vii) The Company agrees to sponsor a group health plan which provides major medical and other health benefits to (a) Company employees (and their covered dependents) who participated in the HealthSelect coverage under the Health Plan as of the Closing Date, beginning as of 12:01 a.m. on September 15, 1996 and (b) Company employees (and their covered dependents) who participated in the Health Plan as of the Closing Date under either the Humana Health Maintenance Organization coverage, the PCA Health Plans of Texas, Inc. coverage, the HIP Health Maintenance Organization coverage or the Travelers (Metra Health) Health Maintenance Organization coverage (collectively referred to as "HMO Contracts"), beginning as of 12:01 a.m. on October 1, 1996. Coverage and eligibility under such group health plan sponsored by the Company shall disregard, with respect to each Company employee and covered dependent, pre-existing conditions, in-patient hospitalization status (or other confinement in a healthcare facility), waiting periods and any other eligibility requirement with respect to those covered persons who participated in the Health Plan or any HMO Contract immediately prior to the Closing Date. In addition, with respect to each Company employee who did not participate in the Health Plan or HMO Contract immediately prior to the Closing Date, such Company employee may enroll himself or herself (and his or her eligible dependents) in the Health Plan, effective 12:01 a.m. on October 1, 1996. (viii) Subject to the following provisions of this paragraph and the terms and conditions of the applicable plan, program or insurance policy, LCA agrees to continue to provide coverage under its (a) long-term disability coverage under the Health Plan, (b) group term life insurance coverage under the Health Plan, (c) dental insurance coverage under the Health Plan, (d) Starbridge plan and (e) HMO Contracts, for and on behalf of those Company employees and their covered dependents who participated in such plans immediately prior to the Closing Date, during the Transition Period (as defined below) as if such Company employees had continued to be actively employed by LCA throughout the Transition Period. For purposes of this paragraph, the Transition Period is the period beginning at 12:01 a.m. on September 1, 1996 and ending at 12:01 a.m. on October 1, 1996. - 62 - 69 (ix) With respect to those Company employees who are covered as of the Closing Date under the LCA Texas Occupational Injury/Illness Plan (the "TOI Plan"), which plan provides benefits for work-related bodily injuries and occupational diseases, LCA agrees to continue to provide coverage under the TOI Plan on their behalf, during the period beginning at 12:01 a.m. on September 1, 1996 and ending on 12:01 a.m. on October 1, 1996. 8E. Consent to Amendments. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company, the Existing Stockholders or the Purchaser unless such modification, amendment or waiver is approved in writing by the Company (as approved by the vote of the Company's Board of Directors), the Existing Stockholders and the holders of a majority of the Purchaser Stock then outstanding, respectively. No other course of dealing between the Company, the Existing Stockholders and any holder of the Purchaser Stock or any delay in exercising any rights hereunder shall operate as a waiver of any rights of any such holders to the extent that there is no duplication of remedy or recovery. 8F. Successors and Assigns. Except as otherwise expressly provided herein, all covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto whether so expressed or not. In addition, and whether or not any express assignment has been made, the provisions of this Agreement which are for the Purchaser's benefit as a purchaser or holder of Purchaser Stock are also for the benefit of, and enforceable by, any subsequent holder of such Purchaser Stock. 8G. Generally Accepted Accounting Principles. Where any accounting determination or calculation is required to be made under this Agreement or the exhibits hereto, such determination or calculation (unless otherwise provided) shall be made in accordance with GAAP as in effect at the Closing. 8H. Entire Agreement. This Agreement and the other agreements contemplated hereby constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any prior understanding, agreements, or representations by or among the parties hereto, written or oral, to the extent they related in any way to the subject matter hereof. 8I. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 8J. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Agreement. - 63 - 70 8K. Descriptive Headings; Interpretation. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. The use of the word "including" in this Agreement shall be by way of example rather than by limitation. The use of specific dollar thresholds in any provision of this Agreement shall not be determinative of the standard of materiality for purposes of any other provision of this Agreement. 8L. Governing Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Texas, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Texas or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Texas. 8M. Notices. All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement shall be in writing and shall be deemed to have been given when delivered personally to the recipient, one day after being sent to the recipient by reputable overnight courier service (charges prepaid) or three days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Purchaser and to the Company at the address indicated below: If to the Company before the Closing, to: Living Centers-Devcon, Inc. 15415 Katy Freeway, Suite 800 Houston, TX 77094 Attention: Sydney K. Boone, Jr., Associate General Counsel Facsimile: (713) 578-4654 with a copy to: Mayor, Day, Caldwell & Keeton, L.L.P. 700 Louisiana, Suite 1900 Houston, TX 77002-2778 Attention: Eddy Rogers Jeff C. Dodd Facsimile: (713) 225-7047 If to the Company after the Closing, to: American Habilitation Systems, Inc. 15915 Katy Freeway, Suite 340 - 64 - 71 Houston, TX 77094 Attention: Bill M. Wooten Facsimile: (713) 398-7999 with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: Kevin R. Evanich Sanford E. Perl Facsimile: (312) 861-2200 If to the Purchaser, to: Golder, Thoma, Cressey, Rauner Fund IV, L.P. 6100 Sears Tower Chicago, Illinois 60606 Attention: Bryan C. Cressey Donald J. Edwards with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: Kevin R. Evanich Sanford E. Perl Facsimile: (312) 861-2200 If to either Existing Stockholder, to: Living Centers of America, Inc. 15415 Katy Freeway, Suite 800 Houston, TX 77094 Attention: Sydney K. Boone, Jr., Vice President and Associate General Counsel Facsimile: (713) 578-4654 - 65 - 72 with a copy to: Mayor, Day, Caldwell & Keeton, L.L.P. 700 Louisiana, Suite 1900 Houston, TX 77002-2778 Attention: Ed J. Rogers Jeff C. Dodd Facsimile: (713) 225-7047 or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. 8N. No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 8O. Third Party Beneficiaries. Except as provided herein, this Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors, heirs and assigns. 8P. Termination; Effect of Termination. (i) Termination. This Agreement may be terminated as provided below: (a) by mutual written consent of the Company and the Purchaser; (b) by the Company if there has been a material breach on the part of the Purchaser, and by the Purchaser if there has been a material breach by the Company or the Existing Stockholders, of any representation, warranty, covenant or agreement contained in this Agreement; (c) by the Purchaser if any of the conditions in Section 2 has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Purchaser to comply with its obligations under this Agreement) and the Purchaser has not waived such condition on or before the Closing Date; (d) by the Existing Stockholders if any of the conditions in Section 2-1 has not been satisfied as of the Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of any of the Existing Stockholders or the Company to comply with its obligations under this Agreement) - 66 - 73 and the Existing Stockholders and the Company has not waived such condition on or before the Closing Date; (e) by either the Company or the Purchaser if the transactions contemplated hereby have not been consummated on or prior to September 13, 1996; provided that neither the Company nor the Purchaser shall be entitled to terminate this Agreement pursuant to this Section 8P if such party's material breach of this Agreement has prevented the consummation of the transactions contemplated hereby; or (f) by the Existing Stockholders, the Purchaser or the Company if any of the conditions set forth in Sections 2W, 2Y, 2-1P or 2-1Q are not satisfied on or before September 6, 1996 or if the Existing Stockholders, the Purchaser or the Company have not agreed upon the form and substance of the Transition Services Agreement by such date.. (ii) Effect of Termination. Each party's right of termination under Section 8P(i) is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 8P(i), all further obligations of the parties under this Agreement will terminate, except that the obligations in Section 8A will survive; provided, however, that if this Agreement is terminated by a party because of the breach of this Agreement by another party or because one or more of the conditions to the terminating party's obligations under this Agreement is not satisfied as a result of another party's failure to comply with its obligations under this Agreement, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 8Q. Specific Performance. Each of the parties hereto acknowledges and agrees that the other parties hereto would be damaged irreparably in the event any of the covenants and agreements of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties hereto shall be entitled to an injunction or injunctions to prevent breaches of the covenants and agreements of this Agreement and to enforce specifically such provisions in this Agreement and the terms and provisions thereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties hereto and the matter at issue in addition to any other remedy to which they may be entitled, at law or in equity, in accordance with the terms of this Agreement. * * * * * - 67 - 74 IN WITNESS WHEREOF, the parties hereto have executed this Recapitalization Agreement on the date first written above. LIVING CENTERS-DEVCON, INC. By: /s/ [Signature Omitted] ----------------------------------- Its: [Title Omitted] ----------------------------------- GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. By: GTCR IV, L.P. Its: General Partner By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner By: /s/ [Signature Omitted] ----------------------------------- Its: [Title Omitted] ----------------------------------- THE EXISTING STOCKHOLDERS: LIVING CENTERS OF AMERICA, INC. By: /s/ [Signature Omitted] ----------------------------------- Its: [Title Omitted] ----------------------------------- DEVCON HOLDING COMPANY By: /s/ [Signature Omitted] ----------------------------------- Its: [Title Omitted] ----------------------------------- 75 FIRST AMENDMENT TO RECAPITALIZATION AGREEMENT THIS FIRST AMENDMENT, dated as of September 13, 1996 (this "Amendment"), is made to the Recapitalization Agreement, dated as of August 30, 1996 (the "Agreement"), by and among Living Centers-Devcon, Inc., a Florida corporation (the "Company"), Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware limited partnership (the "Purchaser"), Living Centers of America, Inc. ("LCA") and Devcon Holding Company ("Holding"). LCA and Holding are collectively referred to herein as the "Existing Stockholders." Terms used and not otherwise defined herein have the meanings accorded to such terms in the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. The side letter entered into by the parties hereto on September 6, 1996 concerning, among other things, the Transition Services Agreement and the Company's financial statements, is hereby incorporated by reference to the full extent as if restated herein. 2. Section 1A(ii) of the Agreement is hereby deleted in its entirety and the following provision is substituted in lieu thereof: "(ii) Purchaser Stock. The New Board of Directors shall authorize the issuance and sale to the Purchaser (or its designees) of an aggregate of 13,978.27 shares of Class A Preference Stock for a purchase price of $1,000.00 per share and an aggregate of 68,409 shares of Class C Common for a purchase of $ 1.43 per share, each having the rights and preferences set forth in Exhibit 1A attached hereto. The shares of Class A Preference Stock and Class C Common to be purchased hereunder are collectively referred to herein as the "Purchaser Stock."" 3. Section 1B(i) of the Agreement is hereby deleted in its entirety and the following provision is substituted in lieu thereof: "(i) Purchase and Sale of Purchaser Stock. At the Closing, subject to the terms and conditions set forth herein, the Company shall sell to the Purchaser (or its designees), and the Purchaser (or its designees) shall purchase from the Company, the number of shares of Class A Preference Stock and Class C Common set forth in Section 1A(i) hereof for an aggregate purchase price of $14,076,000." 4. Section 1C of the Agreement is hereby deleted in its entirety and the following provision is substituted in lieu thereof: " 1C. The Closing. The closing of the purchase and sale of the Purchaser Stock and redemption of the Existing Stock (the "Closing") shall take place at the offices of 76 Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois (or, at the Purchaser's election, at the offices of Winston & Strawn, 200 Park Avenue, New York, New York) at 10:00 a.m. on September 13, 1996 (the "Closing Date"). At the Closing, (i) the Company shall deliver to the Purchaser (or its designees) stock certificates evidencing the Purchaser Stock to be purchased by the Purchaser (or its designees), registered in the Purchaser's (or its designees' names) upon payment by the Purchaser (or its designees) of the purchase price therefor by wire transfer of immediately available funds to such account as is designated by the Company, in the aggregate amount set forth in Section 1B(i) hereof (provided that the Purchaser may, or it may permit one of its designees to, pay for up to $76,000 of the Purchaser Stock with a promissory note in lieu of cash), (ii) the Company shall enter into the financing arrangements described in Section 1B(ii) hereof, and (iii) Holding shall deliver to the Company stock certificates evidencing the Existing Stock to be repurchased from Holding by the Company upon payment of the Repurchase Price therefor by a cashier's or certified check, or by wire transfer or immediately available funds to such account as is designated by Holding." 5. Section 4(iii) of the Agreement is hereby deleted in its entirety and the following provision is substituted in lieu thereof: "(iii) During the Interim Period, the Existing Stockholders shall provide the Purchaser with a list of disbursements to be made from the Interim Cash Account (or made as advances by the Existing Stockholders on behalf of the Company) to satisfy liabilities and expenses referenced in Section 4(i) above. Immediately prior to the Closing, the Existing Stockholders shall provide a statement listing the amount of Interim Cash deposited in, and disbursements made from, the Interim Cash Accounts and liabilities and expenses referenced in Section 4(i) above as to which no disbursements have been made. To the extent that such statement reflects that the amount of Interim Cash deposited exceeds the sum of such disbursements made, such liabilities and expenses and the Prepaid Rent Amount (as defined below), the Company will retain such excess and the Existing Stockholders will be entitled to all amounts not so retained; to the extent that such statement reflects that the amount of Interim Cash deposited is less than such sum of disbursements made, liabilities and expenses, and the Prepaid Rent Amount, then the Company shall pay to the Existing Stockholders the amount of such deficiency at the Closing. The amount of such excess or deficiency shall be referred to herein as the "Interim Settlement Amount." The Prepaid Rent Amount shall mean lease payments made on behalf of the Company in the amount of $132,562.62. LCA will pay and hold the Company harmless with respect to the payroll payments due to the Company's and its Subsidiary's employees on Wednesday September 4, 1996 (without limiting the generality of the foregoing, the Interim Cash Account will not be reduced by the amount of such payment). The preceding sentence will not apply to any other payroll payments made during the Interim Period." - 2 - 77 6. Section 6B(i) of the Agreement is hereby amended to add the following clauses 6B(i)(xi) through 6B(i)(xx): "(xi) in connection with the San Augustine Development Center, any liability or obligation arising under that certain Deed of Trust dated August 7, 1980 to First International Bank in Houston, NA securing the amount of $355,000; (xii) in connection with the Sweetbriar Development Center, any liability or obligation arising under (a) that certain Deed of Trust dated October 15, 1976 to Don Aron, Trustee securing the amount of $450,000, and (b) that certain Deed of Trust dated August 7, 1980 to Carl R. Graef, Trustee securing that amount of $433,000; (xiii) in connection with the Cypress Group Home, any liability or obligation arising under that certain Deed of Trust dated September 28, 1984 to Malcolm E. Dorman, Trustee securing the amount of $55,920; (xiv) in connection with the Commanche Flats development, any liability or obligation arising under that certain Deed of Trust dated September 20, 1988 to Maurice S. Horine securing the amount of $80,000; (xv) in connection with the West Road Group Home, any liability or obligation arising under that certain Mortgage to Duval Federal Savings and Loan Association securing the amount of $45,800; (xvi) in connection with the Gable Group Home, any liability or obligation arising under that certain Mortgage to Citibank, Federal Savings Bank dated October 11, 1991 securing the amount of $19,864; (xvii) in connection with the Sandy Oaks I and Sandy Oaks II developments, any liability or obligation arising under that certain tax suit filed on May 24, 1994 in Denton County, Texas as Denton ISD, et al vs. Living Center Devcon, Inc., Cause #C94319; (xviii) in connection with the Jacksonville Business Office, Normandy Village, Fern Group Home, Marlake Group Home, Lake Margaret Group Home, and Norwalk Group Home, any liability or obligation under the current leases for said properties arising out of the Company being denied the benefits or use and enjoyment of said properties due to an alleged or actual failure of the Existing Stockholders to provide a valid and subsisting leasehold interest in said properties. The Company hereby agrees to be bound by the terms of the current leases for said properties; - 3 - 78 (xix) in connection with the development at 22 West Lake Beauty Drive, Orlando, Florida, any liability or obligation arising under the lease relating thereto by reason of the failure of the Existing Stockholders to obtain the necessary landlord consent to the assignment of the lease for this development to the Company; (xx) in connection with the Riverview Group Home, the Rincon Group Home, the Aransas Pass Group Home, the Orange Grove Group Home, the Ricardo Group Home, the Silverway Group Home, the Pendleton Group Home, and the Harrison Group Home, any liability or obligation arising out of the failure of the Existing Stockholders to pay the remaining obligations on that certain Promissory Note from ARA Living Centers of Texas, Inc. to Brush County Services in the amount of $518,000. The Existing Stockholders hereby agree to use reasonable efforts to obtain (1) releases for the Deeds of Trust or Mortgages referenced in clauses 6B(i)(xi)-(xvi) and to provide same to the Company, and (2) the dismissal of the tax suit referenced in clause 6B(i)(xvii). The Existing Stockholders' obligations under clauses 6B(i)(xi) through 6B(i)(xviii) above shall be limited to discharging (or providing adequate security for the discharge of) the liability, if any, secured by liens described therein. In addition, the Existing Stockholders' obligations under clause 6B(i)(xix) above shall be limited to discharging the lease obligations in clause 6B(i)(xix)." 7. Each reference in Sections 6B(i)(iv), 8C(i) and 8C(ii) to the term "Closing Date" is hereby replaced with the term "Effective Time." 8. Section 8C of the Agreement is hereby amended to add the following subsection (e)(ii): "Effective Date. The parties agree for all purposes relating to Tax matters (including, but not limited to, the preparation of Tax Returns) they will treat the transactions contemplated by Section 1 as having occurred as of the close of business on August 31, 1996, notwithstanding the fact that the Closing will occur after such date. Such treatment shall not constitute a breach of the obligations of the Existing Stockholders or the Company with respect to Taxes or a breach of any representation or warranty concerning Taxes. The Company hereby indemnifies each of the Existing Stockholders and their Affiliates from any Adverse Consequences suffered by the Existing Stockholders and their Affiliates resulting from, arising out of or relating to any determination by any Tax Governmental Authority that such tax treatment is incorrect; provided that the Company's liabilities under the preceding indemnity shall not exceed $50,000." - 4 - 79 9. Except as expressly amended or modified hereby, the Agreement will and does remain in full force and effect. 10. This Amendment will be governed by and construed in accordance with the domestic laws of the State of Texas, without giving effect to any choice of law or conflict provision or rule (whether of the State of Texas or any other jurisdiction) that would cause the laws of any jurisdiction other than the State of Texas to be applied. In furtherance of the foregoing, the internal law of the State of Texas will control the interpretation and construction of this Amendment, even if under such jurisdiction's choice of law or conflict of law analysis, the substantive law of some other jurisdiction would ordinarily apply. 11. This Agreement may be executed simultaneously in two or more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together shall constitute one and the same Amendment. * * * * - 5 - 80 IN WITNESS WHEREOF, the Parties have executed this First Amendment to Recapitalization Agreement as of the date first written above. LIVING CENTERS-DEVCON, INC. By: /s/ [Signature Omitted] ---------------------------------- Its: [Title Omitted] ---------------------------------- GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. By: GTCR IV, L.P. Its: General Partner By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner By: /s/ [Signature Omitted] ---------------------------------- Its: [Title Omitted] ---------------------------------- THE EXISTING STOCKHOLDERS: LIVING CENTERS OF AMERICA, INC. By: /s/ [Signature Omitted] ---------------------------------- Its: [Title Omitted] ---------------------------------- DEVCON HOLDING COMPANY By: /s/ [Signature Omitted] ---------------------------------- Its: [Title Omitted] ---------------------------------- - 6 - EX-4.7 3 THIRD AMENDED & RESTATED CREDIT AGREEMENT 1 Exhibit 4.7 THIRD AMENDED AND RESTATED CREDIT AGREEMENT 2 [Execution Copy] ================================================================================ $500,000,000.00 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of August 19, 1996 Among LIVING CENTERS OF AMERICA, INC. as Borrower, THE BANKS NAMED IN THIS CREDIT AGREEMENT as Banks, CHASE SECURITIES INC. as Syndication Agent, TORONTO DOMINION (TEXAS), INC. as Documentation Agent, and NATIONSBANK OF TEXAS, N.A. as Administrative Agent ================================================================================ 3 TABLE OF CONTENTS [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS]
Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02. Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 1.03. Accounting Terms; Changes in GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 1.04. Classes and Types of Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 1.05. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE II THE ADVANCES AND THE LETTERS OF CREDIT Section 2.01. Tranche A and Tranche B Advances; Extension of Tranche A Maturity Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.02. Method of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.03. Competitive Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 2.04. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.05. Reduction of the Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.06. Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.07. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.08. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.09. Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 2.10. Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 2.11. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 2.12. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 2.13. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 2.14. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 2.15. Bank Replacement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Section 3.02. Conditions Precedent to all Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Corporate Existence; Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.02. Corporate Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4 [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS] Section 4.03. Authorization and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.04. Enforceable Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.05. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.06. True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 4.07. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.09. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.10. Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 4.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.12. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 4.13. No Burdensome Restrictions; No Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 4.14. Environmental Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Section 4.15. Permits, Licenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 4.16. Health Care Regulatory Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01. Compliance with Laws, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.02. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.03. Preservation of Corporate Existence, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.04. Payment of Taxes, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.05. Visitation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.06. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.07. Maintenance of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 5.08. Additional Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 ARTICLE VI NEGATIVE COVENANTS Section 6.01. Liens, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 6.02. Debts, Guaranties and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 6.03. Agreements Restricting Liens and Distributions . . . . . . . . . . . . . . . . . . . . . . 62 Section 6.04. Merger or Consolidation; Asset Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 6.05. Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.06. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 6.07. Acquisition Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 6.08. Affiliate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 6.09. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 6.10. Cash Flow Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 6.11. Leverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 6.12. Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
-ii- 5 [PAGE NUMBERS IN THIS EXHIBIT DO NOT CORRESPOND TO THIS TABLE OF CONTENTS] Section 6.13. Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 ARTICLE VII REMEDIES Section 7.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 7.02. Optional Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 7.03. Automatic Acceleration of Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.04. Cash Collateral Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.05. Non-exclusivity of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 7.06. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 ARTICLE VIII THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS Section 8.01. Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 8.02. Administrative Agent's Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 8.03. The Administrative Agent and Its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 8.04. Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 8.05. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 8.06. Successor Administrative Agent and Issuing Banks . . . . . . . . . . . . . . . . . . . . . 73 ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 9.02. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 9.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 9.04. Costs and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 9.05. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 9.06. Bank Assignments and Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 9.07. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 9.08. Execution in Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.09. Survival of Representations, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.10. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.11. Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.12. Usury Not Intended . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Section 9.13. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 9.14. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 9.15. Waiver of Jury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
-iii- 6 EXHIBITS: Exhibit A - Form of Assignment and Acceptance Exhibit B - Form of Guaranty Exhibit C - Form of Notice of Borrowing Exhibit D - Form of Notice of Conversion or Continuation Exhibit E-1 - Form of Tranche A Note Exhibit E-2 - Form of Tranche B Note Exhibit E-3 - Form of Competitive Advance Note Exhibit F - Form of Compliance Certificate Exhibit G-1 - Form of Competitive Bid Request Exhibit G-2 - Form of Notice of Competitive Bid Request Exhibit G-3 - Form of Competitive Bid Exhibit G-4 - Form of Competitive Bid Acceptance/Rejection SCHEDULES: Schedule 1 - Notice Information for Banks Schedule 4.01 - Subsidiaries Schedule 6.01 - Certain Secured Debt Schedule 6.02 - Certain Unsecured Debt Schedule 6.08 - Certain Intercompany Arrangements -iv- 7 THIRD AMENDED AND RESTATED CREDIT AGREEMENT This Third Amended and Restated Credit Agreement dated as of August 19, 1996 is among (a) Living Centers of America, Inc., a Delaware corporation ("Borrower"); (b) the Banks (as defined below); (c) NationsBank of Texas, N.A., as Administrative Agent for the Banks; (d) Chase Securities Inc., as Syndication Agent; and (e) Toronto Dominion (Texas), Inc., as Documentation Agent. The Borrower, the Banks, the Administrative Agent, the Syndication Agent, and the Documentation Agent agree as follows: INTRODUCTION A. The Borrower, The Long-Term Credit Bank of Japan, Limited, New York Branch, The Bank of Nova Scotia and Toronto Dominion (Texas), Inc., as co-agents, the Administrative Agent, and certain of the Banks are parties to the Second Amended and Restated Credit Agreement dated as of June 29, 1995 (as the same has been amended, modified and supplemented since such date, the "Existing Credit Agreement"). B. The Borrower, the Administrative Agent, the Syndication Agent, the Documentation Agent, and the Banks have agreed to amend and restate the Existing Credit Agreement by entering into this Agreement. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS Section 1.01. Certain Defined Terms. As used in this Agreement, the terms "Borrower" and "Existing Credit Agreement" shall have the meanings set forth above and the following terms shall have the following meanings (unless otherwise indicated, such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Acquisition Expenditures" means, for any period, the aggregate of all expenditures and costs of the Borrower and its Subsidiaries paid in cash, debt securities, Property other than equity securities, or the assumption of Debt during such period for (a) the purchase or expansion of care homes, care centers, institutional pharmacies, rehabilitation clinics, or other business assets from another Person, (b) the acquisition of stock, partnership, -1- 8 joint venture interests or other equity interests in any Person, and (c) the construction or expansion of any care homes or care centers, institutional pharmacies, rehabilitation clinics, or other business assets of the Borrower or its Subsidiaries; excluding, however, the amount of the consideration paid during such period in connection with the purchase of Property pursuant to the options under the Unispec Leases in an amount not to exceed the lesser of (i) the amount payable in connection with the exercise of any such option and (ii) the fair market value of such Property on the date of such purchase. "Adjusted Base Rate" means, for any day, the fluctuating rate per annum of interest equal to the greater of (a) the Base Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2%. "Administrative Agent" means NationsBank of Texas, N.A. in its capacity as an agent pursuant to Article VIII and any successor agent pursuant to Section 8.06. "Advance" means a Tranche A Advance, a Tranche B Advance or a Competitive Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person or any Subsidiary of such Person. The term "control" (including the terms "controlled by" or "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of equity interests, by contract or otherwise. "Agreement" means this Third Amended and Restated Credit Agreement dated as of August 19, 1996 among the Borrower, the Banks, the Administrative Agent, the Syndication Agent, and the Documentation Agent, as it may be amended, modified, or supplemented from time-to-time. "Applicable Lending Office" means, with respect to each Bank, such Bank's Domestic Lending Office in the case of a Base Rate Advance and such Bank's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Applicable Margin" means, at any time with respect to any Advance, the commitment fee, or the Letter of Credit fees under Section 2.04, the following percentages determined as a function of the Leverage Ratio most recently determined as provided below in this definition: -2- 9
============================================================================================================ Level I Level II Level III Level IV Level V Ratio Ratio greater greater than Ratio greater than or equal or equal to than or equal Ratio greater Ratio to .75, but 1.75, but to 2.50, but than or equal less than less than less than less than 3.00 to 3.00 .75 1.75 2.50 ============================================================================================================ Eurodollar Rate Advance .250% .325% .425% .500% .575% - Tranche A Advance - ------------------------------------------------------------------------------------------------------------ Eurodollar Rate Advance .300% .375% .500% .575% .650% - Tranche B Advance - ------------------------------------------------------------------------------------------------------------ Base Rate Advance 0% 0% 0% 0% 0.0% - ------------------------------------------------------------------------------------------------------------ Facility Fee - Tranche .15% .175% .20% .25% .30% A Commitment - ------------------------------------------------------------------------------------------------------------ Facility Fee - Tranche .10% .125% .125% .175% .225% B Commitment ============================================================================================================
The foregoing ratio (a) shall be deemed to be Level III until September 30, 1996 and (b) shall thereafter be determined from the financial statements of the Borrower and its Subsidiaries most recently delivered pursuant to Section 5.06. Any change in the Applicable Margin after September 30, 1996 shall be effective upon the date of delivery of the financial statements pursuant to Section 5.06. If the Borrower fails to deliver such financial statements after September 30, 1996 within the times specified in Section 5.06, such ratio shall be deemed to be Level V until the Borrower delivers such financial statements to the Administrative Agent and the Banks. "Assignment and Acceptance" means an assignment and acceptance entered into by a Bank and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of the attached Exhibit A. "Banks" means the lenders listed on the signature pages of this Agreement and each Eligible Assignee that shall become a party to this Agreement pursuant to Section 9.06. "Base Rate" means a fluctuating interest rate per annum as shall be in effect from time-to-time equal to the rate of interest publicly announced by NationsBank of Texas, N.A. as its base rate, whether or not the Borrower has notice thereof. -3- 10 "Base Rate Advance" means an Advance which bears interest as provided in Section 2.07(a). "Borrowing" means a Tranche A Borrowing, a Tranche B Borrowing, or a Competitive Borrowing. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City and Dallas, Texas and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on by banks in the London interbank market. "Capital Expenditures" means, for any four fiscal quarter period, the greater of: (a) the aggregate of all expenditures and costs (whether paid in cash or accrued as liabilities during that period and including that portion of Capital Leases incurred during such period which are capitalized on the balance sheet of the Borrower) of the Borrower and its Subsidiaries during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant or equipment or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower, excluding, however: (i) the amount of the consideration paid that the Borrower books as a capital expenditure during such period in connection with the purchase of Property pursuant to the options under the Unispec Leases; (ii) Acquisition Expenditures made during such period; and (iii) up to $25,000,000.00 of aggregate cash consideration paid during such period for all purchases of facilities which have been leased by the Borrower or any of its Subsidiaries for at least three years before the date of such purchase and (b) $400 times the average number of skilled nursing beds of the Borrower and its Subsidiaries during such period. "Capital Leases" means, as applied to any Person, any lease of any Property by such Person as lessee which would, in accordance with GAAP, be required to be classified and accounted for as a capital lease on the balance sheet of such Person. "Cash Collateral Account" means a special interest bearing cash collateral account containing cash deposited pursuant to Section 7.02(b) or 7.03(b) to be maintained at the Administrative Agent's office in accordance with Section 7.04. -4- 11 "Cash Flow" means, for any period, (a) the Borrower's EBITDA for such period plus (b) to the extent deducted in determining Net Income and without duplication, Lease Expense minus (c) cash taxes paid by the Borrower and its Subsidiaries during such period minus (d) Net Restricted Payments made during such period minus (e) Capital Expenditures for such period. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, state and local analogs, and all rules and regulations and requirements thereunder in each case as now or hereafter in effect. "Class" has the meaning set forth in Section 1.04. "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute. "Commitments" means, as to any Bank, its Tranche A Commitment and its Tranche B Commitment. "Competitive Advance" means any advance by a Bank to the Borrower pursuant to Section 2.03 and refers to a Eurodollar Auction Advance or a Fixed Rate Auction Advance. "Competitive Advance Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit E-3, evidencing indebtedness of the Borrower to such Bank resulting from Competitive Advances owing to such Bank. "Competitive Bid" means an offer by a Bank to make a Competitive Advance pursuant to Section 2.03 in the form of Exhibit G-3. "Competitive Bid Acceptance/Rejection" means a notification in the form of Exhibit G-4 made by the Borrower pursuant to Section 2.03 to accept or reject a Competitive Bid. "Competitive Bid Rate" means, as to any Competitive Advance made by a Bank, (i) in the case of a Eurodollar Auction Advance, the Margin, and (ii) in the case of a Fixed Rate Auction Advance, the fixed rate of interest offered by the Bank making such Competitive Bid. "Competitive Bid Request" means a request by the Borrower in the form of Exhibit G-1 for Competitive Bids. "Competitive Borrowing" means a Borrowing consisting of a Competitive Advance or concurrent Competitive Advances from the Bank or Banks whose Competitive Bids for such Borrowing have been accepted by the Borrower under the bidding procedure described in Section 2.03. -5- 12 "CON" means a certificate of need or other license or permit issued by a state health facilities planning board or similar agency or body required for the construction, expansion, or investment in a health facility. "Control Percentage" means, with respect to any Person, the percentage of the outstanding capital stock or other ownership interests of such Person having ordinary voting power which gives the direct or indirect holder of such stock or interests the power to elect a majority of the Board of Directors or similar governing body of such Person. "Controlled Group" means all members of a controlled group of corporations and all trades (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Code. "Convert", "Conversion", and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type pursuant to Section 2.02(b). "Credit Documents" means this Agreement, the Notes, the Guaranties, the Letter of Credit Documents, and each other agreement, instrument or document executed by the Borrower or any of its Subsidiaries at any time in connection with this Agreement. "Debt," for any Person, means without duplication: (a) indebtedness of such Person for borrowed money; (b) obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) obligations of such Person to pay the deferred purchase price of property or services; (d) obligations of such Person as lessee under Capital Leases; (e) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of another Person of the kinds referred to in clauses (a) through (d) above; (f) indebtedness or obligations of others of the kinds referred to in clauses (a) through (e) secured by any Lien on or in respect of any Property of such Person; and (g) all liabilities of such Person in respect of unfunded vested benefits under any Plan. -6- 13 "Default" means (a) an Event of Default or (b) any event or condition which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Devcon Stock Sale" means the sale by the Borrower of more than a majority of its ownership interest in Living Centers-Devcon, Inc., a wholly owned Subsidiary of the Borrower, for an amount not less than $47,500,000.00, subject to post-closing working capital adjustments payable by the Borrower. "Documentation Agent" means Toronto-Dominion (Texas), Inc. "Dollar Equivalent" means the equivalent in another currency of an amount in Dollars to be determined by reference to the rate of exchange quoted by NationsBank, N.A., at 10:00 a.m. (Charlotte, North Carolina time) on the date of determination, for the spot purchase in the foreign exchange market of such amount of Dollars with such other currency. "Dollars" and "$" means lawful money of the United States of America. "Domestic Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Domestic Lending Office" opposite its name on Schedule 1 or such other office of such Bank as such Bank may from time-to-time specify to the Borrower and the Administrative Agent. "EBITDA" means, for any period, (a) Net Income for such period plus (b) to the extent deducted in determining Net Income, Interest Expense, taxes, depreciation and amortization for such period. "Effective Date" has the meaning set forth in Section 3.01. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any State thereof, and having primary capital of not less than $500,000,000.00 and approved by the Borrower, which approval will not be unreasonably withheld, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development and having primary capital (or its equivalent) of not less than $500,000,000.00 (or its Dollar Equivalent) and approved by the Borrower, which approval by the Borrower will not be unreasonably withheld, (c) a Bank, or (d) any other Person that has been approved by the Borrower in its sole discretion and the Administrative Agent, which approval by the Administrative Agent will not be unreasonably withheld. "Environment" or "Environmental" shall have the meanings set forth in 43 U.S.C. Section 9601(8) (1988). -7- 14 "Environmental Claim" means any third party (including governmental agencies and employees) action, lawsuit, claim, demand, regulatory action or proceeding, order, decree, consent agreement or notice of potential or actual responsibility or violation (including claims or proceedings under the Occupational Safety and Health Acts or similar laws or requirements relating to health or safety of employees) which seeks to impose liability under any Environmental Law. "Environmental Law" means all Legal Requirements arising from, relating to, or in connection with the Environment, health, or safety, including without limitation CERCLA, relating to (a) pollution, contamination, injury, destruction, loss, protection, cleanup, reclamation or restoration of the air, surface water, groundwater, land surface or subsurface strata, or other natural resources; (b) solid, gaseous or liquid waste generation, treatment, processing, recycling, reclamation, cleanup, storage, disposal or transportation; (c) exposure to pollutants, contaminants, hazardous, medical, infectious, or toxic substances, materials or wastes; or (d) the manufacture, processing, handling, transportation, distribution in commerce, use, storage or disposal of hazardous, medical, infectious, or toxic substances, materials or wastes. "Environmental Permit" means any permit, license, order, approval or other authorization under Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time-to-time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Federal Reserve Board, as in effect from time-to-time. "Eurodollar Advance" means any Eurodollar Rate Advance or Eurodollar Auction Advance. "Eurodollar Auction Advance" means any Competitive Advance which bears interest as provided in Section 2.07(c). "Eurodollar Lending Office" means, with respect to any Bank, the office of such Bank specified as its "Eurodollar Lending Office" opposite its name on Schedule 1 (or, if no such office is specified, its Domestic Lending Office) or such other office of such Bank as such Bank may from time-to-time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such -8- 15 Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, the term "Eurodollar Rate" shall mean, for the Interest Period for each Eurodollar Advance, the interest rate per annum (rounded upward to the nearest 1/100 of 1% per annum) appearing on Reuters Screen LIBO page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO page, the applicable rate shall be the arithmetic mean of all such rates "Eurodollar Rate Advance" means an Advance which bears interest as provided in Section 2.07(b). "Eurodollar Rate Reserve Percentage" of any Bank for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time-to-time by the Federal Reserve Board for determining the actual reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Bank with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning set forth in Section 7.01. "Expiration Date" means, with respect to any Letter of Credit, the date on which such Letter of Credit will expire or terminate in accordance with its terms. "Facility" means any nursing home or other health care facility (including any facility operating an assisted living unit) operated by the Borrower or any of its Subsidiaries. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for any such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any of its successors. -9- 16 "Financial Statements" means the balance sheet and income, retained earnings and cash flow statements dated September 30, 1995 referred to in Section 4.05(a), copies of which have been delivered to the Administrative Agent and the Banks. "Fixed Rate Auction Advance" means any Competitive Advance which bears interest as provided in Section 2.07(d). "Fund," "Trust Fund," or "Superfund" means the Hazardous Substance Response Trust Fund, established pursuant to 42 U.S.C. Section 9631 (1988) and the Post-closure Liability Trust Fund, established pursuant to 42 U.S.C. Section 9641 (1988), which statutory provisions have been amended or repealed by the Superfunds Amendments and Reauthorization Act of 1986, and the "Fund," "Trust Fund," or "Superfund" that are now maintained pursuant to Section 9507 of the Code. "Funded Debt" means the outstanding principal amount of all indebtedness for borrowed money of any Person, but in any event shall include, without duplication: (a) any obligation with respect to the principal component of a Capital Lease; (b) the face amount of any standby letters of credit supporting the repayment of indebtedness for borrowed money issued for the account of such Person; and (c) obligations of such Person under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) of such Person to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, debt for borrowed money of another Person, including obligations of a type described in clauses (a) and (b) of this definition of another Person; excluding, however any liabilities for insurance premiums financed by the Borrower and its Subsidiaries. In determining the amount of the foregoing clause (c), only the outstanding principal amount or principal component of the obligation of the other Person shall be used in such determination. "GAAP" means United States generally accepted accounting principles as in effect from time-to-time, applied on a basis consistent with the requirements of Section 1.03. "Governmental Authority" means any foreign governmental authority, the United States of America, any state of the United States of America and any subdivision of any of the foregoing, and any agency, department, commission, board, authority or instrumentality, bureau or court having jurisdiction over any Bank, the Borrower, or the Borrower's Subsidiaries or any of their respective Properties. -10- 17 "Governmental Proceedings" means any action or proceedings by or before any Governmental Authority, including, without limitation, the promulgation, enactment or entry of any Legal Requirement. "Guarantor" means each Subsidiary of the Borrower that has entered into a Guaranty, and "Guarantors" means such Persons collectively. "Guaranty" means a guaranty in the form of the attached Exhibit B executed by a Subsidiary of the Borrower, and "Guaranties" means all such Guaranties. "Hazardous Substance" means the substances identified as such pursuant to CERCLA and those regulated under any other Environmental Law, including without limitation pollutants, contaminants, petroleum, petroleum products, radionuclides, radioactive materials, and medical and infectious waste. "Hazardous Waste" means the substances regulated as such pursuant to any Environmental Law. "HCFA" means the Health Care Financing Administration of HHS and any Person succeeding to the functions thereof. "Health Facility License" means a license or permit under applicable law to provide skilled or intermediate care nursing services, operate an assisted living unit or otherwise operate a Facility. "HHS" means the Department of Health and Human Services and any Person succeeding to the functions thereof. "Indemnification Agreement" means the Indemnification Agreement dated as of February 21, 1992 between The ARA Group, Inc. and the Borrower. "Interest Expense" means, for any period and any Person, total interest expense for such Person net of any interest income for such period (including any income received under an Interest Hedge Agreements during such period, but other than interest income earned on any restricted cash listed on such Person's balance sheet during such period), whether paid or accrued (including that attributable to (a) obligations which have been or should be, in accordance with GAAP, recorded as Capital Leases and (b) obligations payable under Debt permitted by Section 6.02(m)), including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Hedge Agreements, all as determined in conformity with GAAP. -11- 18 "Interest Hedge Agreement" means an interest hedge, rate swap, or cap, or similar arrangement between the Borrower or any of its Subsidiaries and a financial institution providing for the exchange of nominal interest obligations or the cap of the interest rate on the Advances made under this Agreement. "Interest Period" means, (a) for each Eurodollar Rate Advance, the period commencing on the date of such Advance or the date of the Conversion of any Base Rate Advance into such an Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02 and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.02, which period shall be one, two, three, or six months, in each case as the Borrower may, upon notice received by the Administrative Agent not later than noon (Dallas, Texas time) on, the third Business Day prior to the first day of such Interest Period select, (b) for each Eurodollar Auction Advance, the period commencing on the date of such Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and Section 2.03, which period shall be one, two, three, or six months, in each case as the Borrower may select in the Competitive Bid Request for such Advance and (c) for each Fixed Rate Auction Advance, the period commencing on the date of such Advance and ending on the date requested by the Borrower in the Competitive Bid Request for such Advance, which period shall be not less than seven days or more than 180 days; provided, however, that: (a) no Interest Period for a Tranche A Advance may extend beyond the Tranche A Maturity Date; (b) the Borrower may not select any Interest Period for any Tranche B Advance which ends after any scheduled principal repayment date (including the Tranche B Commitment Termination Date) unless, after giving effect to such selection, the aggregate unpaid principal amount of Tranche B Advances that are Base Rate Advances and Tranche B Advances having Interest Periods which end on or before such principal repayment date at least equal the amount of Tranche B Advances due and payable on or before such principal repayment date; (c) Interest Periods commencing on the same date for Advances comprising part of the same Borrowing shall be of the same duration; (d) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided that in case of a Eurodollar Advance only, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and -12- 19 (e) in case of a Eurodollar Advance only, any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month. "Interim Financial Statements" means the unaudited balance sheet and income and cash flow statements dated June 30, 1996 referred to in Section 4.05(a), copies of which have been delivered to the Administrative Agent and the Banks. "Issuing Bank" means any Bank which agrees at the request of the Borrower to act as an issuer of a Letter of Credit hereunder, or any Bank acting as a successor issuing bank pursuant to Section 8.06. "Lease Expense" means, for any period, (a) all amounts payable by the Borrower and its Subsidiaries during such period under any lease, sublease, or other instrument (other than a Capital Lease) pursuant to which the Borrower or any of its Subsidiaries is entitled to use any Property of another Person minus (b) all rental income payable to the Borrower and its Subsidiaries during such period under any lease, sublease, or other instrument (other than a Capital Lease) pursuant to which the Borrower or any of its Subsidiaries was the lessor or sublessor of its Property to another Person, all as determined in accordance with GAAP. "Legal Requirement" means any law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, including, but not limited to, Regulations G, T, U and X. "Letter of Credit" means, individually, any letter of credit issued by an Issuing Bank which is subject to this Agreement, and "Letters of Credit" means all such letters of credit collectively. "Letter of Credit Documents" means, with respect to any Letter of Credit, such Letter of Credit and any agreements, documents, and instruments entered into in connection with or relating to such Letter of Credit. "Letter of Credit Exposure" means, at any time, the sum of (a) the aggregate undrawn maximum face amount of each Letter of Credit at such time and (b) the aggregate unpaid amount of all Reimbursement Obligations at such time. "Letter of Credit Obligations" means any obligations of the Borrower under this Agreement in connection with the Letters of Credit. -13- 20 "Leverage Ratio" means, as of the last day of any fiscal quarter of the Borrower, the ratio of (a) the Borrower and its Subsidiaries' Funded Debt plus, to the extent not included in Funded Debt, the face amount of any letters of credit issued for the account of the Borrower or any of its Subsidiaries and outstanding as of such day to (b) the Borrower's EBITDA for the four fiscal quarters ending on such day plus, with respect to each acquisition permitted by this Agreement and made during such period and without duplication, the aggregate amount of the EBITDA during such period attributable to the business acquired minus, with respect any asset sales permitted by this Agreement and made during such period, the aggregate amount of the Borrower's EBITDA attributable to the assets sold during such period. "Lien" means any mortgage, lien, pledge, charge, deed of trust, security interest, or encumbrance to secure or provide for the payment of any obligation of any Person, whether arising by contract, operation of law or otherwise (including, without limitation, the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement). "Liquid Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States; (b) (i) negotiable or nonnegotiable certificates of deposit, time deposits, or other similar banking arrangements maturing within one year from the date of acquisition thereof ("bank debt securities"), issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other bank or trust company which has a combined capital surplus and undivided profit of not less than $500,000,000.00 or the Dollar Equivalent thereof, if at the time of deposit or purchase, such bank debt securities are rated not less than "A" (or the then equivalent) by the rating service of Standard & Poor's Corporation or of Moody's Investors Service, and (ii) commercial paper issued by (A) any Bank that is a commercial bank or commercial financial institution or (B) any other Person if at the time of purchase such commercial paper is rated not less than "A-2" (or the then equivalent) by the rating service of Standard & Poor's Rating Group or not less than "P-2" (or the then equivalent) by the rating service of Moody's Investors Service, Inc., or upon the discontinuance of both of such services, such other nationally recognized rating service or services, as the case may be, as shall be selected by the Borrower with the consent of the Majority Banks; (c) repurchase agreements relating to investments described in clauses (a) and (b) above with a market value at least equal to the consideration paid in connection therewith, with any Person who regularly engages in the business of entering into repurchase agreements and has a combined capital surplus and undivided profit of not less than $500,000,000.00 or the Dollar -14- 21 Equivalent thereof, if at the time of entering into such agreement the debt securities of such Person are rated not less than "A" (or the then equivalent) by the rating service of Standard & Poor's Rating Group or of Moody's Investors Service, Inc.; (d) such other instruments (within the meaning of Article 9 of the Texas Business and Commerce Code) as the Borrower may request and the Administrative Agent may approve in writing, which approval will not be unreasonably withheld; (e) money market mutual funds with a daily right of redemption and a net asset value of $1.00 per share substantially all the assets of which are comprised of investments of the types described in the preceding clauses (a) through (d); (f) investments by LCA Insurance Co., Ltd. made in compliance with the requirements of all Governmental Authorities, including Medicare Regulations; and (g) demand deposit accounts with a bank or other financial institution opened and maintained in the ordinary course of business. "Majority Banks" means, at any time, Banks holding at least 51% of the then aggregate unpaid principal amount of the Advances owed to the Banks and the Letter of Credit Exposure of the Banks at such time, or, if no such principal amount and Letter of Credit Exposure is then outstanding, Banks having at least 51% of the aggregate amount of the Commitments at such time. "Margin" means, as to any Eurodollar Auction Advance, the margin (expressed as a percentage rate per annum in the form of a decimal to more than four decimal places) to be added to or subtracted from the Eurodollar Rate in order to determine the interest rate applicable to such Advance, as specified in the Competitive Bid relating to such Advance. "Material Adverse Change" means a material adverse change in the business, financial condition, or results of operations of the Borrower and its Subsidiaries, taken as a whole, since the date of the Financial Statements. "Material Adverse Effect" means a material adverse effect (a) on the Borrower's ability to perform its obligations under this Agreement, any Note or any other Credit Document; (b) on the Guarantors', taken as a whole, ability to perform their obligations under the Guaranties; or (c) on the business, financial condition, or results of operations of the Borrower and its Subsidiaries, taken as a whole. "Maximum Rate" means the maximum nonusurious interest rate under applicable law. -15- 22 "Medicaid Certification" means certification by the state Medicaid agency or its successor that a Facility complies with all the requirements for participation set forth in the Medicaid Regulations. "Medicaid Provider Agreement" means an agreement entered into between the state Medicaid agency or its successor or other such entity administering the Medicaid program and a Facility which the agency agrees to pay for covered services provided by such Facility to eligible Medicaid recipients in accordance with the terms of such agreement and Medicaid Regulations. "Medicaid Regulations" means, collectively, (a) all Federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the medical assistance program established by Title XIX of the Social Security Act (42 U.S.C. Sections 1396, et seq.); (b) all applicable provisions of all federal rules, regulations, manuals, final orders and administrative, reimbursement and other guidelines of all Governmental Authorities promulgated pursuant to or in connection with the statutes described in clause (a) above; (c) all state statutes and regulations and plans for medical assistance enacted in connection with the statutes and provisions described in clauses (a) and (b) above; and (d) all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all Governmental Authorities promulgated pursuant to or in connection with any of the foregoing. "Medicare Certification" means certification by HCFA or a state agency or entity under contract with HCFA that a Facility complies with all the applicable requirements for participation set forth in the Medicare Regulations. "Medicare Provider Agreement" means an agreement entered into between HCFA or a state agency under contract with HCFA and a Facility under which HCFA agrees to pay for covered services provided by such Facility to Medicare beneficiaries in accordance with the terms of such agreement and Medicare Regulations. "Medicare Regulations" means, collectively, all Federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. Sections 1395, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all Governmental Authorities, including HHS, HCFA, or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law). "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which the Borrower or any member of the Controlled Group is making or accruing an obligation to make contributions. -16- 23 "Net Cash Proceeds" means, with respect to any sale, transfer, or other disposition of any of the Borrower's or any of its Subsidiaries' Property (including the sale or transfer of stock in any such Subsidiary) all cash and Liquid Investments received by the Borrower or any of its Subsidiaries from such sale, transfer or other disposition after (a) provision for all income or other taxes payable in respect of the fiscal year in which such sale, transfer or other disposition occurs measured by or resulting from such sale, transfer, or other disposition and which are payable in such fiscal year or the succeeding fiscal year, (b) payment of, or provision for, all brokerage commissions and other reasonable out-of-pocket fees and expenses actually incurred, (c) payments in connection with such sale, transfer, or other disposition made to repay any liabilities, and (d) the amount of reserves recorded in accordance with GAAP for indemnity or similar obligations of the Borrower and its Subsidiaries directly related to such sale, transfer or other disposition. "Net Income" means, for any period for any Person, such Person's net income for such period after taxes, as determined in accordance with GAAP, excluding, however, extraordinary items, including (a) any net gain or loss during such period arising from the sale, exchange, or other disposition of capital assets (such term to include all fixed assets and all securities) other than in the ordinary course of business and (b) any write-up or write-down of assets. "Net Restricted Payments" means, for any period, (a) all Restricted Payments made by the Borrower during such period minus (b) the sum of (i) the Net Cash Proceeds received from any sales of the Borrower's common stock to any of the Borrower's employees pursuant to any employee stock option plan, employee compensation arrangement, or employee benefit plan during such period; (ii) the amount paid by the Borrower to purchase any of its common stock during such period that has been contributed to an employee benefit plan of the Borrower during such period; and (iii) payments in amount not to exceed $20,000,000.00 made for any purchases by the Borrower of its common stock during the year ending December 31, 1996; provided that Net Restricted Payments shall never be less than zero. "Net Worth" means, at any date for any Person that is a corporation, the sum of (a) the par value (or value stated on the books of such Person) of the capital stock of all classes of such Person, (b) the additional paid-in capital of such Person, and (c) the amount of the surplus and retained earnings, whether capital or earned, of such Person, all determined in accordance with GAAP, excluding, however, the value of any redeemable preferred stock or similar capital stock of such Person. "Nonprofit Subsidiary" means any of the Borrower's wholly-owned Subsidiaries that are qualified under Section 501(c) of the Code as a nonprofit corporation. -17- 24 "Nonordinary Course Asset Sales" means (a) the sale of any division of the Borrower or any of its Subsidiaries, (b) the sale of all of the Facilities of the Borrower or any of its Subsidiaries in a specific geographic area, or (c) the sale of stock of a Subsidiary of the Borrower by the Borrower or any of its Subsidiaries, excluding, however, the Devcon Stock Sale. "Note" means a Tranche A Note, a Tranche B Note or a Competitive Advance Note. "Notice of Borrowing" means a notice of borrowing in the form of the attached Exhibit C signed by a Responsible Officer of the Borrower. "Notice of Conversion or Continuation" means a notice of conversion or continuation in the form of the attached Exhibit D signed by a Responsible Officer of the Borrower. "Obligations" means all Advances, Reimbursement Obligations, and other amounts payable by the Borrower to the Administrative Agent, the Issuing Banks or the Banks under the Credit Documents. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means the Liens permitted to exist pursuant to Section 6.01. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company, or other entity, or a government or any political subdivision or agency thereof or any trustee, receiver, custodian or similar official. "Plan" means an employee benefit plan (other than a Multiemployer Plan) maintained for employees of the Borrower or any member of the Controlled Group and covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code. "Project QC" means the proposed acquisition by the Borrower or any of its Subsidiaries of eight facilities from four limited partnerships the general partner of which is a wholly-owned subsidiary of QualiCorp., Inc. "Property" of any Person means any property or assets (whether real, personal, or mixed, tangible or intangible) of such Person. "Pro Rata Share" means, at any time with respect to any Bank, either (a) the ratio (expressed as a percentage) of such Bank's Commitments at such time to the aggregate Commitments at such -18- 25 time, (b) if the Commitments have been terminated, the ratio (expressed as a percentage) of such Bank's aggregate outstanding Advances and Letter of Credit Exposure at such time to the aggregate outstanding Advances and Letter of Credit Exposure of all the Banks at such time, or (c) if no Advances are then outstanding and no Commitments then in effect, the ratio (expressed as a percentage) of the aggregate principal amount of such Bank's Advances when most recently outstanding to the aggregate principal amount of all Advances when most recently outstanding. "Register" has the meaning set forth in paragraph (c) of Section 9.06. "Regulations G, T, U, and X" means Regulation G, T, U, and X of the Federal Reserve Board, as each is from time-to-time in effect, and all official rulings and interpretations thereunder or thereof. "Reimbursement Obligations" means all of the obligations of the Borrower set forth in paragraph (c) of Section 2.14. "Release" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Response" shall have the meaning set forth in CERCLA or under any other Environmental Law. "Responsible Officer" means the chief executive officer, president, chief financial officer, treasurer, general counsel, or secretary of any Person. "Restricted Payment" means the making by any Person of any dividends or other distributions (in cash, property, or otherwise) on, or any payment for the purchase, redemption or other acquisition of, any shares of any capital stock of such Person, other than dividends payable in such Person's stock. "Revolving Borrowing" means a Tranche A Borrowing or a Tranche B Borrowing. "Subordinated Debt" means any Debt of the Borrower or any of its Subsidiaries which is subordinated to their respective obligations under the Credit Documents and which is on terms and conditions reasonably satisfactory to the Administrative Agent and the Majority Banks. "Subsidiary" of a Person means any corporation or other entity of which more than 50% of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or similar governing body of such corporation or other entity (irrespective of whether at such time capital stock or other ownership interests of any other class -19- 26 or classes of such corporation or other entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more Subsidiaries of such Person or by one or more Subsidiaries of such Person. "Syndication Agent" means Chase Securities Inc. "Tangible Net Assets" means, as of any date, (a) total assets of a Person indicated on its balance sheet less (b) the sum of the value indicated on such Person's balance sheet of patents, trademarks, copyrights, goodwill, and other intangible assets. "Terminating Bank" has the meaning set forth in Section 2.01(c)(iii)(B). "Termination Event" means (a) the occurrence of a Reportable Event with respect to a Plan, as described in Section 4043 of ERISA and the regulations issued thereunder (other than a Reportable Event not subject to the provision for 30-day notice to the PBGC under such regulations), (b) the withdrawal of the Borrower or any of its Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the giving of a notice of intent to terminate a Plan under Section 4041(c) of ERISA, (d) the institution of proceedings to terminate a Plan by the PBGC, or (e) any other event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Tranche A Advance" means any advance by a Bank to the Borrower as part of a Tranche A Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Tranche A Borrowing" means a borrowing consisting of simultaneous Tranche A Advances made by each Bank pursuant to Section 2.01(a) or Converted by each Bank to Tranche A Advances of a different Type pursuant to Section 2.02(b). Except as provided in Sections 2.02(c)(iii) and (v) and 2.08(e), all Advances included in a Borrowing shall be of the same Type. "Tranche A Commitment" means, for each Bank, the amount set opposite such Bank's name on the signature pages of this Agreement as its Tranche A Commitment or, if such Bank has entered into any Assignment and Acceptance after the Effective Date, set forth for such Bank as its Tranche A Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(c), as such amount may be reduced pursuant to Section 2.05. "Tranche A Maturity Date" means the earlier of (a) August 19, 2001, as such date may be extended pursuant to Section 2.01(c), provided the Tranche A Maturity Date for any Terminating Bank shall be the date such Bank's Tranche A Advances are payable in full pursuant to -20- 27 Section 2.01(c)(iii)(B) and (b) the earlier termination in whole of the Commitments pursuant to Section 2.05 or Article VII. "Tranche A Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit E-1, evidencing indebtedness of the Borrower to such Bank resulting from Tranche A Advances owing to such Bank. "Tranche B Advance" means any advance by a Bank to the Borrower as part of a Tranche B Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance. "Tranche B Borrowing" means a borrowing consisting of simultaneous Tranche B Advances of the same Type made by each Bank pursuant to Section 2.01(b) or Converted by each Bank to Tranche B Advances of a different Type pursuant to Section 2.02(b). "Tranche B Commitment" means, for each Bank, the amount set opposite such Bank's name on the signature pages of this Agreement as its Tranche B Commitment or, if such Bank has entered into any Assignment and Acceptance after the Effective Date, set forth for such Bank as its Tranche B Commitment in the Register maintained by the Administrative Agent pursuant to Section 9.06(c), as such amount may be reduced pursuant to Section 2.05. "Tranche B Commitment Termination Date" means the earlier of (a) August 18, 1997 and (b) the earlier termination in whole of the Commitments pursuant to Section 2.05 or Article VII. "Tranche B Note" means a promissory note of the Borrower payable to the order of any Bank, in substantially the form of the attached Exhibit E-2, evidencing indebtedness of the Borrower to such Bank resulting from Tranche B Advances owing to such Bank. "Type" has the meaning set forth in Section 1.04. "Unispec Leases" means the two Lease Agreements, each dated as of June 20, 1986, between Unispec Development Corporation and Geriatrics, Inc. Section 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". Section 1.03. Accounting Terms; Changes in GAAP. (a) All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP applied on a consistent basis with those applied in the -21- 28 preparation of the Financial Statements (except for changes to which the Borrower's independent public accountants take no exception). (b) Unless otherwise indicated, all financial statements of the Borrower, all calculations for compliance with covenants in this Agreement, all determinations of the Applicable Margin, and all calculations of any amounts to be calculated under the definitions in Section 1.01 shall be based upon the consolidated accounts of the Borrower and its Subsidiaries in accordance with GAAP and consistent with the principles of consolidation applied in preparing the Financial Statements (except for changes in the principles of consolidation to which the Borrower's independent public accountants take no exception). Section 1.04. Classes and Types of Advances. Advances are distinguished by "Class" and "Type". The "Class" of an Advance refers to the determination of whether such Advance is a Tranche A Advance or Tranche B Advance, each of which constitutes a Class. The "Type" of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or Base Rate Advance, each of which constitutes a Type. Section 1.05. Miscellaneous. Article, Section, Schedule and Exhibit references are to Articles and Sections of and Schedules and Exhibits to this Agreement, unless otherwise specified. ARTICLE II THE ADVANCES AND THE LETTERS OF CREDIT Section 2.01. Tranche A and Tranche B Advances; Extension of Tranche A Maturity Date. (a) Tranche A Advances. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make Tranche A Advances to the Borrower from time-to-time on any Business Day during the period from the date of this Agreement until the Tranche A Maturity Date in an aggregate amount not to exceed at any time outstanding (i) such Bank's Tranche A Commitment less (ii) such Bank's Pro Rata Share of the Letter of Credit Exposure at such time; provided that, following the making of each Borrowing comprised of Tranche A Advances, the aggregate outstanding principal amount of the Tranche A Advances, Letter of Credit Exposure, Competitive Advances and Debt permitted under Section 6.02(d) shall not exceed the aggregate amount of the Tranche A Commitments. Each Tranche A Borrowing shall be in an aggregate amount not less than (A) $500,000 and in integral multiples of $100,000.00 in excess thereof or (B) if the aggregate outstanding amount of Tranche A Advances is $500,000.00 or more, $100,000.00 and in integral multiples of $100,000.00 in excess thereof and shall consist of -22- 29 Tranche A Advances of the same Type made on the same day by the Banks ratably according to their respective Tranche A Commitments. Within the limits of each Bank's Tranche A Commitment, the Borrower may from time-to-time borrow, prepay pursuant to Section 2.08 and reborrow under this Section 2.01(a). (b) Tranche B Advances. Each Bank severally agrees on the terms and conditions set forth in this Agreement to make Tranche B Advances to the Borrower from time-to-time on any Business Day during the period from the date of this Agreement until the Tranche B Commitment Termination Date in an amount equal to such Bank's Tranche B Commitment. Each Tranche B Borrowing shall be in an aggregate amount not less than (A) $500,000.00 and in integral multiples of $100,000.00 in excess thereof or (B) if the aggregate outstanding amount of Tranche B Advances is $500,000.00 or more, $100,000.00 and in integral multiples of $100,000.00 in excess thereof and shall consist of Tranche B Advances of the same Type made on the same day by the Banks ratably according to their respective Tranche B Commitments. Within the limits of each Bank's Tranche B Commitment, the Borrower may from time-to-time borrow, prepay pursuant to Section 2.08 and reborrow under this Section 2.01(b). After the Tranche B Commitment Termination Date, no Tranche B Advances may be made other than as Conversions or continuations pursuant to Section 2.02 of Tranche B Advances outstanding on the Tranche B Commitment Termination Date. (c) Extension of Tranche A Maturity Date. (i) So long as no Default shall have occurred and be continuing at such time, at least 90 but not more than 150 days before each August 19 beginning August 19, 1998, the Borrower may request in writing to the Administrative Agent and each Bank that the Banks extend the Tranche A Maturity Date by one year. On or before the immediately following July 1 after each such request, each Bank shall notify the Administrative Agent and the Borrower in writing whether it elects to so extend the Tranche A Maturity Date. Any failure by a Bank to so notify the Administrative Agent and the Borrower shall be deemed to be a decision by such Bank to not extend the Tranche A Maturity Date. (ii) If each Bank elects to extend the Tranche A Maturity Date, the Tranche A Maturity Date shall automatically extend for one year. (iii) If the Majority Banks, but not all the Banks elect to extend the Tranche A Maturity Date (A) the Tranche A Maturity Date and the Tranche A Commitments of the Banks electing to extend shall extend by one year, (B) the Tranche A Maturity Date for the Banks not electing to extend (each a "Terminating Bank") shall remain unchanged and each Terminating Bank's Tranche A Commitment shall terminate on such Tranche A Maturity Date and the Borrower shall repay the outstanding Tranche A Advances made by each -23- 30 Terminating Bank on such Tranche A Maturity Date to the extent that the Tranche A Advances under such Terminating Bank's Tranche A Commitment are not assumed pursuant to Section 2.15, (C) the Tranche A Commitment of the Terminating Banks may be assumed and the Terminating Banks may be replaced in accordance with the procedures in Section 2.15, and (D) if not all of the Terminating Banks' Tranche A Commitments are assumed in accordance with Section 2.15, each extending Bank's Pro Rata Share shall be recalculated to take into account the termination of the Tranche A Commitments of the Terminating Banks on the Tranche A Maturity Date for such Terminating Banks. (iv) If less than the Majority Banks elect to extend the Tranche A Maturity Date, the Tranche A Maturity Date shall not be extended for any Bank. Section 2.02. Method of Borrowing. (a) Notice. Each Revolving Borrowing shall be made pursuant to a Notice of Borrowing, given not later than (i) noon (Dallas, Texas time) on the third Business Day before the date of the proposed Borrowing, in the case of a Eurodollar Rate Advance or (ii) 10:00 a.m. (Dallas, Texas time) on the Business Day of the proposed Borrowing, in the case of a Base Rate Advance, by the Borrower to the Administrative Agent, which shall give to each Bank prompt notice and use best efforts to give notice not later than 12:00 p.m. (Dallas, Texas time) on the day of receipt of timely Notice of Borrowing of such proposed Borrowing by telecopier or telex. Each Notice of a Borrowing shall be by telecopier or telex, confirmed immediately in writing specifying the requested (i) date of such Borrowing, (ii) Type and Class of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) if such Borrowing is to be comprised of Eurodollar Rate Advances, Interest Period for each such Advance. In the case of a proposed Borrowing comprised of Eurodollar Rate Advances, the Administrative Agent shall promptly notify each Bank of the applicable interest rate under Section 2.07(b). Each Bank shall (i) in the case of all Revolving Borrowings other than Revolving Borrowings made on the same day as the day the Notice of Borrowing is received, before 11:00 a.m. (Dallas, Texas time) on the date of such Revolving Borrowing and (ii) in the case of Revolving Borrowings made on the same day as the date of the Notice of Borrowing, before 1:00 p.m. (Dallas, Texas time), make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 9.02, or such other location as the Administrative Agent may specify by notice to the Banks, in same day funds, such Bank's Pro Rata Share of such Revolving Borrowing. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at its account with the Administrative Agent. (b) Conversions and Continuations. In order to elect to Convert or continue an Advance under this Section, the Borrower shall deliver an irrevocable Notice of Conversion or -24- 31 Continuation to the Administrative Agent at the Administrative Agent's office no later than (i) 11:00 a.m. (Dallas, Texas time) on the Business Day of the proposed conversion date in the case of a Conversion to a Base Rate Advance and (ii) no later than noon (Dallas, Texas time) three Business Days in advance of the proposed Conversion or continuation date in the case of a Conversion to, or a continuation of, a Eurodollar Rate Advance. Each such Notice of Conversion or Continuation shall be in writing or by telex or telecopier, confirmed immediately in writing specifying (i) the requested Conversion or continuation date (which shall be a Business Day), (ii) the amount, Type, and Class of the Advance to be Converted or continued, (iii) whether a Conversion or continuation is requested, and if a Conversion, into what Type of Advance, and (iv) in the case of a Conversion to, or a continuation of, a Eurodollar Rate Advance, the requested Interest Period. Promptly after receipt of a Notice of Conversion or Continuation under this paragraph, the Administrative Agent shall provide each Bank with a copy thereof and, in the case of a Conversion to or a Continuation of a Eurodollar Rate Advance, notify each Bank of the applicable interest rate under Section 2.07(b). For purposes other than the making of deemed representations and warranties pursuant to Section 3.02, the portion of Advances comprising part of the same Borrowing that are converted to Advances of another Type shall constitute a new Revolving Borrowing. (c) Certain Limitations. Notwithstanding anything in paragraphs (a) and (b) above: (i) at no time shall there be more than eight Interest Periods applicable to outstanding Eurodollar Rate Advances; (ii) the Borrower may not select Eurodollar Rate Advances for any Revolving Borrowing if the aggregate amount of such Revolving Borrowing is less than $5,000,000.00 or at any time when a Default has occurred and is continuing; (iii) (A) if any Bank shall, at least one Business Day before the date of any requested Revolving Borrowing, notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful, for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances, the right of the Borrower to select Eurodollar Rate Advances for such Bank's Advances included in such Borrowing or for such Bank's Advances included in any subsequent Revolving Borrowing shall be suspended until such Bank shall notify the Administrative Agent that the circumstances causing such suspension no longer exist, and such Bank's Advances included in such Revolving Borrowing shall be a Base Rate Advance; (B) such Bank agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such -25- 32 designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such Bank; and (C) if such condition shall continue for such Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15; (iv) if the Administrative Agent is unable to determine the Eurodollar Rate Advances comprising any requested Revolving Borrowing, the right of the Borrower to select Eurodollar Rate Advances for such Revolving Borrowing or for any subsequent Revolving Borrowing shall be suspended until the Administrative Agent shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and each Advance comprising such Revolving Borrowing shall be a Base Rate Advance; (v) (A) if any Bank shall, at least one Business Day before the date of any requested Revolving Borrowing, notify the Administrative Agent that the Eurodollar Rate for such Bank's Eurodollar Rate Advance included in such Revolving Borrowing will not adequately reflect the cost to such Bank of making or funding its Eurodollar Rate Advance included in such Revolving Borrowing, the right of the Borrower to select a Eurodollar Rate Advance from such Bank for such Revolving Borrowing or for any subsequent Revolving Borrowing shall be suspended until such Bank shall notify the Borrower and the Banks that the circumstances causing such suspension no longer exist, and such Bank's Advance included in such Revolving Borrowing shall be a Base Rate Advance; (B) such Bank agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such Bank; and (C) if such condition shall continue for such Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15; and (vi) if the Borrower shall fail to select the duration or continuation of any Interest Period for any Eurodollar Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and paragraph (b) above, the Administrative Agent will forthwith so notify the Borrower and the Banks and such Advances will be made available to the Borrower on the date of such Revolving Borrowing as Base Rate Advances or, if an existing Advance, Convert into Base Rate Advances. (d) Notices Irrevocable. Each Notice of Borrowing and Notice of Conversion or Continuation shall be irrevocable and binding on the Borrower. In the case of any Revolving Borrowing which the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Bank against any loss, out- of-pocket cost or expense actually incurred by such Bank as a result of any failure to fulfill on or before the date -26- 33 specified in such Notice of Borrowing for such Revolving Borrowing the applicable conditions set forth in Article III, or any other failure to Convert such Advances to Eurodollar Rate Advances on the applicable date for Conversion or continuation, including, without limitation, any loss cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Bank to fund the Advance to be made by such Bank as part of such Revolving Borrowing when such Advance, as a result of such failure, is not made on such date. (e) Administrative Agent Reliance. Unless the Administrative Agent shall have received notice from a Bank before the date of any Revolving Borrowing that such Bank will not make available to the Administrative Agent such Bank's Pro Rata Share of such Revolving Borrowing, the Administrative Agent may assume that such Bank has made its Pro Rata Share of such Revolving Borrowing available to the Administrative Agent on the date of such Revolving Borrowing in accordance with paragraph (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Pro Rata Share of such Revolving Borrowing available to the Administrative Agent, such Bank and the Borrower severally agree to immediately repay to the Administrative Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable on such day to Advances comprising such Revolving Borrowing and (ii) in the case of such Bank, the Federal Funds Rate for such day. If such Bank shall repay to the Administrative Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Bank's Advance as part of such Revolving Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Revolving Borrowing. (f) Bank Obligations Several. The failure of any Bank to make the Advance to be made by it as part of any Revolving Borrowing shall not relieve any other Bank of its obligation, if any, to make its Advance on the date of such Revolving Borrowing. No Bank shall be responsible for the failure of any other Bank to make the Advance to be made by such other Bank on the date of any Revolving Borrowing. (g) Notes. The indebtedness of the Borrower to each Bank resulting from Tranche A Advances owing to such Bank shall be evidenced by a Tranche A Note of the Borrower payable to the order of such Bank in substantially the form of Exhibit E-1. The indebtedness of the Borrower to each Bank resulting from Tranche B Advances owing to such Bank shall be evidenced by a Tranche B Note of the Borrower payable to the order of such Bank in substantially the form of Exhibit E-2. -27- 34 Section 2.03. Competitive Advances. (a) Generally. Each Bank severally agrees that the Borrower may request Competitive Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 30 days prior to the Tranche A Maturity Date in the manner set forth below; provided that, following the making of each Competitive Borrowing, the aggregate outstanding principal amount of the Tranche A Advances, Letter of Credit Exposure, Competitive Advances and Debt permitted under Section 6.02(d) shall not exceed the aggregate amount of the Tranche A Commitments. Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow pursuant to paragraph (b) below, prepay and repay pursuant to Section 2.08 below, and reborrow under this Section 2.03. The Competitive Advances made by each Bank shall be evidenced by a Competitive Advance Note in the aggregate amount of the Tranche A Commitments and payable to the order of such Bank. (b) Method of Advancing. (i) The Borrower may request a Competitive Borrowing by delivering to the Administrative Agent a Competitive Bid Request (A) in the case of a Competitive Borrowing consisting of Eurodollar Auction Advances not later than 11:00 a.m. (Dallas, Texas time) four Business Days before the proposed date of such Borrowing and (B) in the case of a Competitive Borrowing consisting of Fixed Rate Auction Advances, not later than 10:00 a.m. (Dallas, Texas time) one Business Day before the proposed day of such Borrowing. Without the prior approval of the Administrative Agent, no Competitive Borrowing may be requested within five Business Days after the delivery of any other Competitive Bid Request and no more than three Competitive Bid Requests may be delivered in any calendar month. A Competitive Bid Request that does not conform substantially to the form of Exhibit G-1 may be rejected by the Administrative Agent and the Administrative Agent shall promptly notify the Borrower of such rejection. Each Competitive Bid Request shall specify (1) whether the Borrowing being requested is to consist of Eurodollar Auction Advances or Fixed Rate Auction Advances; (2) the date of such Borrowing (which shall be a Business Day); (3) the aggregate principal amount of such Borrowing, which shall be a minimum of $5,000,000.00 and in integral multiples of $1,000,000.00; and (4) the Interest Period with respect thereto. Promptly after its receipt of a Competitive Bid Request that is not rejected, the Administrative Agent shall by telecopy in the form set forth in Exhibit G-2 invite the Banks to bid to make Competitive Advances pursuant to the Competitive Bid Request. (ii) Each Bank may, in its sole discretion, make one or more Competitive Bids to the Borrower as part of such proposed Competitive Borrowing. Each Competitive Bid by a Bank must be received by the Administrative Agent by telecopy in the form of Exhibit G- -28- 35 3, (A) in the case of a Competitive Borrowing comprised of Eurodollar Auction Advances, not later than 9:00 a.m. (Dallas, Texas time) three Business Days before the proposed date of such Competitive Borrowing, and (B) in the case of a Competitive Borrowing comprised of Fixed Rate Auction Advances, not later than 9:00 a.m. (Dallas, Texas time) on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form of Exhibit G-3 may be rejected by the Administrative Agent, and the Administrative Agent shall promptly notify the applicable Bank of such rejection. Each Competitive Bid shall specify (1) the principal amount, which shall be a minimum of $5,000,000.00 and in integral multiples of $1,000,000.00, and may equal the entire principal amount of the Competitive Borrowing requested, of the Competitive Advance or Advances that the Bank is willing to make to the Borrower, (2) the Competitive Bid Rate or Rates at which the Bank is prepared to make such Advance or Advances, and (3) the Interest Period applicable to such Advance or Advances and the last day thereof. Any Bank which has not responded to the Administrative Agent prior to the time specified above shall be deemed to have elected to decline to make such an offer. A Competitive Bid submitted by a Bank pursuant to this subsection (ii) shall be irrevocable. If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Bank, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Banks are required to submit their Competitive Bids to the Administrative Agent pursuant to this paragraph (ii). (iii) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount of each Competitive Bid in respect of which a Competitive Bid shall have been made and the identity of the Bank that shall have made each bid. (iv) The Borrower shall before 10:00 a.m. (Dallas, Texas time) at least three Business Days prior to the date of the proposed Competitive Borrowing, with respect to Competitive Borrowings to be comprised of Eurodollar Auction Advances, and on the Business Day of the proposed Competitive Borrowing to be comprised of Fixed Rate Auction Advances, either (A) cancel such Competitive Borrowing by giving the Administrative Agent notice to that effect, or (B) accept one or more of the Competitive Bids made by any Bank or Banks by giving the Administrative Agent a Notice of Acceptance/Rejection stating the amount of the Competitive Advances offered by the Banks which the Borrower has accepted and of the rejection of the remaining Competitive Bids made by the Banks. The failure of the Borrower to give such timely notice shall be deemed to be a rejection of each Competitive Bid. Any Notice of Acceptance/Rejection that does not substantially conform to the form of Exhibit G-4 may be rejected by the Administrative Agent by delivering prompt notice of the rejection to the Borrower. If the Borrower elects to accept any Competitive Bids, the resulting Competitive Borrowing must be in an aggregate principal -29- 36 amount of not less than $5,000,000.00 and in integral multiples of $1,000,000.00 or an aggregate principal amount equal to the remaining balance of the available commitments and cannot exceed the principal amount specified in the relevant Competitive Bid Request. The Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower has decided to reject a Competitive Bid made at a lower Competitive Bid Rate. If the Borrower shall accept a Competitive Bid or Bids made at a particular Competitive Bid Rate but the amount of such Competitive Bid or Bids would cause the total amount to be accepted by the Borrower to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such Competitive Bid or Bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids so accepted, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Bid. If a Competitive Advance must be in an amount less than $5,000,000.00 because of the provisions above, such Competitive Advance may be for a minimum of $1,000,000.00 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate, the amounts shall be rounded to integral multiples of $1,000,000.00 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (iv) shall be irrevocable. (v) The Administrative Agent shall promptly notify each bidding Bank by telecopy whether or not its Competitive Bid has been accepted, and, if so, in what amount and at what Competitive Bid Rate, and each successful bidder will thereupon become bound, upon the terms and subject to the conditions hereof, to make the Competitive Advance in respect of which its Competitive Bid has been accepted in the amount so specified by the Administrative Agent. The Administrative Agent shall thereafter promptly notify each Bank of the amount of each Competitive Advance. Each Bank that is to make a Competitive Advance as part of such Competitive Borrowing shall, before 2:00 p.m. (Dallas, Texas time) on the date of such Competitive Borrowing specified in the notice received from the Administrative Agent, make available to the Administrative Agent at its address referred to in Section 9.02 such Bank's Competitive Advance, in immediately available funds. Upon fulfillment of the applicable conditions set forth herein and, except as specified in paragraph (vi) below, after receipt by the Administrative Agent of such funds, the Administrative Agent shall make such funds available to the Borrower at its account with the Administrative Agent. (vi) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Competitive Borrowing that such Bank shall not make available to the Administrative Agent such Bank's Competitive Advance, the Administrative Agent may assume that such Bank has made such Advance available to the Administrative Agent on the -30- 37 date of such Competitive Borrowing in accordance with paragraph (a) of this Section 2.03 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made its Competitive Advance available to the Administrative Agent, such Bank and the Borrower severally agree to immediately repay to the Administrative Agent on demand such corresponding amount, together with interest on such amount, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (A) in the case of the Borrower, the interest rate applicable on such day to Competitive Advances comprising such Competitive Borrowing and (B) in the case of such Bank, the Federal Funds Rate for such day. If such Bank shall repay to the Administrative Agent such corresponding amount and interest as provided above, such corresponding amount so repaid shall constitute such Bank's Competitive Advance as part of such Competitive Borrowing for purposes of this Agreement even though not made on the same day as the other Advances comprising such Competitive Borrowing. Section 2.04. Fees. (a) Facility Fees. (i) The Borrower agrees to pay to the Administrative Agent for the account of each Bank a facility fee on the amount of such Bank's Tranche A Commitment from the date of this Agreement until the Tranche A Maturity Date at the rate equal to the Applicable Margin for facility fees for Tranche A Advances during such period. The fee payable pursuant to this clause (i) is due quarterly in arrears on the first day of each January, April, July, and October commencing October 1, 1996 and on the Tranche A Maturity Date. (ii) The Borrower agrees to pay to the Administrative Agent for the account of each Bank a facility fee on the amount of such Bank's Tranche B Commitment from the date of this Agreement until the Tranche B Commitment Termination Date at the rate equal to the Applicable Margin for facility fees for Tranche B Advances during such period. The fee payable pursuant to this clause (ii) is due quarterly in arrears on the first day of each January, April, July, and October commencing October 1, 1996 and on the Tranche B Commitment Termination Date. (b) Agents' Fees. The Borrower agrees to pay to the Administrative Agent, the Documentation Agent and the Syndication Agent the syndication, agent and other fees and expenses described in the letters dated June 3, 1996 from the Borrower on the dates required by such letters. -31- 38 (c) Letter of Credit Fees. The Borrower agrees to pay (i) to the Administrative Agent for the pro rata benefit of the Banks, a fee per annum for each Letter of Credit equal to the Applicable Margin for Eurodollar Rate Advances of the face amount of such Letter of Credit and (ii) to such Issuing Bank, a fee for each Letter of Credit of 1/8% per annum of the face amount of such Letter of Credit. Each such fee shall be based on the maximum amount available to be drawn under such Letter of Credit from the date of issuance of the Letter of Credit until its Expiration Date and be payable quarterly in advance on the date of the issuance of the Letter of Credit for the period from such date until the end of the calendar quarter in which such Letter of Credit is issued and on the first day of each January, April, July, and October thereafter until its Expiration Date. Section 2.05. Reduction of the Commitments. (a) The Borrower shall have the right, upon at least three Business Days' irrevocable notice to the Administrative Agent, to terminate in whole or reduce ratably in part the unused portion of the Tranche A Commitments or the Tranche B Commitments; provided that each partial reduction shall be in the aggregate amount of $5,000,000.00 or an integral multiple of $1,000,000.00. (b) The Tranche A Commitments shall automatically reduce on the first anniversary of any Nonordinary Course Asset Sale, by an amount equal to the Net Cash Proceeds received by the Borrower or any of its Subsidiaries from such Nonordinary Course Asset Sale, the proceeds of which are not used for Acquisition Expenditures within one year from the date of the Nonordinary Course Asset Sale. For purposes of this paragraph (b), the Net Cash Proceeds from a Nonordinary Course Asset Sale will be deemed to be used to make the first Acquisition Expenditures made during the one-year period after the date of such Nonordinary Course Asset Sale. (c) Any reduction or termination of the Commitments pursuant to this Section 2.05 shall be permanent, with no obligation of the Banks to reinstate such Commitments and the facility fees provided for in Section 2.04(a)(i) shall thereafter be computed on the basis of the Commitments, as so reduced. Section 2.06. Repayment. (a) Tranche A Advances. The Borrower shall repay the outstanding principal amount of each Tranche A Advance on the Tranche A Maturity Date. (b) Tranche B Advances. The Borrower shall repay the outstanding principal amount of each Tranche B Advance on the Tranche B Commitment Termination Date or ratably based on each Bank's Pro Rata Share in 15 installments of 1/16th of the aggregate principal amount of the Tranche B Advances outstanding on August 18, 1997, each such installment payable on the first -32- 39 day of each calendar quarter beginning with October 1, 1997 and a final installment equal to the outstanding principal amount of the Tranche B Advances payable on July 1, 2001. (c) Competitive Advances. The Borrower shall repay to the Administrative Agent for the account of each Bank which has made a Competitive Advance to the Borrower on the maturity date of each Competitive Advance (such maturity date being that specified by the Borrower for repayment of such Competitive Advance in the related Notice of Acceptance/Rejection delivered pursuant to Section 2.03 above) the then unpaid principal amount of such Competitive Advance. Section 2.07. Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance made by each Bank from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Advance is a Base Rate Advance, a rate per annum equal at all times to the lesser of (i) the Adjusted Base Rate in effect from time-to-time plus the Applicable Margin and (ii) the Maximum Rate, payable in arrears on the last day of each calendar quarter and on the date such Base Rate Advance shall be paid in full, provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the Adjusted Base Rate in effect from time-to-time plus the Applicable Margin plus 2% and (ii) the Maximum Rate. (b) Eurodollar Rate Advances. If such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the Eurodollar Rate for such Interest Period plus the Applicable Margin and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three months from the first day of such Interest Period; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate. (c) Eurodollar Auction Advances. If such Advance is a Eurodollar Auction Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the sum of the Eurodollar Rate for the Interest Period in effect for such Advance plus the Margin offered by the Bank making such Advance and accepted by the Borrower pursuant to Section 2.03(b) and (ii) the Maximum Rate, payable on the last day of such Interest Period, and, in the case of six-month Interest Periods, on the day which occurs during such Interest Period three -33- 40 months from the first day of such Interest Period; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate. (d) Fixed Rate Auction Advances. If such Advance is a Fixed Rate Auction Advance, a rate per annum equal at all times during the Interest Period for such Advance to the lesser of (i) the fixed rate of interest offered by the Bank making such Advance and accepted by the Borrower pursuant to Section 2.03(b) and (ii) the Maximum Rate, payable on the last day of such Interest Period and, in the case of Interest Periods longer than three months, on the day which occurs during such Interest Period three months from the first day of such Interest Period and every three months thereafter; provided that any amount of principal which is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the lesser of (i) the rate required to be paid on such Advance immediately prior to the date on which such amount became due plus 2% and (ii) the Maximum Rate. (e) Additional Interest on Eurodollar Advances. The Borrower shall pay to each Bank, so long as any such Bank shall be required under regulations of the Federal Reserve Board to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Advance of such Bank, from the later of (i) the date of such Advance and (ii) the date such reserve requirement is imposed until the earlier of (A) the date such principal amount is paid in full and (B) the date such reserve requirement is suspended, at an interest rate per annum equal at all times to the remainder obtained by subtracting (1) the Eurodollar Rate for the Interest Period for such Advance from (2) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Bank for such Interest Period, payable on each date on which interest is payable on such Advance. Such additional interest payable to any Bank shall be determined by such Bank and notified to the Borrower through the Administrative Agent (such notice to include the calculation of such additional interest, which calculation shall be conclusive in the absence of manifest error). Each Bank agrees to use commercially reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such Bank. -34- 41 (f) Usury Recapture. In the event the rate of interest chargeable under this Agreement or the Notes at any time is greater than the Maximum Rate, the unpaid principal amount of the Notes shall bear interest at the Maximum Rate until the total amount of interest paid or accrued on the Notes equals the amount of interest which would have been paid or accrued on the Notes if the stated rates of interest set forth in this Agreement had at all times been in effect. In the event, upon payment in full of the Notes, the total amount of interest paid or accrued under the terms of this Agreement and the Notes is less than the total amount of interest which would have been paid or accrued if the rates of interest set forth in this Agreement had, at all times, been in effect, then the Borrower shall, to the extent permitted by applicable law, pay the Administrative Agent for the account of the Banks an amount equal to the difference between (i) the lesser of (A) the amount of interest which would have been charged on the Notes if the Maximum Rate had, at all times, been in effect and (B) the amount of interest which would have accrued on the Notes if the rates of interest set forth in this Agreement had at all times been in effect and (ii) the amount of interest actually paid or accrued under this Agreement on the Notes. In the event the Banks ever receive, collect or apply as interest any sum in excess of the Maximum Rate, such excess amount shall, to the extent permitted by law, be applied to the reduction of the principal balance of the Notes, and if no such principal is then outstanding, such excess or part thereof remaining shall be paid to the Borrower. Section 2.08. Prepayments. (a) Right to Prepay. The Borrower shall have no right to prepay any principal amount of any Advance except as provided in this Section 2.08. (b) Optional. The Borrower may elect to prepay any of the Advances, after giving (i) by 9:00 a.m. (Dallas, Texas time) in the case of Eurodollar Advances, at least two Business Days' or (ii) by 11:00 a.m. (Dallas, Texas time) in case of Base Rate Advances or Fixed Rate Auction Advances, same Business Day's prior written notice to the Administrative Agent stating the proposed date and aggregate principal amount of such prepayment, whether such prepayment should be applied to reduce outstanding Tranche A Advances, Tranche B Advances, or Competitive Advances and, if applicable, the relevant Interest Period for the Advances to be repaid. If any such notice is given, the Borrower shall prepay Advances comprising part of the same Borrowing in whole or ratably in part in an aggregate principal amount equal to the amount specified in such notice, together with accrued interest to the date of such prepayment on the principal amount prepaid and amounts, if any, required to be paid pursuant to Section 2.09 as a result of such prepayment being made on such date; provided, however, that each partial -35- 42 prepayment shall be in an aggregate principal amount in integral multiples of $1,000,000.00 so long as $5,000,000.00 in principal is outstanding. (c) Mandatory. (i) On any date on which the outstanding principal amount of the Tranche A Advances plus the outstanding principal amount of the Competitive Advances plus the Letter of Credit Exposure plus the outstanding principal amount of all Debt permitted under Section 6.02(d) exceeds the Tranche A Commitment, the Borrower agrees to make a prepayment of the Tranche A Advances and, if the Tranche A Advances have been repaid in full or are paid in full in connection with such prepayment, of the Competitive Advances in the amount of such excess. (ii) Before the Tranche B Commitment Termination Date, on the date of each reduction of the aggregate Tranche B Commitments pursuant to Section 2.05, the Borrower agrees to make a prepayment in respect of the outstanding amount of Tranche B Advances to the extent, if any, that the aggregate unpaid principal amount of all Tranche B Advances exceeds the Tranche B Commitment, as so reduced. (iii) Each prepayment pursuant to this Section 2.08(c) shall be accompanied by accrued interest on the amount prepaid to the date of such prepayment and amounts, if any, required to be paid pursuant to Section 2.09 as a result of such prepayment being made on such date. (d) Application of Prepayments. Each prepayment of Tranche B Advances made after the Tranche B Commitment Termination Date shall be applied to future scheduled Tranche B Advance principal payments, at the Borrower's option, (i) in the inverse order of their maturity or (ii) pro rata. (e) Illegality. If any Bank shall notify the Administrative Agent and the Borrower that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or that any central bank or other Governmental Authority asserts that it is unlawful for such Bank or its Eurodollar Lending Office to perform its obligations under this Agreement to maintain any Eurodollar Advances of such Bank then outstanding hereunder, (i) the Borrower shall, no later than 11:00 a.m. (Dallas, Texas time), (A) if not prohibited by law or regulation to maintain such Eurodollar Advances for the duration of the Interest Period, on the last day of the Interest Period for each outstanding Eurodollar Advance or (B) if prohibited by law or regulation to maintain such Eurodollar Advances for the duration of the Interest Period, on the second Business Day following its receipt of such notice, prepay all of the Eurodollar Advances of such Bank then outstanding, together with accrued interest on the principal amount prepaid to -36- 43 the date of such prepayment, (ii) such Bank shall simultaneously make a Base Rate Advance or Fixed Rate Auction Advance, as applicable, to the Borrower on such date in an amount equal to the aggregate principal amount of the Eurodollar Advances prepaid to such Bank, and (iii) the right of the Borrower to select Eurodollar Advances for any subsequent Borrowing from such Bank shall be suspended until such Bank shall notify the Administrative Agent that the circumstances causing such suspension no longer exist. Each Bank agrees to use commercially reasonable efforts (consistent with its internal policies and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such Bank. If the condition requiring the prepayment under this paragraph shall continue for such Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15. (f) Ratable Payments; Effect of Notice. Each payment of any Advance pursuant to this Section 2.08 or any other provision of this Agreement shall be made in a manner such that all Advances comprising part of the same Borrowing are paid in whole or ratably in part. All notices given pursuant to this Section 2.08 shall be irrevocable and binding upon the Borrower. Section 2.09. Breakage Costs. If (a) any payment of principal of any Eurodollar Advance is made other than on the last day of the Interest Period for such Advance, except as a result of Section 2.08(e) or (b) the Borrower fails to make a principal or interest payment with respect to any Eurodollar Advance on the date such payment is due and payable, the Borrower shall, within 10 days of any written demand sent by any Bank to the Borrower through the Administrative Agent, pay to the Administrative Agent for the account of such Bank any amounts (without duplication of any other amounts payable in respect of breakage costs) required to compensate such Bank for any additional losses, out-of-pocket costs or expenses which it may reasonably incur as a result of such payment or nonpayment, including, without limitation, any loss, cost or expense actually incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Bank to fund or maintain such Advance. Section 2.10. Increased Costs. (a) Eurodollar Advances. If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to any Bank of agreeing to make or making, funding or maintaining Eurodollar Advances, then the Borrower shall from time-to-time, upon demand by such Bank (with a copy of such demand to the Administrative Agent), immediately pay to the Administrative Agent for the account of such -37- 44 Bank additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Bank for such increased cost; provided, however, that, before making any such demand, each Bank agrees to use commercially reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such a designation would avoid the need for, or reduce the amount of, such increased cost and would not, in the reasonable judgment of such Bank, be otherwise materially disadvantageous to such Bank. A certificate as to the amount of such increased cost and detailing the calculation of such cost submitted to the Borrower and the Administrative Agent by such Bank shall be conclusive and binding for all purposes, absent manifest error. If the condition requiring payment under this paragraph shall continue for a Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15. (b) Capital Adequacy. If any Bank or the Issuing Bank determines in good faith that compliance with any law or regulation or any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) implemented or effective after the date of this Agreement affects or would affect the amount of capital required or expected to be maintained by such Bank or the Issuing Bank or any corporation controlling such Bank or the Issuing Bank and that the amount of such capital is increased by or based upon the existence of such Bank's commitment to lend or the Issuing Bank's commitment to issue the Letters of Credit and other commitments of this type, then, upon 30 days prior written notice by such Bank or the Issuing Bank (with a copy of any such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Bank or to the Issuing Bank, as the case may be, from time-to-time as specified by such Bank or the Issuing Bank, additional amounts (without duplication of any other amounts payable in respect of increased costs) sufficient to compensate such Bank or the Issuing Bank, in light of such circumstances, (i) with respect to such Bank, to the extent that such Bank reasonably determines such increase in capital to be allocable to the existence of such Bank's commitment to lend under this Agreement and (ii) with respect to the Issuing Bank, to the extent that the Issuing Bank reasonably determines such increase in capital to be allocable to the issuance or maintenance of the Letters of Credit. A certificate as to such amounts and detailing the calculation of such amounts submitted to the Borrower by such Bank or the Issuing Bank shall be conclusive and binding for all purposes, absent manifest error. The Borrower shall not be obligated to compensate any Bank or the Issuing Bank pursuant to this paragraph (b) for reduced return accruing prior to the date which is 90 days before such Bank or the Issuing Bank requests compensation; provided that if any law, rule or regulation, or interpretation or administration thereof, or any request or directive giving rise to reduced returns has retroactive effect, such Bank or the Issuing Bank shall be entitled to claim compensation under this paragraph for the period commencing on such date of retroactive effect through the date of adoption or change or promulgation thereof without regard to the foregoing limitation. If the condition requiring -38- 45 payment under this paragraph shall continue for a Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15. (c) Letters of Credit. If any change in any law or regulation or in the interpretation thereof by any court or administrative or Governmental Authority charged with the administration thereof shall either (i) impose, modify, or deem applicable any reserve, special deposit, or similar requirement against letters of credit issued by, or assets held by, or deposits in or for the account of, the Issuing Bank or (ii) impose on the Issuing Bank any other condition regarding the provisions of this Agreement relating to the Letters of Credit or any Letter of Credit Obligations, and the result of any event referred to in the preceding clause (i) or (ii) shall be to increase the cost to the Issuing Bank of issuing or maintaining any Letter of Credit (which increase in cost shall be determined by the Issuing Bank's reasonable allocation of the aggregate of such cost increases resulting from such event), then, upon demand by the Issuing Bank, the Borrower shall pay to the Issuing Bank, from time-to-time as specified by the Issuing Bank, additional amounts which shall be sufficient to compensate the Issuing Bank for such increased cost. The Issuing Bank agrees to use commercially reasonable efforts (consistent with internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office for the booking of its Letters of Credit if the making of such designation would avoid the effect of this paragraph and would not, in the reasonable judgment of the Issuing Bank, be otherwise materially disadvantageous to the Issuing Bank. A certificate as to such increased cost incurred by the Issuing Bank, as a result of any event mentioned in clause (i) or (ii) above, and detailing the calculation of such increased costs submitted by the Issuing Bank to the Borrower, shall be conclusive and binding for all purposes, absent manifest error. If the condition requiring payment under this paragraph shall continue for a Bank for 60 days, such Bank may be replaced in accordance with the procedures in Section 2.15. Section 2.11. Payments and Computations. (a) Payment Procedures. The Borrower shall make each payment under this Agreement and under the Notes not later than 11:00 a.m. (Dallas, Texas time) on the day when due in Dollars to the Administrative Agent at the location referred to in the Notes (or such other location as the Administrative Agent shall designate in writing to the Borrower) in same day funds. The Administrative Agent will promptly thereafter, and in any event prior to the close of business on the day any timely payment is made, cause to be distributed like funds relating to the payment of principal, interest or fees ratably (other than amounts payable solely to the Administrative Agent, the Issuing Bank, or a specific Bank pursuant to Section 2.03, 2.04(b), 2.04(c), 2.07(c), (d), or (e), 2.09, 2.10, 2.12, or 9.07 but after taking into account payments effected pursuant to Section 9.04) in accordance with each Bank's Pro Rata Share to the Banks for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other -39- 46 amount payable to any Bank or the Issuing Bank to such Bank for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. (b) Computations. All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate, the Federal Funds Rate, and of fees shall be made by the Administrative Agent, on the basis of a year of 360 days, in each case for the actual number of days (including the first day, but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Administrative Agent of an interest rate shall be conclusive and binding for all purposes, absent manifest error. (c) Non-Business Day Payments. Whenever any payment shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Administrative Agent Reliance. Unless the Administrative Agent shall have received written notice from the Borrower prior to the date on which any payment is due to the Banks that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such date an amount equal to the amount then due such Bank. If and to the extent the Borrower shall not have so made such payment in full to the Administrative Agent, each Bank shall repay to the Administrative Agent forthwith on demand such amount distributed to such Bank, together with interest, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Administrative Agent, at the Federal Funds Rate for such day. Section 2.12. Taxes. (a) No Deduction for Certain Taxes. Any and all payments by the Borrower shall be made, in accordance with Section 2.11, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank, the Issuing Bank, and the Administrative Agent, taxes imposed on its income and franchise taxes imposed on it (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable to any Bank, the Issuing Bank, or the Administrative -40- 47 Agent, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.12), such Bank, the Issuing Bank, or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made; provided, however, that if the Borrower's obligation to deduct or withhold Taxes is caused solely by such Bank's, the Issuing Bank's, or the Administrative Agent's failure to provide the forms described in paragraph (d) of this Section 2.12 and such Bank, the Issuing Bank, or the Administrative Agent could have provided such forms, no such increase shall be required; (ii) the Borrower shall make such deductions; and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) Other Taxes. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made or from the execution, delivery or registration of, or otherwise with respect to, this Agreement, the Notes, or the other Credit Documents (hereinafter referred to as "Other Taxes"). (c) Indemnification. The Borrower indemnifies each Bank, the Issuing Bank, and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.12) paid by such Bank, the Issuing Bank, or the Administrative Agent (as the case may be) and any liability (including interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Each payment required to be made by the Borrower in respect of this indemnification shall be made to the Administrative Agent for the benefit of any party claiming such indemnification within 30 days from the date the Borrower receives written demand detailing the calculation of such amounts therefor from the Administrative Agent on behalf of itself as Administrative Agent, the Issuing Bank, or any such Bank. If any Bank, the Administrative Agent, or the Issuing Bank receives a refund in respect of any taxes paid by the Borrower under this paragraph (c), such Bank, the Administrative Agent, or the Issuing Bank, as the case may be, shall promptly pay to the Borrower the Borrower's share of such refund. (d) Foreign Bank Withholding Exemption. Each Bank and Issuing Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Administrative Agent on the date of this Agreement or upon the effectiveness of any Assignment and Acceptance (i) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224 or successor applicable form, as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the Notes payable to it, without deduction or withholding of any United States federal income taxes, (ii) if applicable, an Internal Revenue Service Form W-8 or W-9 or successor applicable -41- 48 form, as the case may be, to establish an exemption from United States backup withholding tax, and (iii) any other governmental forms which are necessary or required under an applicable tax treaty or otherwise by law to reduce or eliminate any withholding tax, which have been reasonably requested by the Borrower. Each Bank which delivers to the Borrower and the Administrative Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant to the next preceding sentence further undertakes to deliver to the Borrower and the Administrative Agent two further copies of the said letter and Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such letter or form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent letter and form previously delivered by it to the Borrower and the Administrative Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower and the Administrative Agent certifying in the case of a Form 1001 or 4224 that such Bank is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes. If an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any delivery required by the preceding sentence would otherwise be required which renders all such forms inapplicable or which would prevent any Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Borrower and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing an exemption from United States backup withholding tax, such Bank shall not be required to deliver such letter or forms. The Borrower shall withhold tax at the rate and in the manner required by the laws of the United States with respect to payments made to a Bank failing to timely provide the requisite Internal Revenue Service forms. Section 2.13. Sharing of Payments, Etc. If any Bank shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off or otherwise) on account of the Advances made by it in excess of its Pro Rata Share of payments on account of the Advances or Letter of Credit Obligations obtained by all the Banks, such Bank shall notify the Administrative Agent and forthwith purchase from the other Banks such participations in the Advances made by them or Letter of Credit Obligations held by them as shall be necessary to cause such purchasing Bank to share the excess payment ratably in accordance with the requirements of this Agreement with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such Bank's ratable share (according to the proportion of (a) the amount of the participation sold by such Bank to the purchasing Bank as a result of such excess payment to (b) the total amount of such excess payment) of such recovery, together with an amount equal to such Bank's ratable share (according to the proportion of (a) the amount of such Bank's required repayment to the purchasing Bank to (b) the total amount of all such required -42- 49 repayments to the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section 2.13 may, to the fullest extent permitted by law, unless and until rescinded as provided above, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation. Section 2.14. Letters of Credit. (a) Issuance. From time-to-time from the date of this Agreement until three months before the Tranche A Maturity Date, at the request of the Borrower, an Issuing Bank shall, on the terms and conditions hereinafter set forth, issue, increase, or extend the expiration date of Letters of Credit for the account of the Borrower on any Business Day. No Letter of Credit will be issued, increased, or extended: (i) if such issuance, increase, or extension would cause the Letter of Credit Exposure to exceed the lesser of (1) $50,000,000.00 and (2) the aggregate Tranche A Commitments less the aggregate outstanding principal amount of all Tranche A Advances, Competitive Advances, and Debt permitted under Section 6.02(d); (ii) unless such Letter of Credit has an Expiration Date not later than the earlier of (A) one year after the date of issuance thereof and (B) the Tranche A Maturity Date; (iii) unless such Letter of Credit is in form and substance acceptable to such Issuing Bank in its sole discretion; (iv) unless such Letter of Credit is a standby letter of credit not supporting the repayment of Funded Debt of any Person; (v) unless the Borrower has delivered to such Issuing Bank a completed and executed letter of credit application on such Issuing Bank's standard form which shall contain terms no more restrictive than the terms of this Agreement; and (vi) unless such Letter of Credit is governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 or any successor to such publication. If the terms of any letter of credit application referred to in the foregoing clause (v) conflicts with the terms of this Agreement, the terms of this Agreement shall control. (b) Participations. (i) On the Effective Date, such Issuing Bank shall be deemed to have sold to each Bank and each other Bank shall be deemed to have purchased from such Issuing -43- 50 Bank a participation equal to such Bank's Pro Rata Share at such date in the Letter of Credit Obligations related to each Letter of Credit issued under the Existing Credit Agreement and outstanding on the Effective Date and (ii) upon the date of the issuance or increase of a Letter of Credit occurring on or after the Effective Date, such Issuing Bank shall be deemed to have sold to each other Bank and each other Bank shall have been deemed to have purchased from such Issuing Bank a participation in the related Letter of Credit Obligations equal to such Bank's Pro Rata Share at such date and such sale and purchase shall otherwise be in accordance with the terms of this Agreement. Such Issuing Bank shall promptly notify each such participant Bank by telex, telephone, or telecopy of each Letter of Credit issued or increased and the actual dollar amount of such Bank's participation in such Letter of Credit. (c) Reimbursement. The Borrower hereby agrees to pay on demand to such Issuing Bank for the benefit of the Banks in respect of each Letter of Credit an amount equal to any amount paid by such Issuing Bank under or in respect of such Letter of Credit. In the event such Issuing Bank makes a payment pursuant to a request for draw presented under a Letter of Credit and such payment is not promptly reimbursed by the Borrower upon demand, such Issuing Bank shall give notice of such payment to the Administrative Agent and the Banks, and each Bank shall promptly reimburse such Issuing Bank for such Bank's Pro Rata Share of such payment, and such reimbursement shall be deemed for all purposes of this Agreement to constitute a Tranche A Borrowing comprised of Base Rate Advances to the Borrower from such Bank. If such reimbursement is not made by any Bank to the Issuing Bank on the same day on which such Issuing Bank shall have made payment on any such draw, such Bank shall pay interest thereon to such Issuing Bank at a rate per annum equal to the Federal Funds Rate. The Borrower hereby unconditionally and irrevocably authorizes, empowers, and directs the Administrative Agent and the Banks to record and otherwise treat such payment under a Letter of Credit not immediately reimbursed by the Borrower as a Tranche A Borrowing comprised of Base Rate Advances to the Borrower. (d) Obligations Unconditional. The obligations of the Borrower under this Agreement in respect of each Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, notwithstanding the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit Documents; (ii) any amendment or waiver of or any consent to departure from any Letter of Credit Documents; (iii) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against any beneficiary or transferee of such Letter of Credit (or any -44- 51 Persons for whom any such beneficiary or any such transferee may be acting), such Issuing Bank or any other person or entity, whether in connection with this Agreement, the transactions contemplated in this Agreement or in any Letter of Credit Documents or any unrelated transaction; (iv) any statement or any other document presented under such 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 to the extent the Issuing Bank would not be liable therefor pursuant to the following paragraph (e); (v) payment by such Issuing Bank under such Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit; or (vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; provided, however, that nothing contained in this paragraph (d) shall be deemed to constitute a waiver of any remedies of the Borrower in connection with the Letters of Credit. (e) Liability of Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither such Issuing Bank nor any of its officers or directors shall be liable or responsible for: (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (iii) payment by such Issuing Bank against presentation of documents which do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the relevant Letter of Credit, unless such payment was due to such Issuing Bank's gross negligence or willful misconduct; or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit (including such Issuing Bank's own negligence, but other than through such Issuing Bank's gross negligence or willful misconduct), -45- 52 except that the Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to, and shall promptly pay to, the Borrower, to the extent of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by (A) such Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under a Letter of Credit comply with the terms of such Letter of Credit or (B) such Issuing Bank's willful failure to make lawful payment under any Letter of Credit after the presentation to it of a draft and certificate strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, such Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. Section 2.15. Bank Replacement. (a) Right to Replace. The Borrower shall have the right to replace each Terminating Bank at any time and each Bank affected by a condition under Section 2.02(c)(iii) or (v), 2.08(e), or 2.10 for more than 60 days (each Terminating Bank and each such affected Bank, an "Affected Bank") with an Eligible Assignee in accordance with the procedures in this Section 2.15. (b) Procedure. Any replacement of a Bank pursuant to this Section 2.15 shall be (i) made by the Eligible Assignee designated by the Borrower or by the Administrative Agent with the Borrower's consent and the selling Bank entering into an Assignment and Acceptance and by following the procedures in Section 9.06 for adding a Bank and (ii) shall close within 10 days after the Administrative Agent's receipt of the notice of election to replace such Bank. ARTICLE III CONDITIONS OF LENDING Section 3.01. Conditions Precedent to Effectiveness. This Agreement shall become effective and the Existing Credit Agreement shall be amended and restated as provided in this Agreement on the date the following conditions precedent are met ("Effective Date"): (a) The Borrower, each Bank, and the Administrative Agent shall have duly and validly executed originals of this Agreement and delivered them to the Administrative Agent; -46- 53 (b) The Administrative Agent shall have received the following duly executed by all the parties thereto, in form and substance satisfactory to the Administrative Agent, (except for the Notes) in sufficient copies for each Bank: (i) the Tranche A Notes, the Tranche B Notes and the Competitive Advance Notes dated as of the Effective Date payable to the order of each of the Banks, respectively; (ii) a Guaranty executed by each of the Borrower's Subsidiaries (other than its Nonprofit Subsidiaries and LCA Insurance Co., Ltd.); (iii) a certificate from the Chief Executive Officer, President, Chief Financial Officer, or Treasurer of the Borrower dated as of the Effective Date stating that as of such date (A) all representations and warranties of the Borrower set forth in this Agreement are true and correct in all material respects and (B) no Default has occurred and is continuing; (iv) copies, each certified as of the date of this Agreement by a Secretary or Assistant Secretary of the Borrower and each Guarantor (A) of the resolutions of the Board of Directors of the Borrower or such Guarantor, as the case may be, and authorizing the execution and delivery of each Credit Document to which such Person is a party and (B) of the certificate of incorporation and bylaws of the Borrower or such Guarantor, as the case may be; (v) a certificate of the Secretary or an Assistant Secretary of the Borrower and each Guarantor dated as of the date of this Agreement certifying as of such date the names and true signatures of officers of the Borrower or such Guarantor, as the case may be, authorized to sign the Credit Documents to which such Person is a party; (vi) a favorable opinion of the Associate General Counsel to the Borrower and the Guarantors, dated as of the Effective Date, in form and substance satisfactory to the Administrative Agent; and (vii) such other documents, governmental certificates, agreements, licenses, lien searches as the Administrative Agent or any Bank may reasonably request. (c) The Borrower shall have paid to the Administrative Agent for its account and the account of the Documentation Agent and the Syndication Agent the fees and expenses required by Section 2.04(b) to be paid as of the Effective Date. (d) No Default or Event of Default shall have occurred and be continuing. -47- 54 (e) The representations and warranties contained in Article IV and in Section 6 of the Guaranties shall be true and correct in all material respects. Section 3.02. Conditions Precedent to all Borrowings. The obligation of each Bank to fund an Advance on the occasion of each Borrowing (other than the Conversion or continuation of any existing Borrowing) and of an Issuing Bank to issue or increase any Letter of Credit shall be subject to the further conditions precedent that on the date of such Borrowing or the issuance or increase of such Letter of Credit the following statements shall be true (and each of the giving of the applicable Notice of Borrowing and the acceptance by the Borrower of the proceeds of such Borrowing or the issuance or increase of such Letter of Credit shall constitute a representation and warranty by the Borrower that on the date of such Borrowing or the issuance or increase of such Letter of Credit such statements are true): (a) the representations and warranties contained in Article IV (excluding the representations and warranties contained in Sections 4.05(a), 4.06, 4.13(b), and 4.16(a)) and Section 6 of the Guaranties are correct in all material respects on and as of the date of such Borrowing or the issuance or increase of such Letter of Credit, before and after giving effect to such Borrowing or to the issuance or increase of such Letter of Credit and to the application of the proceeds from such Borrowing, as though made on and as of such date and (b) no Default has occurred and is continuing or would result from such Borrowing or from the application of the proceeds therefrom. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants as follows: Section 4.01. Corporate Existence; Subsidiaries. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of Delaware and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified would reasonably be expected to cause a Material Adverse Effect. Each Subsidiary of the Borrower is a corporation duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation and in good standing and qualified to do business in each jurisdiction where its ownership or lease of property or conduct of its business requires such qualification and where a failure to be qualified would reasonably be expected to cause a Material Adverse Effect. The Borrower has no Subsidiaries on the date of this Agreement other than the Subsidiaries listed -48- 55 on the attached Schedule 4.01, and Schedule 4.01 lists the jurisdiction of incorporation and the address of the principal office of each such Subsidiary existing on the date of this Agreement. Section 4.02. Corporate Power. The execution, delivery, and performance by the Borrower of this Agreement, the Notes, and the other Credit Documents to which it is a party and by the Guarantors of the Guaranties and the consummation of the transactions contemplated hereby and thereby (a) are within the Borrower's and the Guarantors' corporate powers, (b) have been duly authorized by all necessary corporate action, (c) do not contravene (i) the Borrower's or any Guarantor's certificate or articles, as the case may be, of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower or any Guarantor, the contravention of which would reasonably be expected to cause a Material Adverse Effect and (d) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. At the time of each Borrowing or the issuance or increase of each Letter of Credit, such Borrowing and the use of the proceeds of such Borrowing or the issuance or increase of such Letter of Credit will be within the Borrower's corporate powers, will have been duly authorized by all necessary corporate action, (a) will not contravene (i) the Borrower's certificate of incorporation or by-laws or (ii) any law or any contractual restriction binding on or affecting the Borrower the contravention of which would reasonably be expected to cause a Material Adverse Effect and (b) will not result in or require the creation or imposition of any Lien prohibited by this Agreement. Section 4.03. Authorization and Approvals. No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority is required for the due execution, delivery and performance by the Borrower of this Agreement, the Notes, or the other Credit Documents to which the Borrower is a party or by each Guarantor of its Guaranty or the consummation of the transactions contemplated thereby. At the time of each Borrowing or the issuance or increase of any Letter of Credit, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority will be required for such Borrowing or the use of the proceeds of such Borrowing or the issuance or increase of such Letter of Credit. Section 4.04. Enforceable Obligations. This Agreement, the Notes, and the other Credit Documents to which the Borrower is a party have been duly executed and delivered by the Borrower and the Guaranties have been duly executed and delivered by the Guarantors. Each Credit Document is the legal, valid, and binding obligation of the Borrower and each Guarantor which is a party to it enforceable against the Borrower and each such Guarantor in accordance with its terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar law affecting creditors' rights generally and by general principles of equity (whether considered in proceeding at law or in equity). -49- 56 Section 4.05. Financial Statements. (a) The balance sheets of the Borrower and its Subsidiaries as at September 30, 1995, and the related statements of income, cash flow, and retained earnings of the Borrower and its Subsidiaries for the fiscal year then ended, copies of which have been furnished to each Bank, and the balance sheets of the Borrower and its Subsidiaries as at June 30, 1996, and the related statements of income and cash flow of the Borrower and its Subsidiaries for the nine months then ended, duly certified by an authorized financial officer of the Borrower, copies of which have been furnished to each Bank, fairly present, subject, in the case of said balance sheets as at June 30, 1996 and said statements of income and cash flow for the nine months then ended, to year-end audit adjustments, the financial condition of the Borrower and its Subsidiaries as at such dates and the results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, and such balance sheets and statements of income, cash flow, and retained earnings were prepared in accordance with GAAP. (b) No Material Adverse Change has occurred. Section 4.06. True and Complete Disclosure. No representation, warranty, or other statement made by the Borrower or any Guarantor (or on behalf of the Borrower or any Guarantor) in this Agreement or any other Credit Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made as of the date of this Agreement the effect of which would reasonably be expected to have a Material Adverse Effect. There is no fact known to any Responsible Officer of the Borrower on the date of this Agreement and on the Effective Date that has not been disclosed to the Banks which would reasonably be expected to have a Material Adverse Effect. All projections, estimates, and pro forma financial information furnished by the Borrower or on behalf of the Borrower were prepared on the basis of assumptions, data, information, tests, or conditions believed to be reasonable at the time such projections, estimates, and pro forma financial information were furnished. Section 4.07. Litigation. Except as otherwise disclosed to the Banks in writing after the date of this Agreement, there is no pending or, to the best knowledge of the Borrower, threatened action or proceeding affecting the Borrower or any of its Subsidiaries before any court, Governmental Agency or arbitrator, which would reasonably be expected to have a Material Adverse Effect or which purports to affect the legality, validity, binding effect or enforceability of this Agreement, any Note, or any other Credit Document or the consummation of any of the transactions contemplated hereby or thereby. Section 4.08. Use of Proceeds. The proceeds of Advances may only be used by the Borrower to refinance existing Indebtedness under the Existing Credit Agreement and for general -50- 57 corporate purposes, including acquisitions, working capital needs and the issuance of Letters of Credit. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U). No proceeds of any Advance will be used to purchase or carry any margin stock in violation of Regulation G, T, U or X. Following application of the proceeds of each Advance, not more than 25 percent (or such greater percent as may be provided for in any amendment to Section 221.2(g)(2)(i) of Regulation U after the date of this Agreement) of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a consolidated basis), which are subject to any arrangement with the Administrative Agent or any Bank (herein or otherwise) whereby the Borrower's or any Subsidiary's right or ability to sell, pledge or otherwise dispose of assets is in any way restricted, will be margin stock (within the meaning of Regulation U). Section 4.09. Investment Company Act. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 4.10. Public Utility Holding Company Act. Neither the Borrower nor any of its Subsidiaries is a "holding company", or a "Subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "Subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. Section 4.11. Taxes. (a) Reports and Payments. All Returns required to be filed by or on behalf of the Borrower, its Subsidiaries, or any member of the Controlled Group (hereafter collectively called the "Tax Group") have been duly filed on a timely basis or appropriate extensions have been obtained and such Returns are and will be true, complete and correct, except where the failure to so file would not be reasonably expected to have a Material Adverse Effect; and all Taxes shown to be payable on the Returns or on subsequent assessments with respect thereto will have been paid in full on a timely basis, and no other Taxes will be payable by the Tax Group with respect to items or periods covered by such Returns, except in each case to the extent of (i) reserves reflected in the Financial Statements, (ii) taxes that are being contested in good faith, or (iii) such Taxes, the failure to pay which would not have a Material Adverse Effect. The reserves for accrued Taxes reflected in the financial statements delivered to the Banks under this Agreement are adequate in the aggregate for the payment of all unpaid Taxes, whether or not disputed, for the period ended as of the date thereof and for any period prior thereto, and for which the Tax Group may be liable in its own right, as withholding agent or as a transferee of the assets of, or successor to, any Person, except for such Taxes or reserves therefor, the failure to pay or provide for which does not and could not have a Material Adverse Effect. -51- 58 (b) Taxes Definition. "Taxes" in this Section 4.11 shall mean all taxes, charges, fees, levies, or other assessments imposed by any federal, state, local, or foreign taxing authority, including without limitation, income, gross receipts, excise, real or personal property, sales, occupation, use, service, leasing, environmental, value added, transfer, payroll, and franchise taxes (and including any interest, penalties, or additions to tax attributable to or imposed on with respect to any such assessment). (c) Returns Definition. "Returns" in this Section 4.11 shall mean any federal, state, local, or foreign report, estimate, declaration of estimated Tax, information statement or return relating to, or required to be filed in connection with, any Taxes, including any information return or report with respect to backup withholding or other payments of third parties. Section 4.12. Pension Plans. No Termination Event has occurred with respect to any Plan, and each Plan has complied with and been administered in all material respects in accordance with applicable provisions of ERISA and the Code. No "accumulated funding deficiency" (as defined in Section 302 of ERISA) has occurred and there has been no excise tax imposed under Section 4971 of the Code. To the knowledge of any Responsible Officer of the Borrower, no Reportable Event has occurred with respect to any Multiemployer Plan, and each Multiemployer Plan has complied with and been administered in all material respects with applicable provisions of ERISA and the Code. The present value of all benefits vested under each Plan (based on the assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed the value of the assets of such Plan allocable to such vested benefits in any amount that would reasonably be expected to have a Material Adverse Effect. Neither the Borrower nor any member of the Controlled Group has had a complete or partial withdrawal from any Multiemployer Plan for which there is any material withdrawal liability. As of the most recent valuation date applicable thereto, neither the Borrower nor any member of the Controlled Group has received notice that any Multiemployer Plan is insolvent or in reorganization. Based upon GAAP existing as of the date of this Agreement and current factual circumstances, the Borrower has no reason to believe that the annual cost during the term of this Agreement to the Borrower or any of its Subsidiaries for post-retirement benefits to be provided to the current and former employees of the Borrower or any of its Subsidiaries under welfare benefit plans (as defined in Section 3(1) of ERISA) could, in the aggregate, reasonably be expected to have a Material Adverse Effect. Section 4.13. No Burdensome Restrictions; No Defaults. (a) Neither the Borrower nor any of its Subsidiaries is a party to any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter or corporate restriction or provision of applicable Legal Requirement which would reasonably be expected to have a Material Adverse Effect. The Borrower and the Guarantors are not in default under or with respect to any contract, agreement, lease or other instrument to which the Borrower -52- 59 or any Guarantor is a party and which would reasonably be expected to have a Material Adverse Effect. To the knowledge of a Responsible Officer of the Borrower, neither the Borrower nor any Guarantor has received any notice of default under any contract, agreement, lease or other instrument to which the Borrower or such Guarantor is a party which is continuing and which, if not cured, would reasonably be expected to have a Material Adverse Effect. (b) No Default has occurred and is continuing. Section 4.14. Environmental Condition. (a) The Borrower and its Subsidiaries, taken as a whole, (i) have obtained all Environmental Permits necessary for the ownership and operation of their respective material Properties and the conduct of their respective businesses of which the failure to obtain would reasonably be expected to have a Material Adverse Effect; (ii) have been and are in compliance with all terms and conditions of such Environmental Permits and with all other material requirements of applicable Environmental Laws of which the failure to comply would reasonably be expected to have a Material Adverse Effect; (iii) have not received notice of any violation or alleged violation of any Environmental Law or Environmental Permit the violation of which would reasonably be expected to have a Material Adverse Effect; and (iv) are not subject to any actual or contingent Environmental Claim, which Environmental Claim would reasonably be expected to have a Material Adverse Effect. (b) To the knowledge of any Responsible Officer of the Borrower, none of the present or previously owned or operated Property of the Borrower or of any of its present or former Subsidiaries, wherever located, (i) has been placed on or proposed to be placed on the National Priorities List, the Comprehensive Environmental Response Compensation Liability Information System list, or their state or local analogs, or have been otherwise designated, listed, or identified as a potential site for removal, remediation, cleanup, closure, restoration, reclamation, or other response activity under any Environmental Laws; (ii) is subject to a Lien, arising under or in connection with any Environmental Laws, that attaches to any revenues or to any Property owned or operated by the Borrower or any of its Subsidiaries, wherever located, which Lien would reasonably be expected to have a Material Adverse Effect; or (iii) has been the site of any Release of Hazardous Substances or Hazardous Wastes from present or past operations which has caused at the site or at any third-party site any condition that has resulted in or would reasonably be expected to result in the need for Response that would have a Material Adverse Effect. (c) Without limiting the foregoing, the present and, to the best knowledge of any Responsible Officer of the Borrower, future liability, if any, of the Borrower and its Subsidiaries, taken as a whole, which would reasonably be expected to arise in connection with requirements under Environmental Laws will not have a Material Adverse Effect. -53- 60 Section 4.15. Permits, Licenses, etc. The Borrower and its Subsidiaries possess all permits, licenses, patents, patent rights or licenses, trademarks, trademark rights, trade names rights and copyrights which the failure to possess could reasonably be expected to have a Material Adverse Effect. The Borrower and its Subsidiaries manage and operate their business in accordance with all applicable Legal Requirements which the failure to so manage or operate would reasonably be expected to have a Material Adverse Effect. Section 4.16. Health Care Regulatory Matters. (a) To the knowledge of any Responsible Officer of the Borrower, all necessary steps have been or are being taken to secure the renewal of any Health Facility License, Medicaid Provider Agreement or Medicare Provider Agreement issued with respect to any Facility which the failure to renew could reasonably be expected to have a Material Adverse Effect and that is to expire within 60 days after the date of this Agreement, and there is no reasonable basis known to any Responsible Officer of the Borrower or its Subsidiaries that any such renewal will not be obtained. (b) There are no proceedings pending, or, to the best of the Borrower's knowledge, threatened by any Governmental Authority seeking nor, to the knowledge of any Responsible Officer of the Borrower or any of its Subsidiaries, has the Borrower or any of its Subsidiaries taken any action to the effect of which would be to adversely modify, revoke, withdraw, or suspend any CON, Health Facility License, Medicaid Provider Agreement, Medicare Provider Agreement, Medicare Certification or Medicaid Certification in a manner that would reasonably be expected to have a Material Adverse Effect. To the Borrower's knowledge, there is no decision to fail to renew or deny payments under any Medicaid Provider Agreement or Medicare Provider Agreement which failure or denial would reasonably be expected to have a Material Adverse Effect. ARTICLE V AFFIRMATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit shall remain outstanding, or any Bank shall have any Commitment hereunder, the Borrower agrees, unless the Majority Banks shall otherwise consent in writing, to comply with the following covenants. Section 5.01. Compliance with Laws, Etc. The Borrower will comply, and cause each of its Subsidiaries to comply, with all Legal Requirements of which the failure to comply would -54- 61 reasonably be expected to have a Material Adverse Effect. Without limiting the generality and coverage of the foregoing, the Borrower shall comply, and shall cause each of its Subsidiaries to comply, in all material respects, with all Environmental Laws and, in all material respects, all laws, regulations, or directives with respect to equal employment opportunity and employee safety in all jurisdictions in which the Borrower, or any of its Subsidiaries do business; provided, however, that this Section 5.01 shall not prevent the Borrower, or any of its Subsidiaries from, in good faith and with reasonable diligence, contesting the validity or application of any such laws or regulations by appropriate legal proceedings. Section 5.02. Maintenance of Insurance. The Borrower will maintain, and cause each of its Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as are usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates, provided that the Borrower or such Subsidiary may self-insure to the extent and in the manner normal for similarly situated companies of like size, type and financial condition that are part of a group of companies under common control. Section 5.03. Preservation of Corporate Existence, Etc. The Borrower will preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, and cause each such Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which qualification is necessary or desirable in view of its business and operations or the ownership of its properties, and, in each case, where failure to qualify or preserve and maintain its rights and franchises would reasonably be expected to have a Material Adverse Effect; provided, however, that nothing contained in this Section 5.03 shall prevent any transaction permitted by Section 6.04. Section 5.04. Payment of Taxes, Etc. The Borrower will pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent and which the failure to timely pay or discharge would reasonably be expected to have a Material Adverse Effect, (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or Property that are material in amount, prior to the date on which penalties attach thereto and (b) all lawful claims that are material in amount which, if unpaid, might by law become a Lien upon its Property; provided, however, that neither the Borrower nor any such Subsidiary shall be required to pay or discharge any such tax, assessment, charge, levy, or claim which is being contested in good faith and by appropriate proceedings, and with respect to which reserves in conformity with GAAP have been provided. -55- 62 Section 5.05. Visitation Rights. At any reasonable time and from time-to-time and so long as any visit or inspection will not interfere with patients' rights or unreasonably interfere with the Borrower's or any of its Subsidiaries operations, upon reasonable notice, the Borrower will, and will cause its Subsidiaries to, permit the Administrative Agent and any Bank or any of its agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit and inspect at its reasonable discretion the properties of, the Borrower and any such Subsidiary, to discuss the affairs, finances and accounts of the Borrower and any such Subsidiary with any of their respective officers or directors. Section 5.06. Reporting Requirements. The Borrower will furnish to the Administrative Agent and each Bank: (a) Defaults. As soon as possible and in any event within five Business Days after the occurrence of each Default known to a Responsible Officer of the Borrower or any of its Subsidiaries which is continuing on the date of such statement, a statement of an authorized financial officer of the Borrower setting forth the details of such Default and the actions which the Borrower has taken and proposes to take with respect thereto; (b) Quarterly Financials. As soon as available and in any event not later than 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, the balance sheets of Borrower and its Subsidiaries as of the end of such quarter and the statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous year and ending with the end of such quarter, all in reasonable detail and duly certified with respect to such statements (subject to year-end audit adjustments) by an authorized financial officer of the Borrower as having been prepared in accordance with GAAP, together with a compliance certificate duly executed by a Responsible Officer in substantially the form of the attached Exhibit F; (c) Annual Financials. As soon as available and in any event not later than 90 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, including therein balance sheets of the Borrower and its Subsidiaries as of the end of such fiscal year and statements of income and retained earnings and of cash flows of Borrower and its Subsidiaries for such fiscal year, in each case certified by Ernst & Young or other nationally recognized independent certified public accountants or other independent certified public accountants of recognized standing acceptable to the Administrative Agent and including any management letters delivered by such accountants to the Borrower in connection with such audit, together with a compliance certificate duly executed by a Responsible Officer in substantially the form of the attached Exhibit F; -56- 63 (d) Securities Law Filings. Promptly and in any event within 15 days after the sending or filing thereof, copies of all proxy material, reports and other information which the Borrower or any of its Subsidiary sends to or files with the United States Securities and Exchange Commission or sends to any shareholder of the Borrower; (e) Termination Events. As soon as possible and in any event (i) within 30 days after the Borrower knows or has reason to know that any Termination Event described in clause (a) of the definition of Termination Event with respect to any Plan has occurred, and (ii) within 10 days after any Responsible Officer of the Borrower knows or has reason to know that any other Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower or such Affiliate proposes to take with respect thereto; (f) Termination of Plans. Promptly and in any event within two Business Days after the knowledge of any Responsible Officer of the Borrower of receipt thereof by the Borrower or any member of the Controlled Group from the PBGC, copies of each notice received by the Borrower or any such member of the Controlled Group of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan; (g) Other ERISA Notices. Promptly and in any event within five Business Days after the knowledge of any Responsible Officer of the Borrower of receipt thereof by the Borrower or any member of the Controlled Group from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any member of the Controlled Group concerning the imposition of withdrawal liability pursuant to Section 4202 of ERISA in an amount that could reasonably be expected to have a Material Adverse Effect; (h) Environmental Notices. Promptly upon the knowledge of any Responsible Officer of the Borrower of receipt thereof by the Borrower or any of its Subsidiaries, a copy of any form of notice, summons or citation received from the EPA, or any other Governmental Authority directly engaged in protection of the Environment, concerning (i) material violations or alleged violations of Environmental Laws, which seeks to impose liability therefor and which, based upon information reasonably available to the Borrower at the time or after such violation, would reasonably be expected to have a Material Adverse Effect, (ii) any action or omission on the part of the Borrower or any of its Subsidiaries in connection with Hazardous Waste or Hazardous Substances which, based upon information reasonably available to the Borrower at the time of such receipt, would reasonably be expected to have a Material Adverse Effect, (iii) any notice of potential responsibility under CERCLA which would reasonably be expected to have a Material Adverse Effect, or (iv) concerning the filing of a Lien other than a Permitted Lien upon, against or in connection with the Borrower, its present or former Subsidiaries, or any of their -57- 64 leased or owned material Property, wherever located, which would reasonably be expected to have a Material Adverse Effect; (i) Other Governmental Notices. Promptly and in any event within five Business Days after receipt thereof by the Borrower or any Subsidiary and the knowledge of such receipt by a Responsible Officer of the Borrower or any inside counsel of the Borrower, (i) a copy of any notice, summons, citation, or proceeding seeking to adversely modify in any material respect, revoke, or suspend any CON, Health Facility License, Medicaid Provider Agreement, Medicare Provider Agreement, Medicaid Certification, or Medicare Certification in a manner that would reasonably be expected to have a Material Adverse Effect and (ii) any revocation or involuntary termination of any Medicaid Provider Agreement, Medicare Provider Agreement, Medicaid Certification, or Medicare Certification that would reasonably be expected to have a Material Adverse Effect; (j) Material Changes. Prompt written notice of any condition or event of which any Responsible Officer of the Borrower has knowledge, which condition or event has resulted or could reasonably be expected to result in (i) a Material Adverse Change or Material Adverse Effect or (ii) a breach of or noncompliance with any term, condition, or covenant of any contract to which the Borrower or any of its Subsidiaries is a party or by which they or their properties may be bound, which breach or noncompliance would reasonably be expected to have a Material Adverse Effect; (k) Disputes, etc. Prompt written notice of any claims, proceedings, or disputes, or to the knowledge of any Responsible Officer of the Borrower threatened, or affecting the Borrower, or any of its Subsidiaries which, if adversely determined, could reasonably be expected to have a Material Adverse Effect; and (l) Other Information. Such other information respecting the business or Properties, or the condition or operations, financial or otherwise, of the Borrower, or any of its Subsidiaries, as any Bank through the Administrative Agent may from time-to-time reasonably request. Section 5.07. Maintenance of Property. Borrower shall, and shall cause each of its Subsidiaries to, (a) maintain all of its Property necessary or useful in the proper conduct of its business in good working order and condition, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect and (b) not knowingly or willfully permit the commission of waste or other injury, or the occurrence of pollution, contamination or any other condition in, on or about the owned or operated property involving the Environment that would reasonably be expected to have a Material Adverse Effect. -58- 65 Section 5.08. Additional Guaranties. Upon the creation or acquisition after the Effective Date of any Material Subsidiary or promptly after any Subsidiary which is not a Guarantor becomes a Material Subsidiary, the Borrower will cause such Material Subsidiary to execute and deliver to each Bank a Guaranty and such evidence of corporate authority to enter into such Guaranty as the Administrative Agent may reasonably request; provided that as of the last day of any fiscal quarter the Borrower and the Guarantors shall have at least 85% of the Borrower's Tangible Net Assets on such day and at least 85% of the Borrower's EBITDA for the four fiscal quarters ending on such day. A "Material Subsidiary" is any Subsidiary of the Borrower which on the date of its acquisition or formation or on any quarter end after the date of this Agreement (a) has EBITDA for the four fiscal quarters ending immediately preceding such date equal to or greater than 5% of the Borrower's EBITDA for such period or (b) Tangible Net Assets equal to or greater than 5% of the Borrower's Tangible Net Assets. ARTICLE VI NEGATIVE COVENANTS So long as any Note or any amount under any Credit Document shall remain unpaid, any Letter of Credit remain outstanding, or any Bank shall have any Commitment, the Borrower agrees, unless the Majority Banks otherwise consent in writing, to comply with the following covenants. Section 6.01. Liens, Etc. The Borrower will not create, assume, incur or suffer to exist, or permit any of its Subsidiaries to create, assume, incur, or suffer to exist, any Lien on or in respect of any of its Property whether now owned or hereafter acquired, or assign any right to receive income, except that the Borrower and its Subsidiaries may create, incur, assume or suffer to exist Liens: (a) securing the Obligations; (b) for taxes, assessments or governmental charges or levies on Property of the Borrower or any Guarantor to the extent not required to be paid pursuant to Sections 5.01 and 5.04; (c) imposed by law, such as landlords', carriers', warehousemen's and mechanics' liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Borrower and its Subsidiaries in accordance with GAAP; -59- 66 (d) arising in the ordinary course of business out of pledges or deposits under workers' compensation laws, unemployment insurance, old age pensions or other social security or retirement benefits, or similar legislation or to secure public or statutory obligations of the Borrower or any of its Subsidiaries; (e) Liens securing purchase money Debt, Capital Leases, and acquired Debt permitted under Section 6.02(k); provided that (i) in the case of purchase money Debt and Capital Leases, each such Lien only encumbers the property acquired in connection with the creation of such Debt of Capital Lease and all proceeds therefrom and (ii) the fair market value of the collateral securing any such Debt may exceed the outstanding principal amount of such Debt only to the extent such excess is within customary commercial bank lending and collateralization requirements; (f) securing Debt listed on the attached Schedule 6.01; provided that the Debt of the Borrower or any Subsidiary of the Borrower secured by such Liens shall not be renewed, refinanced or extended if the amount of such Debt so renewed is greater than the outstanding amount of such Debt on the date of this Agreement; (g) arising from litigation and which are effectively stayed from execution and would not otherwise cause a Default to occur; (h) in the nature of utility easements, building restrictions, and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of the Borrower or its Subsidiaries; (i) in the nature of any interest or title of a lessor in assets being leased to the Borrower or one of its Subsidiaries; and (j) encumbering the Property subject to the lease permitted by Section 6.02(m). Section 6.02. Debts, Guaranties and Other Obligations. The Borrower will not, and will not permit any of its Subsidiaries to, create, assume, suffer to exist or in any manner become or be liable in respect of any Debt except: (a) Debt of the Borrower and its Subsidiaries under the Credit Documents; (b) unsecured Debt listed on the attached Schedule 6.02 and all renewals, extensions, rearrangements or refinancings of any such credit arrangements on terms and for amounts substantially similar to the terms and amounts existing as of the date of this Agreement; -60- 67 (c) intercompany Debt owed (i) by any wholly-owned Subsidiary of the Borrower (other than a Nonprofit Subsidiary) to the Borrower; (ii) by the Borrower to any of its wholly-owned Subsidiaries; and (iii) any wholly-owned Subsidiary of the Borrower to another wholly-owned Subsidiary of the Borrower; (d) unsecured borrowings at a market rate of interest with maturities of less than 180 days of the Borrower not otherwise permitted by the preceding paragraphs (a), (b), and (c) in an aggregate outstanding principal amount not to exceed at any time the lesser of (i) $100,000,000.00 or (ii) the amount by which the Tranche A Commitments exceeds the sum of the outstanding Tranche A Advances, Letter of Credit Exposure, and Competitive Advances; (e) Debt secured by the Liens permitted pursuant to paragraph (f) of Section 6.01; (f) current liabilities for the financing of the Borrower's and its Subsidiaries' insurance premiums; (g) the Borrower's guaranty under the Contract to Lease and Surviving Master Agreement for Leases of Mayer, Trustee Nursing Homes dated as of May 1, 1994 among the Borrower, Living Centers of Texas, Inc., and Clarence Mayer, Trustee of the repayment of the residual value of the premises leased thereby; (h) guaranties (i) by the Borrower's Subsidiaries of any Debt of the Borrower permitted by this Section 6.02 and (ii) by the Borrower of its wholly-owned Subsidiaries' Debt permitted by this Section 6.02; (i) reimbursement obligations of the Borrower in respect of any surety bonds or letters of credit otherwise permitted under this Agreement issued to secure payment of any insurance premiums, regulatory obligations, or trust fund obligations for the Borrower or any of its Subsidiaries; (j) unfunded vested liabilities under any Plan that would not reasonably be expected to have a Material Adverse Effect; (k) Debt incurred in connection with the purchase of any Property, Capital Leases, and Debt assumed in connection with any Acquisition Expenditure in an aggregate outstanding principal amount not to exceed at any time the greater of (i) $75,000,000.00 or (ii) 15% of the Borrower's Net Worth at such time; (l) Subordinated Debt in an aggregate outstanding principal amount not to exceed at any time $150,000,000.00; and -61- 68 (m) (i) obligations to pay rent under any lease that is treated as an operating lease under GAAP but for which the Borrower or any of its Subsidiaries is viewed as the owner of the leased Property under the Code and (ii) guaranties by the Borrower or any of its Subsidiaries of the obligations of the lessor of such leased Property which are secured by the payments due under the lease of such Property. Section 6.03. Agreements Restricting Liens and Distributions. The Borrower will not, nor will it permit any of its Subsidiaries to, enter into any agreement (other than a Credit Document) which (a) except with respect to specific property encumbered to secure payment of Debt related to such property, imposes restrictions greater than those under this Agreement upon the creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired or (b) limits Restricted Payments to or any advance by any of the Borrower's Subsidiaries to the Borrower. Section 6.04. Merger or Consolidation; Asset Sales. The Borrower will not, and will not permit any of its Subsidiaries to, (a) merge or consolidate with or into any other Person, except that (i) the Borrower may merge with any of its wholly-owned Subsidiaries and (ii) any of the Borrower's wholly-owned Subsidiaries may merge with another of the Borrower's wholly-owned Subsidiaries, provided that immediately after giving effect to any such proposed transaction no Default would exist and in the case of any such merger to which the Borrower is a party, the Borrower is the surviving corporation or (b) sell, lease, transfer, or otherwise dispose of any asset (including stock of a Subsidiary) other than the Devcon Stock Sale or the sale of certain assets acquired in connection with Project QC if the fair market value of such asset plus the fair market value of all assets (including stock of a Subsidiary) disposed of during the four fiscal quarters immediately preceding the date of such asset sale would exceed 5% of Tangible Net Assets of the Borrower; provided that, for sales of assets in a single transaction or in a related series of transactions with a fair market value in excess in $15,000,000.00, the Administrative Agent shall have received a Compliance Certificate demonstrating pro forma financial covenant compliance, including adjustments to the Borrower's EBITDA for such divested assets. Upon the closing of any transaction permitted by this Section 6.04 involving a Guarantor the shares of stock of which is sold or that does not survive a merger, such Guarantor shall automatically be released from its obligations under its Guaranty, and, if requested by the Borrower, the Agent, on its behalf and the behalf of the Banks, shall execute a release of such Guarantor from its Guaranty. -62- 69 Section 6.05. Restricted Payments. The Borrower will not make or pay any Restricted Payment if a Default exists or would result therefrom. Section 6.06. Investments. The Borrower will not, and will not permit any of its Subsidiaries to, make or permit to exist any loans, advances or capital contributions to, or make any investment in, or purchase or commit to purchase any stock or other securities or evidences of indebtedness of or interests in any Person, except the following: (a) the purchase of Liquid Investments; (b) trade and customer accounts receivable which are for goods furnished or services rendered in the ordinary course of business and are payable in accordance with customary trade terms; (c) ordinary course of business contributions, loans or advances to, or investments in, (i) a direct or indirect Subsidiary of the Borrower, other than a Nonprofit Subsidiary or (ii) the Borrower; (d) the Borrower's ownership of the stock of any Nonprofit Subsidiary; (e) other capital investments not otherwise permitted by this Section 6.06 in an aggregate amount of such investments outstanding at any time not to exceed $5,000,000.00; (f) holding of notes receivable included on the Borrower's balance sheet at June 30, 1995 or received in connection with asset sales permitted by Section 6.04 or acquired in connection with acquisitions by the Borrower permitted by Section 6.07; and (g) Acquisition Expenditures permitted under Section 6.07. Section 6.07. Acquisition Expenditures. Except for up to $25,000,000.00 of aggregate cash consideration paid during any consecutive four fiscal quarter period for all purchases of facilities which have been leased by the Borrower or any of its Subsidiaries for at least three years, the Borrower shall not and shall not permit any of its Subsidiaries to make any Acquisition Expenditure, unless (a) such Acquisition Expenditure is made in substantially the same or complementary lines of business of the Borrower and does not violate any other provision of this Agreement; (b) except for Project QC, (i) the aggregate cash consideration paid during any four consecutive four fiscal quarter period plus (ii) assumptions of Debt for all Acquisition Expenditures made during such period does not exceed (A) $100,000,000.00 plus (B) an amount not less than zero, but equal to (1) the Net Cash Proceeds received from asset sales permitted by Section 6.04 during such period minus (2) the total automatic Commitment reductions made -63- 70 under Section 2.05(b) during such period; (c) at the time of such Acquisition Expenditure no Default has occurred and is continuing or would occur upon the consummation of such acquisition; (d) for Acquisition Expenditures in excess of $15,000,000.00, the Administrative Agent shall have received a Compliance Certificate demonstrating pro forma financial covenant compliance, including adjustments to the Borrower's EBITDA for such acquired business; and (e) immediately following the making of such Acquisition Expenditure, the aggregate amount of the Commitments exceeds the aggregate outstanding principal amount of the Advances, the Letter of Credit Exposure, and the outstanding principal amount of Debt permitted by Section 6.02(d) by at least $25,000,000.00. Section 6.08. Affiliate Transactions. Except as expressly permitted elsewhere in this Agreement, the Borrower will not, and will not permit any of its Subsidiaries to, make, directly or indirectly: (a) any investment in any Affiliate (other than a wholly-owned Subsidiary of the Borrower); (b) any transfer, sale, lease, assignment or other disposal of any assets to any such Affiliate or any purchase or acquisition of assets from any such Affiliate; or (c) any arrangement or other transaction directly or indirectly with or for the benefit of any such Affiliate (including without limitation, guaranties and assumptions of obligations of an Affiliate); provided that the Borrower and its Subsidiaries (i) may enter into any arrangement or other transaction with any such Affiliate providing for the leasing of property, the rendering or receipt of services or the purchase or sale of inventory and other assets in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Borrower and its Subsidiaries as the monetary or business consideration which it would obtain in a comparable arm's length transaction with a Person not such an Affiliate and (ii) may maintain the arrangements listed on the attached Schedule 6.08. Section 6.09. Compliance with ERISA. The Borrower will not, and will not permit any of its Subsidiaries to, (a) terminate any Plan so as to result in any material (in the opinion of the Majority Banks) liability of the Borrower or any of its Affiliates to the PBGC or (b) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Majority Banks) risk of such a termination by the PBGC of any Plan under Section 4042 of ERISA. Section 6.10. Cash Flow Ratio. The Borrower will not permit the ratio of (a) its Cash Flow as of the end of any fiscal quarter for the four fiscal quarters then ended to (b) Interest Expense for such period plus its current maturities of long-term debt as of the last day of such period plus its Lease Expense as of the last day of such period to be less than 1.30. Section 6.11. Leverage Ratio. The Borrower will not permit its Leverage Ratio as of the last day of any fiscal quarter to be greater than 3.25. -64- 71 Section 6.12. Net Worth. The Borrower will not permit its Net Worth to be less than $295,000,000.00 plus 75% of its cumulative positive Net Income for each fiscal quarter after March 31, 1996 (excluding Net Income for any fiscal quarter for which Net Income is negative) plus 50% of the increase of Net Worth caused by any issuance of capital stock after March 31, 1996. Section 6.13. Indemnification Agreement. The Borrower shall not agree to amend any provision of the Indemnification Agreement if such amendment would increase the Borrower's obligations under the Indemnification Agreement. ARTICLE VII REMEDIES Section 7.01. Events of Default. The occurrence of any of the following events shall constitute an "Event of Default" under any Credit Document: (a) Payment. The Borrower shall fail to pay any principal of any Note or any Reimbursement Obligation when the same becomes due and payable, or any interest on any Note or any fee or other amount payable hereunder or under any other Credit Document within three Business Days after the same becomes due and payable; (b) Representation and Warranties. Any representation or warranty made or deemed to be made (i) by the Borrower in this Agreement (other than the representation and warranty in Section 4.13(b)) or in any other Credit Document, (ii) by the Borrower (or any of its officers) in connection with this Agreement or any other Credit Document, or (iii) by any Subsidiary in any Credit Document shall prove to have been incorrect in any material respect when made or deemed to be made; (c) Covenant Breaches. (i) The Borrower shall (A) fail to perform or observe any covenant contained in Section 5.03 or 5.04 or Article VI of this Agreement or (B) fail to perform or observe any other term or covenant set forth in this Agreement or in any other Credit Document which is not covered by clause (i)(A) above or any other provision of this Section 7.01 if such failure shall remain unremedied for 30 days after the earlier of written notice of such default shall have been given to such Person by the Administrative Agent or any Bank or a Responsible Officer of such Person's actual knowledge of such default or (ii) any Guarantor shall fail to perform or observe any covenant contained in its Guaranty if such failure shall remain unremedied for the same period, if any, applicable to such covenant in this Agreement after the earlier of written notice of such default shall have been given to such Person by the -65- 72 Administrative Agent or any Bank or a Responsible Officer of such Person's actual knowledge of such default; (d) Cross-Defaults. (i) The Borrower or any its Subsidiaries shall fail to pay any principal of or premium or interest on its Debt which is outstanding in a principal amount of at least $10,000,000.00 individually or when aggregated with all such Debt of the Borrower or its Subsidiaries so in default (but excluding Debt evidenced by the Notes) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; (ii) any other event shall occur or condition shall exist under any agreement or instrument relating to Debt which is outstanding in a principal amount of at least $10,000,000.00 individually or when aggregated with all such Debt of the Borrower and its Subsidiaries so in default, and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or (iii) any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (e) Insolvency. The Borrower or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against the Borrower or any such Subsidiary, either such proceeding shall remain undismissed for a period of 30 days or any of the actions sought in such proceeding shall occur; or the Borrower or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this paragraph (e); (f) Judgments. Any judgment or order for the payment of money in excess of $5,000,000.00 (reduced for purposes of this paragraph for the amount in respect of such judgment or order that a reputable insurer has acknowledged as being payable under any valid and enforceable insurance policy) shall be rendered against the Borrower or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; -66- 73 (g) Termination Events. Any Termination Event with respect to a Plan shall have occurred, and, 30 days after notice thereof shall have been given to the Borrower by the Administrative Agent, (i) such Termination Event shall have created and caused to be continuing a material risk of Plan termination or liability for withdrawal from the Plan as a substantive employer and (ii) the then present value of such Plan's vested benefits exceeds the then current value of assets accumulated in such Plan by more than the amount of $10,000,000.00 (or in the case of a Termination Event involving the withdrawal of a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), the withdrawing employer's proportionate share of such excess shall exceed such amount); (h) Plan Withdrawals. The Borrower or any member of the Controlled Group as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in an annual amount exceeding $10,000,000.00; (i) Guaranties. Any provision of any Guaranty requiring the payment of the Guaranteed Obligations (as defined in the Guaranties) shall for any reason cease to be valid and binding on the applicable Guarantor or the applicable Guarantor shall so state in writing; or (j) Change of Control. (i) as a result of one or more transactions after the date of this Agreement, any "person" or "group" of persons acting in concert (other than persons owning common stock of the Borrower on the Effective Date (as defined in the Existing Credit Agreement) shall have "beneficial ownership" of more than 30% of the outstanding common stock of the Borrower (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder), provided that the relationships among the respective shareholders of the Borrower on the date of this Agreement shall not be deemed to constitute all or any combination of them as a "group" or (ii) during any period of 12 consecutive months, beginning with and after the Effective Date (as defined in the Existing Credit Agreement), individuals who at the beginning of such 12-month period were directors of the Borrower shall cease for any reason to constitute a majority of the board of directors of the Borrower at any time during such period. Section 7.02. Optional Acceleration of Maturity. If any Event of Default (other than an Event of Default pursuant to paragraph (e) of Section 7.01) shall have occurred and be continuing, then, and in any such event, (a) the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the obligation of each Bank to make Advances and the obligation of the Issuing Banks to issue, increase, or extend Letters of Credit -67- 74 to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Banks, by notice to the Borrower, declare the Notes, all interest thereon, the Letter of Credit Obligations, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest, all such Letter of Credit Obligations and all such amounts shall become and be forthwith due and payable in full, without presentment, demand, protest or further notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower; (b) the Borrower shall, on demand of the Administrative Agent at the request or with the consent of the Majority Banks, deposit with the Administrative Agent into the Cash Collateral Account an amount of cash equal to the Letter of Credit Exposure as security for the Obligations to the extent the Letter of Credit Obligations are not otherwise paid at such time; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Guaranties or any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. Section 7.03. Automatic Acceleration of Maturity. If any Event of Default pursuant to paragraph (e) of Section 7.01 shall occur, (a) the obligation of each Bank to make Advances and the obligation of the Issuing Banks to issue, increase, or extend Letters of Credit shall immediately and automatically be terminated and the Notes, all interest on the Notes, all Letter of Credit Obligations, and all other amounts payable under this Agreement shall immediately and automatically become and be due and payable in full, without presentment, demand, protest or any notice of any kind (including, without limitation, any notice of intent to accelerate or notice of acceleration), all of which are hereby expressly waived by the Borrower; (b) the Borrower shall deposit with the Administrative Agent into the Cash Collateral Account an amount of cash equal to the outstanding Letter of Credit Exposure as security for the Obligations to the extent the Letter of Credit Obligations are not otherwise paid at such time; and (c) the Agent shall at the request of, or may with the consent of, the Majority Banks proceed to enforce its rights and remedies under the Guaranties or any other Credit Document for the ratable benefit of the Banks by appropriate proceedings. -68- 75 Section 7.04. Cash Collateral Account. (a) Pledge. The Borrower hereby pledges, and grants to the Administrative Agent for the benefit of the Banks, a security interest in all funds held in the Cash Collateral Account from time-to-time and all proceeds thereof, as security for the payment of the Obligations, including all Letter of Credit Obligations owing to the Issuing Banks or any other Bank due and to become due from the Borrower to the Issuing Banks or any other Bank under this Agreement in connection with the Letters of Credit. Nothing in this Section 7.04, however, shall either obligate the Administrative Agent to require any funds to be deposited in the Cash Collateral Account or limit the right of the Administrative Agent, which it may exercise at any time and from time-to-time, to release to the Borrower any funds held in the Cash Collateral Account pursuant to the other provisions of this Section 7.04. (b) Application against Letter of Credit Obligations; Release of Funds. The Administrative Agent may, at any time or from time-to-time apply funds then held in the Cash Collateral Account to the payment of any Letter of Credit Obligations owing to the Issuing Banks, in such order as the Administrative Agent may elect, as shall have become or shall become due and payable by the Borrower to the Issuing Banks under this Agreement in connection with the Letters of Credit. So long as no Event of Default referred to in paragraph (a) or (e) of Section 7.01 shall have occurred and be continuing, the Administrative Agent will release to the Borrower at the Borrower's written request funds held in the Cash Collateral Account in an amount up to but not exceeding the excess, if any (immediately prior to the release of any such funds), of (i) the total amount of funds held in the Cash Collateral Account over (ii) the Letter of Credit Exposure. (c) Duty of Care. The Administrative Agent shall exercise reasonable care in the custody and preservation of any funds held in the Cash Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Administrative Agent accords its own property, it being understood that the Administrative Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any such funds. Section 7.05. Non-exclusivity of Remedies. No remedy conferred upon the Administrative Agent is intended to be exclusive of any other remedy, and each remedy shall be cumulative of all other remedies existing by contract, at law, in equity, by statute or otherwise. Section 7.06. Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent, if any, specified by Section 7.02 to authorize the Administrative Agent to declare the Notes and any other amount payable hereunder due and payable pursuant to the provisions of Section 7.02 or -69- 76 the automatic acceleration of the Notes and all amounts payable under this Agreement pursuant to Section 7.03, each Bank is hereby authorized at any time and from time-to-time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement, the Note held by such Bank, and the other Credit Documents, irrespective of whether or not such Bank shall have made any demand under this Agreement, such Note, or such other Credit Documents, and although such obligations may be unmatured. Each Bank agrees to promptly notify the Borrower after any such set-off and application made by such Bank, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Bank under this Section are in addition to any other rights and remedies (including, without limitation, other rights of set-off) which such Bank may have. ARTICLE VIII THE ADMINISTRATIVE AGENT AND THE ISSUING BANKS Section 8.01. Authorization and Action. Each Bank hereby appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof and of the other Credit Documents, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Credit Document (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all Banks and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement, any other Credit Document, or applicable law. Section 8.02. Administrative Agent's Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken (including the Administrative Agent's own negligence) by it or them under or in connection with this Agreement or the other Credit Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Administrative Agent: (a) may treat the payee of any Note as the holder thereof until the Administrative Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Administrative Agent; (b) may consult with legal counsel -70- 77 (including counsel for the Borrower), independent public accountants and other experts selected by it and 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) makes no warranty or representation to any Bank and shall not be responsible to any Bank for any statements, warranties or representations made in or in connection with this Agreement or the other Credit Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Credit Document on the part of the Borrower or its Subsidiaries or to inspect the property (including the books and records) of the Borrower or its Subsidiaries; (e) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Credit Document; and (f) shall incur no liability under or in respect of this Agreement or any other Credit Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. Section 8.03. The Administrative Agent and Its Affiliates. With respect to its Commitment, the Advances made by it and the Note issued to it, the Administrative Agent shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Administrative Agent. The term "Bank" or "Banks" shall, unless otherwise expressly indicated, include the Administrative Agent in its individual capacity. The Administrative Agent and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower or any of its Subsidiaries, and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if the Administrative Agent were not an agent hereunder and without any duty to account therefor to the Banks. Section 8.04. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Bank and based on the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Section 8.05. INDEMNIFICATION. THE BANKS SEVERALLY AGREE TO INDEMNIFY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION AGENT, AND THE ISSUING BANKS (TO THE EXTENT NOT REIMBURSED BY THE BORROWER), ACCORDING TO THEIR RESPECTIVE PRO RATA SHARES FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, -71- 78 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 AND THE ISSUING BANKS IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION AGENT OR THE ISSUING BANKS UNDER THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING THE ADMINISTRATIVE AGENT'S, THE SYNDICATION AGENT'S, THE DOCUMENTATION AGENT'S, AND THE ISSUING BANKS' OWN NEGLIGENCE), PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY PORTION OF SUCH LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS RESULTING FROM THE ADMINISTRATIVE AGENT'S, THE SYNDICATION AGENT'S, DOCUMENTATION AGENT'S, OR THE ISSUING BANKS' GROSS NEGLIGENCE OR WILLFUL MISCONDUCT. WITHOUT LIMITATION OF THE FOREGOING, EACH BANK AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND FOR ITS RATABLE SHARE OF ANY OUT-OF-POCKET EXPENSES (INCLUDING COUNSEL FEES) INCURRED BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE PREPARATION, EXECUTION, DELIVERY, ADMINISTRATION, MODIFICATION, AMENDMENT OR ENFORCEMENT (WHETHER THROUGH NEGOTIATIONS, LEGAL PROCEEDINGS OR OTHERWISE) OF, OR LEGAL ADVICE IN RESPECT OF RIGHTS OR RESPONSIBILITIES UNDER, THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, TO THE EXTENT THAT THE ADMINISTRATIVE AGENT IS NOT REIMBURSED FOR SUCH EXPENSES BY THE BORROWER. Section 8.06. Successor Administrative Agent and Issuing Banks. The Administrative Agent or any Issuing Bank may resign at any time by giving written notice thereof to the Banks and the Borrower and may be removed at any time with or without cause by the Majority Banks upon receipt of written notice from the Majority Banks to such effect. Upon receipt of notice of any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent or Issuing Bank with, if an Event of Default has not occurred and is not continuing, the consent of the Borrower, which consent shall not be unreasonably withheld. If no successor Administrative Agent or Issuing Bank shall have been so appointed, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's or Issuing Bank's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent or Issuing Bank, then the retiring Administrative Agent or Issuing Bank may, on behalf of the Banks and the Borrower, appoint a successor Administrative Agent or Issuing Bank, which shall be a commercial bank meeting the financial requirements of an Eligible Assignee and, in the case of the Issuing Bank, a Bank. Upon the acceptance of any appointment -72- 79 as Administrative Agent or Issuing Bank by a successor Administrative Agent or Issuing Bank, such successor Administrative Agent or Issuing Bank shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent or Issuing Bank, and the retiring Administrative Agent or Issuing Bank shall be discharged from its duties and obligations under this Agreement and the other Credit Documents, except that the retiring Issuing Bank shall remain the Issuing Bank with respect to any Letters of Credit issued by it and outstanding on the effective date of its resignation or removal and the provisions affecting the Issuing Bank with respect to such Letters of Credit shall inure to the benefit of the retiring Issuing Bank until the termination of all such Letters of Credit. After any retiring Administrative Agent's or Issuing Bank's resignation or removal hereunder as Administrative Agent or Issuing Bank, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent or Issuing Bank under this Agreement and the other Credit Documents. Section 8.07. Documentation Agent and Syndication Agent. Neither the Documentation Agent nor the Syndication Agent shall have any duties, obligations, or liabilities in its capacity as the Documentation Agent or the Syndication Agent respectively. Upon the resignation of the Documentation Agent or the Syndication Agent, the Documentation Agent or the Syndication Agent, as the case may be, shall not be replaced. ARTICLE IX MISCELLANEOUS Section 9.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement, the Notes, or any other Credit Document, nor consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Banks and the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Banks and the Borrower, do any of the following: (a) waive any of the conditions specified in Section 3.01 or 3.02, (b) increase the Commitments of the Banks, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or under any other Credit Document or, except as specifically provided in Section 2.01(c), extend the Tranche A Maturity Date or the Tranche B Commitment Termination Date, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, including any change in required amortization of the Tranche B Advances under Section 2.06(c), (e) change the number of Banks which shall be required for the Banks or any of them to take any action hereunder or under any other Credit Document, (f) amend Section -73- 80 2.13 or this Section 9.01, (g) release any Guarantor from its obligations under any Guaranty, except as contemplated by Section 6.04; or (h) amend the definition of "Majority Banks"; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent, the Documentation Agent, the Syndication Agent, or the Issuing Banks in addition to the Banks required above to take such action, affect the rights or duties of the Administrative Agent, the Documentation Agent, the Syndication Agent, or the Issuing Banks, as the case may be, under this Agreement or any other Credit Document. Section 9.02. Notices, Etc. All notices and other communications shall be in writing (including telecopy or telex) and mailed, telecopied, telexed, hand delivered or delivered by a nationally recognized overnight courier, if to the Borrower, at its address at 15415 Katy Freeway, Suite 800, Houston, Texas 77094, Attention: Treasurer (telecopy: (713) 578-4735; telephone: (713) 578-4700), with a copy to the Associate General Counsel (telecopy (713) 578-4654; telephone (713) 578-4715); if to any Bank at its Domestic Lending Office specified opposite its name on Schedule 1 or pursuant to Section 2.11(b); if to the Administrative Agent, at its address at 700 Louisiana, 8th floor, Houston, Texas 77002, Attention: Mr. Frank T. Hundley, Senior Vice President (telecopy: (713) 247-6719; telephone: (713) 247-6000); and if a Notice of Borrowing or a Notice of Conversion or Continuation to the Administrative Agent at the Domestic Lending Office for the Administrative Agent specified opposite its name on Schedule 1 or, as to each party, at such other address or teletransmission number as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telexed or hand delivered or delivered by overnight courier, be effective three days after deposited in the mails, when telecopy transmission is completed, when confirmed by telex answer-back or when delivered, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VIII shall not be effective until received by the Administrative Agent. Section 9.03. No Waiver; Remedies. No failure on the part of any Bank, the Administrative Agent, or the Issuing Banks to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. Section 9.04. Costs and Expenses. The Borrower agrees to pay on demand all out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution, delivery, administration, modification and amendment of this Agreement, the Notes and the other Credit Documents including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent and with respect to advising the Administrative Agent as to its rights and responsibilities under this Agreement, and all reasonable out-of-pocket costs -74- 81 and expenses, if any, of the Administrative Agent, the Issuing Bank, and each Bank (including, without limitation, reasonable counsel fees and expenses of the Administrative Agent, the Issuing Banks, and each Bank, including allocated costs of in-house counsel) in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other Credit Documents. Section 9.05. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent, and when the Administrative Agent shall have, as to each Bank, either received a counterpart hereof executed by such Bank or been notified by such Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, the Issuing Banks, and each Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights or delegate its duties under this Agreement or any interest in this Agreement without the prior written consent of each Bank. Section 9.06. Bank Assignments and Participations. (a) Assignments. Any Bank may assign to one or more banks or other entities all or any portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it, the Notes held by it, and the participation interest in the Letter of Credit Obligations held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of such Bank's rights and obligations under this Agreement, (ii) the amount of the Commitments and Advances of such Bank being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $10,000,000.00 and shall be an integral multiple of $1,000,000.00, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with the Notes subject to such assignment, and (v) each Eligible Assignee (other than an Eligible Assignee of the Administrative Agent) shall pay to the Administrative Agent a $2,500 administrative fee. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least three Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto for all purposes and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Bank hereunder and (B) such Bank thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of such Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). -75- 82 (b) Term of Assignments. By executing and delivering an Assignment and Acceptance, the Bank thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency of value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the Guarantors or the performance or observance by the Borrower or the Guarantors of any of their obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.05 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Bank. (c) The Register. The Administrative Agent shall maintain at its address referred to in Section 9.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Banks and the Commitments of, and principal amount of the Advances owing to, each Bank from time-to-time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent, the Issuing Bank, and the Banks may treat each Person whose name is recorded in the Register as a Bank hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Bank at any reasonable time and from time-to-time upon reasonable prior notice. (d) Procedures. Upon its receipt of an Assignment and Acceptance executed by a Bank and an Eligible Assignee, together with the Tranche A Notes, Tranche B Notes, and Competitive Bid Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of the attached Exhibit A, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the -76- 83 Administrative Agent in exchange for the surrendered Tranche A Notes, Tranche B Notes, and Competitive Bid Notes, a new Tranche A Note and Tranche B Note to the order of such Eligible Assignee in an amount equal to the respective Commitments assumed by it pursuant to such Assignment and Acceptance and a new Competitive Bid Note in an amount equal to the Tranche A Commitment assumed by it and, if such Bank has retained any Commitment hereunder, a new Tranche A Note and a new Tranche B Note to the order of such Bank in an amount equal to the Commitments, respectively, retained by it hereunder and a new Competitive Bid Note in an amount equal to the Tranche A Commitment retained by such Bank. Such new Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the attached Exhibits E-1, E-2, and E-3. (e) Participations. Each Bank may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitments, the Advances owing to it, its participation interest in the Letter of Credit Obligations, and the Notes held by it); provided, however, that (i) such Bank's obligations under this Agreement (including, without limitation, its Commitments to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Bank shall remain the holder of any such Notes for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent, and the Issuing Banks and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement, and (v) such Bank shall not require the participant's consent to any matter under this Agreement, except for change in the principal amount of the Notes, reductions in fees or interest, change in amortization of Tranche B Advances, or, except as specifically provided in Section 2.01(c), extending the Tranche A Maturity Date or the Tranche B Commitment Termination Date. The Borrower hereby agrees that a Bank may pass through to any of its participants the same rights under Sections 2.09, 2.10, 2.12(c), 9.04 and 9.07 to the extent of their respective participations, provided that no participant shall be able to collect in excess of amounts payable to the Bank selling to such participant under such Sections in respect of the interest sold to such participant or to collect any such amounts from the Borrower. (f) Notwithstanding anything to the contrary in Section 9.06(a), any Bank may assign, as collateral or otherwise, any of its rights (including, without limitation, rights to payments of principal of and/or interest on the Notes) under any Credit Document to any Federal Reserve Bank without notice to or consent of the Borrower or the Administrative Agent. Section 9.07. INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION AGENT, THE BANKS, THE ISSUING BANKS, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS FROM, AND DISCHARGE, RELEASE, AND HOLD EACH OF THEM HARMLESS AGAINST, -77- 84 ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, INSOFAR AS SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM (I) ANY ACTUAL OR PROPOSED USE BY THE BORROWER OR ANY AFFILIATE OF THE BORROWER OF THE PROCEEDS OF ANY ADVANCE, (II) ANY BREACH BY THE BORROWER OF ANY PROVISION OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, (III) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO THE FOREGOING, OR (IV) ANY ENVIRONMENTAL CLAIM OR REQUIREMENT OF ENVIRONMENTAL LAWS CONCERNING OR RELATING TO THE PRESENT OR PREVIOUSLY-OWNED OR OPERATED PROPERTIES, OR THE OPERATIONS OR BUSINESS, OF THE BORROWER OR ANY OF ITS SUBSIDIARIES, AND THE BORROWER SHALL REIMBURSE THE ADMINISTRATIVE AGENT, THE SYNDICATION AGENT, THE DOCUMENTATION AGENT, THE ISSUING BANKS, AND EACH BANK, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS, UPON DEMAND FOR ANY REASONABLE OUT-OF-POCKET EXPENSES (INCLUDING LEGAL FEES) INCURRED IN CONNECTION WITH ANY SUCH INVESTIGATION, LITIGATION OR OTHER PROCEEDING; AND EXPRESSLY INCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES, OR EXPENSE INCURRED BY REASON OF THE PERSON BEING INDEMNIFIED'S OWN NEGLIGENCE, BUT EXCLUDING ANY SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES INCURRED BY REASON OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PERSON TO BE INDEMNIFIED. Section 9.08. Execution in 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 to be an original and all of which taken together shall constitute one and the same agreement. Section 9.09. Survival of Representations, etc. All representations and warranties contained in this Agreement or made in writing by or on behalf of the Borrower in connection herewith shall survive the execution and delivery of this Agreement and the Credit Documents, the making of the Advances and any investigation made by or on behalf of the Banks, none of which investigations shall diminish any Bank's right to rely on such representations and warranties. All obligations of the Borrower provided for in Sections 2.09, 2.10, 2.12(c), and 9.07 shall survive any termination of this Agreement and repayment in full of the Obligations. Section 9.10. Severability. In case one or more provisions of this Agreement or the other Credit Documents shall be invalid, illegal or unenforceable in any respect under any applicable -78- 85 law, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not be affected or impaired thereby. Section 9.11. Business Loans. The Borrower warrants and represents that the Loans evidenced by the Notes are and shall be for business, commercial, investment or other similar purposes and not primarily for personal, family, household or agricultural use, as such terms are used in Chapter One ("Chapter One") of the Texas Credit Code. At all such times, if any, as Chapter One shall establish a Maximum Rate, the Maximum Rate shall be the "indicated rate ceiling" (as such term is defined in Chapter One) from time to time in effect. Section 9.12. Usury Not Intended. It is the intent of the Borrower and each Bank in the execution and performance of this Agreement and the other Credit Documents to contract in strict compliance with applicable usury laws, including conflicts of law concepts, governing the Advances of each Bank including such applicable laws of the State of Texas and the United States of America from time-to-time in effect. In furtherance thereof, the Banks and the Borrower stipulate and agree that none of the terms and provisions contained in this Agreement or the other Credit Documents shall ever be construed to create a contract to pay, as consideration for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Rate and that for purposes hereof "interest" shall include the aggregate of all charges which constitute interest under such laws that are contracted for, charged or received under this Agreement; and in the event that, notwithstanding the foregoing, under any circumstances the aggregate amounts taken, reserved, charged, received or paid on the Advances, include amounts which by applicable law are deemed interest which would exceed the Maximum Rate, then such excess shall be deemed to be a mistake and each Bank receiving same shall credit the same on the principal of its Notes (or if such Notes shall have been paid in full, refund said excess to the Borrower). In the event that the maturity of the Notes are accelerated by reason of any election of the holder thereof resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest may never include more than the Maximum Rate and excess interest, if any, provided for in this Agreement or otherwise shall be canceled automatically as of the date of such acceleration or prepayment and, if theretofore paid, shall be credited on the applicable Notes (or, if the applicable Notes shall have been paid in full, refunded to the Borrower of such interest). In determining whether or not the interest paid or payable under any specific contingencies exceeds the Maximum Rate, the Borrower and the Banks shall to the maximum extent permitted under applicable law amortize, prorate, allocate and spread in equal parts during the period of the full stated term of the Notes all amounts considered to be interest under applicable law at any time contracted for, charged, received or reserved in connection with the Obligations. The provisions of this Section shall control over all other provisions of this Agreement or the other Credit Documents which may be in apparent conflict herewith. -79- 86 Section 9.13. Confidentiality. Each Bank agrees that it will use its best efforts not to disclose without the prior consent of the Borrower (other than to its subsidiaries and affiliates conducting business related to the making and syndication of loans and its and such subsidiaries and affiliates' employees, auditors or counsel or to another Bank if the disclosing Bank or the disclosing Bank's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to the Borrower or its Subsidiaries which is furnished pursuant to this Agreement or any other Credit Document and which is designated by the Borrower to the Banks in writing as confidential, provided that any Bank may disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate in any report, statement or testimony submitted to any municipal, state or federal regulatory body having or claiming to have jurisdiction over such Bank or to the Federal Reserve Board or the FDIC or similar organizations (whether in the United States or elsewhere), (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) in order to comply with any law, order, regulation or ruling applicable to such Bank, and (e) to the prospective transferee or participant in connection with any contemplated transfer of any of the Notes or any interest therein by such Bank, provided, that such prospective transferee or participant executes an agreement with the Borrower containing provisions substantially identical to those contained in this Section. Section 9.14. Governing Law. This Agreement, the Notes and the other Credit Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of Texas. Section 9.15. Waiver of Jury. THE BORROWER, THE BANKS, THE ADMINISTRATIVE AGENT, AND THE ISSUING BANKS HEREBY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN RESPECT OF ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER CREDIT DOCUMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY. PURSUANT TO SECTION 26.02 OF THE TEXAS BUSINESS AND COMMERCE CODE, A LOAN AGREEMENT IN WHICH THE AMOUNT INVOLVED IN THE LOAN AGREEMENT EXCEEDS $50,000.00 IN VALUE IS NOT ENFORCEABLE UNLESS THE LOAN AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR THAT PARTY'S AUTHORIZED REPRESENTATIVE. THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO AN AGREEMENT SUBJECT TO THE PRECEDING PARAGRAPH SHALL BE DETERMINED SOLELY FROM THE WRITTEN LOAN AGREEMENT, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THE LOAN AGREEMENT. THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS, AS -80- 87 DEFINED IN THIS AGREEMENT, REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [Remainder of page intentionally left blank] -81- 88 EXECUTED as of the 19th day of August, 1996. BORROWER: LIVING CENTERS OF AMERICA, INC. By:/s/ [signature omitted] ------------------------------------ Boyd P. Gentry Vice President and Treasurer ADMINISTRATIVE AGENT: NATIONSBANK OF TEXAS, N.A. By:/s/ [signature omitted] ------------------------------------ Frank T. Hundley Senior Vice President BANKS: TRANCHE A COMMITMENT NATIONSBANK OF TEXAS, N.A. $31,500,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] ------------------------------------ $13,500,000.00 Frank T. Hundley Senior Vice President -82- 89 TRANCHE A COMMITMENT THE CHASE MANHATTAN BANK, N.A. $31,500,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $13,500,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT TORONTO DOMINION (TEXAS), INC. $31,500,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $13,500,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT BANK OF AMERICA NATIONAL TRUST AND $24,500,000.00 SAVINGS ASSOCIATION, as a Bank and as co-agent TRANCHE B COMMITMENT $10,500,000.00 By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT THE LONG-TERM CREDIT BANK OF JAPAN, $24,500,000.00 LIMITED, NEW YORK BRANCH, as a Bank and co-agent TRANCHE B COMMITMENT $10,500,000.00 By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- -83- 90 TRANCHE A COMMITMENT CREDIT LYONNAIS NEW YORK BRANCH, $24,500,000.00 as a Bank and a co-agent TRANCHE B COMMITMENT $10,500,000.00 By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT COOPERATIVE CENTRALE RAIFFEISEN $24,500,000.00 BOERENLEENBANK B.A., "RABOBANK NEDERLAND", NEW YORK BRANCH, as a TRANCHE B COMMITMENT Bank and as a co-agent $10,500,000.00 By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT BANQUE PARIBAS HOUSTON AGENCY $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- -84- 91 TRANCHE A COMMITMENT THE BANK OF NOVA SCOTIA $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT PNC BANK NATIONAL ASSOCIATION $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT AMSOUTH BANK OF ALABAMA $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT FIRST UNION NATIONAL BANK OF NORTH $15,750,000.00 CAROLINA TRANCHE B COMMITMENT $6,750,000.00 By:/s/ [signature omitted] ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT MELLON BANK, N.A. $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- -85- 92 TRANCHE A COMMITMENT THE SANWA BANK, LIMITED, DALLAS $5,750,000.00 AGENCY TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT THE FUJI BANK, LIMITED, HOUSTON $15,750,000.00 AGENCY TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT THE SUMITOMO BANK, LIMITED $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TRANCHE A COMMITMENT UNION BANK OF CALIFORNIA, N.A. $15,750,000.00 TRANCHE B COMMITMENT By:/s/ [signature omitted] $6,750,000.00 ------------------------------------ Name:[printed name omitted] ---------------------------------- Title:[title omitted] --------------------------------- TOTAL TRANCHE A COMMITMENTS $350,000,000.00 TOTAL TRANCHE B COMMITMENTS $150,000,000.00 -86- EX-10.2 4 EMPLOYMENT AGREEMENT - EDWARD L. KUNTZ 1 EXHIBIT 10.2 EXTENSION AND RATIFICATION OF EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND EDWARD L. KUNTZ 2 [LIVING CENTERS OF AMERICA LETTERHEAD] December 13, 1996 Mr. Edward L. Kuntz 15415 Katy Freeway, Suite 800 Houston, Texas 77094 Re: Extension and Ratification of Employment Agreement Dear Mr. Kuntz: As you are aware, Living Centers of America, Inc. ("Company") has agreed to ratify and extend the Employment Agreement between you and the Company effective as of January 1, 1993 and to give effect to the automatic extension therein so that term of employment is extended until January 1, 2000. If the foregoing is agreeable to you, please sign this letter in the space indicated below. Very truly yours, LIVING CENTERS OF AMERICA, INC. By /s/ Leroy D. Williams ------------------------------------------ Name: Leroy D. Williams --------------------------------------- Title: Chief Operating Officer and President -------------------------------------- AGREED TO AND ACCEPTED BY: /s/ Edward L. Kuntz - ------------------------- Edward L. Kuntz EX-10.4 5 EMPLOYMENT AGREEMENT - LEROY D. WILLIAMS 1 EXHIBIT 10.4 EXTENSION AND RATIFICATION OF EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND LEROY D. WILLIAMS 2 December 13, 1996 Mr. Leroy D. Williams 15415 Katy Freeway, Suite 800 Houston, Texas 77094 Re: Extension and Ratification of Employment Agreement Dear Mr. Williams: As you are aware, Living Centers of America, Inc. ("Company") has agreed to ratify and extend the Employment Agreement between you and the Company effective as of January 1, 1993 and to give effect to the automatic extension therein so that term of employment is extended until January 1, 2000. If the foregoing is agreeable to you, please sign this letter in the space indicated below. Very truly yours, LIVING CENTERS OF AMERICA, INC. By /s/ Edward L. Kuntz ------------------------------------------ Name: Edward L. Kuntz --------------------------------------- Title: Chief Operating Officer and President -------------------------------------- AGREED TO AND ACCEPTED BY: /s/ Leroy D. Williams - ------------------------- Leroy D. Williams EX-10.5 6 EMPLOYMENT AGREEMENT - CHARLES B. CARDEN 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND CHARLES B. CARDEN 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, dated this 13th day of December , 1996, by and between LIVING CENTERS OF AMERICA, INC., a Delaware corporation (the "Employer"), and CHARLES B. CARDEN (the "Employee"); W I T N E S S E T H: For and in consideration of the agreement of the Employer to employ the Employee at the salary and upon the terms and conditions herein set forth, and the Employee's agreement to accept such employment and to serve the Employer for such salary and on such terms and conditions, the parties hereto hereby agree as follows: 1. Employment. Employer hereby employs the Employee, and Employee hereby accepts employment upon the terms and conditions set forth in this Employment Agreement effective as of October 1, 1996. 2. Duties. The Employer agrees to employ the Employee and the Employee agrees to accept employment by the Employer and to serve the Employer, in such capacities and with such powers and duties as may from time to time be determined by the Chief Executive Officer of the Employer, on a basis involving the Employee's full working time. It is anticipated that in performing such services the Employee will serve as Executive Vice President and Chief Financial Officer of the Employer, but such title or office shall in no way diminish or inhibit the authority of the Chief Executive Officer of the Employer to reasonably enlarge or restrict the duties and functions of the Employee. Such duties shall be performed in Houston, Texas and at such other places as the Chief Executive Officer may reasonably require without necessitating any change in the Employee's place of residence. -1- 3 3. Annual Compensation. As his compensation for services to the Employer under this Employment Agreement, in whatever capacity or capacities rendered, the Employer shall pay to the Employee during the term of this Employment Agreement a salary, in the aggregate of Two Hundred Forty Thousand Dollars ($240,000.00) per year, plus such increases as may be granted by the Board of Directors, ("Annual Compensation"), payable bi-weekly, subject only to such payroll and withholding deductions as may be required by law. The Employee shall be reimbursed for all of the actual costs and expenses incurred by him in the performance of his services and duties hereunder, including travel and entertainment expenses. 4. Bonuses, Stock Options and Other Benefits. The Employee shall participate in the Employer's Management Incentive Bonus Plan ("MIB Plan"), 1992 Stock Option Plan, Executive Benefits Plan, Employee Stock Purchase Plan, all of which as may be amended from time to time, and other present or future benefits provided for other employees of the Employer. The Annual Compensation to be paid to the Employee shall not operate as a limitation upon or as a direction against the exercise by the Board of Directors of the Employer of its power and discretion to grant bonuses, options, awards or other additional direct or indirect benefits to or on behalf of the Employee if, in the judgment of such Board of Directors, such action is in the best interest of the Employer. 5. Term and Termination. 5.1 This Employment Agreement shall be for a term of two (2) years, commencing on the effective date hereof. The term shall be extended for additional one (1) year periods on the anniversary date of each one year period of the term with the Employee's consent and the approval of the Board of Directors. This Employment Agreement may be terminated at will, with or without cause, by the Employer prior to the expiration of such term upon thirty (30) -2- 4 days written notice of election so to terminate; provided, however, that if this Employment Agreement is terminated by the Employer without good cause prior to the expiration of the three year term, the Employee's Annual Compensation hereunder shall continue for the remainder of the two(2) year term and the Employee shall be paid his prorata bonus pursuant to the MIB Plan for the fiscal year in which this Employment Agreement is terminated. 5.2 Termination for "good cause" shall include termination for such things as fraud or dishonesty, willful failure to perform assigned duties, willful violation of the Employer's Business Conduct Policy, or intentionally working against the best interest of the Employer. 6. Extent of Services. Consistent with his obligations hereunder, the Employee shall regulate his own hours of employment, performing the duties assigned to him from time to time by the Chief Executive Officer of the Employer to the best of his ability and with reasonable care and diligence. 7. Obligations Surviving Employment. 7.1 Employer is an operator of long-term health care centers and provides long term care and assisted living services, and rehabilitation therapy services, and pharmaceutical and infusion therapy services and supplies throughout various states. It has a valuable, special, unique and proprietary interest in its various business methods and systems, which include, but are not limited to, strategic operating plans and budgets, policy and procedure manuals, computer programs, financial forms and information, supplier information, accounting forms and procedures, personnel policies, information on the needs of residents, techniques and methods of operation, prospects, research and data developed by or for the benefit of the Employer, and information relating to strategic plans, revenues, costs, profits and the financial condition of the Employer, and all other information developed by or for the benefit of the Employer, all of which -3- 5 information is considered by the Employer to be confidential trade secrets ("Confidential Information"), to the extent such information is not publicly disclosed. 7.2 The Employer may, pursuant to Employee's employment hereunder, provide and confide to Employee, and Employee will have access to the Employer's Confidential Information, which were developed at great expense by or on behalf of the Employer, all of which Employee recognizes and acknowledges to be unique valuable and confidential assets of the Employer. Further, as an adjunct of Employee performing his duties hereunder, Employee may develop additional information, techniques and programs for the Employer which Employee agrees shall be the sole and exclusive property of the Employer. Employee agrees that he shall not, and he shall not, during or after the term of employment hereunder, directly or indirectly, in any manner, utilize, disclose or otherwise divulge to any person, firm, corporation, association or other entity engaged in the same business as Employer, for any reason whatsoever, any such Confidential Information or other such information, techniques, methods of operations, or programs, whether developed by him on behalf of, or by the Employer independent of Employee, which is not generally known to the public or recognized as standard practice in the industry in which the Employer shall be engaged. 7.4 This Employment Agreement by Employee shall cover and be enforceable by the Employer in all states in which the Employer is engaged in business at the termination of Employee's employment or has been so engaged at any time during the term hereof. For purposes of this Article 7, the term "Employer" shall include the Employer as herein defined and any direct or indirect subsidiary or affiliate. -4- 6 8. Remedies. 8.1 Employee acknowledges that in the event of any violation by Employee of the provisions set forth in Article 7 hereof the Employer will sustain serious, irreparable and substantial harm to its business, the extent of which will be difficult to determine and impossible to remedy solely by an action at law for money damages. Accordingly, Employee agrees that, in the event of such violation or threatened violation by Employee, the Employer shall be entitled to, in addition to all such other legal and equitable remedies as may be available to the Employer, an injunction before trial from any court of competent jurisdiction as a matter of course upon the posting of not more than a nominal bond, restraining Employee from such violation or threatened violation. Nothing herein contained shall be construed as limiting or prohibiting the Employer from pursuing other remedies available to the Employer therefor, including recovery of money damages through an action at law against Employee. Employee further agrees that, in the event any of the provisions of this Agreement are determined by a court of competent jurisdiction to be contrary to any applicable statute, law or rule, or for any reason unenforceable as written, such court may modify any of such provisions so as to permit enforcement thereof as thus modified. 8.2 In the event a legal action is filed by either party to enforce its rights under this Employment Agreement, the prevailing party shall be reimbursed by the other party for the prevailing party's reasonable enforcement costs, including without limitation, attorneys' fees and costs of investigation and court. 9. Change of Control of the Employer. In the event of a change of control of the Employer and either the Employee's (a) involuntary termination by the Employer or (b) voluntary termination for good cause after a change of control, then the Employee shall be entitled to receive a lump sum payment from the Employer of an amount equal to two times (i) Employee's Annual -5- 7 base salary in effect at the date of termination plus (ii) Employee's base bonus for Employee's grade as of the date of termination as set forth in Employer's policy statement on the Management Incentive Bonus Program. For purposes of this Article 9 "voluntary termination for good cause after a change of control" shall include within the six month time period after a change of control, a change in title or working responsibilities. For purposes of this Article 9, "change of control" is the occurrence of one or more of the following events: (i) any person or entity, together with all associates of such person or entity, becomes the beneficial owner of 30% or more of the Employer's outstanding common stock, except where such person or entity is bound by the terms of a standstill agreement under which the parties cannot acquire more than 30% of the outstanding common stock or (ii) during any two year period, directors serving at the beginning of such period cease for any reason to constitute a majority of the directors serving, unless the election of at least 75% of the new directors was approved by at least 75% of the directors in office at the time of election. 10. Binding Effect. The respective rights and obligations of the Employer and the Employee under this Employment Agreement shall inure to the benefit of and shall be binding upon the Employer and the Employee and the respective successors and assigns of the Employer. This Employment Agreement shall not be assignable by the Employee. As used herein, the term "successors and assigns" shall include any corporation or corporations which acquire all or substantially all of the assets and businesses of the Employer whether by purchase, merger, consolidation or otherwise. 11. Applicable Law. This Employment Agreement shall be interpreted and construed in accordance with the laws of the State of Texas. -6- 8 IN WITNESS WHEREOF, the Employer and the Employee have executed this Employment Agreement in duplicate originals as of the date first above written. LIVING CENTERS OF AMERICA, INC. /s/ Charles B. Carden By: /s/ Edward L. Kuntz - ----------------------------------- ----------------------------------- CHARLES B. CARDEN Name: Edward L. Kuntz "EMPLOYEE" Title: Chairman and Chief Executive Officer "EMPLOYER" -7- EX-10.7 7 EMPLOYMENT AGREEMENT - PAULINE BONNER 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND PAULINE BONNER 2 EMPLOYMENT AGREEMENT THIS AGREEMENT is between the undersigned individual ("Employee") and LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living Centers of America, Inc. ("LCA"). R E C I T A L S: A. LCA, through its operating subsidiaries, is an operator of long-term health care centers, Progressive Care Centers providing subacute care, Alzheimer's care centers, assisted living centers, retirement apartments, centers and programs for people with mental retardation and developmental disabilities, and a company providing pharmaceutical services and supplies. B. LCA and LC Management have a proprietary interest in its business methods, opportunities, operations and systems which include, but are not limited to, internal financial and operating reports and data, strategic plans, business acquisition and development opportunities, policy and procedure manuals, management information programs and systems, financial forms and information, supplier and vendor information, accounting forms and procedures, personnel policies and information on the needs of residents, clients and patients and their families, and the financial condition of LCA all of which information ("Corporation Information") not publicly disclosed is considered by LCA and LC Management and recognized by Employee to be confidential. C. LC Management intends to employ or continue to employ Employee in a position where Employee will have access to this Corporate Information, and therefore, LCA will be vulnerable to unfair post-employment competition by Employee. 3 D. In consideration of the severance and other employment benefits provided for herein, Employee is willing to enter into this Agreement with LC Management as a condition of employment. NOW, THEREFORE, intending to be legally bound, the parties agree as follows effective the day and date set opposite their signatures below: ARTICLE 1. Term of Employment Employee acknowledges that LC Management has the right to terminate Employee's employment at any time for any reason whatsoever; provided, however, that any termination by LC Management for reasons other than "good and sufficient cause," as defined in Article 2., Paragraph E below, shall result in the severance benefits described in Article 2 below, to become due in accordance with the terms of this Agreement. Employee further acknowledges that the severance payments made and other benefits provided by LC Management are in full satisfaction of any claims that Employee may have against LC Management resulting from LC Management's exercise of its right to terminate Employee's employment, except for those fringe benefits which are intended to survive termination such as the rights to receive payments pursuant to retirement plans and similar rights. ARTICLE 2. Severance Benefits If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause," Employee shall be entitled to the following severance benefits: -2- 4 A. Severance Pay: Employee shall receive severance payments equivalent to Employee's base salary in effect at the time of termination for the number of months set forth below: ================================================================================ Years of Living Centers Continuous Service Completed from Last Hire Date ----------------------------- - -------------------------------------------------------------------------------- 1 2 3 4 5 6 7 8 9 10 or more - -------------------------------------------------------------------------------- Months of Severance Pay ----------------------- - -------------------------------------------------------------------------------- 6 8 10 12 14 16 18 20 22 24 ================================================================================ B. Other Severance Benefits: (1) Group medical and life insurance coverages shall continue under then prevailing terms as long as severance payments are being made to Employee. Deductions for Employee's share of the premiums will be made from Employee's severance payments. Group medical coverage provided during such period shall be applied against LC Management's obligation to continue group medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Upon termination of group medical and life insurance coverage, Employee may convert, at his cost, to individual policies. (2) Employee shall receive payment at the Employee's then prevailing rate, for Employee's earned, but unused, and accrued vacation days through the date of termination. (3) Employee's eligibility to receive or participate in all other benefit and compensation plans, including, but not limited to Management Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option Plans, shall terminate as of the effective -3- 5 date of Employee's termination except as provided otherwise hereunder or under the terms of a particular benefit or compensation plan. C. Change of Control of the Employer. In addition to the Severance Pay and Other Severance Benefits provided for in Paragraphs A and B, immediately above, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control"; (1) The Employee shall be entitled to receive a lump sum payment from LC Management of an amount equal to twelve (12) month's salary, which shall be the Employee's base salary in effect at the date of termination plus Employee's base bonus for Employee's grade as of the date of termination as set forth in LCA's policy statement on the Management Incentive Bonus Program; and (2) All stock options granted to Employee under the Living Centers of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of the date of termination shall "vest" and become exercisable, as that term is defined in the Option Plan, as of the termination date, and Employee shall thereupon have all rights applicable thereto as set forth in the Option Plan pertaining to Employee's Stock Options. For purposes of this Agreement, "voluntary termination for good cause in anticipation of, during or after a change of control" shall mean Employee's electing to terminate his employment with LC Management as a result of an adverse change in title or working responsibilities of the Employee within the six (6) month time period before and the twelve (12) month time period after a "change of control." For purposes of this Paragraph C, -4- 6 "change of control" is the occurrence of one or more of the following events: (i) any person or entity, together with all associates of such person or entity, becomes the owner, beneficial or otherwise, of 30% or more of the then outstanding common stock of LCA, or (ii) during any two (2) year period, directors of LCA serving at the beginning of such period cease for any reason to constitute a majority of the directors serving, unless the election of at least 75% of the new directors was approved by at least 75% of the directors in office immediately prior to the election. D. Right to Terminate Severance Pay and Benefits. If Employee is terminated by LC Management for reasons other than "good and sufficient cause," as that term is defined in Section E of this Article 2, Employee will receive the severance payments and benefits described in Paragraphs A, B and C of this Article 2. Notwithstanding the foregoing, if Employee commences other employment while receiving such severance payments and benefits said severance payments and benefits shall cease as of the date Employee commences such other employment, but in no event shall the severance payments and benefits provided in Paragraphs A and B of this Article 2 be terminated prior to Employee's receiving severance payments and benefits for a two (2) month period. However, if Employee commences other employment and the base salary Employee is paid in the course of the other employment is less than the base salary Employee received from LC Management at Employee's termination, LC Management shall pay to Employee the difference in said base salaries each month for the remaining number of months Employee would otherwise be entitled to severance pay as provided in Section A of this Article 2 at the commencement of said other employment, starting with the first full month after Employee commences said -5- 7 other employment. Notwithstanding the foregoing, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control" and if Employee commences other employment while receiving severance payments and benefits described in Paragraphs A, B and C of this Article 2, said severance payments and benefits shall not cease as of the date Employee commences such other employment, and shall continue pursuant to Paragraph A of this Article 2. LC Management reserves the right to terminate all continuing severance payments and benefits described in Paragraphs A and B of this Article 2 if Employee violates any of the non-disclosure covenants set forth in Article 3 or the non-piracy covenant set forth in Article 4 below. E. "Good and Sufficient Cause" Defined. Termination for "good and sufficient cause" shall include termination for such things as fraud or dishonesty, willful failure to perform assigned duties, willful violation of LCA's Business Conduct Policy, or intentionally working against the best interests of LCA. F. Termination for Good and Sufficient Cause. If Employee's employment with LC Management is terminated by LC Management for "good and sufficient cause" as that term is defined in Section E of this Article 2, Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. G. Voluntary Termination by Employee. If Employee voluntary terminates his/her employment with LC Management Company, (and said termination is other than "voluntary termination for good cause in anticipation of, during or after a change of control" -6- 8 as defined in this agreement), Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. H. Parachute Payment. If the Employee is liable for the payment of any excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, with respect to any payments or benefits received or to be received from LC Management or any successor to LC Management, whether provided under this Agreement or otherwise, LC Management shall pay the Employee an amount (the "Special Reimbursement") which, after payment by the Employee (or on the Employee's behalf) of any federal, state and local taxes applicable thereto, including, without limitation, any further excise tax under such Section 4999 of the Code, on, with respect to or resulting from the Special Reimbursement, equals the net amounts of the Basic Excise Tax. I. Survival. The provisions of this Article 2 shall survive the termination of Employee's employment with LC Management. ARTICLE 3 Non-Disclosure Agreement Employee acknowledges and recognizes that in the course of Employee's employment, Employee has had and will continue to have or will have access to Corporate Information; and that LC Management may provide and confide to Employee Corporation Information, techniques and methods of operation developed at great expense by LCA, all of which Employee recognizes to be unique assets of LCA. Employee agrees that Employee shall not, during or after the term of employment, directly or indirectly, in any manner utilize, -7- 9 appropriate, disclose, communicate, divulge, copy or relate to any person, firm, corporation, association or other entity, except where required by law, or use or make use of any such Corporate Information, any such techniques or methods of operation; data of any kind; or any information relating to strategic plans, revenues, costs, profits or the financial condition of LCA, which is not generally known to the public or recognized as standard practice in the industry in which LCA is or shall be engaged. The provisions of this Article 3 shall survive the termination of Employee's employment with LC Management. ARTICLE 4 Non-Competition Agreement A. Duration; Applicability. Subject to the provisions of Paragraphs B and E below, Employee agrees that for a period of two (2) years following Employee's Voluntary termination of Employee's employment with LC Management (other than "voluntary termination for good cause in anticipation of, during or after a change of control" as defined in this Agreement), or Employee's termination by LC Management for "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, employee shall not, without LC Management's prior written permission, which may be withheld by LC Management in its sole discretion, directly or indirectly, on Employee's behalf or on behalf of any other person, firm, corporation, association or other entity, engage in, or in any way be employed by, connected with, concerned with, involved with, consult for or negotiate for, or acquire or maintain any ownership interest in any business or activity which is the same, similar to or competitive with that conducted by, or engaged in by the LCA operating subsidiary, indicated on Schedule A, which is attached hereto and incorporated by reference -8- 10 herein as if reproduced verbatim for which Employee primarily provided services. Employee and LC Management agree that Employee, for purposes of the application of Paragraph A of this Article 4, primarily provides services to the LCA operating subsidiary listed on Schedule A. If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, the provisions of this Article 4 shall not apply to Employee and shall not be enforced as against Employee. B. Area. The provisions set forth in Paragraph A. above shall apply to any area within a 25 miles radius of any center, or facility, or location operated by the operating subsidiary of LCA indicated on Schedule A hereof. C. Non-Piracy. Employee further agrees that Employee shall not for a period of two (2) years following the termination of Employee's employment for any reason, directly or indirectly, or through third parties, for himself or for others, at any time in any manner, induce or attempt to influence any employees of any subsidiary of LCA to terminate their employment with such subsidiary, nor shall Employee have an interest in, directly or indirectly, any entity which shall, with Employee's direct or indirect participation, induce or attempt to influence any employee of any subsidiary of LCA to terminate their employment with such subsidiary. D. Remedies. Employee acknowledges that in the event of any violation or threatened violation by Employee of the provisions set forth in Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing and substantial harm and damage to its business, the extent of which will be difficult to determine and impossible to remedy by an -9- 11 action at law for money damages. Accordingly, Employee agrees that, in the event of such violation or threatened violation by Employee, LCA shall be entitled to an injunction preventing such violation or threatened violation before trial from any court of competent jurisdiction as a matter of course in addition to and not in lieu of any and all such other legal and equitable remedies as may be available to LCA. Should any court of competent jurisdiction determine, consistent with the established precedent of the forum jurisdiction, that the public policy of such jurisdiction requires a more limited restriction in geographic area, duration, nature of restricted activities, or any combination thereof, it would be in furtherance of the intentions of the parties hereto for the court to so interpret and construe the terms of this Article 4 to apply only to the extent of such more limited restrictions. E. Survival. The provisions of this Article 4 shall survive the termination of Employee's employment with LC Management. ARTICLE 5 Miscellaneous A. Definition. As used throughout this Agreement, "LC Management" shall include all subsidiaries of LCA, affiliates, and any corporation, joint venture, or other entity in which LCA or its subsidiaries or affiliates has an equity interest in excess of ten percent (10%). B. Gender. Reference to the masculine gender shall include the feminine gender. C. Supersede. This Agreement shall supersede and substitute for any previous employment or severance agreement between Employee and LCA or LC Management, and is entered into in consideration of the mutual undertakings of the parties, the cancellation of -10- 12 all previous agreements, and the release of the parties of their respective rights and obligations under any previous employment or severance agreement, excepting only such rights and obligations which by their nature are intended to survive termination or cancellation of such employment agreement. D. Hire Date. Employee and LC Management acknowledge that for purpose of Article 2, Employee's last hire date with LC Management is that date provided in Schedule B hereof, which is attached hereto and incorporated by reference herein as if reproduced verbatim. E. Binding Effect. The respective rights and obligations of LC Management and the Employee under this Employment Agreement shall inure to the benefit of and shall be binding upon LCA, LC Management and the Employee and the respective successors and assigns of LCA and LC Management. This Employment Agreement shall not be assignable by the Employee, but shall inure to the benefit of Employee's heirs, legal and personal representatives. As used herein, the term "successors and assigns" shall include any corporation or corporations which acquire all or substantially all of the assets and businesses of LCA whether by purchase, merger, consolidation or otherwise, including without limitation a surviving corporation upon a "change in control" as defined herein. F. Arbitration. Any dispute under this Employment Agreement, except for those arising under Articles 3 and 4 hereof, shall be resolved by arbitration. The arbitration shall be conducted in Houston, Texas, under the auspices of the American Arbitration Association and under its rules for commercial arbitrations generally. The prevailing party in such proceedings shall be entitled to its costs and attorneys' fees. -11- 13 G. Applicable Law. This Employment Agreement shall be interpreted and construed in accordance with the laws of the State of Texas. It is understood and agreed that LCA will benefit from the covenants and agreements of Employee hereunder, and, therefore by its execution hereof, guarantees the performance by LC Management of its obligations and agreements hereunder. IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed this Employment Agreement in duplicate originals as of the date first above written. Date: 12/26/95 /s/ Pauline Bonner ------------------------- -------------------------------- "EMPLOYEE" LC MANAGEMENT COMPANY Date: 12/27/95 By: /s/ C. W. Frank ------------------------- ----------------------------- "LC MANAGEMENT" LIVING CENTERS OF AMERICA, INC. Date: 12/27/95 By: /s/ C. W. Frank ------------------------- ----------------------------- "LCA" -12- 14 SCHEDULE A LCA Operating subsidiary for which Employee primarily provides services: Living Centers - Rocky Mountain, Inc.. -13- 15 SCHEDULE B Employee's last hire date: June 6, 1980 --------------- -14- EX-10.15 8 EMPLOYMENT AGREEMENT - JOHN D. LEE, III 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND JOHN D. LEE, III 2 EMPLOYMENT AGREEMENT THIS AGREEMENT is between the undersigned individual ("Employee") and LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living Centers of America, Inc. ("LCA"). R E C I T A L S: A. LCA, through its operating subsidiaries, is an operator of long-term health care centers, Progressive Care Centers providing subacute care, Alzheimer's care centers, assisted living centers, retirement apartments, centers and programs for people with mental retardation and developmental disabilities, and a company providing pharmaceutical services and supplies. B. LCA and LC Management have a proprietary interest in its business methods, opportunities, operations and systems which include, but are not limited to, internal financial and operating reports and data, strategic plans, business acquisition and development opportunities, policy and procedure manuals, management information programs and systems, financial forms and information, supplier and vendor information, accounting forms and procedures, personnel policies and information on the needs of residents, clients and patients and their families, and the financial condition of LCA all of which information ("Corporation Information") not publicly disclosed is considered by LCA and LC Management and recognized by Employee to be confidential. C. LC Management intends to employ or continue to employ Employee in a position where Employee will have access to this Corporate Information, and therefore, LCA will be vulnerable to unfair post-employment competition by Employee. 3 D. In consideration of the severance and other employment benefits provided for herein, Employee is willing to enter into this Agreement with LC Management as a condition of employment. NOW, THEREFORE, intending to be legally bound, the parties agree as follows effective the day and date set opposite their signatures below: ARTICLE 1. Term of Employment Employee acknowledges that LC Management has the right to terminate Employee's employment at any time for any reason whatsoever; provided, however, that any termination by LC Management for reasons other than "good and sufficient cause," as defined in Article 2., Paragraph E below, shall result in the severance benefits described in Article 2 below, to become due in accordance with the terms of this Agreement. Employee further acknowledges that the severance payments made and other benefits provided by LC Management are in full satisfaction of any claims that Employee may have against LC Management resulting from LC Management's exercise of its right to terminate Employee's employment, except for those fringe benefits which are intended to survive termination such as the rights to receive payments pursuant to retirement plans and similar rights. ARTICLE 2. Severance Benefits If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause," Employee shall be entitled to the following severance benefits: -2- 4 A. Severance Pay: Employee shall receive severance payments equivalent to Employee's base salary in effect at the time of termination for the number of months set forth below: =============================================================================== Years of Living Centers Continuous Service Completed from Last Hire Date ----------------------------- - -------------------------------------------------------------------------------- 1 2 3 4 5 6 7 8 9 10 or more - -------------------------------------------------------------------------------- Months of Severance Pay ----------------------- - -------------------------------------------------------------------------------- 6 8 10 12 14 16 18 20 22 24 ================================================================================ B. Other Severance Benefits: (1) Group medical and life insurance coverages shall continue under then prevailing terms as long as severance payments are being made to Employee. Deductions for Employee's share of the premiums will be made from Employee's severance payments. Group medical coverage provided during such period shall be applied against LC Management's obligation to continue group medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Upon termination of group medical and life insurance coverage, Employee may convert, at his cost, to individual policies. (2) Employee shall receive payment at the Employee's then prevailing rate, for Employee's earned, but unused, and accrued vacation days through the date of termination. (3) Employee's eligibility to receive or participate in all other benefit and compensation plans, including, but not limited to Management Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option Plans, shall terminate as of the effective -3- 5 date of Employee's termination except as provided otherwise hereunder or under the terms of a particular benefit or compensation plan. C. Change of Control of the Employer. In addition to the Severance Pay and Other Severance Benefits provided for in Paragraphs A and B, immediately above, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control"; (1) The Employee shall be entitled to receive a lump sum payment from LC Management of an amount equal to twelve (12) month's salary, which shall be the Employee's base salary in effect at the date of termination plus Employee's base bonus for Employee's grade as of the date of termination as set forth in LCA's policy statement on the Management Incentive Bonus Program; and (2) All stock options granted to Employee under the Living Centers of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of the date of termination shall "vest" and become exercisable, as that term is defined in the Option Plan, as of the termination date, and Employee shall thereupon have all rights applicable thereto as set forth in the Option Plan pertaining to Employee's Stock Options. For purposes of this Agreement, "voluntary termination for good cause in anticipation of, during or after a change of control" shall mean Employee's electing to terminate his employment with LC Management as a result of an adverse change in title or working responsibilities of the Employee within the six (6) month time period before and the twelve (12) month time period after a "change of control." For purposes of this Paragraph C, -4- 6 "change of control" is the occurrence of one or more of the following events: (i) any person or entity, together with all associates of such person or entity, becomes the owner, beneficial or otherwise, of 30% or more of the then outstanding common stock of LCA, or (ii) during any two (2) year period, directors of LCA serving at the beginning of such period cease for any reason to constitute a majority of the directors serving, unless the election of at least 75% of the new directors was approved by at least 75% of the directors in office immediately prior to the election. D. Right to Terminate Severance Pay and Benefits. If Employee is terminated by LC Management for reasons other than "good and sufficient cause," as that term is defined in Section E of this Article 2, Employee will receive the severance payments and benefits described in Paragraphs A, B and C of this Article 2. Notwithstanding the foregoing, if Employee commences other employment while receiving such severance payments and benefits said severance payments and benefits shall cease as of the date Employee commences such other employment, but in no event shall the severance payments and benefits provided in Paragraphs A and B of this Article 2 be terminated prior to Employee's receiving severance payments and benefits for a two (2) month period. However, if Employee commences other employment and the base salary Employee is paid in the course of the other employment is less than the base salary Employee received from LC Management at Employee's termination, LC Management shall pay to Employee the difference in said base salaries each month for the remaining number of months Employee would otherwise be entitled to severance pay as provided in Section A of this Article 2 at the commencement of said other employment, starting with the first full month after Employee commences said -5- 7 other employment. Notwithstanding the foregoing, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control" and if Employee commences other employment while receiving severance payments and benefits described in Paragraphs A, B and C of this Article 2, said severance payments and benefits shall not cease as of the date Employee commences such other employment, and shall continue pursuant to Paragraph A of this Article 2. LC Management reserves the right to terminate all continuing severance payments and benefits described in Paragraphs A and B of this Article 2 if Employee violates any of the non-disclosure covenants set forth in Article 3 or the non-piracy covenant set forth in Article 4 below. E. "Good and Sufficient Cause" Defined. Termination for "good and sufficient cause" shall include termination for such things as fraud or dishonesty, willful failure to perform assigned duties, willful violation of LCA's Business Conduct Policy, or intentionally working against the best interests of LCA. F. Termination for Good and Sufficient Cause. If Employee's employment with LC Management is terminated by LC Management for "good and sufficient cause" as that term is defined in Section E of this Article 2, Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. G. Voluntary Termination by Employee. If Employee voluntary terminates his/her employment with LC Management Company, (and said termination is other than "voluntary termination for good cause in anticipation of, during or after a change of control" -6- 8 as defined in this agreement), Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. H. Parachute Payment. If the Employee is liable for the payment of any excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, with respect to any payments or benefits received or to be received from LC Management or any successor to LC Management, whether provided under this Agreement or otherwise, LC Management shall pay the Employee an amount (the "Special Reimbursement") which, after payment by the Employee (or on the Employee's behalf) of any federal, state and local taxes applicable thereto, including, without limitation, any further excise tax under such Section 4999 of the Code, on, with respect to or resulting from the Special Reimbursement, equals the net amounts of the Basic Excise Tax. I. Survival. The provisions of this Article 2 shall survive the termination of Employee's employment with LC Management. ARTICLE 3 Non-Disclosure Agreement Employee acknowledges and recognizes that in the course of Employee's employment, Employee has had and will continue to have or will have access to Corporate Information; and that LC Management may provide and confide to Employee Corporation Information, techniques and methods of operation developed at great expense by LCA, all of which Employee recognizes to be unique assets of LCA. Employee agrees that Employee shall not, during or after the term of employment, directly or indirectly, in any manner utilize, -7- 9 appropriate, disclose, communicate, divulge, copy or relate to any person, firm, corporation, association or other entity, except where required by law, or use or make use of any such Corporate Information, any such techniques or methods of operation; data of any kind; or any information relating to strategic plans, revenues, costs, profits or the financial condition of LCA, which is not generally known to the public or recognized as standard practice in the industry in which LCA is or shall be engaged. The provisions of this Article 3 shall survive the termination of Employee's employment with LC Management. ARTICLE 4 Non-Competition Agreement A. Duration; Applicability. Subject to the provisions of Paragraphs B and E below, Employee agrees that for a period of two (2) years following Employee's Voluntary termination of Employee's employment with LC Management (other than "voluntary termination for good cause in anticipation of, during or after a change of control" as defined in this Agreement), or Employee's termination by LC Management for "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, employee shall not, without LC Management's prior written permission, which may be withheld by LC Management in its sole discretion, directly or indirectly, on Employee's behalf or on behalf of any other person, firm, corporation, association or other entity, engage in, or in any way be employed by, connected with, concerned with, involved with, consult for or negotiate for, or acquire or maintain any ownership interest in any business or activity which is the same, similar to or competitive with that conducted by, or engaged in by the LCA operating subsidiary, indicated on Schedule A, which is attached hereto and incorporated by reference -8- 10 herein as if reproduced verbatim for which Employee primarily provided services. Employee and LC Management agree that Employee, for purposes of the application of Paragraph A of this Article 4, primarily provides services to the LCA operating subsidiary listed on Schedule A. If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, the provisions of this Article 4 shall not apply to Employee and shall not be enforced as against Employee. B. Area. The provisions set forth in Paragraph A. above shall apply to any area within a 25 miles radius of any center, or facility, or location operated by the operating subsidiary of LCA indicated on Schedule A hereof. C. Non-Piracy. Employee further agrees that Employee shall not for a period of two (2) years following the termination of Employee's employment for any reason, directly or indirectly, or through third parties, for himself or for others, at any time in any manner, induce or attempt to influence any employees of any subsidiary of LCA to terminate their employment with such subsidiary, nor shall Employee have an interest in, directly or indirectly, any entity which shall, with Employee's direct or indirect participation, induce or attempt to influence any employee of any subsidiary of LCA to terminate their employment with such subsidiary. D. Remedies. Employee acknowledges that in the event of any violation or threatened violation by Employee of the provisions set forth in Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing and substantial harm and damage to its business, the extent of which will be difficult to determine and impossible to remedy by an -9- 11 action at law for money damages. Accordingly, Employee agrees that, in the event of such violation or threatened violation by Employee, LCA shall be entitled to an injunction preventing such violation or threatened violation before trial from any court of competent jurisdiction as a matter of course in addition to and not in lieu of any and all such other legal and equitable remedies as may be available to LCA. Should any court of competent jurisdiction determine, consistent with the established precedent of the forum jurisdiction, that the public policy of such jurisdiction requires a more limited restriction in geographic area, duration, nature of restricted activities, or any combination thereof, it would be in furtherance of the intentions of the parties hereto for the court to so interpret and construe the terms of this Article 4 to apply only to the extent of such more limited restrictions. E. Survival. The provisions of this Article 4 shall survive the termination of Employee's employment with LC Management. ARTICLE 5 Miscellaneous A. Definition. As used throughout this Agreement, "LC Management" shall include all subsidiaries of LCA, affiliates, and any corporation, joint venture, or other entity in which LCA or its subsidiaries or affiliates has an equity interest in excess of ten percent (10%). B. Gender. Reference to the masculine gender shall include the feminine gender. C. Supersede. This Agreement shall supersede and substitute for any previous employment or severance agreement between Employee and LCA or LC Management, and is entered into in consideration of the mutual undertakings of the parties, the cancellation of -10- 12 all previous agreements, and the release of the parties of their respective rights and obligations under any previous employment or severance agreement, excepting only such rights and obligations which by their nature are intended to survive termination or cancellation of such employment agreement. D. Hire Date. Employee and LC Management acknowledge that for purpose of Article 2, Employee's last hire date with LC Management is that date provided in Schedule B hereof, which is attached hereto and incorporated by reference herein as if reproduced verbatim. E. Binding Effect. The respective rights and obligations of LC Management and the Employee under this Employment Agreement shall inure to the benefit of and shall be binding upon LCA, LC Management and the Employee and the respective successors and assigns of LCA and LC Management. This Employment Agreement shall not be assignable by the Employee, but shall inure to the benefit of Employee's heirs, legal and personal representatives. As used herein, the term "successors and assigns" shall include any corporation or corporations which acquire all or substantially all of the assets and businesses of LCA whether by purchase, merger, consolidation or otherwise, including without limitation a surviving corporation upon a "change in control" as defined herein. F. Arbitration. Any dispute under this Employment Agreement, except for those arising under Articles 3 and 4 hereof, shall be resolved by arbitration. The arbitration shall be conducted in Houston, Texas, under the auspices of the American Arbitration Association and under its rules for commercial arbitrations generally. The prevailing party in such proceedings shall be entitled to its costs and attorneys' fees. -11- 13 G. Applicable Law. This Employment Agreement shall be interpreted and construed in accordance with the laws of the State of Texas. It is understood and agreed that LCA will benefit from the covenants and agreements of Employee hereunder, and, therefore by its execution hereof, guarantees the performance by LC Management of its obligations and agreements hereunder. IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed this Employment Agreement in duplicate originals as of the date first above written. Date: 12/22/95 /s/ John D. Lee ------------------------- ----------------------------- "EMPLOYEE" LC MANAGEMENT COMPANY Date: 12/27/95 By: /s/ C. W. Frank ------------------------- ----------------------------- "LC MANAGEMENT" LIVING CENTERS OF AMERICA, INC. Date: 12/27/95 By: /s/ C. W. Frank ------------------------- ----------------------------- "LCA" -12- 14 SCHEDULE A LCA Operating subsidiary for which Employee primarily provides services: Living Centers Southeast, Inc. -13- 15 SCHEDULE B Employee's last hire date: May 16, 1994 -------------- -14- EX-10.17 9 EMPLOYMENT AGREEMENT - KENNETH MORGAN 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT BETWEEN LIVING CENTERS OF AMERICA, INC. AND KENNETH MORGAN 2 EMPLOYMENT AGREEMENT THIS AGREEMENT is between the undersigned individual ("Employee") and LC MANAGEMENT COMPANY ("LC Management"), a wholly owned subsidiary of Living Centers of America, Inc. ("LCA"). R E C I T A L S: A. LCA, through its operating subsidiaries, is an operator of long-term health care centers, Progressive Care Centers providing subacute care, Alzheimer's care centers, assisted living centers, retirement apartments, centers and programs for people with mental retardation and developmental disabilities, and a company providing pharmaceutical services and supplies. B. LCA and LC Management have a proprietary interest in its business methods, opportunities, operations and systems which include, but are not limited to, internal financial and operating reports and data, strategic plans, business acquisition and development opportunities, policy and procedure manuals, management information programs and systems, financial forms and information, supplier and vendor information, accounting forms and procedures, personnel policies and information on the needs of residents, clients and patients and their families, and the financial condition of LCA all of which information ("Corporation Information") not publicly disclosed is considered by LCA and LC Management and recognized by Employee to be confidential. C. LC Management intends to employ or continue to employ Employee in a position where Employee will have access to this Corporate Information, and therefore, LCA will be vulnerable to unfair post-employment competition by Employee. 3 D. In consideration of the severance and other employment benefits provided for herein, Employee is willing to enter into this Agreement with LC Management as a condition of employment. NOW, THEREFORE, intending to be legally bound, the parties agree as follows effective the day and date set opposite their signatures below: ARTICLE 1. Term of Employment Employee acknowledges that LC Management has the right to terminate Employee's employment at any time for any reason whatsoever; provided, however, that any termination by LC Management for reasons other than "good and sufficient cause," as defined in Article 2., Paragraph E below, shall result in the severance benefits described in Article 2 below, to become due in accordance with the terms of this Agreement. Employee further acknowledges that the severance payments made and other benefits provided by LC Management are in full satisfaction of any claims that Employee may have against LC Management resulting from LC Management's exercise of its right to terminate Employee's employment, except for those fringe benefits which are intended to survive termination such as the rights to receive payments pursuant to retirement plans and similar rights. ARTICLE 2. Severance Benefits If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause," Employee shall be entitled to the following severance benefits: -2- 4 A. Severance Pay: Employee shall receive severance payments equivalent to Employee's base salary in effect at the time of termination for the number of months set forth below: ================================================================================ Years of Living Centers Continuous Service Completed from Last Hire Date ----------------------------- - -------------------------------------------------------------------------------- 1 2 3 4 5 6 7 8 9 10 or more - -------------------------------------------------------------------------------- Months of Severance Pay ----------------------- - -------------------------------------------------------------------------------- 6 8 10 12 14 16 18 20 22 24 ================================================================================ B. Other Severance Benefits: (1) Group medical and life insurance coverages shall continue under then prevailing terms as long as severance payments are being made to Employee. Deductions for Employee's share of the premiums will be made from Employee's severance payments. Group medical coverage provided during such period shall be applied against LC Management's obligation to continue group medical coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Upon termination of group medical and life insurance coverage, Employee may convert, at his cost, to individual policies. (2) Employee shall receive payment at the Employee's then prevailing rate, for Employee's earned, but unused, and accrued vacation days through the date of termination. (3) Employee's eligibility to receive or participate in all other benefit and compensation plans, including, but not limited to Management Incentive Bonus, Long Term Disability, Retirement Savings, and Stock Option Plans, shall terminate as of the effective -3- 5 date of Employee's termination except as provided otherwise hereunder or under the terms of a particular benefit or compensation plan. C. Change of Control of the Employer. In addition to the Severance Pay and Other Severance Benefits provided for in Paragraphs A and B, immediately above, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control"; (1) The Employee shall be entitled to receive a lump sum payment from LC Management of an amount equal to twelve (12) month's salary, which shall be the Employee's base salary in effect at the date of termination plus Employee's base bonus for Employee's grade as of the date of termination as set forth in LCA's policy statement on the Management Incentive Bonus Program; and (2) All stock options granted to Employee under the Living Centers of America, Inc. 1992 Stock Option Plan, as amended (the "Option Plan"), as of the date of termination shall "vest" and become exercisable, as that term is defined in the Option Plan, as of the termination date, and Employee shall thereupon have all rights applicable thereto as set forth in the Option Plan pertaining to Employee's Stock Options. For purposes of this Agreement, "voluntary termination for good cause in anticipation of, during or after a change of control" shall mean Employee's electing to terminate his employment with LC Management as a result of an adverse change in title or working responsibilities of the Employee within the six (6) month time period before and the twelve (12) month time period after a "change of control." For purposes of this Paragraph C, -4- 6 "change of control" is the occurrence of one or more of the following events: (i) any person or entity, together with all associates of such person or entity, becomes the owner, beneficial or otherwise, of 30% or more of the then outstanding common stock of LCA, or (ii) during any two (2) year period, directors of LCA serving at the beginning of such period cease for any reason to constitute a majority of the directors serving, unless the election of at least 75% of the new directors was approved by at least 75% of the directors in office immediately prior to the election. D. Right to Terminate Severance Pay and Benefits. If Employee is terminated by LC Management for reasons other than "good and sufficient cause," as that term is defined in Section E of this Article 2, Employee will receive the severance payments and benefits described in Paragraphs A, B and C of this Article 2. Notwithstanding the foregoing, if Employee commences other employment while receiving such severance payments and benefits said severance payments and benefits shall cease as of the date Employee commences such other employment, but in no event shall the severance payments and benefits provided in Paragraphs A and B of this Article 2 be terminated prior to Employee's receiving severance payments and benefits for a two (2) month period. However, if Employee commences other employment and the base salary Employee is paid in the course of the other employment is less than the base salary Employee received from LC Management at Employee's termination, LC Management shall pay to Employee the difference in said base salaries each month for the remaining number of months Employee would otherwise be entitled to severance pay as provided in Section A of this Article 2 at the commencement of said other employment, starting with the first full month after Employee commences said -5- 7 other employment. Notwithstanding the foregoing, in the event of a "change of control" of LCA and either the Employee's (a) involuntary termination or (b) "voluntary termination for good cause in anticipation of, during or after a change of control" and if Employee commences other employment while receiving severance payments and benefits described in Paragraphs A, B and C of this Article 2, said severance payments and benefits shall not cease as of the date Employee commences such other employment, and shall continue pursuant to Paragraph A of this Article 2. LC Management reserves the right to terminate all continuing severance payments and benefits described in Paragraphs A and B of this Article 2 if Employee violates any of the non-disclosure covenants set forth in Article 3 or the non-piracy covenant set forth in Article 4 below. E. "Good and Sufficient Cause" Defined. Termination for "good and sufficient cause" shall include termination for such things as fraud or dishonesty, willful failure to perform assigned duties, willful violation of LCA's Business Conduct Policy, or intentionally working against the best interests of LCA. F. Termination for Good and Sufficient Cause. If Employee's employment with LC Management is terminated by LC Management for "good and sufficient cause" as that term is defined in Section E of this Article 2, Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. G. Voluntary Termination by Employee. If Employee voluntary terminates his/her employment with LC Management Company, (and said termination is other than "voluntary termination for good cause in anticipation of, during or after a change of control" -6- 8 as defined in this agreement), Employee will not receive the severance payments and benefits described in Paragraphs A, B, C, and D of this Article 2. H. Parachute Payment. If the Employee is liable for the payment of any excise tax (the "Basic Excise Tax") because of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor or similar provision, with respect to any payments or benefits received or to be received from LC Management or any successor to LC Management, whether provided under this Agreement or otherwise, LC Management shall pay the Employee an amount (the "Special Reimbursement") which, after payment by the Employee (or on the Employee's behalf) of any federal, state and local taxes applicable thereto, including, without limitation, any further excise tax under such Section 4999 of the Code, on, with respect to or resulting from the Special Reimbursement, equals the net amounts of the Basic Excise Tax. I. Survival. The provisions of this Article 2 shall survive the termination of Employee's employment with LC Management. ARTICLE 3 Non-Disclosure Agreement Employee acknowledges and recognizes that in the course of Employee's employment, Employee has had and will continue to have or will have access to Corporate Information; and that LC Management may provide and confide to Employee Corporation Information, techniques and methods of operation developed at great expense by LCA, all of which Employee recognizes to be unique assets of LCA. Employee agrees that Employee shall not, during or after the term of employment, directly or indirectly, in any manner utilize, -7- 9 appropriate, disclose, communicate, divulge, copy or relate to any person, firm, corporation, association or other entity, except where required by law, or use or make use of any such Corporate Information, any such techniques or methods of operation; data of any kind; or any information relating to strategic plans, revenues, costs, profits or the financial condition of LCA, which is not generally known to the public or recognized as standard practice in the industry in which LCA is or shall be engaged. The provisions of this Article 3 shall survive the termination of Employee's employment with LC Management. ARTICLE 4 Non-Competition Agreement A. Duration; Applicability. Subject to the provisions of Paragraphs B and E below, Employee agrees that for a period of two (2) years following Employee's Voluntary termination of Employee's employment with LC Management (other than "voluntary termination for good cause in anticipation of, during or after a change of control" as defined in this Agreement), or Employee's termination by LC Management for "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, employee shall not, without LC Management's prior written permission, which may be withheld by LC Management in its sole discretion, directly or indirectly, on Employee's behalf or on behalf of any other person, firm, corporation, association or other entity, engage in, or in any way be employed by, connected with, concerned with, involved with, consult for or negotiate for, or acquire or maintain any ownership interest in any business or activity which is the same, similar to or competitive with that conducted by, or engaged in by the LCA operating subsidiary, indicated on Schedule A, which is attached hereto and incorporated by reference -8- 10 herein as if reproduced verbatim for which Employee primarily provided services. Employee and LC Management agree that Employee, for purposes of the application of Paragraph A of this Article 4, primarily provides services to the LCA operating subsidiary listed on Schedule A. If Employee's employment with LC Management is terminated by LC Management for any reason other than "good and sufficient cause" as that term is defined in Section E of Article 2 of this Agreement, the provisions of this Article 4 shall not apply to Employee and shall not be enforced as against Employee. B. Area. The provisions set forth in Paragraph A. above shall apply to any area within a 25 miles radius of any center, or facility, or location operated by the operating subsidiary of LCA indicated on Schedule A hereof. C. Non-Piracy. Employee further agrees that Employee shall not for a period of two (2) years following the termination of Employee's employment for any reason, directly or indirectly, or through third parties, for himself or for others, at any time in any manner, induce or attempt to influence any employees of any subsidiary of LCA to terminate their employment with such subsidiary, nor shall Employee have an interest in, directly or indirectly, any entity which shall, with Employee's direct or indirect participation, induce or attempt to influence any employee of any subsidiary of LCA to terminate their employment with such subsidiary. D. Remedies. Employee acknowledges that in the event of any violation or threatened violation by Employee of the provisions set forth in Article 3 or this Article 4, LCA will sustain serious, irreparable, continuing and substantial harm and damage to its business, the extent of which will be difficult to determine and impossible to remedy by an -9- 11 action at law for money damages. Accordingly, Employee agrees that, in the event of such violation or threatened violation by Employee, LCA shall be entitled to an injunction preventing such violation or threatened violation before trial from any court of competent jurisdiction as a matter of course in addition to and not in lieu of any and all such other legal and equitable remedies as may be available to LCA. Should any court of competent jurisdiction determine, consistent with the established precedent of the forum jurisdiction, that the public policy of such jurisdiction requires a more limited restriction in geographic area, duration, nature of restricted activities, or any combination thereof, it would be in furtherance of the intentions of the parties hereto for the court to so interpret and construe the terms of this Article 4 to apply only to the extent of such more limited restrictions. E. Survival. The provisions of this Article 4 shall survive the termination of Employee's employment with LC Management. ARTICLE 5 Miscellaneous A. Definition. As used throughout this Agreement, "LC Management" shall include all subsidiaries of LCA, affiliates, and any corporation, joint venture, or other entity in which LCA or its subsidiaries or affiliates has an equity interest in excess of ten percent (10%). B. Gender. Reference to the masculine gender shall include the feminine gender. C. Supersede. This Agreement shall supersede and substitute for any previous employment or severance agreement between Employee and LCA or LC Management, and is entered into in consideration of the mutual undertakings of the parties, the cancellation of -10- 12 all previous agreements, and the release of the parties of their respective rights and obligations under any previous employment or severance agreement, excepting only such rights and obligations which by their nature are intended to survive termination or cancellation of such employment agreement. D. Hire Date. Employee and LC Management acknowledge that for purpose of Article 2, Employee's last hire date with LC Management is that date provided in Schedule B hereof, which is attached hereto and incorporated by reference herein as if reproduced verbatim. E. Binding Effect. The respective rights and obligations of LC Management and the Employee under this Employment Agreement shall inure to the benefit of and shall be binding upon LCA, LC Management and the Employee and the respective successors and assigns of LCA and LC Management. This Employment Agreement shall not be assignable by the Employee, but shall inure to the benefit of Employee's heirs, legal and personal representatives. As used herein, the term "successors and assigns" shall include any corporation or corporations which acquire all or substantially all of the assets and businesses of LCA whether by purchase, merger, consolidation or otherwise, including without limitation a surviving corporation upon a "change in control" as defined herein. F. Arbitration. Any dispute under this Employment Agreement, except for those arising under Articles 3 and 4 hereof, shall be resolved by arbitration. The arbitration shall be conducted in Houston, Texas, under the auspices of the American Arbitration Association and under its rules for commercial arbitrations generally. The prevailing party in such proceedings shall be entitled to its costs and attorneys' fees. -11- 13 G. Applicable Law. This Employment Agreement shall be interpreted and construed in accordance with the laws of the State of Texas. It is understood and agreed that LCA will benefit from the covenants and agreements of Employee hereunder, and, therefore by its execution hereof, guarantees the performance by LC Management of its obligations and agreements hereunder. IN WITNESS WHEREOF, LC Management, LCA and the Employee have executed this Employment Agreement in duplicate originals as of the date first above written. Date: 12/28/95 /s/ Kenneth L. Morgan --------------- -------------------------------------------- "EMPLOYEE" LC MANAGEMENT COMPANY Date: 12/28/95 By: /s/ Sydney K. Boone, Jr., Vice President --------------- --------------------------------------------- "LC MANAGEMENT" LIVING CENTERS OF AMERICA, INC. Date: 12/28/95 By: /s/ Sydney K. Boone, Jr., Vice President --------------- --------------------------------------------- "LCA" -12- 14 SCHEDULE A LCA Operating subsidiary for which Employee primarily provides services: Living Centers of Texas, Inc. -13- 15 SCHEDULE B Employee's last hire date: January 9, 1995 ------------------- -14- EX-11 10 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS 2 LIVING CENTERS OF AMERICA, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS (in thousands, except per share amount) (unaudited)
1996 1995 1994 ------- ------- ------- ASSUMING FULL DILUTION (a) Net Income $43,180 $24,234 $26,616 Pro forma taxes (b) 0 599 899 ------- ------- ------- Pro forma net income $43,180 $23,635 $25,717 ======= ======= ======= Applicable Common Shares: Weighted average shares outstanding during the period 20,124 18,851 16,923 Weighted average shares issuable upon exercise of common stock options using the treasury stock method 191 193 209 Weighted average shares issuable upon exercise of warrants using the treasury stock method - - - ------- ------- ------- Total shares 20,315 19,044 17,132 ======= ======= ======= Earnings per share (fully diluted) (c) $ 2.13 $ 1.27 $ 1.55 ======= ======= ======= Pro forma earnings per share (fully diluted(c) $ 2.13 $ 1.24 $ 1.50 ======= ======= =======
(a) This calculation is submitted in accordance with Regulation S-K, item 601 (b) (1 by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in less (b) The pro forma provision is included to reflect the estimated taxes that would ha BCC Entities S corporations (c) Excluding non-recurring merger and acquisition and other related costs of $14.3 per share and pro forma earnings per share in 1995 would have been $1.94 and $ EX-21 11 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT 2 LIVING CENTERS OF AMERICA, INC. DIRECT AND INDIRECT SUBSIDIARIES
State/Country Incorporated Living Centers of America, Inc. DE Subsidiaries - ------------ Beaver Properties/Newco, Inc. NC LC Management Company DE LCR, Inc. DE LCA Insurance Co., Ltd. Cayman Islands Living Centers Holding Company DE Living Centers - Southeast, Inc. NC Living Centers - Southeast Development Corporation NC Brian Center Health & Retirement/Lawrenceville, Inc. NC Brian Center Health & Retirement/Weber City, Inc. NC Brian Center of Asheboro, Inc. NC Brian Center Health & Retirement/Alleghany, Inc. NC Brian Center Health & Retirement/Bastian, Inc. NC Brian Center Nursing Care/Fincastle, Inc. NC Living Centers of Texas, Inc. DE Devcon Holding Company DE Living Centers - Rocky Mountain, Inc. NV Living Centers - East, Inc. DE TOICA, Inc. DE Brian Center Health & Rehabilitation/Tampa, Inc. AL American Pharmaceutical Services, Inc. DE Driftwood Pharmacy Services, Inc. FL American Pharmaceutical Services of Georgia, LLC GA Mauch Care - Atlanta, Inc. NC Allied Pharmacy Management, Inc. TX Nann-Dan Corporation FL Professional RX Systems, Inc. FL APS Holding Company, Inc. TN Progressive Care Centers of America, Inc. DE Brian Center Health & Retirement/Wallace, Inc. NC Brian Center Nursing Care/Powder Springs, Inc. NC Brian Center of Raleigh, Inc. NC Brian Center Health & Retirement/St. Simons, Inc. NC Brian Center Nursing Care/Waynesville, Inc. NC Brian Center Health & Retirement/Wilson, Inc. NC Brian Center Nursing Care/Austell, Inc. NC Brian Center Nursing Care/Hickory, Inc. NC Health Care Investors, Inc. NC Brian Center of Central Columbia, Inc. NC Brian Center Management Corporation NC Med-Care Sales and Rentals, Inc. NC American Rehabilitation Services, Inc. UT American Rehabilitation Management, Inc. TN American Therapy Services, Inc. DE Workhealth Healthcare Management, Inc. DE Therapy Management Innovations, Inc. NV Quest Rehab, LLC UT Med-Therapy Rehabilitation Services, Inc. NC Med-Therapy Rehabilitation Services/Florida, Inc. NC NS&H, Inc. DE Rehability Health Services, Inc. TX Gulf Coast Physical Therapy Group, Inc. MS Metro Physical Therapy (51%) MS Industrial Therapy Center (50%) MS TheraCare Home Health Agency, Inc. TN Living Centers LTCP Development Company DE American Geriatric Management Service, Inc. (75%) TX LCA Hospice Services Corporation DE Heart of America Hospice, LLC (50%) KS Hospice Care of Louisiana, LLC (50%) LA Hospice Management Partners, LLC (66.7%) DE American Geriatric Management Services, Inc. DE
EX-23 12 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS 2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-09707) pertaining to the 1992 Stock Option Plan of Living Centers of America, Inc. of our report dated November 25, 1996, with respect to the consolidated financial statements and schedule of Living Centers of America, Inc. included in its Annual Report (Form 10-K) for the year ended September 30, 1996. /s/ ERNST & YOUNG LLP December 16, 1996 Houston, Texas EX-24 13 POWERS OF ATTORNEY 1 EXHIBIT 24 POWERS OF ATTORNEY 2 LIVING CENTERS OF AMERICA, INC. DIRECTORS' POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT each of the undersigned directors of Living Centers of America, Inc., a Delaware Corporation, does hereby make, constitute and appoint EDWARD L. KUNTZ and SUSAN THOMAS WHITTLE, and each of them, either one of whom may act without joinder of the other, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to execute, deliver and file an Annual Report on Form 10-K for the fiscal year ended September 30, 1996, with the Securities and Exchange Commission, together with any and all amendments thereto, with all exhibits thereto and other documents in connection therewith or supplemental thereto, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing as said attorney or attorneys may deem necessary or advisable to carry out fully the intents and purposes of the foregoing as the undersigned might or could do personally or in the capacity or capacities as aforesaid, hereby ratifying and confirming all acts and things which said attorneys-in-fact and agents, and each of them, or the substitute or substitutes of any or all of them, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney effective /s/ Edward L. Kuntz - ----------------------------------- December 12, 1996 Edward L. Kuntz /s/ Leroy D. Williams - ----------------------------------- December 12, 1996 Leroy D. Williams /s/ Eddy J. Rogers, Jr. - ----------------------------------- December 12, 1996 Eddy J. Rogers, Jr. /s/ Roger J. Bulger, M.D. - ----------------------------------- December 12, 1996 Roger J. Bulger, M.D. /s/ Anthony M. Frank - ----------------------------------- December 12, 1996 Anthony M. Frank /s/ Robert Hurlbut - ----------------------------------- December 12, 1996 Robert Hurlbut /s/ Donald C. Beaver - ----------------------------------- December 12, 1996 Donald C. Beaver EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1996 SEP-30-1996 21,394 0 204,462 22,783 16,582 281,561 476,051 186,333 821,734 180,470 262,702 203 0 0 329,112 821,734 1,114,491 1,114,491 0 1,024,935 0 0 12,461 77,095 33,759 43,180 0 0 0 43,180 2.13 2.13
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